Robertson v. Davis

• Decision Date: 15 February 1936
• Parties: ROBERTSON, Superintendent of Banks, v. DAVIS et al.
• Court: Tennessee Supreme Court

90 S.W.2d 746

169 Tenn. 659

ROBERTSON, Superintendent of Banks, v. DAVIS et al.

Supreme Court of Tennessee.

February 15, 1936

Appeal from Chancery Court, Wilson County; J. W. Stout, Chancellor.

Suit by D. D. Robertson, Superintendent of Banks, etc., against C. C Davis and others. From an adverse decree, defendants appeal.

Affirmed and cause remanded.

R. L Forrester, of Watertown, L. H. Walker and W. R. Chambers, both of Lebanon, and Harry Phillips, of Watertown, for appellants.

C. C. Davis, of Watertown, and Jos. Higgins and Larkin Crouch, both of Nashville, for appellee.

SMITH Special Justice.

Pursuant to an order of the court below in which the affairs of the Citizens' Bank of Watertown, Tenn., are in process of liquidation, Robertson, as superintendent of banks of the state of Tennessee under the Banking Act of 1913 (chapter 20), as amended, and also as the duly appointed, qualified, and acting receiver of the bank, filed the bill in this cause, for the use of the depositors and unsecured creditors of the bank, against Davis and seven others as directors of the bank, on the ground that the directors had so fraudulently and willfully manipulated and dissipated the assets of the bank as to render them liable to the receiver for the amounts alleged to have been so wrongfully and fraudulently misappropriated.

The bill averred that the Citizens' Bank had an authorized capital stock of $19,000, one hundred and eighty shares of a total of one hundred and ninety shares being owned by the defendants, and that they, as such majority stockholders controlled and dominated the affairs of the Citizens' Bank, and that on September 25, 1928, the bank was a solvent going concern with resources amounting to $150,025.20.

After stating the figures showing the financial condition of the bank on September 25, 1928, the bill alleged that a proper administration of its affairs would have resulted in the full payment to all of the depositors and unsecured creditors, with a substantial balance available for its stockholders.

It was further alleged that on September 25, 1928, and for many years prior thereto, the Bank of Watertown had been doing a general banking business in Watertown, Tenn., and that for years prior to that date its financial condition was so unstable as to cause the state superintendent of banks in 1921 to require it to execute a bond in the sum of $75,000 to secure its depositors and unsecured creditors, as a condition of its being allowed to continue its business; that the financial condition of the Bank of Watertown was generally known throughout the entire section, and that the defendants knew, or in the exercise of ordinary care should have known, of such condition, but, notwithstanding this fact, the defendants, as directors of the Citizens' Bank, on September 25, 1928, without any excuse except for the purpose of realizing 50 cents on the dollar in cash upon their stock, which sum was realized by the defendants on their stock in the Citizens' Bank, who thus, under the guise of selling the cash assets and real property of the Citizens' Bank to the insolvent Bank of Watertown and without demanding or receiving any protection, guaranty, or security to make certain the payment of the depositors and unsecured creditors of the Citizens' Bank, did, on September 25, 1928, pass a resolution purporting to sell the entire assets of the Citizens' Bank, amounting to $150,025.20, to the Bank of Watertown for the sum of $9,500 and the promise of the said insolvent Bank of Watertown to pay and liquidate all liabilities of the Citizens' Bank.

The bill further alleged that the action thus taken by the defendants was without regard of the rights of the depositors and unsecured creditors of the bank and in violation of the statute of the state of Tennessee relating to the sale and consolidation of banks (Code, § 6028); that the resolution of the directors of the Citizens' Bank was adopted on the night of September 25, 1928, and by virtue of this resolution all of the cash assets of the Citizens' Bank and possession and control of its real estate passed to the insolvent Bank of Watertown.

The bill further alleged that this unlawful transaction was committed by the defendants, who owned the majority of the stock of the bank and were its directors, for the purpose of effecting a sale of their stock in the Citizens' Bank, and realizing 50 cents on the dollar on each share of stock so held.

It was charged that the letter of September 26, 1928, addressed to the stockholders, depositors, and unsecured creditors of the Citizens' Bank was a studious effort on the part of the defendants to conceal the truth of their unlawful conduct in surrendering the assets of the bank from its unsuspecting creditors and depositors, and that the defendants negligently surrendered said assets without taking a detailed inventory thereof, so as to preserve their identity, and without a careful examination or inspection of the books and records of the Bank of Watertown, and without making a proper effort to determine its solvency or insolvency, and that this illegal sale and transfer of the assets of the Citizens' Bank of the estimated value of $150,025.20 was made at a time when the actual cash assets of the Bank of Watertown were only $5,211.47, including demand items due from other banks, and by so doing the defendants were guilty of willful misconduct and gross negligence as directors of the Citizens' Bank, and were guilty of a gross violation of their duties, as directors, to preserve and protect the assets of the bank.

It was further alleged that the assets of the Citizens' Bank were received by the Bank of Watertown, and converted to its own uses and purposes, and that the Bank of Watertown continued to operate until November 5, 1928, when by proper resolution of its directors all of the assets of both banks were surrendered to the superintendent of banks of the state of Tennessee, who was by the court duly appointed receiver and took charge of the assets of both of said banks; that for the period between September 25, 1928, and November 5, 1928, the assets of the Citizens' Bank were converted by the Bank of Watertown to the amount of $28,334.52 without considering any loss on any item of the transfer, which conversion included all of the cash assets delivered to and belonging to the Citizens' Bank, and that said loss so sustained by the Citizens' Bank was the direct result of the willful negligence and fraudulent act of the defendants, to the detriment and financial loss of the depositors and unsecured creditors of the Citizens' Bank; that notwithstanding that the liquidation of both banks has been in progress since November 12, 1928, and that practically all of the assets of the Citizens' Bank have been reduced to cash, its total available assets amount to $26,696.41, that its liability due to depositors amounts to the sum of $39,875.85 and some $40,000 additional claims of other depositors whose rights to dividends are yet to be determined, the condition of its affairs is such as to render it insolvent, and that, when all of its assets have been reduced to cash and all bona fide creditors are determined, there will still exist a deficit fairly estimated of approximately $20,000 or more; that it was impossible, at the time the bill was filed on September 24, 1934, to determine what the net deficit would be, but that it was necessary, in order to protect the rights of the unsecured creditors, that the bill be filed, to the end that sums alleged to be due by the defendants to the bank may be recovered.

(1) The bill prayed that, as the assets of the Bank of Watertown and the Citizens' Bank had been so blended by the illegal action of the directors of the Citizens' Bank in selling its assets to the Bank of Watertown on September 25, 1928, that a reference be ordered by the court to segregate the assets of the Citizens' Bank from the assets of the Bank of Watertown; and (2) that on final hearing a decree be rendered, holding the defendants jointly and severally liable by reason of their grossly negligent and maliciously fraudulent conduct in delivering to the insolvent Bank of Watertown all of the cash assets of the Citizens' Bank and in delivering into the possession of the Bank of Watertown all real estate of the Citizens' Bank, without taking any steps to safeguard the interests of the unsecured creditors of the Citizens' Bank; and (3) that a decree be rendered holding the defendants jointly and severally liable for the amount of the loss which the proof may reveal has been suffered by the action of the defendants specified in the bill, and, further, that a decree be rendered primarily against each of the defendants and secondarily against all of the others for the moneys respectively received by them for their stock in the Citizens' Bank, which was paid for at the rate of $50 a share on September 25, 1928, out of the depleted cash balance of the Bank of Watertown, or out of the assets of the Citizens' Bank, which the defendants in violation of their contractual obligation to the Citizens' Bank fraudulently transferred to the Bank of Watertown.

Counsel for the appellants, conceiving that the bill was based on Code, § 5927, filed a demurrer, which the chancellor overruled, and in his discretion allowed an appeal to this court, and here thirteen errors are assigned.

The sole question to be determined is whether or not counsel for the appellants are correct in their assumption that the bill is based exclusively on the section above cited, for, if they are mistaken in this assumption, the chancellor clearly was correct in overruling the demurrer.

The section invoked on behalf of the appellants often has been construed by this court....