Texas Continental Life Ins. Co. v. Bankers Bond Co.

• Decision Date: 15 July 1960
• Docket Number: No. 3747.,3747.
• Citation: 187 F. Supp. 14
• Parties: TEXAS CONTINENTAL LIFE INSURANCE COMPANY, Plaintiff, v. BANKERS BOND COMPANY, Inc., Elinore Sedley, Charles D. Dunne and J. E. Dunne II, Defendants.
• Court: U.S. District Court — Western District of Kentucky

187 F. Supp. 14

TEXAS CONTINENTAL LIFE INSURANCE COMPANY, Plaintiff, v. BANKERS BOND COMPANY, Inc., Elinore Sedley, Charles D. Dunne and J. E. Dunne II, Defendants.

No. 3747.

United States District Court W. D. Kentucky, Louisville Division.

July 15, 1960.

COPYRIGHT MATERIAL OMITTED

Peter, Heyburn & Marshall, Henry R. Heyburn, Gavin H. Cochran, Mark B. Davis, Jr., Louisville, Ky., Ira Lee Allen, Dallas, Tex., for plaintiff.

Stites & Stites, Henry J. Stites, J. Leonard Walker, Arthur Grafton, A. Scott Hamilton, Louisville, Ky., Berkowitz, Lefkovits & Paden, A. Berkowitz, Charles Najjar, Birmingham, Ala., for defendants.

SWINFORD, District Judge.

This is an action in which the plaintiff is seeking to recover $103,000 with interest on a sale to it of municipal bonds of the sixth class city of West Buechel, Jefferson County, Kentucky. The case was tried by a jury. At the conclusion of all the evidence, the plaintiff moved the court for a directed verdict in its favor. The motion was overruled and the case was submitted to the jury for its determination under instructions of the court. The jury was unable to reach a verdict and was discharged. Within ten days the plaintiff moved the court to enter a judgment in accordance with its motion for a directed verdict made at the close of all the evidence. Rule 50(b), Rules of Civil Procedure, 28 U.S.C.A. The record is now before the court on that motion.

From the evidence offered at the trial the following facts were developed. Except in possibly minor details these facts were uncontradicted.

The defendant, The Bankers Bond Company, Inc., is a corporation organized under the laws of Delaware but principally transacts business in the Commonwealth of Kentucky and maintains a principal office at Louisville, Jefferson County, Kentucky. It is engaged in the brokerage business and in the buying, selling and handling of securities. The securities in which it deals consist of about 50 per cent municipal business, 40 per cent regional and over-the-counter securities, and 10 per cent securities that are listed on the Midwest Stock Exchange. It has been in business since 1922 and is a well and favorably known firm.

The defendant, Mrs. Elinore Sedley, owns all of the stock of the Bankers Bond Company. She is chairman of the board and treasurer. She is the chief financial officer, is active in the business and has been continuously since the corporation was founded in 1922.

The defendants, Charles D. Dunne and J. E. Dunne II, are father and son respectively. They were officers of the corporation styled The Dunne Press, Inc. The Dunne Press published certain circulars, magazines or other papers of interest to insurance companies and persons in the insurance business. Through their business transactions the Dunnes became acquainted with various individuals and corporate entities in the insurance field. Among these were Ben Jack Cage of Jack Cage & Company and I. C. T. Insurance Company, both of Dallas, Texas, Continental Union Insurance Company, All States Life Insurance Company, of Dallas, and the plaintiff, Texas Continental Life Insurance Company, of San Antonio, Texas.

Another person who is prominently mentioned throughout the trial of the case is Colonel Henry J. Stites, attorney of Louisville, Kentucky. Colonel Stites, who has been a practicing attorney since 1913, is an attorney of record for the defendants. He has been the attorney for Mrs. Elinore Sedley since 1942 and a director of the defendant, Bankers Bond Company, since that time. Since 1928 he has done work for the company and has been recognized as its general counsel since that time. He has been retained as the lawyer for the company since October 1958. Colonel Stites was also the attorney and general advisor of the sixth class city of West Buechel and its sole legal advisor in the transactions leading up to and the issuance, handling and sale of the bonds involved in this action. The city of West Buechel was incorporated in October 1951.

Colonel Stites was also attorney for and director of the Rauen Construction Company, of which the defendant, Mrs. Sedley, owned one hundred per cent of the stock and served with Colonel Stites on the board of directors. The Rauen Construction Company owned a small tract of land of about three acres within the city limits of West Buechel. Another corporation, Kentucky Industrial Corporation, owned entirely by Mrs. Sedley and of which both she and Colonel Stites were directors, owned a tract of twenty-one acres outside of but adjacent to the city limits. Fourteen or fifteen houses had been built on these two tracts of land.

On March 15, 1954, the defendant, Bankers Bond Company, wrote a letter to the Trustees of the City of West Beuchel, signed by Elinore Sedley, owner, chairman of the board of directors, and treasurer of the company, in which it proposed a two million dollar revenue bond issue for the building of sewers, waterworks, streets and drainage throughout the area in and adjacent to the city boundaries under the provisions of Chapter 58, Kentucky Revised Statutes. The letter stated that the Bankers Bond Company would prepare the issue and provide for the interest rate not to exceed 3 5/8 % and set forth various series and maturity dates of the bonds.

It also stated that "it will be futile to have a public sale with bidders, but since Section 58.040 permits the bonds to `* * * be sold in such manner and upon such terms as the governmental agency deems best, or * * * may provide that payment shall be made in such bonds. * * *'. We have carried on negotiations with various insurance companies and others who may be interested in purchasing your revenue bonds."

The letter also contained the following paragraph: "We and our attorneys, Messrs. Stites and Stites, will do all the work incident to the issuance of said bonds, including the preparation of all resolutions, contracts, minutes and notices and we will pay all expenses including the cost of printing the bonds, advertising and any other expenses incurred in such issuance and sale, with the cost of the approving legal opinion. For our services, expenses and risk we will charge, and you will agree to pay an amount equal to any sum over par received for such bonds up to 3% of the face amount of all bonds sold, to be paid simultaneously with the delivery of the bonds. Of necessity title to the bonds must technically pass through The Bankers Bond Company in which event, upon securing an offer above par, as above outlined, for and in consideration of our services, without any expenditure other than moneys previously expended, we will take title to the bonds being sold and simultaneously pass title to the purchaser."

The Trustees accepted the proposal of the defendant, Bankers Bond Company, acting on the advice of Colonel Stites, and by proper ordinance authorized the issuance of two million dollars worth of revenue bonds. The numerous orders and minutes of the Board of Trustees required to effect the issuance of the bonds were prepared by Colonel Stites.

In a legal opinion he stated that the bonds were issued for the purpose of constructing a waterworks, sewer, drainage, and street system in the City of West Buechel with reserve facilities for water plant distribution and storage with equal monthly assessments provided by ordinance, payable with each water bill to provide the city with funds for the payment of the bonds and interest upon maturity. It further stated that from the proceeds of the sale of the bonds, there would be maintained a sinking fund for paying interest.

The purposes of the bonds were set forth on the face of the bonds themselves, clearly indicating that the proceeds from the bonds were to be used for the development purposes recited, from which revenues were to create a sinking fund for the retirement of the bonds upon their maturity and for current interest.

The title to the bonds was transferred to the defendant, Bankers Bond Company. A circular setting out the opinion of Colonel Stites was issued by the Bankers Bond Company in its efforts to sell the bonds. The bonds were printed by the Dunne Press, of which the defendant, Charles D. Dunne, was an officer and in a managerial position. Through the defendants, Charles D. Dunne and J. E. Dunne II, the Bankers Bond Company and Jack Cage & Company of Dallas, Texas, opened negotiations for the sale of the entire two million dollar bond issue.

The negotiations between the Bankers Bond Company and Ben Jack Cage culminated in a sale of the bonds to Jack Cage & Company. In consideration for the bonds the purchaser paid the sum of $335,000 in cash and executed a promissory note in the sum of $1,725,000 of September 6, 1954, which is in words and figures as follows:

"Promissory Note "Dallas, Texas "$1,725,000.00 September 6, 1954

"For Value Received, Jack Cage & Company, a Texas corporation, does hereby promise to pay to the order of The Bankers Bond Company, Incorporated, at the office of First National Bank in Birmingham, Alabama, the sum of One Million Seven Hundred Twenty-Five Thousand and no/100ths Dollars ($1,725,000.00), plus interest thereon at the rate of five percent (5%) per annum, from date to the date of maturity.

"The principal on this note shall be payable in seven (7) equal annual installments; each of which shall be in the amount of Two Hundred Forty-Six Thousand Four Hundred Twenty-Eight and 57/100th Dollars ($246,428.57). The first installment of principal shall be due and payable on March 15, 1956, and an installment of principal shall be due and payable on March 15 of each year thereafter until this note is paid in full. The interest on this note shall be payable as it accrues upon the unpaid principal balances hereof, on each date that an installment of principal becomes due and payable.

"This note may be prepaid in part or in full at any time without penalty.

"This note is secured by that certain Assignment of even date

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