Full opinion text
WILKERSON, District Judge. Findings of Fact. The court finds the facts as follows: Plaintiff -was incorporated by Act of January 22, 1932 (chapter 8, 47 Stat. 5, see 15 U.S.C.A. § 601 et seq.). Defendant bank was organized under Illinois law on July 25, 1931, with paid up capital stock of $14,000,000, divided into 140,000 shares of the par value- of $100 per share. The condition of the bank on July 25, 1931, was as follows: Loans, $154,243,421.-45; cash, including amounts due from other banks, $62,839,335.08; deposits, $240,-746,647.25. The condition of the bank on June 25, 1932, was as follows: Loans, $101,016,512.33; cash, $18,620,916.84; deposits, $127,686,092.82. During the month of June, 1932, defendant bank lost deposits at a rapidly increasing rate. From the close of business on June 1, 1932, to the close of business on June 25, 1932, deposits decreased from $147,688,097.62 to $127,686,092.82. From the close of business on June 20, 1932, to the close of business on June 25, 1932, deposits decreased from $141,238,322.88 to $127,686,092.82. On June 25, 1932, deposits decreased in the amount of $4,618,523.15. Charles G. Dawes became a member of plaintiff’s board of directors on February 2, 1932. He tendered his resignation as director on June 6, 1932, and on June 8, 1932, the resignation was accepted effective at the close of business on June 15, 1932. Shortly prior to June 25, 1932, defendant bank applied to plaintiff for a loan of $16,000,000. Plaintiff sent examiners to make an examination of the collateral to be offered as security for the loan, and the examiners commenced to make the examination. It became apparent, however, that a larger loan would be required, and the examination was temporarily discontinued. The investigation of collateral by the examiners was not completed until after July 7, 1932. On June 25, 1932, plaintiff’s board of directors by resolution approved a loan of $16,000,000 to the bank. The loan was to be payable six months from date, with interest at 5% per cent, per annum, payable at maturity, on the note of the bank in the form prescribed by the corporation, and upon delivery to the Federal Reserve Bank of Chicago, as custodian, of collateral valued at $31,099,000. On June 27, 1932, at 1 a. m., there was a meeting of the stockholders'of defendant bank, at which Charles G. Dawes was elected a director. There was- a special meeting of the board of directors at 1:15 a. m. on the same day at which Charles G. Dawes was elected chairman of the board. The chairman stated that it was desirable and in the interests of the bank, its depositors and stockholders, to apply for a loan from the Reconstruction Finance Corporation, and explained fully the reasons for such action. The board adopted resolutions authorizing the officers of the bank, among other things, to borrow from plaintiff or others, a sum not to exceed $95,000,-000, and to pledge with plaintiff any collateral which might be required as security for the loan. On June 27, 1932, between 2:30 and 4 a. m., the bank executed and delivered to plaintiff an application for a loan of not more than $95,000,000, in the form prescribed by the plaintiff and submitted by it to the board of the bank. Defendant bank delivered with the application to plaintiff its note, dated June 27, 1932, for $95,000,000, payable to plaintiff’s order on or before December 24, 1932, at the Federal Reserve Bank of Chicago, with interest at 5% per cent, per annum. The note contains provisions pledging collateral, .authorizing its sale and the application of the proceeds to the payment of the note and of any indebtedness of the bank to plaintiff, as plaintiff shall deem proper, and authorizing the collection or conversion of the collateral and the application of the proceeds to the payment of the note or any other indebtedness of the bank, whether due or not, in such manner as plaintiff shall choose. Defendant bank also delivered, with the application, a statement dated June 27, 1932, signed by H. P. Preston, manager of plaintiff’s Chicago Loan Agency, George M. Reynolds and M. A. Traylor, members of plaintiff’s local advisory committee, and W. R. Milford and Ralph Buss, examiners of plaintiff, as follows: “Based upon the information which we have received we believe the proposed loan in the amount of $95,000,000 (Ninety-five Million Dollars) to Central Republic Bank and Trust Company, Chicago, Illinois, of which The Reconstruction Finance Corporation is lending $90,000,000 and others, $5,000,000 to be fully and adequately secured, the security to be of a face or book value of approximately $118,000,000 and including all the assets of the bank.” Before the delivery of the application, note, and statement, plaintiff’s examiners obtained information concerning the bank, which was communicated by telephone to its board of directors in Washington, and to Jesse H. Jones and Wilson McCarthy, members of the board who were present at the bank during the night of June 26, 1932, and the morning of June 27, 1932. The examiners had conversations with Philip R. Clarke, president of the bank, as to the liability of the stockholders. Mr. Clarke stated to the examiners that the liability of the stockholders was worth between $7,-000,000 and $8,000,000. The estimate of the amount which could he realized from the liability of stockholders was not included in the valuation of $118,000,000 placed upon the assets of the defendant bank in the statement of Mr. Preston and others, delivered with the application. That estimate was in the information submitted to plaintiff’s directors and to Mr. Preston and others before the statement as to the adequacy of the security was signed. On June 29, 1932, plaintiff’s examiners sent to plaintiff’s Washington office a preliminary report of the information obtained during the examination of the defendant bank. That report contained the following: “In considering the available security, it was recognized that stockholders’ liability on capital of $14,000,000 is probably good for $7,000,000.” In the final report made by the examiners to plaintiff’s board of directors on July 12, 1932, there is the following: “Mention is here made of the liability of stockholders with reference to the $14,-000,000 capital stock. This liability is believed to be good at this time for (at) least 50%.” Before the final report of the examiners was sent to Washington the part relating to the liability of stockholders was called to the attention of the chairman of the board of defendant bank, who stated that many of the stockholders would be able to pay their liability. The Federal Reserve Bank of Chicago acted as depositary, custodian, and fiscal agent for the plaintiff. On June 25, 1932, plaintiff by telegram instructed its fiscal agent to disburse $16,000,000 to the defendant bank. . On June 27, 1932, at 8 a. m., defendant bank delivered to the Federal Reserve Bank its note for $10,000,000. The note was in the same form as the one for $95,-000,000, which had been delivered earlier in the day. The Federal Reserve Bank at once disbursed to defendant bank the sum of $10,000,000, which was credited to its account with the Federal Reserve Bank. At the same time the $95,000,000 note of defendant bank was returned to the bank by the plaintiff and never became an effective obligation of the maker. On June 27, 1932, at 9:15 a. m., there was a special meeting of plaintiff’s board of directors called, according to the recitals in the minutes, “to consider, particularly a serious situation confronting the Central Republic. Bank and Trust Company of Chicago.” It was stated in the minutes of the meeting that General Dawes, representing the bank, had informed the corporation that the bank could not open its doors unless a loan could be arranged, and that General Dawes had assured the board that the loan applied for was for current requirements, including the payment of deposits, in order to keep the bank open, and not in contemplation of liquidation. The statement of Mr. Prestbn and others as to the adequacy of the collateral was presented to the board and , the board amended the resolution of June 25, 1932, by increasing the amount of the loan to $90,000,000. A telegram to the Chicago Loan Agency containing the substance of the resolution was then authorized by the board and sent. The board instructed its secretary to send to Charles G. Dawes the following telegram: “Relying your assurance already given that loan applied for is for current requirements and to keep bank open and not in contemplation of liquidation Corporation has wired Custodian instructions regarding loan.” To this General Dawes replied by wire as follows: “Your telegram received. Am glad to know that relying upon my assurance already given that loan applied for is for current requirements and to pay depositors in order to keep bank open and not in contemplation of liquidation that Corporation has wired Custodian instructions regarding loan.” The telegrams were made a part of the minutes of the meeting of the board. The board approved the action of the treasurer on June 25, 1932, in authorizing the Federal Reserve Bank to accept collateral on its count and check instead of that of the manager of the loan agency. On June 27, 1932, defendant bank delivered to the Chicago Loan Agency its note for $30,000,000 in form the same as those theretofore executed by it. On June 29, 1932, that note was transmitted to the Federal Reserve Bank with a letter, signed by the assistant manager of the agency, in part as follows: “I hereby certify that the attached Exhibit E, primary obligation of the above named applicant [i. e., said $30,000,000 note], is in proper form and applies to loan from the Reconstruction Finance Corporation which the Board has approved for $90,000,000.00 subject to conditions, if any, stated in the Treasurer’s telegraphic or mailed advice of approval. Washington telegraphic advice of approval contains the condition that $30,000,000.00 shall be available to said bank against delivery of certificate signed by Agency Manager, Reynolds, Traylor, Milford and Buss, as follows: * * * “The above condition has been complied with. “Washington telegraphic approval also further states that advance in excess of $30,000,000.00 and up to $90,000,000.00 conditioned upon agreement satisfactory to Agency and Agency Counsel providing for participation in loan of other banks, Chicago, $5,000,000.00, in total of $95,000,000.-00, on understanding they also approve collateral that we have control of handling thereof. “The agreement referred to above is in your possession and has been duly approved by the Agency Manager and Agency Counsel. “In keeping with the authority contained in Leach’s telegraphic advice of approval, you are authorized to advance proceeds as needed in the sum of $30,000,000.-00, as per directions of the applicant, upon the condition that you have under your control not less than $60,000,000.00 face' amount of sundry collateral, including $10,-000,000.00 equity in collateral now pledged with certain New York Banks, against which you hold, a proper assignment.” The words “Washington telegraphic advice of approval,” “Washington telegraphic approval” and “Leach’s telegraphic advice of approval” in this letter referred to the telegram of June 27, 1932, authorizing the disbursement of the entire $90,-000,000 loan. On June 29, 1932, plaintiff disbursed to the defendant bank the additional sum of $30,000,000, which was credited to its account at the Federal Reserve Bank. On June 29, 1932, a satisfactory agreement for a loan of $5,000,000 by the Chicago banks, as required by the resolution of plaintiff’s board, adopted June 27, 1932, was delivered to the fiscal agent of plaintiff, and on July 13, 1932, the Chicago banks disbursed to defendant bank a part of the $5,000,000 proportionate to the amount advanced by plaintiff out of the authorized $90,000,000 loan. On June 29, 1932, defendant bank requested an additional disbursement of $30,-000,000 on the loan, and delivered to plaintiff’s loan agency another note for $30,000,-000, dated June 27, 1932, in the same form as the other notes executed by it. The note was sent to the Federal Reserve Bank with a letter which was the same as the one with which the other $30,000,000 note was transmitted with the exception of the last paragraph. For that paragraph was substituted the following: “An original disbursement of $10,000,000.00 was made June 27 and a supplemental disbursement of $30,000,000.00 has been previously authorized on this date. In keeping with the authority contained in Leach’s telegraphic advice of approval you are authorized to advance an additional $30,000,000.00 as per directions of the applicant, upon the condition you have under your control not less than $80,000,000.00 face amount of sundry collateral, including $10,000,000.00 equity in collateral now pledged with certain New York Banks against which you hold a proper assignment.” On June 29, 1932, the Federal Reserve Bank disbursed an additional $30,000,000 on the loan and placed the same to the credit of the defendant bank. This disbursement resulted in an overdraft of the account of the United States Treasury with the Federal Reserve Bank, and on June 30, 1932, plaintiff’s board adopted the following resolution: “Resolved that it is the sense of this Board that the Central Republic Bank and Trust Company, Chicago, Illinois, should return $30,000,000 of the total of $70,000,000 indebtedness without release of collateral and upon such return the accounts between the Central Republic Bank and Trust Company and this Corporation be adjusted as the Treasurer may arrange so that the remaining balance of $50,000,000 of the loan heretofore authorized may be disbursed as provided in the resolutions of the Board and on conditions prescribed therein. It is the intention that this transaction is in no way a repayment of any money advanced but is a deferring of the advance of said $30,000,000 for the better convenience of the parties.” On June 30, 1932, defendant bank sent to the Federal Reserve Bank the following: “For the better convenience of the parties and at the instance of the Reconstruction Finance Corporation, we have determined to defer acceptance of the most recent $30,000,000 arranged to be provided on the loan application and commitment of June 27, 1932. “You are accordingly authorized to take such steps as may be necessary to effectually provide that this particular $30,-000,000 is held by you for the account of the Reconstruction Finance Corporation. “The result of this will be that we are still entitled to receive from the Reconstruction Finance Corporation and its participants the balance of $55,000,000. “For the convenience of the parties you will hold the note referring to the above $30,000,000 as against the future advance of same amount to us.” On June 30, 1932, the second credit of $30,000,000 to the defendant bank on the books of the Federal Reserve Bank was reversed by debiting the bank’s account with $30,000,000 and crediting the account of the Treasury with the same amount. The defendant bank paid interest for one day on said amount of $30,000,000. After the approval of the $90,000,000 loan the deposits of the bank continued to decrease, until by July 13, 1932, they had gone down to about $100,000,000. The bank had a rental liability of $780,000 a year. The collateral pledged by the bank for loans yielded 4% per cent, per annum, and the bank was obligated for 5% per cent, per annum on the loans. In view of these expenses it could not continue to operate except at a great loss without a large increase in its deposits. The attempt to restore the standing of the bank and to bring its deposits up to a point where it could continue to operate without loss had failed. On July 13, 1932, Owen D. Young appeared at a meeting of plaintiff’s directors on behalf of defendant bank. He reviewed the condition of the bank and proposed a plan to meet the difficulties which confronted the bank. The plan included the organization of a new bank, the taking over by the new bank of the deposit liabilities of the old, with cash enough to cover the deposit liabilities and the purchase by the new bank of a part of the collateral pledged by the old bank as security for its loans. On July 19, 1932, plaintiff’s board of directors sent one of its attorneys to Chicago to investigate all aspects of the proposed plan for the organization of a new national bank to take over the deposit liabilities of the defendant bank. It was understood that he would make no commitments on behalf of plaintiff. On July 22, 1932, plaintiff’s board of directors approved the action of the loan agency in releasing to the defendant bank collateral of the face value of $20,000,000. The manager of the loan agency stated that the release was necessary so that the bank could carry on its business and function as a bank. ' On August 3, 1932, Henry M. Dawes and Harry B. Hurd, directors, and C. C. Haffner and Arthur T. Leonard, vice presidents of defendant bank appeared before plaintiff’s board of directors. The minutes of the board contain the following: “Mr. Dawes, stressing the urgent nature of the matter, stated it was desirable to have the new bank start business with a large capital. He said that deposits of between $50,-000,000 and $55,000,000 were reasonably assured, not counting secured deposits and corporate trusts. He felt that it would be unsafe for the new bank to make a commitment involving more than $15,000,000 with respect to loans to enable makers to take up paper held by .the Corporation. The opinion was expressed by members of the Board that the new bank should arrange to retire at least $35,000,000 worth of the collateral now held by the Corporation against its loan to the Central Republic Bank & Trust Company. Mr. Bogue raised the question as to whether the liability of the stockholders of the Central Republic Bank & Trust Company is preserved under the plan, and stated that the Legal’ Division would have to study the matter further, before expressing an opinion. The representatives ’ of the bank thereupon withdrew from the meeting.” A committee consisting of four members of the staff of the corporation was appointed to confer further with the representatives of defendant bank, and report to the board. The committee made a report on August 4, 1932, and gave its opinion that the board would be justified in indicating that it had no objection to the plan provided certain conditions were satisfied. The minutes of the board do not show any action of the board on the report of the committee, arid there is not any evidence showing that the board ever considered the report again or took any formal action with reference to it. On September 23, 1932, Mr. Clarke, the president, and Mr. Hurd, director and attorney for the bank, appeared before the board, and the following took place, as shown by the minutes: “In reply to a question as to whether the new bank would purchase paper pledged with the Corporation to the extent of $25,000,000, with the result that the Corporation’s loan would be reduced by that amount, Mr. Clarke replied in the negative, explaining that it had been previously stated that the new bank would purchase $15,000,000 of the paper and that it had also been suggested that other Chicago banks purchase $10,000,000 of the Corporation’s collateral. “Mr. Clarke stated that he did not now believe other banks of Chicago would take any of the paper of the Central Republic Bank and Trust Company, because, in their opinion, such action would be prejudicial to the best interests of the newly organized bank. He further pointed out that since the statement was made that the new bank would purchase $15,000,000 of the paper, there had been payments on it, so that the amount which would be purchased would be approximately $13,000,000. “Mr. Hurd told the Board that, through the organization of the new bank, the Corporation would not lose any of its legal rights to proceed against the stockholders of the old Central Republic Bank and Trust Company in connection with their liability as stockholders. “Mr. Clarke and Mr. Hurd thereupon withdrew. “The Board further considered the questions involved in the liquidation of the Corporation’s loan to the Central Republic Bank and Trust Company, but took no action.” The deposits of defendant bank were as follows: July 25, 1931, $240,746,647.25; June 30, 1932, $112,308,320.76; October 5, 1932, $72,208,817.60. As a result of the disbursement by the plaintiff of $10,000,000 on June 27, 1932, and $60,000,000 on June 29, 1932, to the defendant bank, the cash, including money due from other banks, of the defendant bank, increased from $18,620,916.84 at the close of business on June 25, 1932, to $76,-448,754.62 at the close of business on June 29, 1932. Within those four days the deposits of the bank decreased in an amount in excess of $14,000,000. After the reversal of the second $30,000,000 credit on June 30, 1932, and as a result of continued withdrawals of deposits, the cash, including money due from other banks, of the defendant bank declined to $43,949,673.14 at the close of business on June 30, 1932. From June 30, 1932, through October 5, 1932, this item of $43,949,673.14 decreased to $21,078,183.90. At the close of business on July 25, 1931, the total resources of the defendant bank amounted to $277,933,760.26. At that time the bank had n"o bills payable outstanding and none of its resources were pledged.' At the close of business on July 30, 1932, the total resources of the defendant bank decreased to $173,264,741.81. Of these resources, loans in the anjount of $93,744,836.66, and investments in the amount of $33,969,933.70, or total resources in the amount of $127,714,770.36, were pledged at this time to secure bills payable and rediscounts in the amount of $47,678,-587.07. Against deposit liabilities in the amount of $92,304,835.57, the defendant bank, at the close of business on July 30, 1932, had the following unpledged resources : Loans to customers........ $ 1,666,688.90 Real Estate Department loans ................... 67,634.84 Overdrafts ............... 79,168.99 Investments .............. 3,772,841.56 Cash and due from banks... 27,687,291.96 Acceptances of other banks sold .................... 1,246,560.20 Customers liability a/c travelers checks, letters of credit and acceptances... 3,231,351.02 Real Estate owned......... 4,703,220.09 Advances to trust department ................... 350,000.00 Other resources............ 2,745,213.89 Total resources unpledged ............ $45,549,971.45 At the close of business on October 5, 1932, the total resources of the defendant bank had declined to $139,069,238.88. Of these resources, loans in the amount of $85,436,608.79 and investments in the amount of $19,186,768.61, or total resources in the amount of $104,623,377.40 were pledged at this time to secure bills payable and rediscounts in the amount of $38,270,174.59. Against deposit liabilities in the amount of $72,208,817.60, the defendant bank, at the close of business on October 5, 1932, had the following unpledged resources: Loans to customers........ $ 4,374,156.33 Real Estate Department loans ................... 110,225.29 Overdrafts ............... 51,393.88 Investments .............. 27,973.04 Cash and due from banks... 21,078,183.90 Customers liability a/c travelers checks, letters of credit and acceptances... 602,331.34 Real Estate owned......... 4,772,059.28 Advances to trust department .................. 350,000.00 Other resources............ 3,079,538.42 Total resources unpledged ............ $34,445,861.48 The defendant bank, by the terms of the resolution of plaintiff’s board passed on June 27, 1932, was entitled, upon compliance with the terms of the resolution as to collateral, to an additional disbursement of $50,000,000. As a result of decreased earnings and heavy interest charges accruing on its outstanding bills payable, the defendant bank operated at a substantial loss during the months of July, August, and September, 1932. During this period the income of the bank declined materially, primarily as the result of a substantial decrease in the interest and discount earned by the bank. For the month of June, 1932, the total income of the bank amounted to $703,449.22; for the month of July, $574,383.98; for the month of August, $591,606.88; and for the month of September, $486,454.42. Concurrently with this decline in income, the expenses of the defendant bank increased substantially. For the month of June, 1932, the total expenses of the bank amounted to $559,341.24; for the month of July, $743,296.92; for the month of August, $686,133.59, and for the month of September, $611,799.15. The increased expenses of the bank resulted from the payment and accrual of heavy interest charges on the outstanding bills payable of the defendant bank. For the month of June, 1932, interest accrued and paid amounted to $115,657.50; for the month of July, $297,962.48; for the month of August, $275,837.85; and for the month of September, $213,771.97. The combination of decreased income and increased expenses caused the defendant bank to change from a net profit of $144,107.98 for the month of June, 1932, to a net loss of $168,912.94 for July, 1932; a net loss of $94,526.71 for August, 1932; and a net loss of $125,344.73 for September, 1932. In view of the circumstances of the defendant bank, the plan for the reorganization of a new bank to take over its deposit liabilities was carried forward by its sponsors. On September 29, 1932, the Federal Reserve Bank of Chicago returned to the defendant bank the second $30,000,000 note of that bank, delivered on June 29, 1932, with a letter to the defendant bank which read in part as follows: “In view of present developments it is evident that this instrument will not be used, and it is therefore returned for your files.” On September 28, 1932, defendant bank sent to the Federal Reserve Bank its note for $50,000,000 in terms as prescribed by the resolution of June 27, 1932, with a letter as follows: “Pursuant to the agreement made under the loan application of the undersigned to the Reconstruction Finance Corporation dated June 27, 1932, we are handing you herewith our promissory note, payable to the order of Reconstruction Finance Corporation, dated October 3, 1932, maturing December 24, 1932, in the principal amount of $50,000,000, bearing interest at the rate of 5%% per annum payable at maturity. “Please notify the Reconstruction Finance Corporation of the receipt by you of the aforementioned note of the undersigned and arrange to credit our account with the proceeds of the note on October 3, 1932.” On September 29, 1932, defendant bank requested the return of the $50,000,000 note in a letter to the Federal Reserve Bank, as follows: “Referring to our letter of the 28th with reference to payment of the balance of the loan of the Reconstruction Finance Corporation to us, we will not need the balance of the loan earlier than October 5th and possibly not before the 10th of October. “Accordingly it will be a sufficient compliance with our request to make such payment on October 5th or such later date as we may request. If you will return to us the note enclosed in our letter we will at the proper time substitute a new note bearing the proper date. “You may advise the Reconstruction Finance Corporation accordingly.” ' The note was returned to defendant bank and never became an effective obligation of the maker. On the afternoon of October 4, 1932, the organization papers of the City National Bank & Trust Company of Chicago were filed with the Comptroller of the Currency, and the. certificate of the Comptroller was issued late in the day on October 5, 1932. The books of the City National Bank were opened on the morning of October 6, 1932. At a special meeting of the directors of defendant bank at Q. p. m. on October 5, 1932, Charles G. Dawes, chairman of the board, Philip R. Clarke, president of the bank, and certain other directors resigned. Joseph E. Otis was elected chairman of the board. The board then passed a resolution authorizing officers of defendant bank to-transfer to plaintiff any notes and securities pledged to plaintiff, in payment of all or any part of the loan from plaintiff and the Chicago banks. The board also authorized a lease of certain premises from defendant bank to the Central Republic Company. The payment of rent was to be secured by the pledge of 5,000 shares-of the capital stock of City National Bank to be issued to Central Republic Company. The board further authorized the execution of agreements between defendant bank and plaintiff, whereby defendant bank should assign to plaintiff the rentals to be paid under the aforesaid lease, together with the security rights of defendant bank in said 5,000 shares of stock of the City National Bank, pledged by the Central Republic Company, as additional security for any indebtedness of defendant bank to plaintiff. The board of directors' also passed a resolution, in which after reciting that “in view of existing conditions the Board of Directors of this Corporation deem it to be in the interests of this Corporation and its stockholders to enter into and carry out the agreement,” the board authorized the execution of a contract between the defendant bank and the City National Bank, whereby the latter-bank would agree to assume the deposit liabilities of the former in consideration for the payment of cash funds aggregating the amount of said deposit liabilities. The board also authorized the payment in cash to the City National Bank of the amount of the unsecured deposit liabilities to be assumed by the City National Bank. The board also authorized the execution of an agreement between defendant bank and the City National Bank, whereby the latter bank would-supply office space and personnel for servicing the real estate loan department and the trust department of the former bank. Late in the afternoon of October 5, 1932, defendant bank mailed to all persons having commercial deposits with the bank the following notice: “Effective tomorrow the Commercial, Savings and Checking-Savings Departments of this bank are being transferred to the City National Bank and Trust Company of Chicago. “The new bank will be located in our present banking quarters at 208 South La Salle Street. “Customers of these departments will experience no inconvenience in transacting their banking business as they will deal for the present with the same employees who have served them in the past. Checks drawn on the Central Republic Bank and Trust Company will be honored at the City National Bank and Trust Company. “The services of our Trust Department and Real Estate Loan Department will be carried on by the Central Republic Bank and Trust Company as heretofore. Our Investment affiliate, Central Republic Company, will also continue its business in its present quarters as in the past. “We are confident that the changes outlined above will assure for our customers a maintenance of a banking service of the calibre we have always sought to render.” On October 5, 1932, defendant bank sent to plaintiff’s Chicago loan agency its note for $50,000,000, dated October 6, 1932, in terms, except as to date and amount, the same as the other notes made by defendant bank to plaintiff’s order. The letter transmitting the note stated: “Referring to our letters to Federal Reserve Bank of Chicago, of September 28, and September 29, 1932, we hereby advise you that we have need of the sum of Fifty Million Dollars ($50,000,000), being the undisbursed balance of the commitment of Reconstruction Finance Corporation to the undersigned. “We therefore are herewith handing to you our new note payable to the order of Reconstruction Finance Corporation, dated October 6, 1932, maturing December 24, 1932, in the principal amount of Fifty Million Dollars ($50,000,000) bearing interest at the rate of five and one-half per centum per annum payable at maturity. “Will you arrange to credit our account at the Federal Reserve Bank of Chicago with the sum of Fifty Million Dollars ($50,000,000), representing the proceeds of said note, on October 6, 1932.” On October 5, 1932, plaintiff’s, loan agency sent the note to plaintiff’s fiscal agent, Federal Reserve Bank of Chicago, with a letter which stated: “I hereby certify that the attached Exhibit E, primary obligation of the above named applicant, in the amount of $50,000,-000.00 is in proper form and applies to loan from the Reconstruction Finance Corporation which the Board has approved for $90,000,000.00, subject to conditions, if any, stated in Treasurer’s telegraphic or mailed advice of approval. Washingtoñ telegraphic advice of approval contains the condition that $30,000,000.00 shall be available to said bank against delivery of certificate signed by Agency Manager, Reynolds, Traylor, Milford and Buss. The above condition has been complied with. “Washington telegraphic approval also further states that advance in excess of $30,000,000.00 and up to $90,000,000.00 conditioned upon agreement satisfactory to Agency and Agency Counsel providing for participation in loan of other banks, Chicago, $5,000,000.00, in total of $95,000,000.-00 on understanding they also approve collateral, and that we have control of handling thereof. “The agreement referred to above is in your possession and has been duly approved by the Agency Manager and Agency Counsel. “Washington telegraphic approval further requires the Agency Manager or Agency Counsel to furnish to you, as Custodian, a certified copy of Resolution of Directors authorizing borrowing. “This requirement has been complied with and the resolution is in your hands as a part of the formal application. “An original disbursement of $10,000,-000.00 was made on June 27, 1932, and a supplemental disbursement of $30,000,000.-00 was made on June 29, 1932. In keeping with the authority contained in the Board’s Resolution, as set out in Leach’s telegraphic advice of approval, you are authorized to advance an additional $50,000,000 as per directions of the applicant.” The words “Washington telegraphic advice of approval”, “Washington telegraphic approval” and “Leach’s telegraphic advice of approval” in this letter referred to the telegram of June 27, 1932, authorizing the disbursement of the entire $90,000,000 loan. On October 6, 1932, between 7 and 8:15 a. m., the Federal Reserve Bank gave to defendant bank its check for $50,000,000, dated October 6, 1932. The check was indorsed at once and deposited to the credit of defendant bank at the Federal Reserve Bank before 8:15 a. m. There were no resolutions of plaintiff’s board approving the disbursement other than those of June 27, 1932, set out above, and there is no evidence of any other action of plaintiff’s board approving said disbursement. At the same time on October 6, 1932, the four participating Chicago banks disbursed to defendant bank amounts aggregating $2,777,777.78. The draft of one of the banks was dated October 6, 1932; the drafts of the others were dated October 5, 1932. None of them was to be paid, and none of them was paid, until the delivery of the $50,000,000 check to defendant bank by plaintiff. The drafts were deposited to the credit of defendant bank in the Federal Reserve Bank. As a result of the withdrawal of money by depositors and its inability to borrow from other banks on its collateral, defendant bank would have been obliged to close its doors shortly after June 25, 1932, if it had not been able to obtain the loan on its collateral which was made by plaintiff. The losses in the conduct of the business of defendant bank and the withdrawal of deposits, increased during July, August, and September, 1932; and the evidence clearly shows that if its. deposit liabilities had not been transferred to another bank, defendant bank would have been obliged, within a short time, to close its doors and go into liquidation. The agreement for the assumption of depositors’ liabilities became effective in tlie morning of October 6, 1932. The City National Bank at the opening of business on October 6, 1932, assumed all unsecured deposit liabilities and certain other current liabilities of defendant bank. Those liabilities were in the aggregate amount of $72,330,629.11. Defendant bank paid to City National Bank an amount of cash or cash items equal to the amount of such liabilities. The cash and cash items so paid included, among others, the $50,-000,000 disbursed by plaintiff on October 6, 1932, the amounts contributed by the four Chicago banks on their loan, and about $9,300,000 representing the balance of the account' of defendant bank with the Federal Reserve Bank of Chicago at the opening of business on October 6, 1932. Those amounts were represented by a draft for $62,121,060.14 drawn by defendant bank on the Federal Reserve Bank to the order of City National Bank. The draft was deposited in Federal Reserve Bank to the credit of City National Bank. None of the funds disbursed by plaintiff or the four Chicago banks on their loans was used to furnish capital or surplus of City National Bank. On October 6, 1932, plaintiff purchased from defendant bank some of the collateral pledged to plaintiff and the four Chicago banks for their loan, and the plaintiff then sold the collateral so purchased to the City National Bank. The amount of such purchase was $15,051,201. Plaintiff made an appropriate credit for the amount of collateral purchased from defendant bank to the indebtedness of defendant bank and the four participating banks. Early in the morning of October 6, 1932, defendant bank entered into an agreement with the City National Bank, whereby the latter bank agreed to supply office space and personnel for servicing the real estate loan department and trust department of defendant bank. The Central Republic Company was an affiliate of defendant bank, all of its stock being held by trustees for the pro rata benefit of the stockholders of defendant bank. Pursuant to the resolution herein-above mentioned (p. 22) defendant bank leased to Central Republic Company certain premises in the building located at 134 South La Salle street, Chicago, 111., including the ground floor, the main floor, one-half of the third floor and certain vault space in the basement. The lease was dated October 5, 1932, and was for a term commencing October 5, 1932, and ending October 14, 1938, with rent payable in the aggregate amount of $1,000,000 for the entire term. This lease was executed in the afternoon of October 5, 1932, and was delivered in the morning of October 6, 1932. In accordance with the same resolution, the defendant bank entered into an agreement with the Central Republic Company whereby the latter company agreed to pledge 5,000 shares of the capital stock of the City National Bank as security for the lease of said premises at 134 South La Salle street. This agreement was dated October 5, 1932, and executed in the afternoon of October 5, 1932, and was delivered in the morning of October 6, 1932. In accordance with the same resolution the defendant bank entered into two agreements with the plaintiff assigning respectively the rentals under said lease with the Central Republic Company and the security rights under said agreement pledging 5,000 shares of stock of the City National Bank, to the plaintiff “as additional security for all indebtedness now or hereafter owing by said Central Republic Bank and Trust Company to Reconstruction Finance Corporation.” These agreements were dated October 5, 1932, were executed in the afternoon of October 5, 1932, and were delivered in the morning of October 6, 1932. On, and a few days prior to, October 6, 1932, the plaintiff knew that the $50,-000,000 which it was to disburse to the defendant bank on October 6, 1932, would be transferred to the City National Bank in consideration for the assumption by that bank of the deposit liabilities of the defendant bank. The following documents were prepared by Messrs. Pam and Hurd, as counsel for the defendant bank, and were approved, prior to their delivery, by counsel for the plaintiff: The agreement for the assumption by City National Bank of- the' deposit liabilities of the defendant bank; the lease dated October 5, 1932, ber tween the defendant bank and Central Republic Company; the pledge agreement between the defendant bank and the Central Republic Company securing the payment of rentals under said lease; the assignments by the defendant bank to the plaintiff of the rentals under said lease and the security rights under said pledge agreement; the agreement between the defendant bank and the City National Bank for the servicing of the real estate loan department and the trust department of the defendant bank; the assignment of notes- and securities from the defendant bank to the plaintiff; and the assignment of notes and securities from the plaintiff to the City National Bank. Messrs. Pam and Hurd also prepared the necessary papers for the organization of the City National Bank. These documents were not referred to counsel for the plaintiff but such counsel were assured by the morning of October 6, 1932, that the City National Bank had been duly organized. On October 5, 1932, the directors of defendant bank sent to its stockholders a communication as follows: * * “The nation-wide decline in bank deposits which culminated last June in a succession of local outlying bank failures, resulted in very heavy withdrawals from Central Republic Bank and Trust Company. The situation became so acute that to maintain adequate protection of depositors, it was necessary to borrow a substantial sum of money. While this restored the favorable cash position of the bank, it imposed a severe burden in the form of interest on the money' borrowed. “Drastic reductions had been made in overhead and salaries but the shrinkage in earning assets due to declining deposits was making it increasingly difficult to meet fixed rental obligations and other charges. Therefore when the cost of borrowed money was addeff to the other operating expense, the continuation of the Central Republic Bank and Trust Company without some readjustment could only have the effect of a steady impairment of its assets. ■ “The problem of how to remedy this uneconomic condition has for the past two months had the constant attention of your Board of Directors. Every effort was made to devise a plan that would retain intact the business of the bank. A careful analysis, however, of all of the factors involved, and particularly the high fixed rental charges, made it apparent that continued operating losses were inescapable and could only result ultimately in forced liquidation. This would have meant a sacrifice of the assets and would -also carry the inherent threat of a stockholders’ liability. “Therefore it was finally concluded that the Central Republic Bank and Trust Company could only be enabled to remain in existence and proceed in orderly liquidation by divesting itself of its deposits and having them assumed by an outside and distinct institution. “The deposits of Central Republic Bank and Trust Company have been taken over and assumed by City National Bank and Trust Company of Chicago, a newly formed bank with fully paid in capital and surplus of $5,000,000 ($4,000,000. capital and $1,000,000 surplus) provided by a syndicate organized for that purpose. “As a collateral result of such action an advantageous settlement of certain other burdensome obligations of the bank was made possible. All of this is obviously in the best interests of the stockholders as it permits a realization of the assets to be made carefully during a prospective period of business recovery. “Furthermore an agreement has been entered into with this new National Bank whereby it will service the administration of the Trust and Real Estate Loan Departments of Central Republic Bank and Trust Company upon a basis of divided earnings which is considered equitable. Therefore while the Central Republic Bank and Trust Company ceases to accept further deposits it will continue, with the assistance of the new National Bank, to operate its Trust and Real Estate Loan Departments and collect or realize upon its assets. “Under the terms of the syndicate agreement whereby City National Bank and Trust Company of Chicago was organized, your Directors secured for the stockholders of the Central Republic Bank and Trust Company for sixty days the option to subscribe for the stock of City National Bank and Trust Company at the same price paid by the members of the syndicate—namely $125 per share. Thus in addition to the advantages of the orderly liquidation, the stockholders are also given the privilege of acquiring their proportionate interest in the new bank. “Some suitable form of warrant evidencing the right to subscribe will be forwarded to all stockholders at an early date.” On October 18, 1932, the managers of the original syndicate which originally subscribed for the entire capital of the City National Bank, sent to the stockholders of the defendant bank a notice that under the terms of the syndicate agreement they were entitled to purchase for cash one share of stock in the City National Bank for each 3% shares of defendant bank; that the capital stock of the City National Bank was $4,000,000 with a surplus of $1,-000,000; that the price at which the stockholders were permitted to purchase stock of the City National Bank was $125 per share, the price paid by the syndicate for the shares acquired by it. Certain stockholders of the defendant bank purchased 123 shares of the capital stock of City National Bank. The Central Republic Company subscribed and paid for 11,200 shares of the 40,000 shares of the stock of the City National Bank, paying therefor the subscription price of $125 a share. On October 20, 1932, notice was given to the stockholders of defendant bank of a stockholders’ meeting to be held on November 19, 1932. At the meeting on November 19, 1932, 99,927 shares of the capital stock of defendant bank, out of a total of 140,000 shares, were represented either • in person or by proxy. At this meeting by vote of 98,271 shares to 280 shares the following resolution was adopted: “Be it resolved by the stockholders of Central Republic Bank and Trust Company that the stockholders of this corporation do hereby in all respects ratify, approve and confirm the action of the Board of Directors of this corporation in authorizing, and the action of the officers of this corporation in consummating, the following transactions in respect of the readjustment of the affairs of this corporation, to wit: “(a) A transaction whereby on or about June 27, 1932 this corporation entered into an arrangement for a loan from Reconstruction Finance Corporation and certain Chicago Banks associated with it in such loan and did pledge as security for the repayment of such loan all or substantially all of the assets of the corporation existing at the time of such pledge other than the items in the balance sheet comprising ‘Total Cash Means.’ “(b) A transaction consummated on or about the 6th day of October, 1932, whereby this corporation transferred to Reconstruction Finance Corporation, pursuant to an instrument of transfer’entered into at that time, certain notes and securities in partial payment of said loan. “(c) A transaction entered into on or about October 6, 1932 whereby pursuant to an agreement between the parties for that purpose City National Bank and Trust Company of Chicago assumed the deposit liabilities of Central Republic Bank and Trust Company against the payment by Central Republic Bank and Trust Company to City National Bank and Trust Company of Chicago of cash funds equal to the deposit liabilities so assumed. “(d) A transaction entered into on or about the 6th day of October, 1932 whereby under an agreement entered into between the parties for that purpose City National Bank and Trust Company of Chicago undertook to service the activities of the Real Estate Loan and Trust Departments of Central Republic Bank and Trust Company for a period of three years upon a basis of fifty per cent of the net earnings of such Departments and of the corresponding Departments of City National Bank and Trust Company of Chicago going to City National Bank and Trust Company of Chicago and the remainder thereof going to Central Republic Bank and Trust Company. • “(e) A transaction whereby on or about October 5, 1932 this corporation leased to Central Republic Company, for a term of years, certain space in the building owned by this corporation at 134 South LaSalle Street and assigned to Reconstruction Finance Corporation as security for this corporation’s loan the benefits from time to time accruing to this corporation under such lease. “(f) Transactions consummated on or about October 6, 1932 whereby certain leases in the loop district to Central Republic Bank and Trust Company and/or its predecessors as lessee were canceled. “And do further in all respects ratify, approve and confirm all action of the officers and/or Directors of this corporation incident to or in furtherance of any of the foregoing transactions.” At the same meeting the offer of the City National Bank to modify the contract relating to the servicing by that bank of the real estate loan department and the trust department of defendant bank was modified so that the contract should be terminable at any time on or after six months from its date at the option of the defendant bank upon three months’ notice to the City National Bank of such intended termination. At'the same meeting a resolution was adopted changing the name of defendant bank to Central Republic Trust Company, which change of name was approved by the Auditor of Public Accounts of Illinois, on November 26, 1932. The names of defendants who, as stockholders, voted for or against the resolution approving the transactions with plaintiff and City National Bank & Trust Company are stated in Plaintiff’s Exhibits 102, 102-A to 102-1, inclusive, 103 and 103-A to 103-BB, inclusive, which are made a part of these findings. The agreement between defendant bank and City National Bank & Trust Company relative to the servicing of the trust and real estate loan departments of defendant bank was modified early in 1933, and that contract as modified continued in force until October 6, 1935, after which date the trust department and real estate loan department of defendant bank were operated by the receiver of the defendant bank. Defendant bank received deposits until the transfer of its deposit liabilities to City National Bank on October 6, 1932. Defendant bank did not receive any deposits after the morning of October 6, 1932. It had directors, officers, and employees after October 6, 1932. At the end of October, 1932, the bank had 19 officers and 85 other employees. At the end of October, 1934, there were 7 officers and 57 other employees. From October 6, 1932, until November 21, 1934, when a receiver was appointed for the defendant bank, the bank paid salaries to its officers and employees in the aggregate sum of $517,501.49. For the month of November, 1932, the total salaries paid were $36,007.73. For the month of October, 1934, such salaries amounted to $15,147.36. For the month of October, 1932, defendant bank paid rent in the amount of $25,589.18. From January 1, 1933, to the end of November, 1934, the bank paid rent at the rate of $2,343.33 each month. The defendant bank retained its membership in the Federal Reserve system until after October 19, 1932. The stockholders, board of directors, and executive committee of defendant bank continued to hold regular meetings after October 6, 1932. The stockholders held annual meetings in January, 1933, and January, 1934. The directors held regular meetings until October 5, 1934, and the executive committee held regular meetings until it was abolished early in 1934. From October 6, 1932, until November 21, 1934, the commercial department of defendant bank was engaged in realizing upon, servicing and otherwise protecting its assets, most of which were pledged to the plaintiff and the four participating banks. The officers of defendant bank from time to time renewed commercial loans that had previously been made by the bank, and reported such renewals either to the board of directors or its executive committee. During this period defendant bank made regular commercial loans to persons already indebted to it ■ for the purpose of enabling those persons to earn funds to pay their debts to the bank. The loans were made by officers-of defendant bank, who investigated and approved the loans. The persons who renewed the commercial loans, and those who were engaged in realizing upon them, servicing and otherwise protecting the assets of the bank, were officers and employees of defendant bank. They were paid by defendant bank out of its operating fund, and none of them was paid by the City National Bank. After October 6', 1932, the trust business of defendant bank was continued in accordance with the servicing agreements of City National Bank. Defendant bank had a trust investment committee composed of officers and one director of the bank. That committee had a secretary ■ who presented reports concerning the investment of funds or changing of investments. The files of the trust department of defendant bank were kept in its vaults or in the custody of the officers of the trust department. City National Bank paid the salaries of employees of defendant bank in the trust department. Its officers and employees were also officers and employees of City National Bank, but, when working on trust accounts in defendant bank, they were responsible to the board of directors and the executive committee of defendant bank and not to the City National Bank. During this period, defendant bank qualified as executor under a will. The real estate loan department of defendant bank carried on its full operations of servicing real estate items, collecting rents and interest and principal on mortgages for its clients until about March, 1933, when City National Bank took over that servicing under the agreements between it and defendant bank. Thereafter the real estate loan department operated in the same manner as the trust department. The officers of the real estate loan department were also officers of City National Bank. New loans were made by these officers on behalf of defendant bank under the authority of the board of directors. No loans were made with funds of defendant bank, but were made for the account of other persons, especially insurance companies. From March, 1933, until November 20, 1934, defendant bank continued to operate and service certain real estate assets which it owned. After the transfer of deposit liabilities to City National Bank on October 6, 1932, defendant bank had remaining cash and unpledged assets in the „ amount of about $5,000,000. These assets were used as an operating fund for the purpose of paying expenses of the bank. Under the agreements for servicing of the trust and real estate loan departments City National Bank paid to defendant bank between $9,-000 and $12,000 each month from October 6, 1932, until November 21, 1934, as its share of the earnings of those departments. This income became part of the operating fund. On December 6, 1933, the operating fund of defendant bank amounted to approximately $4,000,000 in cash and unpledged assets. Prior to October 6, 1932, defendant bank occupied a part of the building located at 208 South La Salle street, Chicago, 111., under sixteen separate leases with an aggregate monthly rental of $73,-600. The leases covering most of the space occupied by defendant bank did not expire until 1959. On October 6, 1932, all of these leases were canceled under an agreement with the lessor, and at the same time a new lease for about two-thirds of the premises occupied by defendant bank was made to City National Bank. After October 6, 1932, and until October 10, 1932, defendant bank and City NationaTBank together occupied the quarters at 208 South La Salle street leased by City National Bank under the new lease. After October 10, 1932, and until December 10, 1932, defendant bank occupied approximately 18,-000 square feet of the first floor of the premises located at 208 South La Salle street, which had not been leased to and were not occupied during said period by said City National Bank. In accordance with the provisions of the cancellation agreement, defendant bank paid rentals for the month of October, 1932, due to the lessor under the sixteen leases above referred to. Thereafter City National Bank reimbursed defendant bank for the proportion of the rental from October 6, 1932, to October 31, 1932. Defendant bank on December 10, 1932, vacated the premises at 208 South La Salle street, and thereafter, until the appointment of the receiver, occupied premises at 134 South La Salle street and paid rent therefor at the rate of $1,968.33 per month. The note of defendant bank dated June 27, 1932, for $10,000,000 has been fully repaid. At the close of business November 19, 1934, there remained unpaid on the $30,000,000 note the principal amount of $7,103,710.25, plus certain accrued interest. On the same date there remained unpaid on the $50,000,000 note the principal amount of $49,456,036.61, plus certain accrued interest. At the close of business January 15, 1936, there remained unpaid on the $30,000,000 note the principal amount of $7,099,554.61, plus accrued interest in the amount of $1,357,250.51, and on the $50,000,000 note the principal amount of $47,291,841.78, plus accrued interest in the amount of $107,197.27. Until the appointment of the receiver on November 21, 1934, plaintiff credited only $543,963.39 on the $50,000,000 note. After the appointment of -the receiver plaintiff credited all payments which it received upon the $50,000,000 note. All such payments received since the appointment of the receiver were derived exclusively from the proceeds of the pledged collateral, except about $3,800 which was remitted by the receiver to plaintiff. Prior to November 21, 1934, all transactions with reference to the collateral pledged by the defendant bank as security for the loans of the plaintiff and the four participating banks, such as payments, renewals, extensions, substitutions, and withdrawals of prime collateral and subcollateral items, were entered into by plaintiff at the request, and upon the application, of the defendant bank, or, in the routine cases arising in the regular course of business, by the Federal Reserve Bank of Chicago as fiscal agent for the plaintiff. In all cases where such transactions did not originate in the defendant bank, that bank received prompt notice of the material details of the respective transactions. From November 21, 1934, until the present time, the plaintiff has liquidated the collateral and has given prompt notice of the material details of all transactions concerning said collateral to the receiver of the defendant bank. The defendant bank and later its receiver made a daily reconciliation of the figures on its books with the figures on the books of the Federal Reserve Bank of Chicago, as fiscal agent of the plaintiff, with respect to bills payable and interest charges. On July 17, 1934, plaintiff made demand on defendant bank for the payment of the principal and interest due upon the $30,000,000 and $50,000,000 notes. Defendant bank responded that it was unable to comply with the demand. On November 19, 1934, the defendant bank was unable to meet its debts as' the