Weicker v. Bromfield (34 F.2d 377, 1929)

McDERMOTT, Circuit Judge.

These eight appeals involve the same controversy. The eases were consolidated for trial and on thtó appeal. All are actions at law, tried to the court without a jury, and findings of fact made. The notes involved here are a part of a bunch of notes which were among the assets of the Globe National Bank at the time of its failure on September 19,1925. The receiver sued on the notes in six of the cases. In two of the eases the Globe National Bank had negotiated the notes to purchasers for value before maturity and the makers paid the notes. In one of such cases, No. 37, Donaldson sued the receiver to recover the payment made to such purchaser for value; in the other, No-. 2-9, Weieker was sued on two notes not in dispute, and counterclaimed for the amount of the note he had paid tó a purchaser for value, such note being one of those in dispute; and also counterclaimed for the amount of two small' deposits. If his counterclaim is good on its merits, his right to set it off is not challenged. In case No. 33, Knifton, denying the right of the receiver to- recover on the note sued on, counterclaimed for a deposit of $170'. In ease No. 36, Bartlett had given his note for $17,333.34 (one of the notes in dispute), had paid thereon the sum of $13,000, and was sued for the balance. He denied the right to recover on the balance, and counterclaimed for the amount paid. In case No. 30-, Bourk filed a similar counterclaim for a deposit of $1,827.-74. In the eases where affirmative relief! is •sought against the receiver, the note makers allege breach of contract, resultant damages, and pray for a money judgment, which they ask to have decreed a first lien upon all the assets in the hands of the receiver.

While the issues as joined involve some collateral matters, such as notes not in dispute and 'deposits, the only controversy presented is over eight notes, aggregating $186,-000 face value, which came into the possession of the Globe National Bank on July 6, 1925. In this opinion, the Globe National Bank will be referred to as the ¡Globe Bank, the Home Savings & Merchants’ Bank (a state banking institution) as the Home Bank, and the appellants aa the note makers.

The pleadings are not identical in form, but in substance they are the same. The note makers (a) deny that the receiver is the lawful owner of such notes; (b) allege absence of consideration; (e) allege that the notes were given in pursuance of an agreement by the terms of which the Globe Bank agreed to pay all the indebtedness of the Home Bank; agreed to forthwith deliver to the Home Bank notes of a par value in excess of $200,000; agreed to deliver to the Home Bank other notes of a par value in excess of $500,000 as soon as an aggregate sum of about $190,000' had been collected thereon by the Globe Bank; and agreed that it would not foreclose or dispose of the last-mentioned notes without first giving 120 days notice to representatives of the Home Bank. The answers allege that the Globe Bank violated this agreement in all particulars. One or two of the makers allege a wrongful delivery of the notes to the Globe Bank.

The trial court found for the receiver, and this appeal follows.

The essential faets are not in dispute. The note makers were directors and stockholders of the Home Bank, and early in 1925 were .undertaking to dispose of the bank to some institution which would assume and pay its obligations, and thus reheve them of their statutory liability as stockholders and at the same time protect their business reputations. In May of that year they asked Mr. G. E. Armstrong, a national bank examiner, to examine their bank. His report estimated the losses to be $891,235.57. The capital, surplus, and undivided profit account amounted to $503,803.84. He reported that the bank was insolvent, as in fact it was. July 1st was an interest-paying date on savings accounts, and, as that day approached, the efforts to sell the| bank became more marked. Other efforts failing, negotiations were opened with the Globe Bank, a smaller but then solvent institution. Any deal with the Globe Bank necessarily involved the approval of Mr. Armstrong, who was in touch with the situation at all times. On July 2d a meeting was held, attended by the officers of both banks, their counsel, and all of the directors •of both institutions excepting three or four. What happened at that meeting is testified to by the directors of the Home Bank and is not denied by the directors of the Globe Bank, although some of them were on the stand. Out of that meeting there emerged a plan, agreed to by both institutions, which was that a new state banking institution should be incorporated, to be called the “Globe Trust Company,” which was to take over both the Globe and Home Banks, and which would start business in the quarters of the Home Bank on Monday morning, July 6th. Officers of the new trust company were agreed upon and the trust company chartered on July 3d. The Globe Bank could not go into the merger, however, until the assets of the Home Bank were replenished. This was provided for by an agreement of the note makers to put up $186,000. For this $186,-000, the note makers were to receive approximately- $700,000 face value of notes and securities then belonging to the Home Bank, and which Mr. Armstrong had criticized. In addition, they were to réeeive 172 shares of the stock of the Globe Trust Company, and the Globe Trust Company was to assume the obligations of the Home Bank, and take over all its other assets. The note makers agreed to repay themselves for their $186,000 advanced out of thel $700,000 ofi criticized paper, the balance realized thereon to go to the stockholders of the Home Bank, In pursuance of that agreement, the notes in suit, and others, were executed. They were “myself” indorsed notes, transferable by delivery. They were intrusted to one of their number, Carl Ph. Schwalb, for delivery to the Globe Trust Company, in accordance with the agreement, excepting one or two which were made after it was known that the Globe National would go ahead with the plan, instead of the trust company; but as to these one or two notes, that was the only change in the conditions authorized by the makers.

On Saturday July 4th and Sunday July 5th the Globe Bank moved into the Home Bank. When they moved in, the plan was to open the morning of July 6th as the Globe Trust Company. Sunday evening the plan was changed by the officers of the Globe Bank and Mr. Armstrong, the bank examines Mr. Gates, the president of the Globe Bank, and a witness for the receiver, testified as to who made this fundamental change in the plan agreed to by the directors of both institutions. The men who undertook to change the plan were Mr. Gates, the president of the Globe Bank, Mr. Boot, the cashier of the Globe Bank, Mr. Staley, one of its directors, and Mr. Armstrong, the national bank examiner. Apparently it was not thought necessary to consult any one representing the Home Bank as to this change in their mutual agreement, for Mr. Gates testified:

“There was a discussion at the old quarters of the Home Savings & Merchants’ Bank, and there was a conference which I referred to between Mr. Armstrong and Mr. Staley and Mr. Boot and myself when we decided to go ahead as a national bank because we would have to do practically the same things, in fact, the same things; eliminate the questionable paper in the trust company, as we would in a national bank, and in that discussion it was thought best to go ahead as a national bank for the reason that we could retain some of our various bank accounts which otherwise we could not retain. The discussion I am now talking about is the discussion which occurred on Sunday afternoon. The four were present.”

Mr. Boot, the cashier of the Globe Bank, was equally naive. He testified:

“On Saturday, July 4th, the Globe National Bank was moving some of their property up- to the quarters, of the Home Bank. I don’t recall the day, -whether it was Saturday or Sunday. I know1 I was there both days I imagine. I was there both Saturday and Sunday, getting- both institutions together. The Globe National Bank was moving up. I guess the Globe Trust Company had not been thoroughly organized. I think the arrangement was to move up there and combine the assets, to open up on Monday as the Globe Trust Company. I didn’t know exactly what they were doing. I know the plan was changed Sunday afternoon. They decided to make the change to the Globe National Bank at office of the Globe National Bank with Mr. Gates, Mr. Staley, Mr. Armstrong and myself present. Up to that time we were moving in and fixing the quarters and posting the books, and preparing to open the bank Monday morning as the Globe Trust Company. I think at that time they had filed articles and made application for a charter for the Globe Trust Company.”

Mr. Gates testified, in explanation of this somewhat unusual method of modifying contracts, that this was the only change in the agreement they undertook to make. He said: “We would have to do| practically the same things, in faet the same things; eliminate the questionable paper in the trust company, as we would in a national bank;” and,

“Q. Mr. Gates, I want you to give to the court your understanding of the entire agreement under which those notes, aggregating $186,000, were received into the Globe National Bank at the time they were received by the bank. A. Well, these notes,-$186,000, were a part of the various items that were necessary to eliminate all paper which had been questioned by Mr. Armstrong. Then there was a further understanding when these notes were paid that the stockholders or stockholders and directors of the Home Savings & Merchants Bank were to receive a certain amount of this questionable paper in consideration of having put in the $186,000. I can’t give you the exact items, the other items, that went in to make up the approximately $700,000.00 worth of questionable paper.”

And again:

“Well, that is approximately as I have stated. The understanding was with Mr. Armstrong in connection, first, with the Globe Trust Company, and later, on July 5th, when we decided to go ahead as a national bank, the same amount of paper was to be taken out and in approximately the same way.

“Q. Let me see if I get you, Mr. Gates. As I see it then your evidence is that it was understood that the Globe Bank would take over the Home Bank, take its assets and assume its liabilities; that these notes aggregating $186,000.00 signed by these various stockholders were to come into the Globe National Bank; that certain criticized assets by Mr. Armstrong were to come out of the Globe Bank and go to these men who had signed these notes? A. When they paid the notes, yes. That was the agreement in connection with the Globe Trust Company. The matter had not been discussed further, as I recall, to any extent when we decided to go ahead as a national bank, but we all understood that the questionable paper would have to come out in either event, and that when these notes were paid, the $186,000.00, the men who gave the notes or the cash, a^ the ease might be, would benefit by the questionable paper which would be delivered to them, at that time.”

When Mr. Sehwalb, the custodian of these notes, was advised of this change, he was in a quandary. On Monday morning, the Globe Bank was in possession of all of the assets of the Home; was in its banking house; the Home had ceased doing business; and the Globe Bank was receiving its deposits and paying its cheeks. Mr. Armstrong was there to see that the $186,000 was turned over to' the Globe. He said he expeeted money. Mr. Sehwalb was sent for, and finally concluded there was nothing else to do but turn over the notes, which he did without consulting the makers. Mr. Armstrong and Mr. Gates testified that when the notes were delivered, nothing was said. Mr. Sehwalb and Mr.. Cannon testified that a good deal was said, including a restatement of the conditions under which the notes were given. It is a little unusual to consummate such a transaction without any words whatever, as Gates and Armstrong testify, particularly since Armstrong must have been greatly surprised, according to his evidence, to receive notes instead of cash. However, the trial court found nothing was said,'and we are bound by that conclusion. It is not at all material, how-' ever, whether the conditions were restated; Mr. Gates and Mr. ’ Armstrong knew the. terms of the agreement under which the notes were given, as Mr. Gates testified, and a restatement of them was unnecessary.

As the note makers found out, one by one, that the Globe Bank, and not the trust company, had their notes, and discovered that the Globe Bank still retained the $700,000 of criticized paper, and that there would be no 172 shares of stock of the trust company for them, they employed counsel. He and counsel. for the bank then started to try to work the thing out. The Globe Bank found itself in possession of $186,000 of paper, which it was carrying in its assets; it also had all of the assets of thei Home Bank,¡ including the $700,000 of criticized paper. A fundamental change in the agreement had been made without consent of the note makers. A ratification was, to say the least, most desirable. So counsel for the note makers and counsel for the/ bank started to work. The Globe Bank, now having possession of both the notes for $186,000 and the $700,000 of criticized pamper, commenced demanding other concessions. First, if could not deliver 172 shares of trust company stock, as agreed, and declined to deliver Globe 'Bank stock in lieu thereof, or anything else. Then, it is said, Mr. Armstrong would not permit it to give up the $700,000 of criticized paper. We quote from the uncontradieted' evidence of Mr. Denious as to these negotiations:

“Mr. Wright and I and Mr. Moore in that same conversation discussed the form of contract which we would make and I think it was agreed or I think it was requested by Mr. Wright at the ‘time that we should draw up a form off contract. We had subsequent negotiations and conversations in which Mr. Wright and Mr. Gates were both present, and they reported back to me that they could not deliver any of the stock of the Globe National Bank; that that feature of the contract would have to be eliminated. They could not carry it out, but that the other provisions of the contract would be, and I went back to my people and explained the situation to them, and after we had had another conference and it was agreed Mr. Wright and I both consented, and so did Mr. Gates, that we would eliminate this stock proposition, the 172 shares of stock, and then they brought up this modification of the securities of $700,-000.00. They said Mr. Armstrong objected to that feature of it, and that it would have to be this way: that they would turn over immediately the $200,000.00 in securities, but that the $700,000.00 would have to remain there until certain items were collected.”

These negotiations) bore their fruit in an agreement, a part of which was the execution of a written contract, signed by the two banks, and approved by a resolution, of the officers and directors of the Home; and the resolution was in turn indorsed “Approved,” followed by the signature of all of the appellants. The written contract is between the Globe and Home Banks, and, omitting formal parts, provides:

“Whereas, In the opinion of Colorado State Bank Commissioner, the capital, surplus and assets of Home Savings and Merchants Bank have become badly depleted so that said Home Bank can not with safety and within the provisions of the law continue in the banking business; and

“Whereas, Overtures were made to the Globe National Bank to take over the assets and deposits, of Home Bank and to assume and agree to pay its outstanding obligations; and.

“Whereas, as a condition precedent thereto, the Globe Bank required that cash, or its equivalent, in the sum of One Hundred Eighty-six Thousand Dollars ($186,000) be first provided or contributed by the Directors and Stockholders of the Home Bank, to the assets of said Home Bank as a part replenishment of the depleted assets of said Home Bank; apd

“Whereas, Certain Directors and Stockholders of Home Bank have complied with said condition and have advanced and contributed for the account of Home Bank the said sum of $186,000;

“Now Therefore, In consideration of Ten Dollars) ($10 ) each to the other in hand paid and other good and valuable consideration, receipt whereof is hereby acknowledged, it is mutually agreed by and between the Home Bank and the Globe/Bank, as follows:

“1. Home Bank has assigned and transferred, and does by these presents assign and transfer, to Globe Bank its entire assets of every kind and character existing as of date July 4, 1925, except those certain choses in action listed and appearing on Exhibit A hereto attached, which said ehoses in action are retained and reserved as the property of the Home Bank.

“2. The Globe Bank,1 accepts said assignments and delivery of the assets of said Home Bank as of date, July 4, 1925; and hereby assumes and agrees to pay all outstanding obligations of every kind and character of Home Bank existing as of said date July 4, 1925.

“3. Of the notes, collateral and choses in action hereby assigned to Globe Bank by Home Bank, it is mutually agreed and understood that as to the following items Globe Bank is to retain and hold the same until the amounts designated shall have been paid thereon, and in each instance when such amount so designated has been paid that thereupon the remainder of the notes, collateral' and securities representing said item shall be reassigned and delivered to the Home Bank, to-wit.”

Then 'follows a list of eleven items, with a provision as to each that it should be "delivered to the Home Bank when a specified sum was paid thereon. The face value of the securities -is not given, but the aggregate amount of the sums to be received by the Globe Bank before delivery was required, is $187,340.40.

The contract concludes:

“The Globe Bank agrees to appoint a Committee composed of Jno. Q. Adams, H. Brown Cannon and Thos. S. Cox and Geo. H. Knifton, to act in that respect, and agrees that it will not foreclose, sell or otherwise dispose of the collateral held as security for any of the above mentioned items without consulting said Committee, and will not foreclose or dispose of said collateral at public or private sale or by compromise, for less than the face value of the same without one hundred twenty (120) days previous written notice of its intention so to do, given to the Board of Directors of the Home Bank or the Liquidating Committee of Trustees: that may be appointed by it.”

Exhibit A is a list of securities of a total face value of $199,230.22.

This contract was executed on July 15, 1925. Shortly and repeatedly thereafter representatives of the Home Bank and the note makers demanded the securities listed in Exhibit A, but without success. They were finally |told that several days before the Globe Bank had signed the contract, acknowledging the right of the Home Bank to these securities, the Globe Bank had in fact appropriated them as collateral to a so-called “trustee’s note” for $76,000 which the Globe Bank claimed was an additional item of indebtedness of the Home Bank not theretofore disclosed. The Globe Bank thereafter paid no attention to the rights of the note makers of the Home Bank under the contract, gave no notice as required by the last paragraph of the contract, and later challenged its validity.

The result is that the Globe Bank and its receiver has retained the $186,000 of notes, retained all of the securities listed in Exhibit A, has never accounted for the collections on the securities listed in the body of the contract, or in /fact paid any attention to. its agreement. Having secured the ratification