In Re Liquidation of Farmers Trust Co.

45 N.E.2d 10, 112 Ind. App. 692, 1942 Ind. App. LEXIS 87

• Court: Indiana Court of Appeals
• Decided: December 1, 1942
• Docket: No. 16,920.
• Status: Published

Opinions

Stevenson, J. —

The legal questions presented -by this appeal can be understood best by a recital of the facts out of which the controversy grew. On March 5, 1930, the Farmers Trust Company and the Citizens Trust Company were each operating as banks of discount and deposit under the laws of the State of Indiana, in the City of Fort Wayne. Prior to that- date, the board of directors of the Farmers Trust Company had authorized a special committee to investigate the possibility of a consolidation of said bank with some other banking institution in the city. At the meeting of the board of directors on March' 5, 1930, a contract with the Citizens Trust Company regarding consolidation was presented to the board of directors of the Farmers Trust Company. A meeting of the stockholders was called March 10, 1930, for the purpose of ratifying this contract. At this stockholders meeting the contract was ratified by more than eighty per cent of the stockholders, and aS' a result of such ratification the contract was, by the board of directors, ratified and accepted.

This contract provided generally that in consideration of the mutual' agreements therein contained:

“That the Citizens Trust Company will well and truly pay or cause to be paid the depositors of the said The Farmers Trust Company on demand the amounts due them in accounts designated commercial deposits, trust deposits, savings deposits, contract deposits and time certificate deposits as the same appear of record on the books of the said The Farmers Trust Company, on the date of this transfer.

“Further, it will likewise pay or cause to be paid the bills payable of said The Farmers Trust Company as the same likewise appear of record.”

The contract further provided that in consideration of the payment of the above obligations, the Farmers Trust Company, by and through its board of directors, should execute a promissory note to the Citizens Trust Company “in the full amount of said deposits and bills payable, collateraled and secured by all and singular the assets of said the Farmers Trust Company as the same appear of record on the date of this transfer.” It was further provided in the contract that the Farmers Trust Company would at the time of closing “grant, bargain, sell, assign, pay, transfer and deliver unto the Citizens Trust Company as its sole and absolute property, such portions of the notes, securities and other assets owned by the Farmers Trust Company at said closing time as shall be selected by the said Citizens Trust Company,” and further agreed that if for any reason the Citizens Trust Company became dissatisfied with any notes or. securities acquired by it under the provisions of this contract, that it should have the right at any time on or before September 1, 1981 to return such notes and securities, and the Farmers Trust Company agreed to pay therefor their cash value.

To secure the performance of this agreement, the Farmers Trust Company further agreed “to pledge and deposit with the Citizens Trust Company at the closing time, all assets of the Farmers Trust Company existing at the closing time not granted, bargained, sold, assigned, paid, transferred and delivered to the Citizens Trust Company . . . , said assets to be known and hereafter referred to as the ‘Guaranty Fund.’ ”

. The Citizens Trust Company was given full power and authority to collect these obligations so pledged, and all collections so made by the Citizens Trust Company should be credited on the note of the Farmers Trust Company given to the Citizens Trust Company for which such notes and securities were collateral. It was further stipulated that the Citizens Trust Company should determine on or before September 1, 1931 what securities it would return and it was further agreed not to extend the time of payment on any obligation not accepted by them beyond September 1, 1931. It was further stipulated: “Whenever the Farmers Trust Company shall have paid the Citizens Trust Company in accordance with the terms of this agreement all of its obligations in full, any sum remaining in the Guaranty Fund or property of the Farmers Trust Company held by the Citizens Trust Company as collateral security for its obligation shall be returned to and become the property of the Farmers Trust Company.”

The record further discloses that, on September 1, 1931 the Farmers Trust Company executed a certain promissory note payable September 1, 1932 in the principal sum of $575,000.00 as a renewal of the note stipulated in the contract, and this* note forms the basis of the.cause of action now before this court.

On June -22, 1932, Edward F. Scheumann was appointed receiver of the Citizens Trust Company, and immediately took possession thereof for the purpose of liquidation. On January 3, 1938, the Department of Financial Institutions of the State of Indiana filed its notice in the office of the clerk of the Allen Circuit Court to the effect that it had taken charge of the Farmers Trust Company for the purpose of liquidation.' On February 13, 1938, Carl E. Kaser appellee was appointed special representative for the Department of Financial Institutions to administer the assets of the Farmers Trust Company. On February 26, 1938, the said Carl E. Kaser as special representative filed an inventory of all the assets and liabilities coming into his knowledge and possession, showing a total of assets listed in the amount of $329,658.83, and liabilities in an equal amount, and other additional liabilities listed, including judgments payable, in the amount of more than $22,000.00. This schedule contained the further statement that all of these assets were held by the receiver of the Citizens Trust Company under an alleged pledge and hypothecation to secure the payment of a promissory note. Notice of the filing of this schedule was' published, and on March 3, 1938, said Carl E. Kaser, as special representative for the Department of Financial Institutions, filed his schedule of claims, among which was listed the claim of the Federal Land Bank of Louisville, Kentucky, on a deficiency judgment totaling $5,916.74, and also the claim of Edward F. Scheumann as receiver for balance due on note in the principal sum of $326,000.00. The special representative recommended that said claims be allowed without priority or preference.

On March 25, 1938, appellant Lee J. Hartzell and others filed objections to the allowance of these claims, which objections were set forth in nine paragraphs. These objections were for and on behalf of the stockholders in the Farmers Trust Company, and alleged among other things: (1) A payment of the $326,000.00 note; (2) a transfer and sale of all the assets of the Farmers Trust Company to the Citizens Trust Company in consideration of full payment of their indebtedness; (3) a want of consideration; (4) that said note was executed without authority.; (5) that said contract was ultra vires. Other paragraphs of answer were addressed to claims not here in contest.

On March 29,1938, Edward F. Scheumann as receiver of the Citizens Trust Company filed a claim for priority on the note held by him over all other creditors, in which claim he asserts that all the assets of the Farmers Trust Company save and except the stockholders liability were pledged by the Farmers Trust Company to secure the payment of the note sued upon which forms the basis of his claim.

On April 18, 1938, the court ordered alias writs t,o all creditors and appearances were made thereto by the Federal Land Bank of Louisville among other creditors. On December 15, 1938, the appellant Federal Land Bank filed an answer in two paragraphs. The second paragraph alleged that on February 24, T927, the Federal Land Bank had loaned $11,500.00 to one Ervin Kaiser and wife, which loan was secured by a first mortgage on certain real estate in Wells County, Indiana. This obligation the Farmers Trust Company assumed and agreed to pay, and which obligation was reduced to a judgment by the Federal Land Bank against the Farmers Trust Company on September 9, 1935. The answer further alleged that there remains unpaid on this judgment approximately $5,900.00, which judgment is a lien upon all the assets of the Farmers Trust Company by virtue of an execution issued upon said judgment as of November 20, 1936. The answer further alleges that the transfer of the assets of the Farmers Trust Company to the Citizens Trust Company is a fraud upon the creditors and, therefore, null and void. The Federál Land Bank accordingly prayed that the lien of its judgment be adjudged prior and superior to the lien of the Citizens Trust Company.

On the issues presented by these pleadings the case was submitted to the court for trial, and the court after hearing the evidence found for the claimant, Edward F. Scheumann, as receiver of the Citizens Trust Company, and that there was due him upon the note sued upon the sum of $442,828.03. The court further found that the claim of the said Scheumann, as receiver, was secured by the pledge by all the assets of the Farmers Trust Company except sums secured by reason of stockholders liability. The court further found that the claim of said receiver was prior and superior to the claims of all other creditors to the extent of said security so pledged, and that the said objectors Lee J. Hartzell and other stockholders. and the Federal Land Bank of Louisville should take nothing by their pleadings.' Judgment was entered accordingly. A motion for new trial was filed by the appellant Federal Land Bank of Louisville for the reason that the decision of the court was not sustained by sufficient evidence and is contrary to law. This motion was overruled and the Federal Land Bank of Louisville has appealed. A similar motion was filed by the appellant Lee J. Hartzell and likewise overruled.

The overruling of these motions constitutes the appellants’ assignment of error on appeal. On this appeal the appellants urge first that the contract by which the Citizens Trust Company took over the assets of the Farmers Trust Company was a contract for the sale of such assets and the assumption by the Citizens Trust Company of all of the liabilities of the Farmers Trust Company.

The appellees on the other hand contend that this contract was only a contract of sale as to certain assets, and an agreement to assume certain liabilities, to wit: deposit liabilities and bills payable, as shown by the books of the Farmers Trust Company. The appellees contend that the contract operated to pledge .all assets not purchased by the Citizens Trust Company to secure the payment of the liabilities assumed, which liabilities were represented by the original note and the renewal thereof which constitutes the basis of the claim of Seheumarin, receiver.

The appellant Lee J. Hartzell and other stockholders similarly situated, contend that the contract between the Farmers Trust Company and the Citizens Trust Company was a contract of purchase and sale of all the assets of the Farmers Trust Company in consideration for which the Citizens Trust Company assumed and agreed to pay all the liabilities of the Farmers Trust Company. The appellant Hartzell, therefore, contends that there was no consideration for the note in suit. The appellant further contends that if there was, in fact, a consideration for the execution of the note, that the Citizens Trust Company, having taken possession of all the assets of the Farmers Trust Company, the note in suit has been fully paid. The appellant makes the further contention that the execution of this note by the Farmers Trust Company was an ultra vires act.

We cannot agree with the appellant that this contract was a contract of sale of all the assets of the Farmers Trust Company, in return for their promise to pay all their liabilities. The contract itself specifically provides otherwise. By the terms of this contract it was expressly stipulated that the Farmers Trust Company would “grant, bargain, sell, assign, pay, transfer and deliver unto the Citizens Trust Company as its sole and absolute property such portions of the notes, securities and other assets” as should be selected by them, and all other assets were pledged as collateral security for the payment of the promissory note, which is executed by the Farmers Trust Company in the amount of the deposits and bills payable which the Citizens Trust Company had promised and agreed to pay. Under the provisions of this contract the Citizens Trust Company did not buy, and was not obligated to buy, all of the assets of the Farmers Trust Company. There is evidence in the record to support the court in its finding that it did not contemplate or make such a purchase. By the express provisions of the contract the Citizens Trust Company did not assume and agree to pay all the liabilities of the Farmers Trust Company. It only assumed and agreed to pay “commercial deposits, trust deposits, savings deposits, contract deposits and time certificate deposits,” as the same appear of record on the books of the said Farmers Trust Company on the date of this transfer. In addition to this it further agreed to’ pay the “bills payable of said The Farmers Trust Company” as the same appear of record on the books of the Farmers Trust' Company. It was entirely proper, therefore, for the contracting banks to agree as they did. with reference to the methods by which the remaining assets of the Farmers Trust Company should be handled after the Citizens Trust Company had selected those which they desired to purchase outright. Contracts of this character have been frequently before the courts of this State, and have been generally approved. In the case of South Bend State Bank v. Dept. of Financial Inst. (1938), 213 Ind. 396, 11 N. E. (2d) 689, the court had before it a case similar in many respects to the one now under consideration. The court said, p. 404:

“Looking at the contract as a whole, and considering the representation that the appellant was solvent; that it sought to avoid involuntary liquidation; that it desired that its creditors and depositors should be paid immediately; that the appellees agreed to make such immediate payments; that the cashier, assistant cashier, and bookkeeper of the appellant were employed by the appellees to assist in the liquidation, and the many other conditions surrounding the banking situation in South Bend at that time, leads to the inevitable conclusion that the contract did not contemplate an outright sale in the first instance, but was a pledge of the assets for the purposes named.”

It is apparent from a reading of this record that the Farmers Trust Company was desirous of discontinuing the banking business. In order to secure the payment of their deposit liabilities and bills payable it was necessary that they either borrow large sums of money or induce some other financial institution to take over these obligations. They accordingly determined to enter into this contract with the Citizens Trust Company rather than borrow $300,000.00, which the record discloses the board of directors had been authorized to do.

On the date of closing, the books of the Farmers Trust Company showed the following liabilities:

“Checking Accounts _____________$ 336,226.37

Demand Certificates_____________ 11,283.74

Trust Deposits_________________ 25,887.98

Time Certificates_______________ 221,899.33

Special Time Dep’s______________ 28,852.28

Time Sav. Deposits______________ 355,027.97

Cashier’s Checks________________ 7,655.97

986,843.64

Bills Payable___________________ 194,515.16

$1,181,358.80”

It was for the total amount of these obligations that the first note of the Farmers Trust Company was given. It was to secure the payment of this obligation-that the assets of the Farmers Trust Company were pledged. This the bank had unquestioned authority to do. As our Supreme Court has said: “The right of a bank to borrow money and pledge its assets •for the payment thereof is beyond serious question.” Shornick, Rev., v. Butler (1933), 205 Ind. 304, 308, 185 N. E. 111. See also Wilhelm v. Ryband (1939), 215 Ind. 281, 19 N. E. (2d) 551.

The record discloses that at the time of the execution of the note for the above amount there was delivered to the Citizens Trust Company assets as shown on the books of the Farmers Trust Company in the sum of $1,404,479.61. On the day of the transfer of these assets there was credited on the note an item of $52,074.08 which represented the cash and quick assets that day transferred to the Citizens Trust Company. Payments were made on this note from time to time thereafter as-the assets were liquidated until September, 1931 when the balance remaining due on the original note was embodied in a renewal note in the amount of $575,000.00. Further liquidation of the assets operated to reduce this note to the principal sum of $326,000.00 which forms the basis of this claim. As against this amount it still had on hand assets showing a book value .of $329,658.83. These assets the receiver of the Citizens Trust Company had been unable to liquidate.

The question, therefore, in its last analysis, is whether or not this note of the Farmers Trust Company is a valid obligation which the receiver is entitled to enforce. It is our opinion that it is.

A case similar to the case at bar was before the Supreme Court of the United States in the case of Wyman v. Wallace (1906), 201 U. S. 230, 50 L. Ed. 738. On facts very similar to those involved in this case, the Supreme Court said:

“We come, then, to the final question in the case, and that is whether the notes executed by the American bank were its valid obligations. And in reference to this question these are the significant facts: The demands against the American bank were pressing. It had not the money with which to meet them. It arranged with the Union bank to advance the money for the payment of all its outstanding obligations. When the Union bank paid these obligations of the American bank it was the same as though it advanced money to that bank to pay them. To reimburse and secure the former the latter bank turned over certain property, and executed these notes for the balance, securing them by a pledge of all its other assets, which were placed in the hands of its president, as trustee.

“All the stipulations and agreements made by the directors of the two banks were carried out in good faith; and, with full knowledge of what had been done, the stockholders voted for a-voluntary liquidation. The borrowing of the money by the American bank did not necessarily put it into liquidation. It had a large amount of assets, and if the real had equaled the nominal value of these assets, it would have been enabled, after discharging its obligation to the Union bank, to continue business. But, on an examination, the stockholders felt that it was wiser to stop at once. But that decision did not at all impugn the wisdom or bona fides of the transaction by which the money was obtained to pay off the pressing demands of the American bank. The question, therefore, is, whether a national bank, finding itself embarrassed^ with a large amount of assets, much in excess of its obligations, yet without the cash to make payment of those which are due and urgent, can borrow to meet those pressing demands. A very natural answer is, why not? It is not borrowing money to engage in a new business. It simply exchanges one creditor for others. There may be wisdom in consolidating all its debts into the hands of one person. At least such a consolidation cannot be pronounced beyond its powers.”

It is our opinion, therefore, that the decision of the trial court in holding that the note in suit was a valid obligation of the Farmers Trust Company is supported by the evidence and is not contrary to law. It is our further opinion that the execution of the note in suit by the officers of the Farmers Trust Company was not an ultra vires act. The court was not in error, therefore, in overruling the motion for a new trial by the appellant Lee J. Hartzell.

In addition to the objection raised by the appellant Hartzell, the appellant The Federal Land Bank of Louisville, Kentucky, contends that the court was in error in overruling its motion for a new trial for the reason that the evidence conclusively shows that the obligation due the Federal Land Bank by the Farmers Trust Company was one of the bills payable which the Citizens Trust Company, by their contract, became obligated to pay.

We have searched the record and have been unable to find any evidence which expressly identifies the obligation due the Federal Land Bank as one of the bills payable which appeared on the books of the Farmers Trust Company at the date of its closing. There is evidence from which the court might find that this obligation did not appear on the books of the Farmers Trust Company as one of its bills payable. Since the trial court evidentally found against the Federal Land Bank on this issue, this court is unable to disturb such finding on appeal.

The appellant The Federal Land Bank of Louisville, Kentucky, further contends that the rules of law governing the validity of the note in suit as heretofore announced in this opinion are not applicable where a bank transfers all of its assets in return for a promise to pay its liabilities. In disposing of this contention, it is sufficient to say that the record in this case discloses that the Farmers Trust Company did not dispose of all its assets under the provisions of the contract, and the rule contended for by the appellant accordingly has no application here.

The court accordingly committed no error in overruling the motion for new trial as filed by the appellant The Federal Land Bank of Louisville, Kentucky.

Finding no reversible error, the judgment of the trial court is affirmed.

Judgment affirmed.

Bedwell, J. — Dissents.

Flanagan, C. J. — Not participating.