Gelwicks v. Homan , 124 W. Va. 572 ( 1942 )

I doubt whether this transaction can properly be treated as a joint adventure for the simple reason that it was not formed for the purpose of profit, (see Springston v. Powell, 113 W. Va. 638,169 S.E. 459) but simply for the purpose of seeing that the additional stock of The First National Bank of Keyser was properly distributed to "those parties" who would add to the stability of all of the stockholders, and, perhaps incidentally, not be hypercritical of the existing officers and board of directors. There being no pecuniary profit involved, I believe the joint understanding by the directors could be more accurately designated as a joint business trust, Gelwicks acting as trustee and providing the necessary capital.

Passing the question as to the nature of the agreement, I am convinced that its effect was plainly a substantial violation of Title 12, Sec. 83, U.S.C.A., cited and quoted in the majority opinion, and being so cannot furnish a basis for equitable relief, but creates a situation in which the parties are to be left where they are found by a court of chancery.

A perusal of the majority opinion at once discloses that the increasing of the capital stock of The First National Bank of Keyser in 1921 was a rather loosely-conducted proceeding. Neither the proceeding of the directors nor that of the stockholders mentioned the par value of the additional shares or their number, and the Federal Act must be turned to in order to ascertain that the increase in capital stock from sixty to eighty thousand dollars represents the issuance of two hundred additional shares of a par value of one hundred dollars each, so that fixing the selling price at one hundred and sixty dollars a share carried with it a premium of sixty per cent.

Until November 4, 1921, the stockholders and directors of the bank were managing and directing the issuance and sale of the additional stock with decided informality, but without definite departure from permissible methods. On that day the directors agreed to "take up" the stock remaining unsold, being sixty shares, to be distributed later to new stockholders. This understanding appears from the official minutes of its directors' meetings. Of course, the directors could not have been acting for the bank, but under the circumstances their course of conduct could have affected only themselves as individuals. Otherwise it would have been a plain violation of Sec. 83 of Title 12. Yet it is apparently plain that it was not the directors' purpose to make a profit, and that they did believe they were acting for the common protection of all of the bank's existing stockholders. It will be noted that there was no method of procedure mentioned in the resolution of November 4th to govern the taking up of the stock by the individual directors, so that at the next meeting on December 2nd, in order to have Gelwicks take up the unsold stock, the other directors agreed to sign an agreement assuming their pro rata share of any liability that might be incurred before the stock was placed in other hands. The understanding was entirely personal between the individual directors, and yet the only evidence of their understanding is found in the minutes of the bank's board of directors. The written agreement was never executed, but Gelwicks promptly procured ninety-six hundred dollars from the bank, it not being directly shown that this was done pursuant to the understanding between him and the other directors of the bank that he should "take up" the unsold sixty shares; but it is extremely unlikely that even at the instance of a director the bank would loan, especially upon unsecured paper, a sum equivalent to almost one-sixth of its outstanding capital stock. Certainly that would not occur upon an unindorsed and unsecured note of that amount.

It should be constantly borne in mind that under the Federal statute The National Bank of Keyser was required to procure the sanction of the Comptroller of the Currency before putting into effect the increase of its capital stock, and before receiving that approval was obliged to sell and to be fully paid for the additional shares. Barnes' Federal Code, 1919, Sec. 9170; Revised Statutes, Sec. 5142. The bank had sold and received payment for one hundred and forty shares and, instead of segregating the purchase money until all the additional stock was sold and paid for and the approval of the Comptroller of the Currency was procured, it had increased its working capital as and when payments were received. Consequently, as the bank approached the first of the year 1922, it found itself confronted by the necessity of reporting its condition and disclosing a non-compliance with the statutory requirements, or in some way disposing of the sixty remaining shares, and, at least in form, complying with the statute. Naturally, the directors chose the latter alternative.

When Gelwicks paid to the bank the entire purchase price for the original issue of the sixty shares of its stock, which the bank was selling to him for himself and the decided majority of its board of directors, the certificate representing those shares was not delivered to him. It was issued in his name, indorsed in blank by him, and left entirely in the custody and control of the bank. The semi-annual dividend thereafter was received by the bank and was applied by it to discharge the interest payable upon what it knew to be Gelwicks' purchase money note, the remaining part of the dividend being applied to the note's curtailment. When small blocks of the sixty shares were sold, Gelwicks did not enter into the transaction. The bank sold them. The bank caused certificates to be issued to the buyers, and the shares deducted from Gelwicks' stock account. The purchasers were not conscious of the fact that they were buying shares that stood on the bank's stock book in the name of Gelwicks. So we have here the picture of Gelwicks borrowing ninety-six hundred dollars from The First National Bank of Keyser and simultaneously with its receipt executing his ordinary promissory note, and arranging for the bank to receive the custody and entire control of the sixty shares of its own stock purchased with its own money, Gelwicks being nothing more than a formal figurehead. It may be that his credit-rating was quite good, but it is significant that the bank did not rediscount his paper.

I do not agree with the reasoning of the majority opinion to the effect that the purpose of Title XII, Sec. 83, is to prevent a national bank from purchasing its own stock. Of course, being expressly prohibited, that is one of its purposes. However, that section goes considerably beyond that one inhibition. It definitely forbids making "any loan or discount on the security of the shares of its own capital stock * * *." Note the use of the phrase "on the security of," and that the effect of the section is not limited to the acceptance of its capital stock as collateral. The section under consideration not being penal, I believe should be broadly construed, and if it were necessary to determine the legislative purpose in order to arrive at a construction of its meaning, which I am of the decided opinion it is not for the reason that ambiguity is entirely lacking, I should still say that its definite purpose is to prevent the use of the bank's funds by its officers in control thereof to manipulate or in any way control, directly or indirectly, the voting power of its outstanding stock, thus undermining the free use of independent judgment by its officers. The history of our banking institutions, I think, fortifies this conclusion.

I believe that it cannot be questioned that this record by direct proof and inescapable inferences clearly shows that The First National Bank of Keyser knowingly invested ninety-six hundred dollars of its cash on hand in its own common stock. The stock was purchased in the name of Gelwicks, it is true, and for that reason the conclusion of the majority that the bank did not purchase its own stock is probably maintainable. The fact, however, remains that simultaneously with advancing the purchase price, the bank took over the complete and absolute control of the purchased shares, which it unlimitedly exercised, regardless of Gelwicks other substantial property holdings, recognizing quite clearly that the transaction was not for the benefit of Gelwicks alone, but included as well others with an equitable interest, along with him, in the res. I think, therefore, that the bank made a loan on the security of the shares of its own capital stock in violation of Sec. 83 of Title 12 of the United States Code Annotated, and that Gelwicks was in pari delicto with the other directors, and that he is thereby precluded in a court of chancery from recovering a contribution from those who acted with him in the resultant loss.

There is another matter, which, according to the showing of this record, I believe to be incidental, and this is that at the time of the loan of the ninety-six hundred dollars the approved outstanding capital stock of The First National Bank of Keyser was sixty thousand dollars, although one hundred and forty additional shares had tentatively been sold. The amount of its earned surplus was thirty thousand dollars. The Federal Act prohibits a loan in excess of ten per cent of a national bank's outstanding capital stock plus ten per cent of its surplus. At the time of the loan, therefore, that statute was also violated.

The further question is to what extent, if at all, the complete change of face by the plaintiff in this proceeding, as compared with the position taken by Gelwicks in the proceeding brought against the bank in his lifetime, operates as an estoppel. In the former proceeding the trial court held that Gelwicks had failed to show a purchase by The First National Bank of Keyser, and since his recovery was based upon that theory, the former proceeding, after a full hearing, was dismissed. His executor now takes the position that The First National Bank of Keyser played no part directly in the purchase, but that it was a joint adventure between Gelwicks and the directors who attended the proceeding, the minutes of which recite a private understanding between Gelwicks and those present. Beyond affecting the credibility of witnesses, I do not see how such a change of position could operate directly upon the executrix. The parties here are different. Obviously, it cannot be treated as res adjudicata, and, as pointed out in the majority opinion, there has been no subsequent change of position upon the part of any single defendant to justify treating it as an estoppel. Of course, contradictory written statements and declarations made in the former proceeding may be regarded as declarations against interest, if material, but that question is not now before us.

For the foregoing reasons I would affirm the trial chancellor and dismiss the cause here.

Judge Lovins joins in this dissent.