Opinion
No. 23778
Decided March 29, 1933.
Banks and banking — Liquidation — Money for reconstruction purposes only, preferred as special deposit — Bank president, depositing reorganization money, a general creditor, when — Money applied to bank's debts, at suggestion of state bank superintendent — Deed to one director, as preference, a nullity, when.
1. Money placed with an insolvent bank for reconstruction purposes only, is in fact a "special deposit," and so long as it retains its integrity as "money deposited for the purpose of reconstruction," it constitutes a preferred claim against the assets of the bank in case of liquidation.
2. When the depositor of such money was the president of the bank in question, although he safeguarded himself to the extent of taking, first, a certificate of deposit for such amount, and, second, returning such certificate and taking a receipt from the bank, with the recital, "Received from (name of depositor) Ten Thousand Dollars for re-organization," if he afterward knowingly permitted the bank to use such money for the payment of its debts, such deposit lost its sanctity as a "special deposit," became part and parcel of the general fund of the bank, and the depositor thereby lost his preference.
3. Nor does it matter that such money was applied to the payment of the bank's debts, at the suggestion of the then superintendent of banks of the State, as he had no authority to make such suggestion. ( Andrews v. State, ex rel., 124 Ohio St. 348, approved and followed.)
4. The further fact that the then superintendent of banks of the state advised the depositor to take steps to secure himself, avails such depositor nothing. ( Andrews v. State, ex rel., 124 Ohio St. 348, approved and followed.)
5. Where the board of directors of a bank consists of nine members, five of whom meet and pass a resolution to execute and deliver a deed to one of their number as a preference in a matter in which three of the members present have a financial interest adverse to that of the corporation, such action is a nullity, and no right, title or interest in lands passes by such deed. ( Briggs v. Gilbert Grocery Co., 116 Ohio St. 343, second paragraph of syllabus, approved and followed.)
ERROR to the Court of Appeals of Wayne county.
The Doylestown Banking Company was an Ohio corporation, having its principal place of business at Doylestown, Wayne county, Ohio. Dr. A.E. Stepfield was for many years its president, which office he resigned December 11, 1930. He continued, however, to serve as a director up to December 30, 1930, when said bank was taken over by O.C. Gray, then superintendent of banks, for liquidation.
For some weeks prior to the closing of the bank it was in financial difficulty, and was under the close supervision of the superintendent of banks, through his deputy, Robert F. Lind.
Through negotiations, of which Mr. Lind apparently had knowledge, arrangements were made early in December, 1930, whereby $30,000 of new capital was to be put into said bank. Of this, Dr. Stepfield and his associates were to raise and put in $10,000, and Blake McDowell and his associates of Akron, Ohio, were to raise and put in $20,000. The old stock was all to be surrendered and new stock issued, two-thirds to the Akron parties and one-third to Dr. Stepfield and his associates. Dr. Stepfield had agreed to permit any of the old stockholders, who cared to contribute to the $10,000 fund, to have a pro rata share in his one-third of the stock. J.W. Zimmerman and E.N. Koehler, two of the directors, each agreed to contribute to said fund and participate in the distribution of the new stock.
Under date of December 7, 1930, Mr. Lind wrote to Dr. Stepfield as follows:
"State of Ohio "Department of Banks "Columbus"Canton, Ohio, Dec. 7th, 1930.
"Dr. A.E. Stepfield, Doylestown, Ohio.
"Dear Doctor:
"I was in Akron yesterday and after a long discussion with the committee of the First City I thought I would not be able to do anything with them. Mr. Bates turned it down flat. Finally he said he would take 10,000 in mortgages that the Peoples hold but McDowell would have to take the balance. I saw Arnot at the Standard and he said he thought there would be no trouble and he would call his Committee at once. I went back to McDowell and he said he would arrange in some way to take care of the balance 10,500 at the Peoples. I was in his Office when he called you. I think you will have no trouble in getting the 10,000 at the Central in Barberton, but you will have to act at once. You can have the other stockholders sign with you and collect from them and pay on the note when they pay.
"I almost forgot to tell you and Mr. Zimmerman will have to give the First City Trust a written guarantee to take care of any of the mortgages they can not collect out of the 10,000.
"Now Doctor get busy at once and try to have this cleaned up by Tuesday. McDowell is ready to pay in his 20,000 just as soon as you people get the 10,000 together.
"Let's hope there will be no hitch in this matter and it will all be cleaned up. Your situation in the Bank is dangerous and I do not know if the Department will allow any more time. Let me hear from you just as soon as it is finished.
"With best wishes, I am,
"Yours truly,
"R.F. Lind.
"1343 Logan Ave., N.W. Canton, Ohio.
"Phone 2-3626."
On December 11, 1930, said three directors, Dr. Stepfield, J.W. Zimmerman and E.N. Koehler, met Deputy Lind in Akron, where, in Lind's presence, said three parties signed notes made payable to an Akron bank for a total of $10,000, which notes were further secured by a pledge of Dr. Stepfield's stock in The Doylestown Telephone Company. The payee Bank deducted its interest, $175.00, and issued to Dr. Stepfield its official check for $9825. Dr. Stepfield, accompanied by Mr. Lind, took this check to The Standard Savings Bank of Akron, a depository of the Doylestown Banking Company, and deposited it to the credit of said Doylestown Bank, receiving a deposit slip, which Dr. Stepfield delivered the same day to The Doylestown Banking Company, whereupon the Doylestown Banking Company immediately drew drafts against the same in payment of letters to the Federal Reserve Bank, which were five or six days past due.
On the surrender of the deposit slip to the Doylestown Bank, such bank, on December 11, 1930, issued to Dr. Stepfield a certificate of deposit in the sum of $9825.00. The following day Lind appeared at Doylestown, and when he found that Stepfield had received a certificate of deposit he called O.C. Gray, superintendent of banks, by telephone, after which Dr. Stepfield surrendered his certificate of deposit for $9825.00, his account was charged with $175.00, and he received a receipt, as follows:
"December 12, 1930.
"Received from A.E. Stepfield Ten Thousand and no/100 Dollars for Reorganization.
"The Doylestown Banking Co.
"By W.E. Butler, A. Cashier.
"$10,000.00"
The bank thereupon set up a reorganization fund of $10,000 on its books, as shown by the record.
Mr. McDowell and his Akron associates finally failed to put in their $20,000. Mr. Lind, so Dr. Stepfield says, told him to take some security to protect himself on the $10,000 reorganization fund deposit, which had been previously used by the bank. Thereupon, at a special meeting of the board of directors of The Doylestown Banking Company, held on December 26, 1930, four days before such bank closed, a resolution was adopted directing the conveyance by deed of three parcels of real estate, owned by the bank, to Dr. Stepfield, as collateral on $10,000 deposited by him for the purpose of reorganization. This meeting was presided over by Dr. Stepfield. Of nine directors, but five were present. Three of the five, all of whom voted for said resolution, were Dr. A.E. Stepfield, J.W. Zimmerman and E.N. Koehler; the latter two being liable with Dr. Stepfield to the Akron bank on the notes previously signed by them.
A deed was thereupon, on the same day, executed and delivered to Dr. Stepfield, as shown by the record. The bank closed four days later, to wit, December 30, 1930. This so-called deed was filed for record on December 31, 1930.
On or about December 30, 1930, O.C. Gray, superintendent of banks of the state of Ohio, took the Doylestown Bank over for liquidation. On July 30, 1931, a suit was filed by the superintendent of banks. In his petition he set out a copy of the minutes of the meeting of the board of directors held on December 26, 1930, and recited the fact that A.E. Stepfield, on December 12, 1930, did advance to the bank $10,000 for reorganization purposes, and such sum was accepted by the bank for such purpose, but was used by the bank in the ordinary course of business.
It is further alleged that in pursuance of the action of the board of directors on December 26, 1930, a deed for the real estate described in the petition was executed and delivered to Stepfield, which deed was recorded on December 31, 1930; that this deed was made to secure to Stepfield the sum of $10,000 advanced by him to the bank for reorganization purposes.
The petition prays that the deed in question be declared a mortgage, that the lands be sold and the proceeds distributed according to law. The petition named other parties defendant, but it is not necessary to refer to them in this statement of fact.
On motion, W.R. Hower and others, creditors of the bank, were made parties defendant. By answer and cross-petition they allege that the bank was insolvent when A.E. Stepfield paid over to it the $10,000 in question, and that Stepfield had full knowledge thereof; that such deed was a preference. They pray that the deed from the bank to Stepfield be set aside, and that the property be sold for the benefit of all the creditors of the bank.
Stepfield, by way of answer and cross-petition, details the facts substantially as pleaded by the superintendent of banks. He admits that the deed was intended to be a mortgage; that he has been in possession of the real estate in question, has collected the rentals and made repairs thereon. He asks that the lands be sold, that he be given a lien thereon for $10,000, and an accounting had of the proceeds.
Stepfield did not answer the cross-petition of Hower et al., and no reply was made by the superintendent of banks.
These issues were tried to the court of common pleas of Wayne county, which court found that the action of the board of directors of December 26, 1930, authorizing the execution and delivery of the deed in question was a nullity; that it constituted constructive fraud, conveyed no right, title or interest in the lands by way of mortgage or otherwise to Stepfield. It was ordered that the deed be set aside and the lands sold.
Error was prosecuted to the Court of Appeals, which court affirmed the judgment of the court of common pleas. Error is prosecuted to this court to reverse the judgment of the Court of Appeals.
Mr. Irwin D. Allen and Mr. Karl Hoover, for plaintiff in error.
Mr. Gilbert Bettman and Mr. John W. Bricker, attorneys general, Mr. Daniel C. Funk, Mr. Ray A. Morton and Messrs. Weiser Weimer, for defendants in error.
The salient features in this case are undisputed.
There was no error committed by the trial court in permitting Hower, Shertz, Dannemiller, Galehouse, Gantz, Cox and Whitman to be made parties defendant, and there was no error in permitting them to plead.
The subject of the action was claimed to be an asset of the bank. These parties alleged, and it was not denied, that they were creditors of the bank, presumably depositors. As such, they had a right to see to it that the assets were not dissipated. Although this question is not raised by the record, to which fact the Court of Appeals made reference, we refer to it in passing, to emphasize the entire absence of error on this proposition.
The contention by these creditors, that the delivery and execution of the deed in question was fraudulent, did change the course and nature of the action. The case was tried on the theory injected into it by these creditors, and was decided favorably to them. True, there is no express fraud in this case. Stepfield parted with his $10,000 in good faith. He first took a certificate of deposit for the amount and later exchanged it for a receipt in which it was recited, in substance, that the $10,000 was received by the bank for purposes of reorganization; and when the reconstruction plan had failed, the board of directors endeavored to make Stepfield whole by executing and delivering to him a deed for some of its real estate. Their purpose is rather to be commended than criticised, but it could not be accomplished in the manner attempted at the directors' meeting of December 26, 1930, when the execution and delivery of the deed were authorized.
The board of directors of this bank consisted of nine members, five of whom were present, including Stepfield. All of them voted to pass this resolution, and Zimmerman, Koehler and Stepfield thereby voted in a matter in which they were adversely financially interested. This they had no authority in law to do. Their action was a nullity and carried no right, title or interest in the land in question to Stepfield. Briggs v. Gilbert Grocery Co., 116 Ohio St. 343, 156 N.E. 494: "Since said resolutions were adopted by aid of the vote of the three interested directors, such resolutions are illegal and not sufficient upon which to base an action by the officer seeking to recover such compensation, after having voted in favor of such resolution."
This attempted action on the part of the board of directors was a nullity, and was attacked in a direct proceeding, and did constitute constructive fraud.
Whether or not the bank was insolvent on December 26, 1930, was a question of fact. This fact was found by the trial court, and there was some evidence to support it, and it is not further considered by this court.
We quite agree that this $10,000 deposit was a "special" deposit when made, but it was transferred into the "general" or checking fund of the bank for the purpose of taking care of the Federal Reserve letters; in other words, to pay a debt of the bank. This was done with Stepfield's knowledge and he acquiesced in it, and thereby foreclosed himself. The fact that the $10,000 intended as a part of a reconstruction fund was placed in the general fund of the bank, on the suggestion of the state superintendent of banks, and that such superintendent advised Stepfield to secure himself, avails Stepfield nothing, as such superintendent was without authority in either instance. The superintendent of banks has no authority, express or implied, to prejudice the rights of the general creditors of a bank. Andrews v. State, ex rel. Blair, Supt. of Banks, 124 Ohio St. 348, 178 N.E. 581.
The sympathies of a humane court must be with Dr. Stepfield, but he must bow before the inflexibility of the law.
There is no prejudicial error in this record, and the judgment of the Court of Appeals is hereby affirmed.
Judgment affirmed. WEYGANDT, C.J., DAY, ALLEN, JONES and MATTHIAS, JJ., concur.
KINKADE, J., not participating.