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Coast National Bank v. Bloom

Decided: September 27, 1934.


On appeal from a judgment of the Supreme Court.

For the appellant, Walter Carson.

For the respondent, Howard Ewart.


The opinion of the court was delivered by

HEHER, J. There was a judgment for plaintiff, based upon the findings and determination of Judge Lawrence (who tried the issue without a jury), in an action upon a promissory note, dated June 26th, 1931, in the sum of $1,500, made by defendant to it.

Defendant appeals, and his grounds of appeal present, in substance, the following questions, viz.: (1) Is appellant's relation to the respondent bank that of an accommodation maker merely, or is his promise supported by a valuable consideration, and is, therefore, an obligation binding upon him and enforceable by the receiver of the bank? (2) Was there "a breach and frustration of" the agreement between appellant and the bank which discharged the former's obligation? and (3) Had the obligation contemplated by the parties matured?

The essential findings of fact follow: Appellant was the owner of five shares of the capital stock of the respondent bank, and was a member of its board of directors. On April 1st, 1931, a federal bank examiner, following an examination of the bank's books, reported to the Comptroller of the Currency that the "capital, surplus and profits" had been exhausted by a depreciation in the bank's bond account. A conference between the bank's president, a committee of its board of directors and the chief bank examiner was followed by a meeting of the board of directors at which the members, including appellant, "were given to understand that they were either liable for the depreciation or that they would be required to provide a special reserve fund to protect the bond account." Judge Lawrence further found that, "while it was not stated that the bank would otherwise have to close, it is a fair inference from the evidence that its financial condition was sufficiently critical to make the provision of such a fund not only advisable but necessary, in the interest of depositors, creditors and stockholders." Our examination of the proofs satisfies us that, in the absence of adequate corrective measures, the bank would have been closed by departmental order, and that the bank's officers so understood. The

capital, surplus and undivided profits having been wiped out by depreciation in the bank's assets, it could not have continued business with safety to the public, and it is fairly inferable that, in that situation, the federal officers in charge would not have permitted it to do so.

Accordingly, the directors agreed, with the approval of the federal bank department, to increase the capital assets of the bank to the extent of $13,000, and, pursuant thereto, they deposited with the bank, between April 27th, 1931, and July 13th following, the above mentioned sum, partly in cash (to the extent of $9,000, the contribution of six directors), and partly in promissory notes made by the remaining three directors, in the aggregate sum of $4,000, including the one in suit. The fund thus created, so the trial judge found, was entered "on a saving fund record of the bank as 'special reserve deposits for depreciation,' with the apparent understanding among the individual members of the board that when the bond account returned to a market value which would no longer impair 'capital, surplus and profits,' the several sums advanced by the directors would be returned to them with four per cent. interest." This indicated, in the opinion of the trial judge, "that the promissory notes given by defendant and other directors should be subject to discount or negotiation, to the end that the reserve fund should be liquid and readily answer the purpose for which it was set up." As a matter of fact, these notes were discounted by the bank, and the proceeds credited (in the name of the maker of the note) to the mentioned special reserve fund, and the notes were subsequently discounted by the Federal Reserve Bank, and used as collateral. The discount, in the first instance, was paid by the maker. Appellant's note was later returned by the reserve bank. It should be observed, in passing, that appellant testified that "when the bonds would come back to the book value," his money was to be returned with interest; and that if there were no such appreciation, "each and every one who had put up cash would have lost his cash or would have been liable for the amount of cash and notes * * *."

After the creation of this reserve fund, the bank continued

to function, and on August 4th, 1931, one Sims and associates purchased the capital stock held by the directors, including appellant's shares, for $150 per share, under an agreement that provided, inter alia, that the directors would tender their resignations as such, to take effect when the consideration price for the stock was paid, and "the special reserve fund deposited by the directors amounting to $13,000 has been returned with accumulated interest to the several directors." The respondent bank apparently was not a party to this agreement, and it did not at any time become bound to return the fund except upon the happening of the contingency firstmentioned. Sims and his associates, it would seem, paid the consideration price for the capital stock held by the directors, for these shares were subsequently assigned to them, and they assumed the management of the bank. The old board of ...

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