Scribd Logo
Upload

Welcome to Scribd!

  • 31 views

    United States Court of Appeals Fourth Circuit

    Uploaded by

    Scribd Government Docs
    1. This appeal concerns whether a subordination provision in debenture bonds issued by National Discount Corporation should be enforced, which would give priority to bank loans over the debenture bonds. 2. The Chief Insurance Commissioner of South Carolina argues the subordination should not be enforced because the debenture bonds were improperly purchased by insurance companies and other organizations he represents. However, the district court found that the banks were not aware of any improper conduct and enforced the subordination provision. 3. On appeal, the court reviewed the evidence and found that the district court's factual findings that the banks did not know about the improper transactions were not clearly erroneous. The court affirmed the district court's decision to enforce the sub

    Copyright:

    Public Domain
    Download as PDF or read online from Scribd

    United States Court of Appeals Fourth Circuit

    Uploaded by

    Scribd Government Docs
    31 views6 pages
    1. This appeal concerns whether a subordination provision in debenture bonds issued by National Discount Corporation should be enforced, which would give priority to bank loans over the debenture bonds. 2. The Chief Insurance Commissioner of South Carolina argues the subordination should not be enforced because the debenture bonds were improperly purchased by insurance companies and other organizations he represents. However, the district court found that the banks were not aware of any improper conduct and enforced the subordination provision. 3. On appeal, the court reviewed the evidence and found that the district court's factual findings that the banks did not know about the improper transactions were not clearly erroneous. The court affirmed the district court's decision to enforce the sub

    Original Description:

    Filed: 1963-09-04 Precedential Status: Precedential Citations: 322 F.2d 928 Docket: 8979

    Original Title

    William F. Austin, Chief Insurance Commissioner of South Carolina, as Receiver for National Fidelity Insurance Company, Title Insurance and Guaranty Company and Cudd & Coan Underwriters, Inc., and Also as Trustee for Atlantic Mutual Fund v. National Discount Corporation, Bankrupt, 322 F.2d 928, 4th Cir. (1963)

    Copyright

    © Public Domain

    Available Formats

    PDF or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    1. This appeal concerns whether a subordination provision in debenture bonds issued by National Discount Corporation should be enforced, which would give priority to bank loans over the debenture bonds. 2. The Chief Insurance Commissioner of South Carolina argues the subordination should not be enforced because the debenture bonds were improperly purchased by insurance companies and other organizations he represents. However, the district court found that the banks were not aware of any improper conduct and enforced the subordination provision. 3. On appeal, the court reviewed the evidence and found that the district court's factual findings that the banks did not know about the improper transactions were not clearly erroneous. The court affirmed the district court's decision to enforce the sub

    Copyright:

    Public Domain
    Download as PDF or read online from Scribd
    Download as pdf
    31 views6 pages

    United States Court of Appeals Fourth Circuit

    Uploaded by

    Scribd Government Docs
    1. This appeal concerns whether a subordination provision in debenture bonds issued by National Discount Corporation should be enforced, which would give priority to bank loans over the debenture bonds. 2. The Chief Insurance Commissioner of South Carolina argues the subordination should not be enforced because the debenture bonds were improperly purchased by insurance companies and other organizations he represents. However, the district court found that the banks were not aware of any improper conduct and enforced the subordination provision. 3. On appeal, the court reviewed the evidence and found that the district court's factual findings that the banks did not know about the improper transactions were not clearly erroneous. The court affirmed the district court's decision to enforce the sub

    Copyright:

    Public Domain
    Download as PDF or read online from Scribd
    Download as pdf
    of 6

    322 F.

    2d 928

    William F. AUSTIN, Chief Insurance Commissioner of South


    Carolina, as Receiver for National Fidelity Insurance
    Company, Title Insurance and Guaranty Company and Cudd
    & Coan Underwriters, Inc., and also as Trustee for Atlantic
    Mutual Fund, Appellant,
    v.
    NATIONAL DISCOUNT CORPORATION, Bankrupt,
    Appellee.
    No. 8979.

    United States Court of Appeals Fourth Circuit.


    Argued June 5, 1963.
    Decided September 4, 1963.

    T. Emmet Walsh, Spartanburg, S. C., and J. Monroe Fulmer, Columbia, S.


    C. (William H. Smith, General Counsel, South Carolina Insurance
    Department, Frank A. Lyles and Robert L. Stoddard, Spartanburg, S. C.,
    on brief), for appellant.
    Neville Holcombe, Spartanburg, S. C. (T. Sam Means, Jr., and Robert F.
    Chapman, Spartanburg, S. C., on brief), for appellee.
    Before BRYAN and J. SPENCER BELL, Circuit Judges, and
    BARKSDALE, District Judge.
    J. SPENCER BELL, Circuit Judge.

    This appeal is brought to set aside a decision of the district court holding that a
    subordination provision in a debenture bond issue be enforced as written.

    National Fidelity Insurance Company, Title Insurance and Guaranty Company,


    Cudd and Coan Underwriters, Inc., and Atlantic Mutual Fund are presently
    under the receivership or trusteeship of the Chief Insurance Commissioner of
    South Carolina. Ownership and control of these organizations has been, in
    varying degrees and through various corporate arrangements, interrelated with

    that of the National Discount Corporation, Bankrupt. It is alleged that those in


    control of the organizations currently under the receivership or trusteeship of
    the Chief Insurance Commissioner, caused them, in a manner unjust and
    inequitable to their creditors, to purchase a large portion of the subordinated
    debenture bonds of the National Discount Corporation. The provisions of the
    subordination agreement of these bonds are such that their holders are
    subordinated to over two million dollars of bank loans.
    3

    It is the Commissioner's position that because of the inequitable and unjust


    manner in which these bonds were foisted upon the organizations he currently
    represents, and because the banks claiming priority knew, or from information
    in their possession should have known, of the suspect nature of the debenture
    transactions, the subordination provisions should not be enforced. He further
    contends that the subordinated debenture transactions were ultra vires the
    authority of both the bankrupt and the organizations he represents, and are,
    therefore, void.

    The district court found that the lending banks advanced the funds to the
    bankrupt in reliance on the subordinated nature of the debentures, and that they
    neither knew nor had sufficient information so that they should have known of
    the suspect nature of the debenture transactions. He enforced the subordination
    agreement, thereby granting priority to the debts due the banks. The court did
    not pass on the issue of ultra vires, apparently because it was not presented to
    him.

    * General Orders in Bankruptcy 37, 11 U.S.C.A. following 53 provides that


    the Federal Rules not inconsistent with the Bankruptcy Act or with the General
    Orders shall be followed in bankruptcy "as nearly as may be". In reviewing the
    findings of fact of the district court, where there has been no decision by the
    referee, we are bound by the clearly erroneous rule of Fed.R.Civ.P. 52(a). Cf.
    Small v. Williams, 313 F.2d 39 (4 Cir. 1963); Potucek v. Cordeleria Lourdes,
    310 F.2d 527 (10 Cir. 1962). Cert. denied, 372 U.S. 930, 83 S.Ct. 875, 9
    L.Ed.2d 734 (1963); Employers Mutual Casualty Company v. Hinshaw, 309
    F.2d 806 (8 Cir. 1962); Mountain Trust Bank v. Shifflett, 255 F.2d 718 (4 Cir.
    1958); General Order in Bankruptcy 47, 11 U.S.C.A. following 53. A
    thorough review of the evidence does not convince us that the district court's
    findings are reversible. There is no evidence which makes clearly erroneous his
    finding that the banks did not know, either actually or constructively, who
    owned the bonds in issue.

    The record makes it clear that it is the general business practice of finance
    companies, such as National Discount Corporation, to borrow large portions of

    their working assets from banks. The lending banks, in deciding the amount
    they will permit the finance company to borrow, rely to a large extent on the
    amount of capital invested in the finance company. In determining the amount
    of invested capital, these banks include long term indebtedness that will be
    subordinated to the loans the banks will make. This is based on the realization
    that the sale of such subordinated debt, as does the sale of capital stock, swells
    the amount of assets of the finance company available for operating use without
    increasing the amount of debt that will share the available assets on a parity
    with the banks in the event of bankruptcy.
    7

    The evidence supports the conclusion that banks as a regular practice in dealing
    with a borrower do not seek to determine the names of the holders of
    debentures subordinated to their loans. The Commissioner, however, sought to
    prove several facts which might tend to indicate that the banks actually knew,
    or should have known, who owned the bonds. The district court failed to draw
    the inferences the Commissioner suggests, and we do not find the court's
    conclusion clearly erroneous.

    The Commissioner first showed that at least some of the banks required a sub
    rosa agreement to maintain compensating balances1 before they would grant
    the loans, and that in some cases the compensating balances were maintained
    by the interrelated corporations involved in the instant case rather than by
    National Discount Corporation. He further showed that many documents
    submitted to the banks by National Discount Corporation listed some of the
    organizations involved here as affiliates. This evidence shows clearly that at
    least some of the banks knew of the interrelation of the several corporations,
    but, as the banks point out, and the district court apparently found, it does not
    prove knowledge of ownership of the debenture bonds.

    The Commissioner then proved that some of the banks loaned money to the
    corporations he represents and were, therefore, in possession of their financial
    statements. However, the evidence introduced by the banks indicates that
    because of the relatively secured nature of these loans the financial statements
    required were not extensive, and did not disclose the names of the issuers of
    debentures these corporations owned.

    10

    The Commissioner further showed that one of the principal assets listed on the
    bankrupt's statement was the stock of Title Insurance and Guaranty Company
    one of the companies which he represents in this action. He argues that an
    investigation of this asset, which was so important to the bankrupt's financial
    status, would have led the banks to the books of the Insurance Company, which
    would in turn have disclosed it to be the holder of the bankrupt's subordinated

    debentures. However, the evidence clearly shows that the banks did not in fact
    investigate the asset and, therefore, had no knowledge of the ownership of the
    subordinated debentures. Furthermore, an examination of the bankrupt's
    certified financial statement upon which the banks testified they relied shows
    that other assets listed thereon were sufficient in case of insolvency to liquidate
    the bank loans provided the subordination provisions of the bonds were
    honored.
    11

    Finally, the Commissioner showed that the banks had knowledge of severe
    losses suffered by National Discount Corporation which did not show up on
    subsequent financial statements. Apparently the Commissioner contends that
    because of these known losses and the bankrupt's failure to disclose them on its
    financial statements, the banks should have either ceased permitting the
    bankrupt to borrow money, or conducted an investigation of the bankrupt's
    financial status which would have disclosed the names of the owners of the
    debenture bonds. However, the evidence indicates that the banks made no such
    investigation but instead continued to lend money to the bankrupt, because of
    an apparently reasonable explanation given for the failure of the loss to be
    reflected on the financial reports.

    12

    As this brief review of the extensive evidence indicates, the findings of fact of
    the district court are not clearly erroneous, and we cannot set them aside.

    13

    Our discussion of the facts supporting the district court's decision that the banks
    had no knowledge of the bankrupt's improper conduct is not intended to
    indicate that a contrary conclusion would have required a different result than
    that reached by the court below. It is to be noted that subordination provisions
    such as those in the instant bond have been almost universally enforced by
    bankruptcy courts, in the absence of circumstances making such enforcement
    inequitable. Bird & Sons Sales Corporation v. Tobin, 78 F.2d 371, 100 A.L.R.
    654 (8 Cir. 1935); Bank of America Nat. Trust & Savings Ass'n v. Erickson,
    117 F.2d 796 (9 Cir. 1941); In re George P. Schinzel & Son, 16 F.2d 289
    (S.D.N.Y. 1926) (L. Hand, J.); Elias v. Clarke, 143 F.2d 640 (2 Cir. 1944);
    Cert. denied, 323 U.S. 778, 65 S.Ct. 191, 89 L.Ed. 622 (1944); In re
    Aktiebolaget Kreuger & Toll, 96 F.2d 768 (2 Cir. 1938); In re George C. Bruns
    Co., 256 F. 840 (7 Cir. 1919); Searle v. Mechanics' Loan & Trust Co., 249 F.
    942 (9 Cir. 1918), petition for cert. dismissed, 248 U.S. 592, 593, 39 S.Ct. 67,
    63 L.Ed. 437 (1918); Cf. Prudence Realization Corp. v. Geist, 316 U.S. 89, 62
    S.Ct. 978, 86 L.Ed. 1293 (1942). Although creditors may not reap the fruits of
    transactions in which they have joined with the debtor to defraud other
    creditors, In re Friedman, 164 F. 131 (E.D.Wis.1908); Cf. Zavelo v. Reeves,
    227 U.S. 625, 33 S.Ct. 365, 57 L.Ed. 676 (1913), they are not generally held to

    be fiduciaries of other creditors, and are not held to a higher ethical standard
    than that required by market place morals. Rader v. Boyd, 252 F.2d 585 (10
    Cir. 1957); Crowder v. Allen-West Comm. Co., 213 F. 177 (8 Cir. 1914),
    affirming, In re Hawks, 204 F. 309 (E.D. Kan.1913). However, we expressly
    take no position on the matter.
    II
    14

    In the absence of knowledge by the banks, either actual or constructive, of the


    suspect nature of the subordinated debenture transaction, we can see no
    equitable basis for refusing to enforce the subordination provision in the instant
    case. It is to be noted that the Commissioner has not and does not now seek
    rescission of the bond transaction. His decision not to do so is apparently based
    on the relative valuelessness of some of the assets transferred in exchange for
    the bonds.

    III
    15

    The issue of ultra vires was apparently not presented to the court below. At any
    rate, as the receiver does not desire to return the benefits received under the
    debenture agreement in exchange for the assets that were transferred to the
    bankrupt, but is rather attempting to enforce the bonds without the
    subordination provision, this claim has no merit. Williamson v. Eastern
    Building & Loan Ass'n, 54 S.C. 582, 32 S.E. 765 (1899); Lancaster v. Southern
    Life Ins. Co., 89 S.C. 179, 71 S.E. 864 (S.C.1911).

    16

    Affirmed.

    Notes:
    1

    A compensating balance is generally a deposit maintained in the lending bank


    by the borrower. Kept at a flexible percentage of the loan, the effect of the
    compensating balance is to increase the security of the lending bank and at the
    same time to increase the effective rate of interest the lender is receiving.
    Although generally no specific agreement to maintain a compensating balance
    was entered into, this was often understood by all concerned as a requirement.
    One of the bank's witnesses testified, after denying that compensating balances
    were required, that "if they had come in and said we want to borrow some
    money and they were not a depositor of ours, I would have said in all
    probability, well, where do you do your banking business; if they had said Mr.
    Brawley's bank, I would have said, I suggest you go down and see what you can

    do with Mr. Brawley"

    You might also like