GARDNER, Circuit Judge.
The question to be determined in this case is whether appellant, by reason of having by written contract taken over practically all of the assets of the Home Trust Company while it was in straitened financial circumstances, became liable for the taxes due from such company to the United States. The lower court, in an action at law tried to the court without a jury, held appellant liable. This liability is predicated upon the following facts found by the court, or otherwise appearing from the record:
The Home Trust Company, of Kansas City, Mo., was incorporated as a trust company under the laws of Missouri, and until early in 1933 it did business in Kansas City. In 1932 and in the early part of 1933, the banking situation had become very acute and was in a state of nation-wide panic. In February, 1933, the capital of the Home Trust Company (the taxpayer) and three other Kansas City concerns, the Mercantile Trust Company, the Main Street State Bank, and the Sterling Bank, was seriously impaired. Their deposits were being rapidly withdrawn, and they were threatened with a "run." With the co-operation and assistance of the Kansas City Clearing House and the Reconstruction Finance Corporation, they entered into a contract whereby all their deposit liabilities, their outstanding cashier's and certified checks, and their unpaid wages and current bills were assumed by the appellant, which was incorporated for that purpose. The new concern had a capital of $400,000, fully paid in cash. In consideration of the assumption of the designated liabilities, each of the four banking concerns agreed that the total amount of the debts assumed by appellant should represent a debt and obligation of each to appellant, which each promised to repay with interest on or before February 25, 1938. The tax liabilities of the Home Trust Company and the Home Safe Deposit Company, a subsidiary of the Home Trust Company, stock of which was wholly owned by the last-named company, to the United States, were not included in the assumed liabilities. The assumed liabilities were classified in the contract, and following the classification is a provision that: "The aforesaid liabilities and obligations shall constitute the sole and only obligations of the last named four parties to this contract which the new bank shall assume hereunder or in any manner become liable for." The contract refers to certain outstanding obligations or certificates of the Home Trust Company as follows:
"Alexander Rieger $174,000.00 Alexander Rieger 26,000.00 A.G. Biggerstaff, Trustee 139,000.00"
Referring to these obligations, the contract provides: "The New Bank shall, under no circumstances, and in no event, be deemed to have assumed any of the obligations of any of the presently existing banks which are parties to this contract represented by certificates of indebtedness, nor shall the New Bank be deemed to have assumed any other obligations which are not specifically assumed by the New Bank under the terms of this contract."
The new corporation, at the close of business on February 25, 1933, was to open an account against each of the four banks or trust companies, on one side of which was to be entered a charge against it for liabilities assumed. Each of the existing banks or trust companies agreed that at the close of business on February 25, 1933, it would sell, transfer, convey, set over, and deliver to appellant, to become its absolute property, the following assets: (1) All cash on hand; (2) all amounts due it from any bank, banker, or trust company; (3) all furniture, fixtures, vaults, safe deposit boxes, machines, equipment, supplies, books, records, and all other property used in its business; (4) the capital stock of its safe deposit company, if any, and all outstanding safe deposit contracts.
The contract made provision that the aggregate amount of the cash and the amounts owing the respective banks or trust companies should be credited to their respective accounts and applied as of the close of business February 25, 1933. Accordingly, the Home Trust Company was given credit with the sum of $235,000, the agreed value of its banking premises, fixtures, equipment, and the capital stock of the Home Safe Deposit Company. The difference between the obligations and liabilities assumed and the property sold and conveyed to appellant was considered the balance owing on the debts of each and was secured by a pledge of the remaining assets and property of each of the four banks and trust companies.
The terms of the contract, which was approved by the State Banking Department, have been meticulously observed and carried out. At the time of the execution of the contract and the transfer of the assets, it was thought that the assets pledged were of greater value than the debt for which they were pledged, but at the time of the trial the assets pledged had been proven to be of less value than the debt for which they were pledged as security, and it was estimated that there would be a deficit of from $60,000 to $70,000 in the liquidated account, and the sum of $40,000 had already been charged off as a loss against the account out of earnings of the appellant, the charge-off being made on the demand of the state bank examiner.
The agreement provided that, if there should be any surplus in the assets pledged or turned over as security, as against the liabilities assumed, it would be returned to each of the four original banks and trust companies, and that, if the indebtedness, after five years from the date of the contract, had not been paid in full, the newly formed trust company, appellant herein, should have the right to sell these unliquidated pledged assets to the highest bidder and apply the proceeds upon the payment of the indebtedness.
The Home Trust Company had not been dissolved up to the time of the trial.
The court found that an unusual situation of financial distress confronted these banks and trust companies, and that the purpose of the contract and of the organization of the plaintiff was not only to save these companies from failure, but that it was advantageous to them to take this action to prevent their complete failure, and that what was done by these corporations under this contract was not done in the ordinary course of business, but was unusual and extraordinary.
The depositors of each of these four original corporations were permitted to and did continue business with the new corporation, just as they had done business with the several original trust companies or banks, and whatever deposit credit a depositor had in either of the old institutions was given him in the new institution, and the outstanding checks on the old institutions were honored and paid by the new, and checks issued subsequently on them were likewise honored by it, and deposit books and signature cards of the four original institutions were used by the new institution. The new institution opened for business and continued to use and occupy the bank rooms theretofore occupied and used by the Home Trust Company, and the subsidiary, Safe Deposit Company, continued to do business in its same quarters which it occupied before the opening of the new corporation. Many of the officers of the contracting corporations became officers and directors of the new corporation.
There is no finding that the shareholders of the old corporations became shareholders of the new corporation, and it appears from the record that, in so far as the Home Trust Company is concerned, it had fifty-five shareholders, only one of whom became a shareholder in the new corporation; and it further appears that there were but four shareholders in the new corporation.
The court found that the transfer to the Mercantile Home Bank Trust Company would and did, as a matter of fact, impair, defeat, or defraud the plaintiff, unless the new corporation became liable for and paid the income tax deficiencies.
A witness called by plaintiff, who was familiar with and participated in the transactions culminating in the execution of the contract, testified: "The situation came to such a point here in Kansas City that something had to be done, not only for the salvation of certain small banks but to save this town from a catastrophe. The question was what to do. The stockholders and officers of all of these banks had a great deal of pride in their own reputations, the fact that their friends had confided in them and given them money. It was just a case of something as a last resort, and this was thought to be the best thing to do. It was done with the best intentions in the world, with the idea of protecting the people of Kansas City. There was no thought given to the people that owned stock in these banks. The stockholders were willing to sacrifice what they had for the general good of the town, and this action, in the opinion of the best informed minds in Kansas City, had to be taken to save the banks of this town. I don't mean just these four banks, but all the banks, because as this thing went on, it developed and finally culminated in the National Bank Holiday. * * * Now this bank was organized with entirely new capital and I helped to obtain subscriptions myself."
After the transfer from the old corporations to the new, the Home Trust Company continued to exercise its corporate franchise and continued to operate in the way of collecting notes and real estate loans, assets which had been pledged by it to the Mercantile Home Bank Trust Company but were still owned by the Home Trust Company, subject to the pledgee's rights. It continued to make such reports as were required by law to the state and federal authorities. It paid its annual franchise taxes to the State of Missouri and its annual state corporation taxes every year since February 25, 1933. The directors of that company since that time held regular meetings, and from time to time held informal meetings for the purpose of determining matters of settlement and sale of real estate.
This action was commenced by the United States against the Home Trust Company and the Home Safe Deposit Company to recover deficiency in income taxes. The appellee United States Fidelity Guaranty Company was made a defendant. The deficiency involved was in the income taxes assessed against the defendants Home Trust Company and Home Safe Deposit Company for the years 1923 and 1924. These taxes had been in litigation which was still pending in this court when the transfer of assets described in the contract was effected. The United States Fidelity and Guaranty Company was surety on a supersedeas bond given on behalf of the Home Trust Company and the Home Safe Deposit Company on appeal of the tax case to this court. This court affirmed the decision of the Board of Tax Appeals on May 11, 1933. Home Trust Co. v. Com'r, 8 Cir., 65 F.2d 532.
After the action had been commenced, on motion of plaintiff, the appellant Mercantile Home Bank and Trust Company was made a party defendant. The petition upon which the action was tried alleges the income tax deficiency of the two corporations, the execution of the supersedeas bond by the United States Fidelity and Guaranty Company, and alleges that appellant by the contract which it entered into with the Home Trust Company and the subsidiary "effected a merger and consolidation of the three named contracting corporations in accordance with and under the provisions of section 5379 of the Revised Statutes of Missouri 1929, Mo.St.Ann. § 5379, p. 7595, by the terms of which said contract the said Mercantile Home Bank and Trust Company purchased and acquired all of the assets of the said Home Trust Company and the said Home Safe Deposit Company, and assumed and became liable for all the liabilities of the said Home Trust Company and the said Home Safe Deposit Company."
Finding the issues in favor of the plaintiff, the court entered judgment against appellant for $17,473.21, and adjudged that the United States Fidelity Guaranty Company was liable to the plaintiff in the amount of $14,000, that being the amount of the bond executed by it as surety, and provided that, if the plaintiff shall not be able to collect the judgment against the Home Trust Company, Home Safe Deposit Company and Mercantile Home Bank Trust Company upon execution, then and then only shall execution issue against said United States Fidelity Guaranty Company. The Home Safe Deposit Company paid the judgment against it so that the only judgment involved is that for the income tax deficiency of the Home Trust Company.
While it is alleged that appellant assumed all the liabilities of the Home Trust Company "by the terms of which said contract," that is not the contention urged by appellees here, nor was it in fact the theory upon which the lower court held appellant liable. Manifestly, "the terms of the contract" refute any such contention. The contract not only specifically enumerates what liabilities appellant assumed, but as clearly declares that no other obligations are or will be assumed. It is now claimed, and the lower court found, that a merger or consolidation resulted, and hence appellant became liable for all debts of all the old corporations, notwithstanding the terms of the contract to the contrary, the court holding that such provisions are and were void.
The importance of the case becomes apparent when we consider the sweeping effect of the lower court's decision. If these provisions of the contract by which appellant disclaimed liability for the debts of these banks and trust companies, except such as were enumerated and specifically assumed, were void, then appellant not only became liable for the $18,000 taxes due the government, but for all the debts and liabilities of every kind and character of each of these corporations, amounting to many hundred thousand dollars, far in excess of the total capital stock and surplus of appellant. For instance, it appears in the contract that the Home Trust Company had outstanding obligations of certificates of indebtedness issued to three individuals amounting in the aggregate to $339,000, which the contract provided should under no circumstances and in no event be deemed to have been assumed by appellant; yet, if all these saving provisions of the contract are void, the appellant is at once liable for these debts, as well as the many other debts and liabilities of the various corporations which the contract specifically declared were not and should not be assumed. The result of such a holding, applied, as it must be, to all debts of these banks and trust companies, will be to wipe out the entire capital and surplus of appellant and take from it the ability to protect and pay the innocent and confiding depositing public which has extended its confidence and continued its deposits not only with appellant, but, we may assume, with many other institutions brought into life under similar circumstances and for equally beneficent purposes.
The law in Missouri, in harmony with the common-law rule, sustains the right of an insolvent debtor corporation, absent intent to defraud, to dispose of its assets for a fair and adequate consideration, so as to prefer favorite creditors, although the result may be to leave nothing for others who stand on a footing equally meritorious. Heidbreder v. Superior Ice, etc., Co., 184 Mo. 446, 83 S.W. 466; State v. Manhattan Rubber Co., 149 Mo. 181, 50 S.W. 321; Schufeldt v. Smith, 131 Mo. 280, 31 S.W. 1039, 29 L.R.A. 830, 52 Am.St.Rep. 628; Alberger v. Nat. Bank of Commerce, 123 Mo. 313, 27 S.W. 657; Russe Burgess v. Meisner Lumber Mfg. Co., Mo.App., 243 S.W. 353; Graham Paper Co. v. Publishing Co., 172 Mo.App. 495, 158 S.W. 92; Warren v. Fertilizer Junk Co., 145 Mo. App. 558, 122 S.W. 1087; Commerce Trust Co. v. Woodbury, 8 Cir., 77 F.2d 478; Burston v. Fennewald, 222 Mo.App. 128, 2 S.W.2d 824; Foster v. Mullanphy Planing-Mill Co., 92 Mo. 79, 4 S.W. 260; United States Rubber Co. v. American Oak Leather Co., 181 U.S. 434, 21 S.Ct. 670, 45 L.Ed. 938; Hollins v. Brierfield Coal, etc., Co., 150 U.S. 371, 14 S.Ct. 127, 37 L.Ed. 1113.
In the absence of any actual fraud, therefore, there was nothing unlawful about this contract. The undisputed facts clearly demonstrate that it was entered into in entire good faith, and there is no room for a suspicion of actual fraud. The consideration paid exceeded by some $50,000 or $70,000 the actual value of the property transferred. In passing, it may be observed that, if the sale and transfer had been fraudulent or without consideration, the debtor might in equity have set aside the transfer and subjected the assets to the payment of its claim, but here the assets had prior to the commencement of plaintiff's suit been entirely paid out by appellant in discharging lawful debts of its transferors, and, in addition, it has expended in the payment of such debts an amount in excess of $40,000, so that even in a court of equity the plaintiff could have recovered nothing. But it is urged that plaintiff is entitled to recover from appellant, in spite of the fact that it has paid full value for the property transferred, regardless of its good faith, regardless of the fact that the property transferred has been entirely devoted to the payment of bona fide debts of the transferor, and in disregard of all the equitable principles ordinarily determining the rights of the parties in such transactions, because, it is said, there resulted a merger or consolidation.
In considering this question, it is important to have in mind that the appellant paid a fair and adequate consideration for the property received, and that the transaction was not an unlawful one under the laws of Missouri, it not having been tainted by bad faith or actual fraud.
There is a recognized distinction as applied to corporations between the terms "merger" and "consolidation." In a merger, one corporation absorbs the other but remains in existence, while the other is dissolved. In a consolidation, a new corporation is created, and the consolidating corporations are extinguished. In either event, the new corporation acquires all the assets, property rights, and franchises of the dissolved corporations, and their stockholders become its stockholders. Pinellas Ice Cold Storage Co. v. Commissioner, 5 Cir., 57 F.2d 188; Royal Palm Soap Co. v. Seaboard Air Line Ry. Co., 5 Cir., 296 F. 448; Ferguson v. Meredith, 1 Wall. 25, 17 L.Ed. 604, 609; Collinsville Nat. Bank v. Esau, 74 Okla. 45, 176 P. 514; Atlantic, etc., R. Co. v. Georgia, 98 U.S. 359, 25 L.Ed. 185; Cortland Specialty Co. v. Commissioner, 2 Cir., 60 F.2d 937, 939; Prairie Oil Gas Co. v. Motter, 10 Cir., 66 F.2d 309; Drovers' Mechanics' Nat. Bank v. First Nat. Bank, 4 Cir., 260 F. 9, 15.
Pinellas Ice, etc., Co. v. Commissioner, supra, went to the Supreme Court ( 287 U.S. 462, 53 S.Ct. 257, 260, 77 L.Ed. 428), where, in an opinion affirming the lower court it is, among other things, said: "But the mere purchase for money of the assets of one company by another is beyond the evident purpose of the provision, and has no real semblance to a merger or consolidation."
In Cortland Specialty Co. v. Commissioner, supra, the court was considering the statute with reference to reorganization, merger, or consolidation. In the course of the opinion it is said: "A sale of the assets of one corporation to another for cash without the retention of any interest by the seller in the purchaser is quite outside the objects of merger and consolidation statutes."
In Drovers' Mechanics' Nat. Bank v. First Nat. Bank, supra, it was contended that a merger or consolidation had been effected. In the course of the opinion the court said: "In this instance there was no fraud in the purchase, every asset purchased and every debt assumed was particularly specified, the stock of the trust company was not purchased, no obligation was assumed to the stockholders of the selling corporation and the trust company continued its business for the purpose of winding up its affairs, including the payment of the note given to the First National Bank. The contract, therefore, was not a merger or consolidation and by it the First National Bank did not become liable for any debt of the trust company not mentioned in the contract."
The facts in that case bear a striking resemblance to those in the instant case.
It requires no argument to demonstrate that no merger resulted from the carrying out of this contract. A most casual inspection of the contract refutes any such thought. There were lacking, too, many of the essential elements of a consolidation. As has been observed, the stockholders of the Home Trust Company, with one exception, did not become stockholders of the new corporation. The old corporation was not dissolved but has continued to function as such. The contract contains provision for a return to the old companies of any excess resulting from the collection or sale of the property pledged, and it was thought at the time that these assets exceeded the obligations for which they were pledged as security. The old corporations have not been extinguished, and hence have not been consolidated with the new corporation. The contract was for an absolute sale and transfer of a part of the properties and assets of the old corporations and a transfer of the other assets as a pledge to secure a legitimate indebtedness. This is the construction which the parties to the contract have placed upon it throughout the period in which it has been in process of execution. The Home Trust Company did not become "practically extinct," but retained its franchise and continued to function as a corporation. The control and possession of the assets of the old companies which were vested in appellant by the contract were incident to carrying out the pledge. Appellant agreed not only to pay the Home Trust Company's depositors, but to liquidate the assets and apply them to its indebtedness of more than $2,000,000, practically without charge or expense to it. The parties thought the practical way to carry out such obligations was to create a bank and accept those who had been customers of the old corporations as customers of the new bank as far as possible.
In considering the provisions of the contract, the circumstances surrounding its execution must constantly be borne in mind. It was manifestly the purpose of those interested in these institutions to prevent a financial catastrophe, and the task was a delicate one. The psychology of the situation required that the relations of the depositors to the banking institutions be disturbed as little as possible, and for that reason the contract enabled appellant to deal directly with the old depositors. Certain of the officers from the old institutions were installed in the new bank, and the appellant was authorized to collect and liquidate the assets pledged by the old corporations, and it was intended to make it convenient and desirable for the customers of the old institutions to continue business with the new.
The contract contains provision that the old concerns would go into voluntary liquidation if so requested by appellant, and this is dwelt upon by appellees as indicating a consolidation. But the agreement to liquidate on request of appellant would enable appellant, in the event of a deficiency after the pledged assets had been disposed of and applied, more readily and promptly to enforce the stockholders' liabilities of the old concerns. It was a further safeguard, more or less conventional, favoring the creditor who held the pledge as security. It did not alter the controlling features of the contract, nor change its nature to assimilate the transaction under a merger or consolidation.
Appellees cite a number of authorities which they claim support the theory of merger or consolidation. It would unnecessarily extend this opinion to review these cases. It may be said of them generally, however, that they are cases in which the transfers involved were either without consideration, or for an inadequate consideration, or were tainted with actual fraud, and the courts held that the debtor, under well-recognized principles of equity, might pursue the assets in the hands of the transferee to the extent of the excess of the consideration paid for them by the transferee in satisfaction of the debt. Thus, in Blackington v. United States, 8 Cir., 6 F.2d 147, 148, this court held that the transferee had taken over all the assets of the taxpayer of the value of more than $14,000, and had left nothing in their place. "Such an absorption of assets," this court said, "carries with it necessarily a liability for the debts which those assets might have paid." The tax was much less than $14,000.
In Okmulgee Window Glass Co. v. Frink, 8 Cir., 260 F. 159, 162, this court held that the creditor of one corporation could maintain a suit in equity against a corporation which was "in its essence but a continuation of the activities and interests of the old company," but the recovery was limited to excess assets found to be held by the successor corporation as a trust fund.
There might be added the case of Hunn v. United States, 8 Cir., 60 F.2d 430, not cited by either party, in which this court held that there was a de facto dissolution of the transferor; that the transferees had received from the assets property of the value of $54,000, for which they had paid nothing, and we held the transferee liable to the extent of the value of the property received. This was also an equity suit.
Thompson v. Abbott, 61 Mo. 176, and Eans' Adm'r v. Exchange Bank, 79 Mo. 182, are also equity suits, and they held that transferees of property of an insolvent corporation without consideration became liable for the debts of the old corporation. That doctrine has no application to the facts here. The effect of the judgment here is to compel appellant to pay debts which it was agreed it should not assume. Here the creditor attempts to secure all the benefits of the transaction and of the new money put into the new corporation and secure payment of its entire debt out of appellant's money, and this in the absence of fraud and in the face of the undisputed evidence that the appellant not only paid adequate consideration but has already expended in paying the debts assumed over $40,000 in excess of what it received.
The Missouri cases cited are reviewed and considered by the Court of Appeals in Zimmerman v. W.L. Grush Produce Commission Co., 156 Mo.App. 588, 137 S.W. 642, 643. The Zimmerman Case was an equity suit in which it was sought to follow property transferred in alleged fraud of creditors. In that case there was an absolute transfer of all the assets of an insolvent corporation to a new corporation bearing a name similar to that of the old one. But the court held that there was no merger or consolidation and no obligation upon the new corporation to pay an outstanding judgment debt of the old corporation which it had not assumed. The court cited the Missouri cases which are relied upon here by appellees and, among other things, it is there said: "The instances cited are not parallel to this one. The purpose of the new company was not to continue in existence the old company, but to put into existence a new corporation with new stockholders. * * * It lacked in the most important particulars the elements of a consolidation with the old company or a merger of the latter. * * * It being fully established that the transaction amounted to nothing more than the purchase of the property of one corporation by another in good faith, we cannot see wherein appellant has any standing in equity. It is true the transaction amounts to giving a preference of one set of creditors over another. But it is legitimate for a corporation in failing circumstances to prefer one creditor to another in discharging its obligation, `if the preference is made in good faith while the property remains in its possession unaffected by liens or by process of law.' Alberger v. National Bank, 123 Mo. 313, 27 S.W. 657; Schufeldt v. Smith, 131 Mo. [280] 286, 31 S.W. 1039, 29 L.R.A. 830, 52 Am.St.Rep. 628." See, also, Neely v. Rawlings, 5 Cir., 64 F.2d 655.
The lower court, in its opinion, cited the case of Caldwell State Bank v. First National Bank, 49 Idaho 110, 286 P. 360, as sustaining its conclusion. In that case the court held that from a fair interpretation of the contract between the parties the new bank was obligated to pay the small claim sued on, although it had not been specifically included in a statement of debts. True, the trial court had found that a merger resulted, but the Supreme Court expressly refrained from sustaining that finding. The authority we think inapplicable to the facts in this case. As has been observed, this is an action at law, but, even if it were a suit in equity, the equities cannot be said to be in appellees' favor. The contract vested the rights of a pledgee in appellant for the benefit of the depositors who have left millions of dollars with it, confidently relying upon its solvency which exists only if the contract be upheld as written. Such a doctrine would go far to ruin many financial institutions that have taken pledges.
The Missouri statutes concerning sale of assets and merger and consolidation of banks and trust companies are discussed in briefs of counsel. Where a merger of banks is effected under the statute, or probably regardless of statute, a creditor of either may recover a debt by suit against the resultant corporation. These statutory provisions add nothing to the general Missouri law. No provision gives rise to a right to sue except where a merger or consolidation has in fact resulted.
It was contended in appellees' briefs that the appellant was liable for the tax under the provisions of section 311(a)(1) of the Revenue Act of 1934, 26 U.S.C.A. § 311(a)(1), relating to claims against transferees. On oral argument, however, this contention was specifically withdrawn.
Convinced as we are that no merger or consolidation resulted from the carrying out of the contract, and the transaction being free from any taint of actual fraud, the sale and pledge of the assets being for an adequate consideration, and the appellant having already paid more than their value in discharge of legitimate debts of the old concerns, we conclude that the appellant was entitled to judgment dismissing the action, and hence the judgment appealed from is reversed.
STONE, Circuit Judge (dissenting).
These were Missouri corporations. What they did was within Missouri and governed by the state law. There is some difference between the parties as to whether the organization of appellant and the transfers to it were under section 5379, Mo. St.Ann. § 5379, p. 7595, or under article 4, section 5470 et seq., Mo.St.Ann. § 5470 et seq., p. 7666 et seq. (containing section 5488, Mo.St.Ann. § 5488, p. 7674) of chapter 34 of the Revised Statutes of Missouri 1929. Article 4 is not involved because the method pursued here was entirely different from and failed to follow essential provisions of that chapter. Section 5379 of article 2 of the same chapter seems to be the only other statutory basis for what these companies did. It seems to fit what they did.
Article 4 covers "Merger and Consolidation of Trust Companies" and provides the methods and requirements therefor. Essential requirements under this Article are: submission to and approval by stockholders (sections 5477, 5478); exchange of stock of consolidation or merger company for that of consolidating or merging companies (section 5481); compensation of dissenting stockholders (sections 5482-5485); and merging of the "corporate existence" of the old companies into the new company (section 5486). Not one of these requirements was attempted to be met here.
Section 5379 is as follows:
"Bank may sell its business, or any of its departments — procedure. Any bank may sell the whole of its business, or the whole of the business of any of its departments, to any other bank or trust company, state or national, or may for the purpose of consolidating or merging with another bank or trust company, state or national, transfer its affairs, assets and liabilities to the bank or trust company with which it intends to consolidate or merge: Provided, that such sale, merger, or consolidation shall in nowise impair, defeat or defraud any creditor of said bank or trust company or either of them. No state bank shall enter into such sale, purchase, merger, or consolidation as seller, except after obtaining the consent of the stockholders of record holding at least two-thirds of the outstanding capital stock, except where such sale, merger or consolidation shall, in the opinion of the commissioner of finance be deemed a public necessity or advantage. Such consent may be expressed either in writing, executed and acknowledged by said stockholders or by a vote at a stockholders' meeting called for that purpose, notice of which shall be given by mailing notice thereof to each stockholder of record at his last known address as shown by the records of said bank, at least twenty days prior to said meeting. Such notice shall state the time and place of holding of such meeting and a brief and concise statement of the objects and purposes thereof. No such sale, purchase, merger or consolidation shall be made without the consent of the commissioner of finance. The commissioner of finance may before granting his consent thereto cause an examination to be made of each of the banks or trust companies involved, the expense of which shall be paid by said banks or trust companies and shall not exceed fifteen dollars per day for each examiner and the actual expense incurred while making the examination. The commissioner of finance shall, before granting his consent, require each of the banks or trust companies to file certified copies of all proceedings of their directors' and stockholders' meetings relating to the transaction, showing a full compliance with the requirements of this section, and also copies of any agreement or agreements which may have been entered into between said banks or trust companies." Laws 1927, p. 216, § 11.
There is much argument here as to whether these transactions were sales, a merger or a consolidation. I am unable to see what difference that makes upon the liability of appellant for these taxes. Section 5379 expressly covers all three: Sales (of all or a part) of the business of a bank, a merger, or a consolidation. The power to do any one of these three things is conditioned "that such sale, merger, or consolidation shall in nowise impair, defeat or defraud any creditor of said bank or trust company or either of them."
It seems to me that this was a sale in form but a merger or a consolidation in effect — however, it makes no difference if it was just a sale. But it clearly was not a sale in which the appellant, as an independent entity, purchased the business and/or assets of the old companies and paid to each of them the fair value of what it got. Had that been the situation, all creditors of the old companies would have had to look to the purchase price paid the respective company for satisfaction of their debts.
What took place here and the effect thereof upon this tax debt of the Home were as follows: Creation of appellant sprang solely from the distressed situation of the four old companies and was for the purpose of meeting and salvaging that situation. The relationship between appellant and each of such companies was based upon a statement of liabilities and assets of each old company as of February 25, 1933. Of these liabilities, appellant was to assume payment of deposits, outstanding cashier's and certified checks and certificates of deposit, compensation of officers and employees from February 1, 1933, and ordinary current bills incurred since February 1, 1933. The liabilities so assumed were to be regarded as a debt of the respective old company to appellant. Such liabilities of each old company were to be independent and separate from any responsibility by any other such company and the assets coming from each were to be devoted exclusively to satisfying its liabilities assumed by appellant. Appellant bought all cash, indebtedness of other banks to any old company, all furniture, records, etc., "and all other property used in the business of any Old Bank," and the capital stock and rental contracts of any safe deposit company of such old company. The aggregate amount of such money, etc., so acquired from each company was to be credited on the above assumed indebtedness of the respective company. There was a specific agreed valuation of the "banking premises" and equipment of the Home, because appellant planned to occupy such premises as its place of business. The difference between the above assumed indebtedness of each old company and the above assets taken over was "deemed the balance then owing on the debts of each Old Bank, shall be secured by all the remaining assets and property of each Old Bank of every kind and character whatsoever, real, personal and mixed, including all assets and property heretofore charged off and not theretofore finally liquidated." Such property of each old company was conveyed "by way of security for the amount of the debt of the respective" old company and such company was obligated, "when requested so to do" by appellant, to convey and deliver to it all or any of such property, to be applied upon the above balance of indebtedness of the respective company to appellant. As to any property theretofore pledged by any old company the equity therein was (with one exception) placed within the above provisions as to property conveyed as security to appellant. Appellant was to liquidate the properties conveyed to it (at the expense of the particular old company) and, when the credits from such property equalled the above balance of indebtedness of any old company, all remaining property coming from it to appellant was to be reconveyed by appellant. If such credits shall not equal such balance by February 25, 1938, then any remaining assets from the old company shall be sold at public sale and the proceeds applied thereto. "Each of the Old Banks agrees that it will cause such action to be taken as will result in its affairs being placed in voluntary liquidation if so requested by the New Bank, with all dispatch and as soon as may be legally done after receipt of such request." The legal expenses of organizing appellant and carrying out the contracts between it and the old companies were to be paid by appellant and allocated and charged to the old companies on the "proportion which their resources bear to the total resources of said four [old] banks."
The above is intended only as a bare outline of this arrangement. The gist of the arrangement is that appellant was organized to take over and did take over all of the property of each of the four banks under an assumption of certain liabilities of each. Such liabilities were confined to deposits, special obligations (cashier's checks, certified checks and certificates of deposit), and current pay rolls and expenses from February 1, 1933, to February 25, 1933. Obviously, the old companies continued only as shells stripped of all property and with no shadow of expectation of ever again functioning as business concerns. That there were other liabilities (including the taxes here involved) of the Home which were left with no chance of payment is clear.
The complete contract is here set out in full except signatures.
The arrangement represented by these transactions presents a laudable attempt to meet a critical situation and, as such, is open to no condemnation. However, appellees are here demanding their rights and I cannot escape the conclusion that this arrangement does "impair, defeat or [in a legal sense] defraud" appellees as creditors of the Home and, therefore, is unavailing, under section 5379, to avoid liability for this tax. I think the judgment should be affirmed.