Petition — Birmingham Trust National Bank v. Harrison
Supreme Court brief1979
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Supreme Court, U,
FILED’
'} SEP 6 4979
IN THE [_Micitaa Ro SAK, JR., CLERR
rr
SUPREME COURT OF THE UNITED STATES
OCTOBER TERM 19__
no. €9-386
JACK H. HARRISON, as Temporary Trustee
of the Linn-Henley Charitable Trust,
Petitioner
vs.
BIRMINGHAM TRUST NATIONAL BANK, a national
banking institution, as Co-trustee of the Linn-Henley
Charitable Trust, SOUTHERN BANCORPORATION
OF ALABAMA, a Delaware Corporation, JOHN C.
HENLEY, III, as Co-trustee of the Linn-Henley
Charitable Trust, and CHARLES A. GRADDICK, Attorney
General of the State of Alabama
Respondents.
PETITION FOR WRIT OF CERTIORARI
TO THE SUPREME COURT OF ALABAMA
Morris K. SIRoTE
2222 Arlington Ave. So.
Birmingham, Ala. 35205
(205) 933-7111
Counsel for Petitioner
Of Counsel:
SIROTE, PERMUTT, FRIEND, FRIEDMAN,
HEwLp & Apo.insky, P.A.
2222 Arlington Ave. So.
Birmingham, Ala. 35205
(205) 933-7111
\ 75 eee
_ arr
Pole
a
i
TABLE OF CONTENTS
Page
Opinions Below ....... Ss RY SUL Ea ie I Oe 2
SCE EEO EA RCT NE Ca OE 2
Questions Presented ................ lellhite tineesibsmabicipenctpadhanesten 3
The Constitutional Provisions, Statutes,
and Regulations Involved ___... 0 UA OC 6
GARI ee oe 7
a. BINB Engages in Long Bitter Dispute With
Individual Co-Trustee as to His Right to Dissent ___. 9
b. BTNB Knew That the Plan of Reorganization
did not Comply With Federal Banking Act
and that the Auctions to be Held Thereunder
I 1]
c. The Public Auctions of the “New Bank” and
the ‘“‘Holding Company” Stocks and the Self-
Dealing on the Part of BITNB __.. 12
d. The Subsequent Involvement of BTNB in the
Appraisal Process Before the Comptroller of
IN EO Oe ‘ 15
e. The Proceedings in the Court of First Instance _..... 16
“Petition by BTNB for Instructions, and for
Confirmation of the Sales at Public Auction
ip a : 16
g. The Course of the Proceedings on the Retrial
After Remand and the Manner in Which the
Federal Questions Sought to be Keviewed
wet eee 2 te EES Lo 19
eenome See Comme te Writ 20
a. There is no Triangular Merger here Involved;
the Distribution of the “Holding Company”
Stock Required Registration Under the
II I ac 22
TABLE OF CONTENTS — Continued
. The Offer and Sale of the “Holding Company”
Stock at a Public Auction Violated § 5
of the Securmies- Act of 1008. «2 23
The Manipulations by BTNB Constituted a
Violation of § 10 of the Securities and
Exchange Act of 1934 and Rule 10b-5
Promulgated Thereunder _......
. Although a State Court does not have Jurisdiction
to Entertain a Claim under § 10 of the Securities
and Exchange Act of 1934, it does have
Jurisdiction to Entertain such a Claim Asserted
as a Defense to a Suit Instituted in a State Court ____.
. The Contract of Sale to, and the Purchase by,
the Holding Company of the Unregistered Stock °
of the “Holding Company” at the Public Auction
is Void and Unenforceable, either under the
1933 or the 1934 Security Acts. 0. FOURS TR,
There is no Substantial Independent State
Ground to Support the Judgement Below .—
. The Federal Questions Underpinning the
Award by the Trial Court .. O55 RC Mebe ad
. The Contentions by Petitioner Bristle
With Dearne Cement
Eee Wn
The Claim for Damages for the Abuse by
Counter-Defendants of the Appraisal
Process Under the Banking Laws _.
The Opinion of the Supreme Court of Alabama
Concedes Existence of Federal Questions to be
Resolved, Which Are Decisive in Favor of Petitioner _.
The Judgment of the Supreme Court of Alabama
is not Supportable by any Independent State
Ground; and the Court Has Implicitly and
Erroneously Decided Substantial Federal Questions _.
RN es rn a sl ON eid,
ae
25
32
33
34
iii
TABLE OF CASES
Affiliated Ute Citizens v. United States, 406 U.S.
fe Rg Ye ah. Rr, acme 26
Ancient Egyptian Arabic Order of Nobles of the
Mystic Shrine of Michaux, 49 §.Ct. 485, 279 U.S.
ce eS | RIVER RE LSE a Se ee 35
Atner State Bank v. Altheimer, 430 F.2d 750,
po Re ae BRR AU. 0 ER A a eal 25
Bailey v. Meister Brau, Inc., 378 F. hres £3
869 (1973), aff'd. “s An Frere Aes Bp
Bailey v. Meister “sie Inc., 535 F.2d
982 (7th Cir. 1976) . busses ceili ies achucasaiinapheactconsses aac Oc ee
Birmingham Trust National Bank v. Henley, et al.,
371 Sane .con (Advance Sheet)... 4. 2
Bryant v. Moss, 329 So.2d 538, 295 Ala. 339-35
Brynes v. Faulkner, Donkins and Sullivan,
ufc 00. es COTE, Oe Wee OOO ek
California Bankers Association v. Shulz, 94 S.Ct.
1496, 416 U.S. Zi, 39 L.Ed.2a Giz... ............__. 38
Creswill v. Grand Lodge Knights of Pythias,
Se S.Ct. 822,229 U.S, 266, 56 L.Ed. 1074 35
Dyer v. Eastern Trust & Banking nena,
336 F.Supp. 890 (D. Me. 1971) eet SG. es oe
Ernst & Ernst v. Hochfelder, 96 S.Ct. 1375,
47 L.Ed.2d 668 .......... ARDS SRE A) AN a 25
General Life of Missouri Investment Company
v. Shamburger, C.A. Ark. 1976, 546 F.2d 774 20) 0. 27
Grand Forks First Nat. Bank v. Anderson, N.D. 1899,
19 S.Ct. 264, 172 U.S. 573, 43 L.Ed. 558 _......... _.._....__.._____36
Henley v. Birmingham Trust National Bank,
295 Ala. 38, 322 So.2d 687 ...2W... iis a til, o, 89
J. I. Case v. Borak, 377 U.S. 426,
eee Oe, Oe eee, POO 26
iv
TABLE OF CASES — Continued
Page
Junigan v. Taylor, 344 F.2d 781, cert. den.
592 US. 879, 15 LEGS 100 2 Ue a al: 27
Logan County Nat. Bank v. Townsend, “aig 1891,
11 S.Ct. 496, 139 U.S. 67, 35 L.Ed. 107 - alten Biaincesraae
Lum Wan v. Esperdy, 321 F.2d 123 (C.A. N.Y. 1968) Paxiinpcounl
McCormick v. Market Nat. Bank, Il. 1897,
17 S.Ct. 433, 165 U.S. 538, 41 L.Ed. 817... 86
Marcou v. Federal Trust ee a
268 A.2d 629, 635 (Me. 1970) _ SE ETA
May v. Midwest Refining Cacia! St 25 F. Fsupp.5 560,
aff'd. 121 F.2d 431, cert. den. 86 L.Ed. 534 _ Sentuedvesee
Mills v. Electric Auto-Lite Co., 396 U.S.
375, 24 L.Ed.2d 593, 90 S.Ct. 616 26, 84
Opinion of Professor Louis Loss 0 8
Pan American Fire & Casualty Company v.
DeKalb-Cherokee County Gas District,
266 So.2d 763, 289 Ala. 206 - Ries Fe mae eT
Peoples Savings Bank v. Stoddard vw. Michigan
National Bank, 359 Mich. 297, 102 N.W.2d
777, 83 A.L.R.2d 344 . Oe OS |
Seabury v. Green, $.C. 1935, 55 S.Ct. 373,
294 U.S. 165, 79 L.Ed. 834, 96 A.L.R. 1463 86
SEC v. Dolnick, 501 F.2d 1279 (7th Cir. i) PER |
SEC v. National Securities, 393 U.S. 453,
21 L.Ed.2d 668, 89 S.Ct. 564 - ewes HE.
Securities Exchange Act of 1934, te 10b,
15 U.S.C.A. § 78)(b), Rule 10b-5 4 5, 7, 24, 26
Staub v. Alabama Power one 350 So.2d 386 35
Superintendent of Insurance v. Bankers Life
& Casualty Company, 404 U.S. 6, 30 L.Ed.2d
128, 92 S.Cy, 166 ee 21, 24, 25
Vv
TABLE OF CASES — Continued
Swanson v. American Consumer dll
Inc., 415 F.2d 1326 (C.A. 7th Cir.) ...
Swope v. Leffinwell, Mo. 1882, 105 U.S. 3,
15 Otto. 3, 25 L.Ed. 939 .
Taylor v. Kentucky, 98 S.Ct. 1930, 1933,
Note 10, 436 U.S. 478, 56 L.Ed.2d 468 |
Union National Bank v. Louisville, etc. R. Co.,
Ill. 1806, 16 S.Ct. 1039, 163 U.S. 325, 41 L.Ed. 177 _.........
United States v. Philadelphia National Bank,
374 U.S. 321, 10 L.Ed.2d 915, 83 S.Ct. 1715 -
Weiner v. Shearson, Hammill & ee
521 F.2d 817, 822 (C.A. 9th Cir, 1975) _.
Will v. Calvert Fire Insurance or 437 US.
655, 57 L.Ed.2d 504, 98 S.Ct. 2552 -
Williams v. Kaiser, 65 S.Ct. 363,
oe Ve, 71, Oe oe
Yates v. Jones Nat. Bank, Neb. 1907,
27 S.Ct. 638, 206 U.S. 158, 51 L.Ed. 1002 sa
Page
wen
ae
36
sO
ae:
<e
35
alas 36
vi
3 * FEDERAL STA EUTES INVOLVED, +s
, ! : Page
Title 12, USCA § 215 ..... Bd OE PLE CME ee WR, 22
Tae 02. USCA § Sie sai dhipaaeneiciedodcenaand 3, 6, 11
§ 215b . chpeiconch 3, 6, 22
Ss Pee ee es Ye rer 8, 22
OD isaac i cena cieetnesenannosione 9
sneer. 3,8, 11, 16, 18, 25
ie hon eeecinigtiap bainlacilh Uialiotnanciaeeaescieaianeees 6
Se a ee ERR APN. Claires ie se 14
UN Te RTE civvosdnsoisentninlececmisaig inte Rouen 2
Te OE ee ee
1” SEER RE eras 4,7
7ST lec IA SS EIR EN RNY 7, 32
leh oe Oe ee ee oe
EEE AER eS
Oe eek Sc a 7, 32
§ 76j(b) i O08 7, 6
ONT TIT TEPER evel gael 4,7
RT OT Ee REE 5, 28
RULES AND REGULATIONS OF THE SECURITIES
AND EXCHANGE COMMISSION
Rule 10b-5 of the Securities and
Exchange Commission 2.202.800 sn .-45, 7, 26
Rule 14a-9 of the Securities and
Exchange Commission, Item 9 __..... ssiediaccimonecsioacoinaaanioned 4,7
Rules and Regulations of the Comptroller
1 Byes cote cg, GRRE ce. aoe ek Eas SUE aha 4
age cae, ERNE 5 ES SRST 5 EA OT OC 2
12 CFR § 9, Fiduciary, Rules and Regulations
of the Comptroller of the Currency 005 7
12 CFR § 11.6, Schedule B, Item 9,
Proxy Regulations Relating to Mergers 0 OG
TEXTS
Opinion of Professor Louis Loss
(Loss, Securities Regulations) 0007, 8, 22
IN THE
SUPREME COURT OF THE UNITED STATES
OCTOBER TERM 19...
NO.
JACK H. HARRISON, as Temporary Trustee
of the Linn-Henley Charitable Trust,
Petitioner
Vs.
BIRMINGHAM TRUST NATIONAL BANK, a national
banking institution, as Co-trustee of the Linn-Henley
Charitable Trust, and SOUTHERN BANCORPORATION
OF ALABAMA, a Delaware Corporation
Respondents.
PETITION FOR WRIT OF CERTIORARI
TO THE SUPREME COURT OF ALABAMA
Petitioner respectfully prays that a Writ of Certiorari issue
to review that part of the final order of the Supreme Court of
the State of Alabama entered on April 6, 1979, in which Peti-
tion for Rehearing was denied on June 8, 1979, which reversed
the judgment of the trial court awarding to the Linn-Henley
Charitable Trust the sum of One Million Two Hundred Thou-
sand Dollars ($1,200,000), as set out in Part II of the order, in
the following entitled case:
2
Birmingham Trust National Bank, et al.
77-382 v.
John C. Henley, III, et al.
AND
Charles A. Graddick, Attorney General
77-382A v.
Birmingham Trust National Bank, et al.
AND
John C. Henley, III, et al.
77-382B v.
Birmingham Trust National Bank, et al.
Appeal from Jefferson Circuit Court
OPINIONS BELOW
There were two appeals in this case. The opinion of the
Supreme Court of Alabama on the first appeal is reported in
Henley v. Birmingham Trust National Bank, 295 Ala. 38, 322
So.2d 688. That part of the judgment here sought to be re-
viewed is contained in the opinion of the Supreme Court of
Alabama reported in 371 So.2d 883 (Advance Sheet) and is set
forth as Appendix ‘‘A(1)". The order denying the application
for rehearing is set forth as Appendix “A(2)".. The Appendix
is separately presented to this petition.
JURISDICTION
The opinion of the Supreme Court of Alabama was entered
on April 6, 1979. Application for rehearing was denied on
June 8, 1979. The jurisdiction of this court is invoked under
28 USC § 1257(3).
3
QUESTIONS PRESENTED
1. Whether a merger and plan of reorganization adopted by
a national bank constituted a triangular merger impermissible
under Title 12, §215a(a), and “inconsistent with sections 215-
215b of this Title,” where the bank (““Old” Bank), desiring to
restructure its corporate structure so as to become a subsidiary
of a ‘‘Holding Company’, formed a Delaware business corpo-
ration (“Holding Company’’), and a phantom national bank
(“New” Bank); and where upon the effective date of the merger
the “Old” Bank became merged into the phantom ‘New’
Bank, all of the stock of the phantom “New” Bank, except
qualifying shares, was transferred to the “Holding Company”,
and all of the shareholders of the “Old” Bank weve required to
exchange their stock in the “Old” Bank on a share-for-share
basis for the stock of the ‘Holding Company”.
2. Whether a national bank violates the provisions of Title
12, § 215a(d) where it merges with a phantom national bank
and adopts a merger and plan of reorganization which provides,
with respect to the rights of dissenting stockholders, that the
shares of stock of a ‘‘Holding Company”, a non-banking busi-
ness corporation, shall be sold by the receiving association at
an advertised public auction, instead of the shares of stock of
the receiving association which would have been delivered to
dissenting stockholders had they not requested payment, as re-
quired by § 215a(d).
3. Whether the purported merger and plan of reorganization
described in 1 above constitutes a mere package or two-step
transaction containing (1) a merger of two national banks, as
permitted by § 215a, and (2) an exchange of the “Holding
Company” stock for the stock of the merging “Old” Bank, with
the result that neither the merging “Old” Bank nor the “New”
Bank, nor the “Holding Company” could compel the stock-
holders of the “Old” Bank to convert their shares into the
4
shares of the “Holding Company”, a mere business corpora-
tion, foreign to the merger of the two national banks.
4. Whether the proxy statement, circulated through the
mails by the “Old” Bank to its stockholders, including the
Linn-Henley Charitable Trust, which owned 27,460 shares of
its stock, and which dissented from the merger, was false and
misleading and violated the provisions of Title 15 USCA § 77q,
15 USCA § 78n, the provisions of Rule 14a-9 of the Securities
& Exchange Commission, Item 9 of the Comptroller of the Cur-
rency, Schedule B, required to be filed pursuant to Rule 12
CFR 11.3, and the fiduciary regulations of the Comptroller
then in effect.
5. Whether the distribution of the “Holding Company”
stock to the stockholders of the merging bank required regis-
tration under the Securities Act of 1933, since the exchange of
the “Holding Company” stock for the stock of the merging
“Old” Bank was not pursuant to either the Alabama statutory
provisions or the provisions of the Federal Banking Act relating
to mergers of national banks, and constituted a mere tender
offer by the “Holding Company” of its stock to the stockholders
of the “Old” Bank in exchange for their stock in the “Old”
Bank.
6. Whether the “New” Bank, in offering the unregistered
stock of the “Holding Company” at public auction, pursuant
to the provisions of the merger and plan of reorganization, and
in selling the same to its parent, the respondent, Southern Ban-
corporation of Alabama, in competition with the Linn-Henley
Charitable Trust of which it was co-trustee, was so blinded by
conflict of interest and was guilty of such infidelity to the trust,
as a dissenting stockholder, as disclosed by the record, that it
violated the provisions of Title 15 USCA, §§ 77e and 77q of the
Securities Act of 1933, § 10b of the Securities and Exchange
Act of 1934, Rule 10b-5 of the Securities and Exchange Com-
3
mission, as well as the fiduciary regulations of the Comptroller
of the Currency, 12 CFR 9.
(a) Whether the violation by the bank, as.co-trustee, of the
provisions of § 10 and Rule 10b-5 may be used by the Linn-
Henley Charitable Trust as a defense to and in a counter-claim
against a petition initiated by the Bank, as co-trustee, in a state
equity court for instructions and for an order ratifying and
confirming the sale of such unregistered stock of the “Holding
Company to its parent at the public auction in question.
(b) Whether the violation by Respondents of any provision
of the Securities and Exchange Act of 1934 rendered void the
contract of purchase and sale of the “Holding Company” stock
at the public auction in question, as regards the Respondents
who made or engaged in the performance of such contract,
within the meaning of Title 15 USCA § 78cc, thus rendering
it improper for a court to confirm the same.
7. Whether the remedy of an appraisal provided for a dis-
senting minority stockholder is exclusive, so that a court in
equity is restricted thereby in affording relief by the applica-
tion of equitable principles, where there has been fraud or
oppressive or unfair treatment of the minority stockholder in
the appraisal process.
8. Whether the decision of the Supreme Court of Alabama
reversing the judgment of the trial court in equity, based upon
substantial evidence adduced at a trial lasting some six weeks,
and which declined to confirm the sale of the “Holding Com-
pany” stock by the respondent bank to its parent, and which
required both respondents to disgorge to the Trust the profits
accruing to them resulting from such purchase, is so contrary
to the ancient, well-established and universally-applied rules of
trust law, as well as the traditional rules of appellate review,
that it does not rest upon substantial and adequate state
ground.
6
9. Whether Alabama courts in the exercise of their general
equity powers are required to redress breaches of trust that are
evidenced by violations of federal law, which under the Su-
premacy Clause (Article VI of the Constitution of the United
States) is part of the total corpus juris of Alabama; and whether
the same considerations that impel the Supreme Court of the
United States, as a matter of federal law, to find a violation of
the supreme law of the land should be recognized by Alabama
courts in exercising their general equity powers.
10. Whether the validity of a statute of the United States is
drawn in question here, or whether petitioner has specially set
up or claimed a title, right, privilege or immunity under the
Constitution or statutes of the United States, and whether such
right, privilege or immunity was denied by the judgment of
the Supreme Court of Alabama in reversing the judgment of
the trial court in question.
THE CONSTITUTIONAL PROVISIONS, STATUTES,
AND REGULATIONS INVOLVED
The pertinent portions of the Supremacy Clause of the
United States Constitution, Article VI, provides:
“This Constitution, and the laws of the United States
which have been made in pursuance thereof; . . . shall be
the supreme law of the land; and the judges in every state
shall be bound thereby, anything in the constitution or
laws of any state to the contrary notwithstanding.”
The pertinent provisions of Title 12, USCA §§ 215a, 215b
and the Regulation of the Comptroller of the Currency, 12
CFR § 11.6, Schedule B, Item 9, dealing with solicitation of
proxies are set forth in Appendix B(1). The pertinent provi-
sions of Title 12, USCA, § 92a relating to trust powers of na-
tional banks, are set forth in Appendix B(2). The pertinent
provisions of the Regulations of the Comptroller of the Cur-
7
rency relating to fiduciary powers and obligations of national
banks, 12 CFR 9, are set forth in Appendix B(3). The perti-
nent provisions of the Federal Securities laws, Title 15 USCA
§§ 77e, 771, 77n, 770, 77p, 77q, 77v, 78), 78n; and Rule 10b-5,
17 CFR § 240.10b-5, and Rule 14a-9, promulgated by the Se-
curities and Exchange Commission, are set forth in Appendix
C(1).
The opinion of Professor Louis Loss, (Loss, Securities, Regu-
lation) analyzing the opinion of the Supreme Court of Ala-
bama in Henley v. Birmingham Trust National Bank, 322
So.2d 687 and the Amended and Supplemental Counter Com-
plaint filed by Petitioner, is set forth in Appendix B(4).
All appendices are separately presented to this petition.
STATEMENT OF THE CASE
The Respondent Birmingham Trust National Bank (‘‘Old”
Bank or “BTNB’) became a national banking association on,
to-wit, December 20, 1946. Since 1946 and for a period of some
22 years the “Old” Bank engaged in the general banking busi-
ness in Birmingham, Alabama, becoming the second largest
bank in the state. As of June 30, 1968, the “Old” Bank, Op-
erating with some 17 different branches, had capital stock of
$10,000,000, divided into 1,000,000 shares held by some 1,500
stockholders of the par value of $10 each, a surplus of
$10,000,000 and an undivided profit of $2,417,053.40.
Some time in the fall of 1968 the “Old” Bank desiring to re-
structure its corporate structure so as to become a subsidiary of
a holding company, formed a Delaware business corporation
known as BTNB Corporation (‘Holding Company’’), with a
relatively nominal capital stock, all of which was owned by
the officers and directors of the “Old” Bank. On October 15,
1968 the “Old” Bank also formed a phantom national bank
known as the Alabama National Bank (‘“‘New” Bank), also with
8
a relatively nominal amount of capital stock, all of which, ex-
cept qualifying shares owned by the officers and directors of
the “Old” Bank, was owned by the “Holding Company.”
The “Old” Bank, the “New” Bank, and the “Holding Com-
pany” then entered into a so-called Merger and Plan of Re-
organization, which provided, among others, that immediately
prior to the effective date of the Merger, to-wit, December 31,
1968, the authorized capital stock of the “Holding Company”
would be increased from 100 shares to 1,000,100 shares, and
the shares of the “New” Bank would be increased from 20,000
shares to 1,020,000 shares.
On the effective date of the Merger the “Old” Bank merged
into the “New” Bank, all of the stock of the “New” Bank, ex-
cept qualifying shares, was transferred to the “Holding Com-
pany,” and all the shareholders of the “Old” Bank were re-
quired to exchange their stock in the “Old” Bank on a share-
for-share basis for the stock of the “Holding Company.”
Following the Merger, all of the stock of the “New” Bank,
being owned by the “Holding Company,” was no longer traded
on the market, or marketable. (R. p. 1904)
Under the provisions of Title 12 USCA § 215a(d), it is pro-
vided that the shares of stock of the receiving association, which
would have been delivered to a dissenting stockholder had he
not requested payment, are required to be sold by the receiving
association at an advertised public auction. In this case the
Merger Agreement provided that the stock of the “Holding
Company” would be sold at public auction. This stock was
unregistered under the Securities Act of 1933. It was required
to be so registered before it could be sold or distributed to the
public. (Professor Loss, Add. Vol. 2-B, p. 609, 613, Record
1230, BINB Ex. 108, R. p. 2620). See also Appendix B(4) to
this petition.
9
BTNB Engages In Long Bitter Dispute With Individual
Co-Trustee As To His Right To Dissent
BTNB and John C. Henley, III, are Co-trustees of the Linn-
Henley Charitable Trust (the “Trust”) which held 27,460
share of the “Old” Bank stock. Henley, as Co-trustee, dissented
from the Merger, and on January 30, 1969 Henley made a
written request upon BTNB that the Trust be paid the value
of its stock (CC-X 58; R. p. 1860).
Thereafter, BTNB for a period of almost nine months en-
gaged in a bitter and acrimonious controversy with Henley
with respect to his right to dissent from the proposed Merger
and Plan of Reorganization, and the appraisal of the “Old”
Bank stock held by the Trust, taking the following positions
and performing the following acts: (CC-X 58; R. p. 1860).
(i) BI'NB did not notify Henley, as Co-trustee and as
dissenting stockholder, in writing of the date of the con-
summation of the Merger, as required by the Proxy State-
ment.
(ii) That Henley did not have the right to unilaterally
dissent from the Merger without the concurrence of
BT NB, although BTNB had for years prior to the merger
advised Henley that the Bank cannot vote its stock held
in a fiduciary account, but ‘that he as an individual Co-
trustee may do so. (R. pp. 2465, 1491)
(ili) That Henley did not have the right to “surrender”
the stock certificates in order to be entitled to receive che
value thereof.
(iv) That it is questionable whether Henley is the sole
Trustee for the purpose of deciding whether the “value”
which might be agreed upon by two of the three appraisers
to be appointed pursuant to §215a(c) is “satisfactory.”
(CC-X-64)
10
(v) It is not clear that Henley alone can “appeal’’ from
the value fixed by two of the three appraisers to the
Comptroller.
(vi) That although Henley voted against the merger in
the proxy for the special meeting of shareholders, BTNB
took the position that the proxy which was signed by Mr.
Henley contained language constituting a contractual
agreement on his part to accept the stock of the “Holding
Company”.
(vii) Questioned Henley’s right to unilaterally deliver
the stock certificates to BINB and “receive the value of
the shares” without any action by the joint trustee. (Brief
memorandum of Facts and Issues, dated May, 1969
(R. 2784).
(viii) Attempted by questionable means to induce the
individual Co-trustee to endorse a divivend check issued
by BTNB Corporation to the Trust on the spurious as-
sumption that the Trust had exchanged the shares of stock
in the “Old” Bank for the stock of the “Holding Com-
pany’.
(ix) Exerted economic pressure upon and warned Hen-
ley of personal responsibility in an effort to get him to
withdraw his dissent. (R. p. 2448 to 2458).
Finally, on September 9, 1969 the Board of Directors of
BINB met, at which time the Board recognized that it “in-
evitably occupies inconsistent positions in respect to the effec-
tiveness of the dissent’’ and “that the bank cannot put itself
in a position of hampering efforts of Mr. Henley to procure
the highest valuation for the Trust if it is to continue as Co-
trustee.’ (R. p. 4094).
Thereafter, on September 23, 1969, BIT'NB addressed a letter
to the Comptroller of the Currency requesting that he make
an appraisal of the “Old’”’ Bank stock held by the Trust.
(R. p. 4143)
1]
BTNB Knew That The Plan Of Reorganization Did Not
Comply With Federal Banking Act And That The
Auctions To Be Held Thereunder Were Improper
As early as January 31, 1969, counsel for BTNB prepared a
memorandum (CCX-64, R. 1871) in which he indicates that the
national banking !aws did not anticipate a ‘“‘Phantom Bank”
merger, saying:
“As you know, the National Banking Laws did not antici-
pate a ‘phantom bank’ merger. In the event the value
fixed is not satisfactory, or is not fixed within 90 days,
under Section 215a(d), the shares of stock of the Continu-
ing Bank which would have been delivered to such dissent-
ing shareholders had they not requested payment shall be
sold by the Continuing Bank at an advertised public auc-
tion and the Continuing Bank shall have the right to pur-
chase such shares at such public auction, if the highest
bidder thereof, for the purpose of reselling such shares
within thirty days, etc.
“Section (8) of the Merger and Reorganization Agreement
provides that the common stock of the Holding Company
(not the capital stock of the Continuing Bank) which
would have been delivered to John Henley, as trustee,
shall be sold. Section (8) of the Merger and Reorganiza-
tion Agreement was approved by the Comptroller of the
Currency.!
'This is contrary to the caveat in the Form 1931 (a) (Revised March
1968) of the Office of the Comptroller of the Currency, giving instructions
for the preparation of applications for merger under Section 215a of Title
12, USCA, wherein it is specifically stated: (R. p. 2299)
“The fact that a proxy statement, form of proxy, or other soliciting
material has been filed with or examined by the Comptroller of the
Currency shall not be deemed a finding by the Comptroller that such
material is accurate or complete or not false or misleading, or that the
Comptroller has passed upon the merits of or approved any satement
contained therein, or any matter to be acted upon by security holders.
No representation contrary to the foregoing shall be made.”
12
“It appears that the stock to be valued may be the stock
of the Continuing Bank but the stock that is to be sold
under the Merger Agreement is the stock of the Holding
Company.”
On December 3, 1969, counsel for BTNB held a telephone
conversation with the Assistant Chief, National Bank Examiner
of the Comptroller of the Currency, in which counsel stated
that the “Holding Company” stock is not registered and it
would cost approximately $40,000 to register that stock in order
that it may be sold by the issuer without restrictions. The
stock, however, could be sold subject to certain restrictions but
this would affect the value received or the marketability of that
stock.” (CCX 52, Add. Vol. 1, p. 109) (Italics ours)
Counsel for BTNB concluded, however: “Since BTNB Cor-
poration will probably buy the stock in that auction, I would
simply proceed to advertise the shares for sale as restricted
shares, and no problem will arise.” (BIT'NB Ex. 108. R. 2620)
The Public Auctions Of The “New Bank” And The
‘Holding Company” Stocks And The Self-Dealing
On The Part Of BTNB
The Auction Of The Unregistered Stock Of
The Holding Company
Thereafter, the “New Bank” found itself on two horns of a
dilemma as follows:
(a) First, what stock would be sold at the public auc-
tion. The Banking Act requires that the stock of the “Re-
ceiving Association” be sold at public auction; whereas,
the Merger and Plan of Reorganization provides that the
stock of the ‘Holding Company” be sold at public auction;
(b) How does the “New Bank”, a non-issuer but an un-
derwriter, participating in a public distribution of the
13
“Holding Company” stock, proceed to hold a public auc-
tion of unregistered stock of the “Holding Company"?
The “New Bank” took the bull by both horns and plunged
into a legal morass from which it could not extricate itself. It
proceeded to hold a public auction on February 10, 1970 of
the unregistered stock of the ‘Holding Company”, without ac-
tively soliciting bidders, pursuant to a newspaper advertisement
which recited the fact that the stock was unregistered under the
Securities Act of 1933 and that it would be sold only pursuant
to an investment letter. (CCX 147, Add. Vol. III, p. 660,
R. p. 2483)
At this time, some 14 months following the effective date of
the Merger, bank stocks generally became depressed, and the
market price of the stock of the “Holding Company” had
dropped from some $31 a share immediately after the Merger
to some $23 a share on February 10, 1970.
Henley, realizing that a sale of the “Holding Company”
stock at public auction as unregistered stock in a depressed
market to be held at this late date could not possibly bring
an amount in excess of $32.80 per share, seeing the com-
plete collapse of the second phase of the appraisal prccess, and
noting that the ‘New Bank", which then constituted the sole
asset of the “Holding Company”, was doing exceedingly well,
and that the corporate trustee had already previously recom-
mended this exact stock as an excellent investment for the
Trust, now recommended to the corporate co-trustee that it
was advisable that the “Trust” purchase this stock as an invest-
ment at the then prevailing depressed market price. The “New
Bank”, and the “Holding Company” on the other hand, now
determined that it was to their best interests ‘‘so that in time
we will recover our dollars in value” (R. 4816-20) that the
“Holding Company” become the purchaser of this stock and
that they themselves would bid up to $32.80 per share. (R. pp.
5030-32, 4812-4819)
14
Accordingly, they ignored Henley's effort to bid and the
“Holding Company” was the sole bidder and became the pur-
chaser of this block of stock at the bid price of $26 per share.
(R. p. 5212-5227, CCX 36, 27, 137, 138; Add. Vol. III, p. 634-
645, R. pp. 2460-2461, 1808-1810)
At no time after this auction did the bank or its parent offer
the Trust the opportunity to acquire the Holding Company
stock which the Trust sought to purchase. (R. 4823)
The Auction Of The “New” Bank Stock
Thereafter, counsel for Henley called the Bank’s attention
to the fact that the National Banking Act requires that the
stock of the “Receiving Association” is to be held at public
auction. The “New Bank”, desiring to humor Henley and his
counsel, held a sham public auction of 27,460 shares of the
“New Bank's” stock on March 6, 1970, and “sold” the same to
the “Holding Company” at $24 per share, well knowing that
all of the stock of the “New Bank” had already been transferred
to the “Holding Company” upon the effective date of the
Merger and Plan of Reorganization and that it did not own
any such stock.
Furthermore, even if the “New Bank” had somehow ac-
quired 27,460 shares of its stock, which it is prohibited from
doing by Title 12 § 83, the sale thereof would have been con-
trary to the Plan of Reorganization.
Finally, no meaningful sa'e of the “New Bank” stock could
have been held because the same was no longer tradeable on
the market (R. pp. 4818-21, 4858-9) and there was no likeli-
hood that anyone would purchase a minority interest of
such non-tradeable stock where the remaining approximately
1,000,000 shares were held and owned by the “Holding Com.
pany’. (R. p. 604950)
The evidence shows that no money changed hands and no
record of this sale was made on the books of either company.
(R. p. 3748-3752). The whole transaction was a mere charade.
15
The Subsequent Involvement Of BTNB In The Appraisal
Process Before The Comptroller Of The Currency
Subsequently, BTNB, without knowledge of, or notice ‘o,
Henley (R. p. 5210), wrote two letters to the Comptroller of
the Currency, dated October 28 and 29, 1969 in which it
sought to influence the Comptroller's evaluation of the 27,460
shares of the bank stock owned by the trust to the prejudice
of the trust, saying, among others:
“In the past we have handled several estates and trusts
which own stock of Birmingham Trust National Bank.
We received blockage discounts in all cases where a few
thousand shares or more of bank stock were involved.”
(CC-H 54; Add. Vol. 1, p. 166; R. p. 4198).
Even before that date the chairman and executive officer of
BI'NB and its counsel visited the office of the Comptroller of
the Currency, without disclosing such visit to Henley (R. p.
1804), in which they sought the sympathetic understanding
of the Comptroller relating to Henley’s dissent and the prob-
lems relating to the dissent procedure and the evaluation of the
bank's stock."
'This information is being furnished merely to show the background of
the case. The fraudulent conduct and infidelity on the part of BTNB
with respect to the evaluation of the bank stock by the Comptroller of the
Currency was made the basis of a separate claim by Petitioner. A judg-
ment for damages in this regard was rendered by the trial court and affirm-
ed by the Supreme Court of Alabama in its order here involved. (Ap-
pendix A-16). We are advised that the bank is in the process of institut-
ing an application to this court for certiorari to the Supreme Court of
Alabama in order to review this phase of the case, although the judgment
thereon was based not upon a review of the legality or illegality of the
findings by the Comptroller, but solely upon state law for fraud and
breach of fiduciary duty on the part of BTNB, as co-trustee, in connection
therewith, and does not involve a federal question. SEC v. National
Securities, 393 U.S. 453, 21 L.Ed.2d 688, 89 S.Ct. 564.
16
The Proceedings In The Court Of First Instance
Sometime in October 1971, some 18 months following the
public auction in question and the purchase of the ‘Holding
Company” stock by the Respondent, BTNB Corporation,
whose name has subsequently been changed to Southern Ban-
corporation of Alabama, BT NB filed a petition in the Circuit
Court, Tenth Judicial Circuit of Alabama, in Equity, Case No.
168-659, in which John C. Henley, III, the individual co-
trustee, and William J. Baxley, the then Attorney General of
the State of Alabama, were Respondents. The petition was
styled:
‘Petition for Instructions, For Confirmation of Certain
Transactions, and for Partial Settlement by One of the
Co-trustees of the Linn-Henley Charitable Trust.”
The petition, which is a part of the record in this case, de-
scribes the merger and plan of reorganization, attaching there-
to, among others, the proxy statement pertaining to the special
meeting of shareholders called for the purpose of approving the
merger, the merger and reorganization agreement, and the plan
of reorganization. Paragraph 17 of the petition states as follows:
“17. Provisions of law (12 U.S.C. 215a(d) pursuant to which
the said merger was accomplished require that the shares of
stock of the receiving association which would have been de-
livered to any dissenting shareholders, had they not requested
payment, be sold by the receiving association at an advertised
public auction and that, if such sale brings a price greater than
the amount paid to the dissenting shareholders, the excess of
such sale price be paid to the dissenting shareholders. Intend-
ing to comply with applicable provisions of law concerning
such sales, petitioner caused an advertisement (‘Advertisement
No. 1”) to be published in the February 2, 1970, edition of The
Birmingham Post-Herald as follows:
17
Pursuant to Section (8) of the Merger and Reorganiza-
tion Agreement by and _ between Birmingham ‘Trust
National Bank, Alabama National Bank and BTNB Cor-
poration, dated October 15, 1968, 27,460 shares of the
common stock of BTNB Corporation shall be sold at pub-
lic auction on February 10, 1970 at 11:30 o'clock, A.M.
(CST) at the Board of Directors Room, Second Floor, of
the main office of Birmingham Trust National Bank, 112
North 20th Street, Birmingham, Alabama.
These shares have not been registered under the Securi-
ties Act of 1933, and are offered for sale for investment
only. Any purchaser of these shares will be required to
pay cash and make appropriate investment representations
in writing to the issuer.” (Italics ours)
In 4 22 of the petition BTNB alleged:
“Petitioner asserts that it has done all things that were
requiréd of it as co-trustee of the trust in connection with
the said dissent from its said merger, including the said
appraisal, the payment to the trust of the appraised value
of the stock, and the said public auction sales as and when
all such things should have been done .. . Petitioner has
proposed to John C. Henley, III and does now suggest to
the court that the following steps by petitioner will fully
satisfy all fiduciary obligations which petitioner may have
with respect to the transactions hereinabove described . . .”
Under 4 26 of the petition it is stated:
“Petitioner submits itself to the jurisdiction of this court
and offers to do equity.”
Under 4 D of the Prayer for Relief, it is prayed:
“That this court enter an order decreeing that the auction
sales of the shares of stock of BTNB Corporation and of
the shares of stock of petitioner, described in q 17 of this
18
petition, fully comply with the requirements of 12 USC
215a(d) and confirming the said sales in all respects.”
Under 4 G of the Prayer it is prayed:
“That upon petitioners making payment to the trustees of
such additional interest, if any, as the court shall find will
fully satisfy petitioners’ fiduciary obligations as a co-trustee
with respect to the transaction described above, relating
to the said merger, the said dissent, the said payment of
the value of the stock in the said auction sale:, this court
will enter an order decreeing (1) that petitioner is fully
and finally released and discharged of and from all its
fiductary obligations as a co-trustee of the trust with re-
spect to petitioners’ merger that was effective December 1,
1968, the dissent from the said merger by John C. Henley,
III, with respect to the stock of petitioners’ tredecessor,
Birmingham Trust National Bank, held by putitioner and
John C. Henley, III, as trustees of the Linn-Flenley Chari-
table Trust, in payment of the appraised value of the said
stock to the trust, and, further decreeing (2) that petitioner
and respondent, John C. Henley, III, in their individual
and corporate capacities and in their fiduciary capacities
as co-trustees of the Linn-Henley Charitable Trust be fi-
nally released and discharged with respect to all the acts
and dealings affecting the funds and property of the trust
from the beginning of the trust to the date of the filing
of this petition.” (Italics ours)
Henley counterclaimed against BTNB alleging, among oth-
ers, breach of fiduciary duty on the part of BTNB arising out
of the public auction of the unregistered stock of BTNB Cor-
poration and the sale thereof to BTNB Corporation, in compe-
tition with the expressed desire on the part of Henley as indi-
vidual co-trustee to purchase said stock for the trust. The trial
court rendered a decree holding that there was no breach of
19
fiduciary duty to the trust on the part of BITNB, although
criticizing BTNB for failing to file a petition for instructions
in order to resolve the various conflicts and disputes.
The cause was appealed by Henley to the Supreme Court of
Alabama. The appellate court in Henley v. Birmingham Trust
National Bank, 295 Ala. 38, 322 So.2d 688, reversed the trial
court, and found BTNB guilty of a breach of its fiduciary duty
owed to the trust based upon the fundamental rule of law that
a trustee must act in good faith and display complete loyalty
to the interest of his beneficiary, and that it was the duty of
BINB to recognize its obvious conflict of interest and to re-
solve it by at least temporarily resigning as trustee. The court
concluded that it was not reviewing the finding of the Comp-
troller of the Currency or the right of BT'NB to merge under
the Federal Banking Act, but that it was simply reviewing the
acts of the co-trustees, as such acts relate to their fiduciary
duttes to the trust.
The court remanded the case to the trial court with direc-
tions to appoint a temporary trustee of the trust estate in lieu
of the named co-trustees for the sole and limited purpose of
the retrial of this cause, and upon resubmission of the cause to
make certain specific findings and conclusions.
The Course Of The Proceedings On The Retrial After '
Remand And The Manner In Which The Federal
Questions Sought To Be Reviewed Were Raised
Following remand of this cause, the court below, in accord-
ance with directions of the Supreme Court of Alabama, ap-
pointed the Petitioner as Temporary Trustee and the under-
signed as his counsel. Pursuant thereto, the Temporary Trustee
filed an Amended and Supplemental Counter Complaint
against BT'NB and its parent, BTNB Corporation. The stage
in the proceedings in the court of first instance, and in the ap-
pellate court, at which, and the manner in which, the Federal
20
questions sought to be reviewed were raised are contained in
portions of the record so voluminous that they are included
in Appendix D(1) and D(2), respectively, separately presented.
REASONS FOR GRANTING THE WRIT
The decision below should be reviewed because it erroneous-
ly interprets, and fails to apply to the facts in the case, the
governing principles of the Federal Banking Act and the ap-
plicable regulations of the Comptroller of the Currency pro-
mulgated thereunder, as well as the decisive principles of the
securities laws of the United States, and the rules and regula-
tions of the Securities and Exchange Commission promulgated
thereunder. These federal laws are, of course, binding upon
the Supreme Court of Alabama under Article XI of the United
States Constitution, anu it is these laws which the Supreme
Court of Alabama ignored in deciding this case.
, Lhe Respondent Bank has flaunted these laws and in doing
so has committed the most flagrant breaches of fiduciary duty
to a charitable trust of which it was co-trustee, relying pri-
marily on alleged informal approvals given by the then Comp-
troller of the Currency in an ex parte, behind-the-scenes buddy-
buddy relationship. Accordingly, this petition raises issues of
far-reaching importance affecting the relationships between
national banks and the Comptroller of the Currency by whom
they are regulated, as well as the alarmingly growing abuses by
national banks in the areas of self dealing and conflict of in-
terest which have led to the enactment by Congress of the Fi-
nancial Institutions Regulatory Act of 1978.
In the report of the Housing, Banking, Finance.and Urban
Affairs Committee of the Congress (Report 95-1383), following
an extensive investigation, the committee deplored the lack of
impartiality on the part of banking agency officials who were
wedded to the industry being regulated, and said:
nnn
21
“Problem banks and insider abuses have been virtually
synonymous. Nothing appears more often on the fever
charts of sick financial institutions than self dealing ail-
ments.”
We do have here self dealing of the most foul nature. But
this is only one strand in the fabric constituting a “single seam-
less web”, along with manipulation and disregard of trust re-
lationship by those “whom the law should regard as fiduci-
aries’. The respondent bank, as fiduciary, did engage in self
dealing and by illegitimate and fraudulent means has caused
great harm to the beneficiaries of the Linn-Henley Charitable
Trust, in violation of the Federal Securities Laws, within the
meaning of the rationale of Superintendent of Insurance v.
Bankers Life & Casualty Company, 404 U.S. 6, 30 L.Ed.2d 128,
92 S.Ct. 165.
As was said by the Michigan Supreme Court in Peoples Sav-
ings Bank v. Stoddard v. Michigan National Bank, 359 Mich.
297, 102 N.W.2d 777, 83 A.L.R.2d 344,
“We deal here with a story of high finance and less lofty
subterfuge. By this latter means the defendant, Michigan
National Bank sought to accomplish indirectly that which
state and federal law prohibited it to do directly.”
And so it is here.
Accordingly, since it appears that this is a case of first im
pression in this court, it is of nation-wide importance that this
court construe the National Banking Act in conjunction with
the federal securities laws and the corresponding regulations
of the Comptroller and the Securities and Exchange Commis-
sion, in order to determine the scope and limits of the merger
provisions applicable to national banks, as well as the extent
of the fiduciary obligations of national banks under these fed-
eral laws.
a a a
22
I.
There is no triangular merger here involved; the dis-
tribution of the “Holding Company” stock required
registration under the Securities Act of 1933
12 U.S.C. § 215a(a) contemplates mergers only of ‘“‘one or
more national banking associations or one or more state banks
.. . under an agreement not inconsistent with sections 215-215b
of this title, . . . into a national banking association located
within the same state...” There is no reference in the Bank-
ing Act to any sort of triangular merger whereby the requisite
vote of shareholders to take stock of a nonbanking Delaware
corporation, such as the BT NB Corporation.
Opinion of Professor Louis Loss, Appendix B(3);
Marcou v. Federal Trust’ Company, 268 A.2d 629, 635
(Me. 1970);
Dyer v. Eastern Trust & Banking Company, 336 F.Supp.
890 (D. Me. 1971)
Under these authorities the only way for an existing bank
to become the subsidiary of the bank holding company would
be to cause the formation of a holding company, which would
then tender its shares in exchange for the shares of the bank.
Such a procedure would require registration of the stock of the
bank holding company under the 1933 Act.
In a similar attempt to structure a triangular merger in
Marcou, the Maine court stated:
“The plan is a package containing a merger and an ex-
change for bank shares. It does not meet the conditions
of the merger statute. Federal may not under the statute
compel its stockholders to convert their shares into shares
of a company not a trust company resulting from the pro-
|
23
posed merger. This, however, is precisely what is proposed
in the plan. In short, Marcou, who objects to the plan,
will be forced out of the resulting or surviving Federal.
He is offered not shares in the merged bank, or Federal,
but shares in Bankshares.”
A similar bank reorganization under Maine law was sought
in Dyer, wherein the bank relied on Rule 133 of the Securities
& Exchange Commission. The court rejected the application
of this rule, stating:
“The exemption for statutory mergers provided by Rule
133 . . . can reach only so far as to exempt the initial
merger transaction. It does not reach beyond the merger
to exempt the later distribution of unregistered stock,
since it is clear that the exchange of stock was not pursu-
ant to the Maine statutory provisions relating to mergers.”
It follows, therefore, that the offer of the “Holding” Com-
pany stock to the shareholders of BTNB violated § 5 of the
1933 Act.
The offer and sale of the “Holding Company” stock at
a public auction violated § 5 of the Securities Act of
1933
There is no way that unregistered stock can be sold at a pub-
lic auction pursuant to an investment letter. As Professor Loss
states, “. . . An offering at a public auction is by hypothesis an
offer to the highest bidder, which is to say, an offer to the
i world.” A public auction is a public offering and a public
| offering cannot become nonpublic merely because as a condi-
tion of the offering all buyers agree to take for investment.
24
iil.
The manipulations by BTNB constituted a violation of
§ 10 of the Securities and Exchange Act of 1934 and
Rule 10b-5 promulgated thereunder
Disregard of trust relationship by national banks as fiduci-
aries “are all a single seamless web” along with manipulation,
investors’ ignorance, and the like; and practices legitimate for
some purposes may be turned to illigitimate and fraudulent
means, within the ambit of § 10(b), although this section does
not seek to regulate transactions which constitute no more than
internal corporate mismanagement. Superintendent of Insur-
ance v. Bankers Life & Casualty Company, 404 U.S. 6, 30 L.Ed.
2d 128, 92 S.Ct. 165; Bailey v. Meister Brau, Inc., 378 F.Supp.
869 (1973), aff'd., Bailey v. Meister Brau, Inc., 535 F.2d 982
(7th Cir. 1976).
The history of the act shows that Congress was especially
concerned with the impact of frauds on creditors or corpora-
tions, which, of course, would include, the most favored in
equity, charitable trusts.
The holding of a public auction of unregistered stock of the
holding company, pursuant to the provisions of the Federal
Banking Act, was so manifestly unfair to the trust that the
bank, blinded by conflicts of interest, wantonly ignored evi-
dence of the unfairness of the transaction, and wantonly failed
to disclose to the individual co-trustee material facts. Further-
more, it knowingly conducted a sale of unregistered stock of
the holdin company with full awareness that to do so would
have an adverse effect upon the bidding, would discourage the
presence of bidders, and would depress the value of the stock.
All of this, coupled with the behind-the-scenes activity on the
part of the bank in its relationship with the Comptroller of the
Currency, the circulation of a misleading proxy statement, the
improper structure of the Plan of Reorganization, and self deal-
De ee ee
25
ing, constitute not only the most flagrant breach of fiduciary
duty but the kind of fraudulent manipulation condemned by
both the 1933 and 1934 Securities Acts.
Bailey and Superintendent of Insurance have dispelled any
implication that might have been drawn from earlier cases that
10b-5 cannot reach a breach of fiduciary duty by controlling
stockholders or directors and that the only remedy lies under
state law. As Bailey points out, there is nothing to the contrary
in Ernse & Ernst v. Hochfelder, 96 S.Ct. 1375, 47 L.Ed.2d 668.
IV.
Although a state court does not have jurisdiction to en-
tertain a claim under § 10 of the Securities and Ex-
change Act of 1934, it does have jurisdiction to enter-
tain such a claim asserted as a defense to a suit instituted
in a state court
Claim violations of the Securities & Exchange Act of 1934
asserted as defense to a counterclaim in a state court, could be
litigated in the state court action, despite exclusive jurisdiction
of federal courts over violations of the Act. Will v. Calvert
Fire Insurance Company, 437 U.S. 655, 57 L.Ed.2 1 504, 98 S.Ct.
2552; Weiner v. Shearson, Hammill & Company, 521 F.2d 817,
822 (C.A. 9th Cir. 1975); Atner State Bank v. Altheimer, 430
F.2d 750, 754 (C.A. 7th Cir. 1970).
In this connection, it must constantly be borne in mind that
it is the respondent bank which initiated a proceeding in an
Alabama court of equity, seeking an order, among others, de-
creeing that the auction sale of the shares of stock of BTNB
Corporation fully complied with the requirements of 12 U.S.C.
215a(d), and that such sale should be confirmed in all respects.
The Counter-Complaint on the part of the Temporary Trus-
tee was filed in defense to such declaratory action and in op-
position thereto.
26
Accordingly, the state court could take cognizance of the vio-
lation of fiduciary duties on the part of the bank arising from
the breach of the federal securities laws. As a result thereof
the trial court was impowered, indeed obligated, to decline to
ratify such sale and to grant appropriate equitable refied result-
ing from the fraudulent self dealing and manipulation con-
demned by the Securities Exchange Act of 1933, § 17(a), 15
U.S.C.A. § 77q(a), as well as the Securities Exchange Act of
1934, § 10b, 15 U.S.C.A. § 78j(b), Rule 10b-5 promulgated
thereunder by the Securities & Exchange Commission, and the
fiduciary Rules and Regulations of the Comptroller of the
Currency.
The relief granted by the trial court in requiring the Re-
spondents to disgorge the profits made by them to the Trust
is entirely consistent with J. J. Case v. Borak, 377 U.S. 426, 12
L.Ed.2d 423, 84 S.Ct. 1555, and Mills v. Electric Auto-Lite Co.,
396 U.S. 375, 24 L.Ed.2d 593, 90 S.Ct. 616, and Affiliated Ute
Citizens v. United States, 406 U.S. 128, 31 L.Ed.2d 741, 92 S.Ct.
1456.
In reversing the trial court, the Alabama court misconstrued
and misapplied the federal law, or refused to apply the same,
as construed by this court, when it was obsessed with the prop-
osition that it did not appear that the “Holding Company”
stock would have produced a bid in excess of $32.80 per share
at the public auction.
Aside from the proposition that the court overlooked the fact
that it was the bank which was responsible for delaying the
auction, while it carried on a vendetta with the individual co-
trustee, so that the same was held some 14 months following
the merger when the value of the stock depreciated some 25%,
and aside from the fact that the Plan of Reorganization made
the stock of the “New” bank unavailable for sale, the Ala-
bama court failed to take into consideration the holding of
this court in UTE that the measure of damages for a defrauded
27
seller under the Federal Securities laws where the defendant
receives more than the seller's actual loss is ‘‘the amount of the
defendant's profit.”
In Junigan v. Taylor, 344 F.2d 781, cert. den. 392 U.S. 879,
15 L.Ed.2d 120 the court held: “It is more appropriate to give
the defrauded party the benefit even of windfalls than to let
the fraudulent party keep them.”
That the Trust is a ‘seller’, within the meaning of the Se-
curities laws is no longer open to question. SEC v. National
Securities, Inc., 21 L.Ed.2d 668; Swanson v. American Con-
sumer Industries, Inc., 415 F.2d 1326 (C.A. 7th Cir.).
We submit that the Trust is also a “buyer”, within the mean-
ing of the Securities Act of 1933, to the extent of the interest
it acquired under the Federal Banking Act in the stock of the
receiving association, and under the Plan of Reorganization in
the stock of the ‘Holding Company”, to the value of such stock
in excess of the appraised value of the “Old” Bank stock. That
interest is a valuable property right which the Trust “pur-
chased” when it dissented from the merger.
V.
The contract of sale to, and the purchase by, the Hold-
ing Company of the unregistered stock of the **Holding
Company” at the public auction is void and unenforce-
able either under the 1933 or the 1934 Security Acts
Where the wrongdoer sues on a contract consummated in
violation of any provision of the securities laws, enforcement
may be denied. Thus, an agreement would not be enforced in
favor of the corporation, which failed to register the securities.
General Life of Missouri Investment Company v. Shamburger,
C.A. Ark. 1976, 546 F.2d 774; Byrnes v. Faulkner, Donkins and
Sullivan, C.A. N. Y. 1977, 550 F.2d 1303.
28
It follows, therefore, that when the respondent bank insti-
tuted an action in a court of equity seeking to uphold the va-
lidity of the contract of sale of the unregistered stock of tke
“Holding Company” to its parent at the public auction in ques-
tion, it came into court as a wrongdoer, and it would have been
improper for the Chancery Court, in the exercise of its equi-
table jurisdiction, to approve and confirm such a sale.
For the same reasons it was improper for the Supreme Court
of Alabama to reverse the trial court, and to thus validate a
contract of sale which was void, as regards the rights of the
Respondents who violated any provision, rule or regulation
under the Securities Act of 1933, and especially those under the
Securities Act of 1934, Title 15 § 78cc.
VI.
There is no substantial independent state ground to
support the judgement below
The Supreme Court of Alabama misconstrued both the hold-
ing of the trial court and the contentions of the Petitioner by
deciding the case on the narrow issue that:
“The theory advanced by the Temporary Trustee and the
basis of this award in the court's decree, was that BTNB
breached its duty to the trust in refusing to purchase the
stock for the trust.”
The Basis Of The Award By The Trial Court
This, of course, is totally untrue and contrary to the record.
If the bank had sold the “Holding Company” stock to a
stranger, we would not be here before this court. It is the sale
by the bank at the public auction of unregistered stock, in vio-
lation of the Securities Act of 1933, and it is the sale of such
29
stock by a co-trustee at his own auction to its affiliate, the re-
spondent, Southern Bancorporation of Alabama, in competi-
tion with the trust, which is the gravamen of the complaint and
which is the basis upon which the award was made by the trial
court.
It is true, of course, that Henley desired to purchase this
stock for the trust because it was then for the best interest of
the trust to do so, and it is also true that the bank had refused
to acquiesce in the effort by Henley to acquire this stock for
the trust at the public auction. But this is not the heart of the
case, it is simply another circumstance, which, together with
the totality of all of the breaches of fiduciary duty and the vio-
lations of federal law, which brings into focus the federal ques-
tions here involved.
That the decision of the trial court was not based upon
the mere failure on the part of the bank to acquiesce in the
sale of the stock to the Trust is conclusively shown by the fol-
lowing extracts from this opinion:
“2(d) & (c). The Court finds that, under the Plan of
Reorganization here in question, and under the newly-
developed evidence and the law applicable thereto, it
clearly appears that BTNB did not provide for the holding
of a public auction of the ‘New’ Bank stock, as provided
by the Federal Act; that all such stock, except qualifying
shares, were, upon the effective date of the Merger, trans-
ferred to and were owned by the ‘Holding Company’; and
that thereafter the ‘New’ Bank stock was neither market-
able nor tradeable on any market. Additionally, on March
6, 1970, on which date BTNB attempted to have a public
auction of this stock, more than 14 months elapsed since
the effective date of the Merger. This unduly long delay
was occasioned by the breach of fiduciary duty on the part
of BIT'NB in improperly engaging in a struggle with the
30
individual Co-Trustee, Henley, as to his right to dissent in
behalf of the Trust from the Merger. In the meantime,
however, the local market on bank stocks became greatly
depressed.
‘Accordingly, the Court further finds that BINB made
it impossible to hold a legal, realistic or meaningful public
auction of the ‘New’ Bank stock, as required by the Fed-
eral Act, and that the public auction of this stock purport-
edly held by BI'NB on March 6, 1970, aside from the fact
that BT NB failed to actively solicit bidders at this auction,
was totally ineffectual.”
‘The Court further finds that, in the light of the newly-
developed evidence adduced on the re-trial of this cause,
and the legal theories advanced by the Temporary Trustee,
that it was legally prohibitive and otherwise completely
impracticable for BT'NB to hold a realistic and meaning-
ful public auction, in accordance with the requirements of
the Federal Banking Act, of unregistered stock of the
‘Holding Company’ on February 10, 1970, after a similar
undue delay following the effective date of the Merger.”
(Appendix A-10)
‘‘At the auction, BT NB ignored Henley’s advice and re-
quest and collaborated with the ‘Holding Company’ in
permitting it to be the sole bidder and purchaser of this
stock.
“The Court further finds that such self-dealing on the
part of BIT'NB, in collaboration with its affiliate, consti-
tutes a separate, distinct and independent breach of trust
on the part of BIT'NB which arises out of the same opera-
31
tive facts and the conflict of interests referred to by the
Supreme Court in 2(b) and (c) above.” (Appendix A-11)3
“By thus competing with the Trust and engaging in self
dealing, in and about the administration of this Trust,
BTNB was guilty of an even more flagrant breach of fi-
duciary duty than the failure to actively seek potential
bidders as of the time of the public auctions referred to
by the Supreme Court in 2(b) and (c) above.
“The Court further finds that the ‘Holding Company’
in purchasing the 27,460 shares of its stock at the public
auction in question willfully and knowingly participated
in the violation of the fiduciary duty on the part of BI'NB,
with full knowledge of such breach on the part of BTNB,
and that both BTNB and the ‘Holding Company’ are lia-
ble to the Trust for the profits accruing to them upon the
purchase of this stock to the extent of the difference be-
tween the bid price of $26 per share made by the ‘Holding
Company’ and the highest intermediate value of said stock
up to the date of trial of $70 per share, and that both
BINB and the ‘Holding Company’ are liable to the
Trust for such profits amounting to the total sum of
$1,208,240.00.” (Appendix A-12)
The Basis Of The Contentions
By The Petitioner
The contentions of the Petitioner are set forth in Appendix
D. Additionally, every count of the counter-complaint bristles
with federal questions and claims. For instance Count II of
the counter-claim reads:
’Under the mandate of the Supreme Court upon remand after the first
appeal, the Supreme Court directed the trial court to . . . determine the
true bid value of the ‘New’ Bank stock had BTNB, absent its conflict of
interest, actively sought potential bidders as of the time of the public
auction as provided by the Federal Act.”
+.
32
COUNT II
THE SECURITIES CLAIMS
Counter-claimant, for allegations of this Count, adopts all
the allegations hereinabove set out, including the allegations of
Count One of the Complaint, and adds thereto the following:
Counter-claimant further avers that because of the matters
and things hereinabove alleged, the counter-defendants have
violated the provisions of Title 53, §§ 28, 30, 44 and 45, Code
of Ala. 1940, as recompiled, as well as the provisions of Title
15, §771, 770, 77q and 77v, USCA; that the “Trust” constitutes
a forced seller, within the meaning of the state and federal se-
curities laws; that the acts complained of constitute an engage-
ment on the part of the counter-defendants in an act, practice
or course of business which operated or would operate as a
fraud or deceit upon the ‘Trust’, in violation of Title 53, § 28,
Code of Ala. 1940, as supplemented, and Title 15, § 77q(a) of
the Securities Act of 1933, and the fiduciary duties on the part
of the counter-defendants to the “Trust”.
WHEREFORE, counter-claimants seek damages from the
counter-defendants for the difference in the amount paid to the
‘Trust’, as determined by the Comptroller of the Currency,
and the actual value of said stock on the date of the filing of
this counter-complaint, or, the sum of $472,312, together with
a reasonable attorney’s fee.
Count VI of the Counter-Complaint reads in. part:
COUNT VI
CILAIM FOR DAMAGES FOR THE ABUSE BY
COUNTER-DEFENDANTS OF THE APPRAISAL
PROCESS UNDER THE BANKING LAWS
Counter-complainant, for this count, restates all of the facts
hereinabove set out, and further alleges as follows:
33
1. Counter-complainant claims damages from the counter-
defendants for the breach of the fiduciary duties to the “Trust”
in the appraisal process following the merger of the two banks
on the ground of self dealing on their part, and on the further
ground that they so structured the purported Merger and Plan
of Reorganization as to make it impossible for the “Trust” to
receive the full benefits to which it was entitled under the
merger provisions of the federal banking laws, as hereinabove
more fully set out.
2. Counter-complainant further alleges that the counter-de-
fendants have subverted the appraisal process provided under
the federal banking laws and have converted the benefits pro-
vided thereunder to their own use, as hereinabove more fully
alleged, and that it is impossible and impractical at this time
to unscramble the transactions so as to make them comply with
the requirements of the federal banking laws or to determine
the damages to which the “Trust” is entitled as of the date and
times the counter-defendants failed to comply with the federal
banking laws and with the appraisal process provided there-
under.
Supreme Court Of Alabama Concedes Existence Of
Federal Questions To Be Resolved
The Supreme Court of Alabama admits the existence of fed-
eral questions, saying:
“The Temporary Trustee argues that the bank can be
charged with breach of its duty by virtue of the Plan of
Reorganization it elected to pursue. It is quite true that
§ 215, supra, does not contemplate the exact type of re-
organization which management and the majority stock-
holders of BTNB adopted. That plan has heretofore been
set out. It was, therefore, not entirely clear what stock
should be offered at the auction. Whether the stock of
34
the ‘New’ national bank or the stock of the “Holding
Company”.
This is enough to trigger the federal question involved here.
It also conclusively shows that the proxy statement was mis-
leading, as a matter of law, since surely stockholders were en-
titled to sow that they had the right to acquire “New” Bank j
stock and what their rights were upon dissent. Mills v. Elec-
tric Auto-Lite Company, 396 U.S. 375, 24 L.Ed.2d 593, 90
S.Ct. 616; SEC v. National Securities, 393 U.S. 453, 212 L.Ed.
2d 668; May v. Midwest Refining Company, 25 F.Supp. 560, }
aff'd. 121 F.2d 431, cert. denied, 86 L.Ed. 534; SEC v. Dolnick,
501 F.2d 1279 (7th Cir. 1974); Dyer v. Eastern Trust & Banking
Company, 336 F.Supp. 890 (1971).
&
VII.
The judgment of the Supreme Court of Alabama is not
supportable by any independent state ground
The basis of the reversal by the Supreme Court is:
“Tested by these standards, did BTNB breach its duty to
the Trust in refusing to acquiesce at Henley’s suggestion
to acquire as an investment for the Trust the stock offered
at auction?
“We hold that it did not and reverse that part of the de-
cree of the trial court so holding.”
Rael oa ares
As we have previously indicated, there is no decree so hold-
ing. This is an incidental issue which was simply a part of the
overall picture, and which was not the sole basis of the Peti-
tioner’s claim nor the sole basis upon which the court rendered
judgment against the Respondents. It sizaply rendered more
flagrant the evil of self dealing as part of the manipulative and
fraudulent practices engaged in by respondents, in violation of |
the Federal Securities laws. The Alabama Supreme Court can-
Lt not ett os BNDS
35
not choose one ingredient comprising the totality of the fraud,
one strand of the web, set it up as a decoy, shoot it down, and
then triumphantly reverse the judgment of the trial court.
Even if the trial court had assigned the wrong reason for its
judgment the same must be affirmed, if it correctly determined
the equity of the case based upon federal law. The questions
to be determined by an appellate court is whether a judgment
is correct, considering the evidence in the case, and not whether
the ground on which it professes to proceed is tenable. Pan
American Fire & Casualty Company v. DeKalb-Cherokee Coun-
ty Gas District, 266 So.2d 763, 289 Ala. 206; Staub v. Alabama
Power Company, 350 So.2d 386: Bryant v. Moss, 329 So.2d 538,
295 Ala. 339.
The same principle applies in the federal courts. Lan Wan
v. Esperdy, 321 F.2d 123 (C.A.N. Y. 1963); California Bankers
Association v. Shulz, 94 §.Ct. 1494, 416 U.S. 21, 39 L.Ed.2d 812.
The decision by the Supreme Court of Alabama reversing
the judgment rendered by the court below, if based upon a
non-federal ground of decision, is without fair support, and it
is the province of this court to inquire not only whether the
federal right was denied in direct terms but whether it was
denied in substance and effect. Ancient Egyptian Arabic Order
of Nobles of the Mistic Shrime of Michaux, 49 S.Ct. 485, 279
U.S. 737, 73 L.Ed. 931; Creswill v. Grand Lodge Knights of
Pythias, 32 S.Ct. 822, 225 U.S. 246, 56 L.Ed. 1074; Taylor v.
Kentucky, 98 S.Ct. 1930, 1933, Note 10, 436 US. 478, 56
L.Ed.2d 468.
There is no independent state ground to justify the holding
that a national bank, acting as fiduciary of a trust, may hold a
public auction of unregistered stock in which the trust has a
vital interest, pursuant to the requirements of federal law, and
that the bank or its affiliate may purchase such stock at its own
sale, in competition with the interest of the trust. Williams v.
Kaiser, 65 S.Ct. 363, 323 U.S. 471, 89 L.Ed. 398.
36
Furthermore, if such self-dealing, which is universally con-
demned by all courts from ancient times, and which has pre-
viously been condemned by the Supreme Court of Alabama
as constituting an evil of the foulest nature*, were now
held to be permissible by the Supreme Court of Alabama
under state law, the transaction in question runs afoul of
and is repugnant to the Federal Securities Laws, and the self-
dealing and conflict of interest provisions of the Regulations
of the Comtroller of the Currency.
Other cases involving national banks have been reviewed by
this court as involving a federal question. Seabury v. Green,
S.C. 1935, 55 S.Ct. 373, 294 U.S. 165, 79 L.Ed. 834, 96 A.L.R.
1463; Yates v. Jones Nat. Bank, Neb. 1907, 27 S.Ct. 638, 206
U.S. 158, 51 L.Ed. 1002; Grand Forks First Nat. Bank v. An-
derson, N.D. 1899, 19 S.Ct. 284, 172 U.S. 573, 43 L.Ed. 558;
Union Nat. Bank v. Louisville, etc. R. Co., Ill. 1806, 16 S.Ct.
1039, 163 U.S. 325, 41 L.Ed. 177; McCormick v. Market. Nat.
Bank, Ill. 1897, 17 S.Ct. 433, 165 U.S. 538, 41 L.Ed. 817; Logan
County Nat. Bank v. Townsend, Ky. 1891, 11 S.Ct. 496, 139
U.S. 67, 35 L.Ed. 107; Swope v. Leffingwell, Mo. 1882, 105 U.S.
3, 15 Otto. 3, 26 L.Ed. 939.
?
CONCLUSION
The federal questions here involved are substantial and are
of nation-wide importance. In United States v. Philadelphia
National Bank, 374 U.S. 321, 10 L.Ed.2d 915, 83 S.Ct. 1715,
this court found: ~
“Thus, during the decade ending 1960 the number of com-
mercial banks in the United States declined by 714, despite
4First National Bank v Basham 191 So 873,238 Ala. 300
37
the chartering of 187 new banks and a very substantial in-
crease in the nation’s credit needs during the period. Of
the 1601 independent banks which thus disappeared, 1503
with combined total resources of well over $25,000,000,000.
disappeared as a result of mergers.”
This court further pointed out in this case that the proper
discharge of the functions of national banks is indispensable to
the national economy, and that federal regulations are wide-
spread not only upon federal banks but upon state banks as
well, who are members of the Federal Reserve System and who
are insured by the Federal Deposit Insurance Corporation.
Additionally, while respondent Southern Bancorporation
was not a bank holding company during the period here in-
volved, under the control of the Federal Reserve Bank®, bank
holding companies have mushroomed in. this country, and
great uncertainty exists in many quarters as to the procedure
to be followed under the merger provisions of Title 12 USCA
§215a, which needs to be resolved by this court.
Accordingly, it is in the national interest that the federal
laws and regulations which govern the activities of national
banks in such vital areas as mergers and fiduciary responsibility,
and which delineate the relationship of national banks to
those who regulate them, be decided by this court so that
they might be clearly understood by the national banking
industry, as well as by those who invest billions of dollars in
their stocks, and who entrust like astronomical sums to their
commercial and trust departments.
*It was not until December 1970 that one-bank holding companies
came under the control of the Federal Reserve Board, pursuant to Title
12 USCA §§1841!, 1842.
38
For the reasons set forth above, it is respectfully submitted
that this petition for a writ of certiorari should be granted.
Respectfully submitted,
Morris K. SirorTeE, attorney
for Jack H. Harrison, as
Temporary Trustee of the Linn-
Henley Charitable Trust
2222 Arlington Avenue South
P. O. Box 3364-A
Birmingham, Alabama 35205
(205) 933-7111
39
PROOF OF SERVICE
I, Morris K. Sirote, attorney for Jack H. Harrison, as Tem-
porary Trustee of the Linn-Henley Charitable Trust, Peti-
tioner herein, and a member of the Bar of the Supreme Court
of the United States, do hereby certify that on the _.... day of
September, 1979, I served copies of the above and foregoing
Petition for Writ of Certiorari to the Supreme Court of Ala-
bama, together with appendices thereto, by mailing and de-
positing same in a United States Post Office or mail box, with
first class postage prepaid, in a duly addressed envelope, to
Hon. Lee C. Bradley Jr. and Macbeth Wagnon, Jr., 1500
Brown-Marx Building, Birmingham, Alabama 35203, attorneys
for respondents Birmingham Trust National Bank and South-
ern Bancorporation of Alabama; to Hon. Donald B. Sweeney,
Jr., 601-09 Frank Nelson Building, Birmingham, Alabama
35203, and James W. May, 2154 Highland Avenue, Birming-
ham, Alabama 35205, attorneys for John C. Henley, III, and
to Hon. Jim O’Kelley, 1927 Ist Avenue North, Birmingham,
Alabama, special counsel for the Attorney General of the State
of Alabama.
It is further certified that all parties required to be served
have been served.
This the __.... day of September, 1979.
Morris K. SiroTe, Attorney for
Jack H. Harrison, as Temporary
Trustee of the Linn-Henley
Charitable Trust, Petitioner
2222 Arlington Avenue South
Birmingham, Alabama 35205
(205) 933-7111
This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.