Appendix — Birmingham Trust National Bank v. Harrison

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SUPREME COURT OF THE UNITED STATE

OCTOBER TERM 19...

No. 79-386

JACK H. HARRISON, as Temporary Trustee

of the Linn-Henley Charitable Trust,

Petitioner

—

r > Au 2]

fe en JR., SLER|

i eee

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, et al,

Respondents.

APPENDIX

TO 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,

HELp & Apo.insky, P.A.

2222 Arlington Ave. So.

Birmingham, Ala. 35205

(205) 933-7111

A-l

APPENDIX A(1).

OPINION OF THE SUPREME COURT

OF ALABAMA

THE STATE OF ALABAMA —

JUDICIAL DEPARTMENT

THE SUPREME COURT OF ALABAMA

OCTOBER TERM, 1978-79

APRIL 6, 1979

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

77-082B V.

Birmingham Trust National Bank, et al.

Appeal from Jefferson Circuit Court

SHORES, JUSTICE.

This is the second appeal in this case. See Henley v. Bir-

mingham Trust National Bank, 295 Ala. 38, 322 So.2d 688

(1975).

For convenience, we reiterate the salient facts:

The Linn-Henley Charitable Trust was created by the will

of Walter E. Henley, a former president and chairman of Bir-

mingham Trust National Bank (BTNB), who died in Decem-

ber, 1961. His will named BTNB, or its successors, and his

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nephew John C. Henley, III, joint executors of his will and

joint trustees of the Trust. BTNB and Mr. Henley served as

joint executors from December, 1961, until July, 1965, when

administration of the estate was terminated. The executors

were then discharged following a final accounting and the

Trust was funded. BTNB and Mr. Henley continued serving

as joint trustees of the Trust down to the present. Potential

beneficiaries of the Trust, to be selected by the joint trustees,

are limited to:

- any Corporation or organization organized and op-

erated exclusively for religious, charitable, scientific, lit-

erary or educational purposes .

Whose activities are exclusively within the geo-

graphical limits of Jefferson County, Alabama, or '

which maintain branch operations within Jefferson Coun-

ty [but any amounts distributed to the latter] .. . must be

expended .. . within Jefferson County . . .”

Assets of the estate of Walter E. Henley consisted almost en-

tirely of bank stocks, a major portion of which was stock of

BINB. These stocks became the initial “inherited” assets of

the Trust. Asa result of various splits and dividends, the Trust

owned 27,460 shares of BTNB stock in 1968.

In the fall of 1968, management of BTNB decided to form

a one-bank holding company. The reorganization plan in-

volved (a) formation of a new national bank, 100% of the stock

of which was held by a Delaware business corporation, also

newly formed, and (b) merger of the existing bank into the

newly formed bank with the holding company issuing its stock,

in a one-for-one exchange, to replace stock of the existing bank.

The merger phase of the reorganization plan was governed by

provisions of the National Bank Act, 12 USC 215a. One effect

of this method of reorganization was that all stock of the sur-

viving national bank (except directors’ qualifying shares) would

be owned by the holding company and the only stock available

to the public would be stock of the holding company.

—~ ne See

—— a

A-3

A stockholder vote was held on November 19, 1968, resulting

in approval of the proposed reorganization by holders of more

than 80%, of the outstanding stock of the old bank. The Comp-

troller of the Currency (the federal official charged with super-

viston of national banks) gave his approval on November 25,

1968. The reorganization became effective December 31, 1968.

Henley opposed the merger/reorganization and decided it

would be in the interest of the Trust to have the Trust dissent

from the merger. The rights of dissenting stockholders are

contained in the provisions of 12 USC 215a, supra. Basically,

the dissent procedure calls for surrender of the stockholders’

shares followed by an appraisal to determine their value. There

is provision for the parties to appoint appraisers but, if for apy

reason the appraisal is not completed within 90 days, either

party may call on the Comptroller to appraise the stock sur-

rendered by the dissenter. The statute provides that the Comp-

troller’s appraisal shall be final and binding on all parties. The

national bank that survives the merger is required to pay dis-

senters for their stock at the appraised value. The final step in

the dissent process requires the continuing national bank to

sell at public auction the stock which would have been deliv-

ered to the dissenting stockholders had they not dissented. The

continuing bank is expressly permitted to buy the stock offered

at this auction but, if it does, it must dispose of the stock in

some manner within 30 days. If the auction sale of the stock

“that would have been delivered” brings more than the ap-

praised value of the shares surrendered, the excess over the

appraised value is paid to the dissenters.

No appraisal having been theretofore accomplished, BT'NB,

on September 23, 1969, wrote to the Comptroller asking him

to appraise the stock of the Trust that had been surrendered in

connection with the dissent.

On January 21, 1970, the Comptroller reported his appraisal,

finding that, at the effective date of the merger, which was De-

cember 31, 1968, the stock of “old” BTNB had a value of

$32.80 per share, making a total value of $900,688 for the

27,460 shares. This amount was paid by the “new” BTNB to

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the Trust and accepted by Mr. Henley on behalf of the Trust.

The “old” BTNB stock was surrendered at this time. This ap-

praisal by the Comptroller was somewhat above the market.

The market price on December 31. 1968, was 30 bid, 31 asked.

In the trial it was accepted that the market price was 3014.

After making this payment, BTNB proceeded to hold an

auction sale, as required by 12 USC 215a(d). With the ap-

proval of the Comptroller, the Bank first advertised an auction

for 27,460 shares of the holding company stock, to be held on

February 10, 1970. Shortly before the date advertised for this

sale, Henley objected, pointing out that 12 USC 215a(d), supra,

required that stock of the “receiving association” be offered at

auction and contending that this meant the stock of the con-

tinuing national bank. Before the first auction, Mr. Henley

delivered to one of the trust officers of the bank a letter in

which he said:

“+ +» Inasmuch as there is in my opinion a real likeli-

hood that the proposed sale will not attract bids in line

with the true value of the stock, I invite the Birmingham

Trust National Bank as Co-Trustee for the Linn-Henley

Charitable Trust to join me in bidding at the sale and to

purchase as many shares of common stock of BTNB Cor-

poration as can be purchased at a price not exceeding

$23.25 per share, the last quoted bid price for such stock.

-.. You are in a unique position to know the value of the

BTNB Corporation stock offered for sale and I believe you

would agree that if the same can be purchased for $23.25

or less per share it would be a good investment for the

Trust. . . .. (Emphasis Added)

The Bank declined to join Henley in purchasing or bidding

for the holding company stock on behalf of the Trust. The

only bid for the stock offered was made by the holding com-

pany. It purchased 27,460 shares of its own stock at $26 per

share.

Being uncertain that the proper stock had been auctioned to

satisfy 12 USC 215a(d), supra, BTNB held a sé€cond auction, at

which 27,460 shares of the continuing national bank were ad-

serie

PO eee ae AS Be ee

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vertised and sold on March 6, 1970. Again, the only bid was

made by the holding company, this time at $24 per share. Since

neither auction produced a bid in excess of $32.80 per share,

there was no further payment by BTNB to the Trust as a re-

sult-of these auctions (12 USC 215a(d), supra)

On the first appeal, Henley contended that BTNB had

breached its duty to the Trust in several respects. A plurality

of this court concurred to reverse the cause to the trial court to:

"od

-*

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.

Upon resubmission of this cause, make the following

specific findings of fact and conclusions:

(a) Determine what data should, and except for the con-

flict of interests of the co-trustee—BTN B—would, have

been made available to the Comptroller; and, from

such data, fix the value of the ‘old’ bank stock as of

the time such ascertainment is contemplated by the

Federal Act. If the value as fixed is more than the

value fixed by the Comptroller, award to the Trust as

damages the sum equal to the difference against

BINB.

“(b) In which latter event (if the fixed value per share ex-

“(c)

ceeds $32.80), determine the true bid value of the

‘new’ bank stock had BTNB, absent its conflict of in-

terests, actively sought potential bidders as of the time

of the public auction as provided by the Federal Act.

If the bid value so fixed is higher than the ascertained

value of the stock as fixed under (a) above, award to

the Trust as additional damages the sum equal to such

difference against BT NB.

If the ascertained value of the ‘old’ bank stock is less

than $32.80 per share, but the per share auction value

as fixed under (b) above exceeds $32.80, award to the

Trust as damages the sum equal to the aggregate of

the difference between such per share auction value

and $32.80 against BTNB.

“It is suggested that the price obtained by BTNB upon

resale of the ‘new’ stock within the 30-day period fol-

lowing the auction, as prescribed by § 215a(d), is rele-

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vant data (subject, of course, to any admissible evi-

dence of price variance) for consideration in making

such determination.

“(d) Determine whether the ascertainable true value of

Birmingham Realty stock and the asking price there-

for of the ‘N. Y. block,’ along with the other material

factors, rendered BTNB’s conflict of interests respon-

sible for an abuse of discretion in refusing to agree to

such purchase. If so, award to the Trust as damages

such sum as the Court may deem reasonable and ade-

quate to make the Trust whole in light of all compe-

tent evidence adduced on this issue.

“(e) Determine whether BTNB’s evidenced conflict of in-

terests is so inherent in the nature of its relationship

to the Trust and to the Co-trustee Henley as to render

BINB disqualified to further serve as co-trustee to

the instant Trust Estate; or, whether the resolution

of the instant controversy will so dissolve the conflict

of interests as to render BTNB fully competent and

qualified to serve as co-trustee; and to implement by

order of the Court such determination as the interest

of the Trust Estate may require.

“3. Determination and award of expenses and fees charge-

able against the Trust Estate shall be limited to those

reasonably and necessarily incurred by the ‘Temporary

Trustee amd his attorney.” (295 Ala. at 48, 49)

On remand, the trial court appointed a temporary trustee

and approved his employment of counsel to retry the case.

After a trial which lasted six weeks, the court entered the fol-

lowing final decree:

“FINAL DECREE

“This cause came on for trial on the merits. following

remand thereof by the Supreme Court of Alabama, and

was submitted to the Court upon pleadings and procf after

more than six weeks of trial time. Counsel appearing for

the parties were as follows:

“Morris K. Sirote and Jack E. Held, attorneys for the

Temporary Trustee; Lee C. Bradley, Jr. and MacBeth

Wagnon Jr., attorneys for BT'NB and the Holding Com-

pany; Donald E. Sweeney, Jr. and James W. May, Jr.,

eT A DLE

4

4

3

4

7

;

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attorneys for the individual Co-Trustee, John C. Henley,

III; Julian L. McPhillips, Jr., Barry V. Hutner and Jim

O’Kelley each as Assistant Attorneys General, in behalf of

the beneficiaries of the Trust Estate. The participation by

the Attorney General in this cause has been active and

continual from the outset until the present. Testimony of

witnesses was received by the Court ore terius and without

a jury. Comprehensive post-trial and pre-trial briefs and

letters which treated all possible subjects evident in the

controversy were received and studied by the Court. The

post-trial briefs and letters were accompanied by suggested

decrees as prepared by the separate parties. The Court has

duly considered all of the pleadings, written documents

and exhibits filed in this cause, and all evidence and the

briefs, letters and arguments of counsel, along with the

data contained in the suggested decrees filed by all parties

to this cause. Because it is believed by this Court that all

of the contentions and authorities of all of the parties are

fully expressed through these several documents all of this

proffered material is expressly incorporated into and made

a part of the record of this case for the edification of any

reviewing Court.

“This Court finds that the findings of fact set forth in

the suggested decree as filed by the attorneys for the Tem-

porary Trustee are consistent with this opinion, and are

fully supported by the overwhelming weight of the evi-

dence. The Court is in agreement therewith, adopts the

same as its own findings of facts and incorporates the same

herein by reference.

“This Court will deal with the specific instructions set

forth in Syllabus (14) 1, 2(a) (b) (c) (d) and (e) of its

opinion seriatim, and will base its orders in response to

these instructions and will not depart from the orbit of

their content. Some new issues and theories have been

raised by the pleadings, but this Court, as stated, will con-

fine itself to the express mandate of the Supreme Court

as contained in its opinion of remand, except as to such

other issues which are consistent therewith and have not

been foreclosed thereby. All motions of the parties not

heretofore ruled upon are hereby overruled.

“In accordance with the directions of the Supreme

Court, the Court makes the following specific findings of

fact and conclusions in the order indicated:

A-8

“Ll. The direction to appoint a “Temporary Trustee of

the Trust Estate in lieu of the named Co-Trustees for the

sole and limited purpose of the re-trial of this cause’ has

been complied with in the appointment of Jack H. Harri-

son, as the Temporary Trustee of the Linn-Henley Chari-

table Trust.

“2(a). Based upon the overwhelming weight of the evi-

dence, ‘the Court has determined what data should, and

except for the conflict of interest of the Co-Trustee —

BINB — would, have been made available to the Comp-

troller; and, from such data, (fixes) the value of the “Old”

Bank stock as of the time such ascertainment is contem-

plated by the Federal Act,’ as hereinafter set forth in the

decretal portion of this decree. Since this fixed value is

more than the value fixed by the Comptroller, this decree

will, in compliance with the directions of the Supreme

Court, award to the Trust as damages a sum equal to the

difference between the actual, fair and intrinsic value of

the ‘Old’ Bank stock surrendered by the Trust following

the effective date of the Merger and the value thereof as

determined by the Comptroller of the Currency.

“In further compliance with the mandate of the Su-

preme Court, the Court finds and determines that the fol.

lowing data should, and except for the conflict of interest

of the Co-Trustee — BTNB — would have been made

available to the Comptroller of the Currency.

“(1) All facts which were known to. or which could

have been ascertained by BTNB, as of the effective date

of the Merger, showing or reflecting the actual, intrinsic

or fair value of the ‘Old’ Bank stock as of December 31,

1968, appraising all material factors and elements affecting

such value, on the basis that BTNB will continue as a

going concern, including the nature and extent of its busi-

ness and its operations, assets, good will, liabilities, earning

capacity, investment value and market value of its stock,

the earnings of the ‘Old’ Bank in the past and the regu-

larity of the payment of dividends as well as the future

prospects and the growth potential of the bank: an esti.

mate of its future earnings and payment of dividends, and

of the expected growth of the bank in earnings and divi-

dends for the future, including an estimate of the divi-

dends expected to be paid by the bank during the year

1969;

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“(2) The plans and goals which were known, or should

have been known to management of BTNB, as of Decem-

ber 31, 1968 for the expansion of its facilities, opening of

new branches, expansion of its leadership in the credit card

field, the expected international growth for Bank Ameri-

card, its plans for the expansion of its computer services:

and all other relevant factors which BTNB knew or should

have known as of December 31, 1968 showing and indi-

cating that BT NB would enjoy substantial growth in earn-

ings and in payment of dividends in future years, giving

due weight to each of the factors entering into a valuation

of the stock of the bank on a going concern basis, and

exercising in this respect the professional knowledge, skill

and business acumen expected of a corporate Co-Trustee,

and that diligence and care which a prudent man ordi-

narily uses in his own concern.

“The Court further finds from the evidence that man-

agement of BIT'NB was highly competent; that on Decem-

ber 31, 1968 it was fully aware of its manifold expansion

plans, of its great potential for future growth, and that its

income and dividends would be increased in the year 1969

and thereafter, as in fact they were so increased to a very

large extent; and that it was incumbent upon BINB, as

Co-Trustee and fiduciary, to furnish the data above enu-

merated to the Comptroller of the Currency, assuming that

it was giving undivided loyalty to the Trust and that it

eliminated its own selfish interests contlicting therewith.

“Based upon the foregoing data and all of the evidence

introduced in connection therewith, the Court fixes the

actual, intrinsic and fair value of the 27,460 shares of the

‘Old’ Bank stock as surrendcred by the Trust as of the

time such ascertainment is contemplated by the Federal

Act, 1e. December 31, 1968, at FIFTY AND NO/100

DOLLARS ($50.00) per share. The difference between

the total value of this stock ($900,688.00), as fixed by the

Comptroller of the Currency, and of the total value so

fixed by the Court ($1,373,000.00) is FOUR HUNDRED

SEVENTY TWO THOUSAND THREE HUNDRED

TWELVE AND NO/100 DOLLARS ($472,312.00), to

which must be added interest at six percent per annum

from January 1, 1969 (the effective date of the Merger) to

September 1, 1977 amounting to the sum of TWO HUN.

DRED THIRTY THOUSAND NINE HUNDRED SIX.

A-10

TY AND NO/100 ($230,960.00). The addition of these

two sums amounts to SEVEN HUNDRED THREE

THOUSAND TWO HUNDRED SEVENTY TWO AND

NO/100 DOLLARS ($703,272.00) which must be awarded

in favor of the Linn-Henley Charitable Trust and against

BINB.

“9(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 BTNB in improperly engaging in a struggle with the

individual Co-Trustee, Henley, as to his right to dissent in

behalf of the Trust from yr Merger. In the meantime,

however, the local market $n bank stocks became greatly

depressed.

“Accordingly, the Court further finds that BTNB 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 BTNB on March 6, 1970, aside from the fact

that BT'NB failed to actively solicit bidders at this auction,

was totally ineffectual. For these reasons the mandatory

instruction by the Supreme 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, cannot, in the fact [sic] of the newly-developed evi-

dence introduced by the Temporary Trustee, be effected

\_by this Court.

“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

a

Sa ee am

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impracticable for BINB 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.

For these reasons also the mandate of the Supreme Court

under 2(b) and (c) above, even if it can be construed to

apply to the public auction of the ‘Holding Company’

stock, as well as to the ‘New’ Bank stock, cannot be effected

by this Court.

“Prior to the auction of the Holding Company stock,

however, the Co-Trustee-Henley, advised BTNB, as cor-

porate Co-Trustee, that it was to the apparent and best

interests of the Trust that, in the light of all the circum-

stances then existing, the Trust itself should bid upon and

purchase this stock at the public auction, and requested

that BTNB concur in this advice. At the auction, BT'NB

ignored Henley’s advice and request and collaborated with

the ‘Holding Company’ in permitting it to be the sole bid-

der and purchaser of this stock.

“The Court further finds that such self-dealing on the

part of BTNB, in collaboration with its affiliate, consti-

tutes a separate, distinct and independent breach of trust

on the part of BT'NB which arises out of the same opera-

tive facts and the conflict of interests referred to by the

Supreme Court in 2(b) and (c) above. Accordingly, the

Court further finds that the claim for damages arising

therefrom, as now presented and developed by the ‘Tempo-

rary Trustee, is not inconsistent with anything determined

by the Supreme Court under 2(b) and (c) and is so closely

connected therewith, that this Court, especially under the

New Alabama Rules of Court, may take cognizance there-

of.

“The Court further finds from the evidence that Henley

exercised sound judgment and prudence in seeking to pro-

tect the Trust against the inefficacious public auctions by

suggesting that the Trust purchase this stock at the then

depressed market prices, and that BINB abused its discre-

tion in failing to concur in the recommendations of Hen-

ley. Additionally, the Court finds that BI'NB failed to

resolve its conflict of interests either by petitioning this

Court for instructions or by subordinating its own inter-

ests in favor of the Trust. By thus competing with the

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Trust and engaging in self dealing, in and about the ad-

ministration of this Trust, BTNB was guilty of an even

more flagrant breach of fiduciary 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 BT'NB,

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

BTNB and the ‘Holding Company’ are liable to the

Trust for such profits amounting to the total sum of

$1,208,240.00.

“2(d). This Court, from the overwhelming weight of the

evidence, finds, relative to 2(d) that the ascertainable true

value of Birmingham Realty stock and the asking price

therefor of the ‘N.Y. Block’, along with the other evident

material factors, rendered BTNB'’s conflict of interests re-

sponsible for an abuse of discretion in refusing to agree to

the purchase of that stock by the Trust. The unwarranted

self-interest of BT NB in refusing this purchase resulted in

the loss of a highly profitable investment for the Trust.

The soundness of this investment for the Trust as a long-

term investment should have been, in the exercise of due

diligence and care, apparent to BINB.

“The Court further finds that at the time the individual

Co-Trustee proposed to BTNB that the 554 shares of Bir-

mingham Realty Company stock be purchased by the

Trust, the underlying value thereof was easily ascertainable

and that the actual, intrinsic value of this stock at such

time was approximately $2,000 a share; and that the assets

of the Realty Company then consisted largely of land hold-

ings, most of which were acquired many years ago at very

low costs and were carried on its books at 1913 values, and

that even at cost the company had a book value of $991.00

per share; that the current market price of the stock was

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$700.00 per share, and that it was common knowledge in

the local business community that the market price was

undervalued and did not reflect the true asset values.

‘The Court further concludes and finds that, as tenta-

tively concluded by the Supreme Court, all the reasons

assigned by BTNB when taken together, and fully ana-

lyzed, ‘are but supportive of the conclusions stated in the

Trust Officer's testimony, and demonstrate the legal con-

clusiveness of the conflict of interest on behalf of BINB

with respect to the transaction. The Court further con-

cludes and finds that the principal reasons which moti-

vated the bank in refusing to consent to the purchase of

this block of stock are those testified to by its Trust Offi-

cer whose testimony was reintroduced on this re-trial and

stands unimpeached.

“As a proximate consequence thereof, the Trust sus-

tained a loss in the sum of $939,500.00, represented by the

difference between the sum of $650.00 per share for which

such stock could and should have been purchased and its

actual value, amounting to the sum of $2,400.00 per share,

which the Trust could have secured as a result of the

tender offer to its stockholders made by the Birmingham

Realty Company on or about May 1976.

“The Court further finds that BT'NB’s evidenced con-

flict of interest is so inherent in the nature of its relation-

ship to the Trust and to the Co-Trustee, Henley, as to ren-

der BTNB unable to further serve as Co-Trustee to the

instant Trust Estate; and that the resolution of the instant

controversy will not dissolve this conflict of interest so as

to render BTNB fully competent and qualified to con-

tinue to thusly serve as Co-Trustee.

“Accordingly, it is CONSIDERED, ORDERED, AD-

JUDGED and DECREED by the Court as follows:

“ONE: That the Linn-Henley Charitable Trust shall

have and recover of Birmingham Trust National Bank the

sum of FOUR HUNDRED SEVENTY TWO THOU-

SAND THREE HUNDRED TWELVE AND NO/100

DOLLARS ($472,312.00), together with interest thereon

at the rate of six percent per annum from January I, 1969

to September 1, 1977, amounting to the sum of TWO

HUNDRED THIRTY THOUSAND NINE HUNDRED

SIXTY AND NO/100 DOLLARS ($230,960.00), or the

A-14

total sum of SEVEN HUNDRED THREE THOUSAND

TWO HUNDRED SEVENTY TWO AND NO/100

DOLLARS ($703,272.00), the same representing the dif-

ference between the actual, intrinsic value of the ‘Old’

Bank stock and the value determined by the Comptroller

of the Currency, pursuant to the directions of the Supreme

Court, together with the costs of litigation and a reason-

able attorneys’ fee, attributable to this claim, which the

Court hereby reserves for future determination to be made

upon application of the parties for reimbursement of such

costs and expenses, including attorneys’ fees.

“TWO: It is further ORDERED, ADJUDGED and

DECREED by the Court that the Linn-Henley Charitable

Trust shall have and recover of the Counter-Defendants,

Birmingham Trust National Bank and Southern Bancor-

poration of Alabama the sum of ONE MILLION TWO

HUNDRED EIGHT THOUSAND TWO HUNDRED

FORTY AND NO/100 DOLLARS ($1,208,240.00), the

same representing the profits accruing upon the ‘Holding

Company’ stock to the Counter-Defendants acquired by

them at the public auction held on February 10, 1970.

“THREE: It is further ORDERED, ADJUDGED and

DECREED that the Linn-Henley Charitable Trust shall

have and recover of the Counter-Defendant, Birmingham

Trust National Bank, the sum of NINE HUNDRED

SIXTY NINE THOUSAND FIVE HUNDRED AND

NO/100 DOLLARS ($969,500.00), the same representing

the profits lost to the Trust by virtue of the breaches of

its fiduciary duties in failing to concur with the individual

Co-Trustee in the purchase of the 554 shares of stock of

Birmingham Realty Company.

“FOUR: It is further ORDERED, ADJUDGED and

DECREED that Birmingham Trust National Bank is

hereby removed and discharged as Trustee for the Linn-

Henley Charitable Trust. In the place and stead of

BINB, The First National Bank of Birmingham is hereby

named as Trustee of the Linn-Henley Charitable Trust

upon its acceptance of this nomination and appointment.

“FIVE: It is further ORDERED, ADJUDGED and

DECREED that all costs of litigation, including reason-

able attorneys’ fees applicable to the establishment of lia-

bility to the ‘Old Bank’ and its stockholders, and the suc-

A-15

cessor, the ‘New Bank’ incident to the circulation of the

fraudulent or misleading proxy statement, in violation of

the securities and other laws, as set out in tie additional

findings of fact and conclusions of law of the Temporary

Trustee made a part hereof, shall be charged against the

Counter-Defendant, Birmingham Trust National Bank.

“SIX: The fixing and awarding of attorneys’ fees costs

of litigation and expenses and compensation to the Tem-

porary Trustee is hereby reserved along with a determina-

tion of the question as to whom the said costs, expenses

and attorneys’ fees shall be charged.

“SEVEN: Counsel for the separate parties, (including

the Temporary Trustee), are instructed to furnish to the

Court their sworn applications for allowance of fees and

expenses which they may claim, along with any supporting

affidavits, within 15 days of the date of this instant de-

cree, along with their claims and suggestions as against

whom these fees and expenses should be charged; and the

Counter-Defendant, BTNB, is hereby taxed with all tax-

able costs of this action, for which let execution issue.

“DONE and ORDERED this 4th day of October, 1977.

“/s/ Wm. C. BARBER

CIRCUIT JUDGE IN EQUITY

SITTING"

BTNB appealed, claiming error in all aspects of the decree.

The attorney general and Henley, as Co-Trustee, cross-appealed

from that aspect of the decree which taxed costs and attorneys’

fees against the Trust.

At the outset, it should be noted that no party argues that

the plan of reorganization adopted by the majority stockholders

was made for the purpose of squeezing or freezing out minority

stockholders on a cash out basis. In fact, it is not argued that

the bank breached its fiduciary duties to minority stockholders.

The only contention made is that the bank breached its duty

to the Trust in various ways. We shall address these theories

in the sequence set out in the remand order in the opinion

delivered on the prior appeal.

A-16

I.

Did BTNB breach its duty to the Trust by failing to furnish

data to the Comptroller of the Currency which would have

produced a higher appraisal of the old bank stock than $32.80

per share as originally fixed?

BTNB argues now, as it did on the prior appeal, that the

provisions of § 215a(d), Title 12, USC, to the effect that the

Comptroller's appraisal “shall be final and binding on all par-

ties” forecloses any question that the appraisal may not have

been sufficient in amount. A majority of the court rejected

that argument on the prior appeal, holding that if the bank

breached its fiduciary duty to the Trust by withholding data

which would be material to the Comptroller in making a valid

appraisal, it was answerable to the Trust under state law. We

adhere to that position.

It was the opinion of the majority that the language of

§ 215a(d), making the appraisal final and binding on all par-

ties was not intended by the Congress to preempt state law in

the area of fiduciary duties of a national bank serving in a

fiduciary position. In fact, the act itself implicitly recognizes

the role of state law in this area. § 215a(f) recognizes that a

national bank acting as a fiduciary under appointment by a

state court is subject to supervision or removal by that court,

saying: Re

“| Nothing contained in this section [215] shall be

considered to impair in any manner the right of any court

to remove the consolidated national banking association

and to appoint in lieu thereof a substitute . . . fiduciary,

except that such right shall not be exercised in such a

manner as to discriminate against national banking asso-

ciations, nor shall any consolidated national banking asso-

ciation be removed solely because of the fact that it is a

national banking association.”

Additionally, the act itself refutes the contention that the

appraisal is final and binding on all parties for all purposes.

The appraisal is not binding on either party if at the public

SS — ——

- reer t

LD A A AAAS SSS SS

Sr rr ea ae rm

ee ee er rt tee >

A-17

auction required to be held a price greater than the appraisal

is received. In that event, the dissenting stockholder is entitled

to receive the amount in excess of the appraisal.

Thus, as we read § 215, state courts are not foreclosed to in-

quire into the question of breach of fiduciary duty on the part

of a national bank or a state bank involved in consolidation

and merger as provided for by that act.

On the retrial of this case, the trial court determined that

BTNB withheld data from the Comptroller of the Currency

which reflected on the actual, intrinsic or fair value of the

stock held in trust as of December 31, 1968. Based upon evi-

dence before it, the court determined that the value of the

stock was $50 per share as opposed to $32.80 fixed by the ap-

praisal and awarded to the Trust the difference, plus interest

from January 1, 1969, to September 1977, for a total award of

$703,272.00. We affirm. The cause was remanded for a deter-

mination of this issue and there is evidence in the record as

shown by the final decree to support the finding. Therefore,

we should not disturb this finding by the court.

II.

On remand, the trial court was instructed to award to the

Trust the difference in the value as determined by an appraisal

(with all pertinent data taken into consideration) and the

“true” bid value of the stock at auction, if that amount were

higher than the appraisal figure. The trial court conceded its

inability to carry out this mandate, and instead awarded to the

Trust the difference in the amount paid for the stock by the

holding company at the auction, $26 per share, and the highest

intermediate value of the stock up to time of trial, $70 per

share, for a total of $1,208,240. 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 re-

fusing to purchase the stock for the Trust. Curiously, the tem-

porary trustee pursued this theory even though Henley, on the

first trial, argued that BT'NB was guilty of a breach of duty

A-18

in recommending that the Trust accept shares of stock in the

new bank holding company in exchange for old bank stock.

The auction is statutorily mandated as a second step in the

dissent procedure. It appears to be designed to further protect

the rights of stockholders who exercise their right to dissent

from the plan of merger or consolidation. If the stock brings

a price higher than that for which it was appraised, the dissent-

ing stockholders reap the benefit. The act expressly permits

the purchase of the shares by the surviving banking association.

The temporary trustee candidly admits that the stock could not

possibly have brought a price at the auction in excess of the

$32.80 per share which the Trust had been paid based on the

appraisal. He obviously concedes, therefore, that it would not

have attracted a bid in excess of the $50 per share which the

court has now determined was the true appraisal value. Hen-

ley, the co-trustee, himself recognized that the stock would not

attract bidders at over $32.80 and urged the investment for the

Trust only up to a price of $23.25. He and the temporary

trustee now contend that the trust ji» entitled to the difference

in the price paid at auction and the highest market price since

that time, not because the bid price did not reflect the true

value of the stock, but because the bank refused to pur-

chase the stock for the Trust. Admittedly, it now appears that

the stock would have been a good investment for the Trust, or

for anyone else for that matter. But, the duty of the bank in

its relation to the Trust must be measured against circum-

stances which existed at the time the alleged breach of its

fiduciary duty occurred. The bank had a duty to conduct a

meaningful public auction of the stock which the dissenting

stockholders would have received in exchange for the stock

they held but for their election to dissent from the plan of

reorganization. The temporary trustee argues that the bank

can be charged with breach of this 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 reorgani-

zation which management and the majority stockholders of

BTNB adopted. That plan has heretofore been set out. It was,

A-19

therefore, not entirely clear what stock should be offered at the

auction, whether the stock of the new national bank or stock

of the holding company. To resolve any question about this

issue, both were offered. There was no evidence offered and

no contention made that the price bid in each instance was not

reflective of the fair market price then prevailing. That either

stock was being offered at auction was a direct result of Henley

as the individual co-trustee having exercised his statutory right

to vote the stock held in trust against the plan of reorganiza-

tion. He had a perfect legal right to so vote those shares. How-

ever, nothing in the law imposes liability on BTNB as co-

trustee in rejecting Henley’s proposal to then purchase as an

investment for the Trust the very stock it would have received

in exchange for the old stock had Henley not voted those

shares against the plan of merger/reorganization. This is so

assuming that the stock could have been legally acquired by

the co-trustee as an investment for the Trust.

The general definition of a trustee’s investment duties was

first stated by the Supreme Court of Massachusetts in Harvard

College v. Amory, Mass. (9 Pick.) 446, 461 (1830):

“All that can be required of a trustee to invest, is, that

he shall conduct himself faithfully and exercise a sound

discretion. He is to observe how men of prudence, dis-

cretion and intelligence manage their own affairs, not in

regard to speculation, but in regard to the permanent dis-

position of their funds, considering the probable income,

as well as the probable safety of the capital to be invested.”

The Restatement of the Law of Trusts 2d, § 227 (1959),

states the rule in the following language: 4

/

“In making investments of trust funds the trustee is under

a duty to the beneficiary

“(a) in the absence of provisions in the terms of the trust

or of a statute otherwise providing, to make such invest-

ments and only such investments as a prudent man would

make of his own property having in view the preservation

of the estate and the amount and regularity of the income

to be derived... .”

A-20

The general rule is, absent express authority in the trust in-

strument, a Corporate trustee is guilty of a breach of fiduciary

duty where it purchases property which it owns for a trust ad-

ministered by it. II Scott on Trusts, § 170.13 (3d ed. 1967).

“Unless authorized to do so by the terms of the trust, or

by statute, a corporate trustee cannot, as a general rule,

properly make or retain a trust investment in its own stock

or bonds. Such a transaction involves self-dealing, or at

least, divided loyalty. . . .” (54 Am.Jur., Trusts, § 413)

A regulation to like effect has been adopted by the Comptroller

of the Currency binding national banks. 12 C.F.R. § 9.12(a).

In fact, Title 12, § 83, USC, prohibits the purchase or reten-

tion by a national bank of its own stock for its Own account.

This, of course, explains why § 215a(d), although allowing a

banking association to purchase the shares of dissenting share-

holders at auction, expressly says it may do so only “for the

purpose of reselling such shares within 30 ra <.-

BT NB was a co-trustee of the Linn-Henley Trust. Multiple

trustees must act jointly and in concert and may not delegate

to each other or to another powers calling for discretion and

judgment. Restatement of the Law of Trusts 2d, § 194. It is

assumed that a settlor generally appoints more than one trustee

because of his desire to attain for the beneficiaries of his trust

the benefit of the wisdom of each, and the courts will not, as a

general rule, interfere with the exercise of discretionary powers

of trustees absent fraud or abuse of discretion. See: The Co-

Trustee Relationship, Vol. 8.9 Real Property, Probate & Trust

Journal (Spring 1973).

Tested by these standarus, did BTNB breach its duty to the

Trust in refusing to acquiesce in 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 decree

of the trial court so holding.

One of this state's outstanding attorneys, while representing

the Linn-Henley Trust, expressed grave doubt that the co-

ea a a

a eS

A-2]

trustees had the power under the Trust to convert the inherited

stock in the bank to stock in the holding company in connec-

tion with the merger/reorganization. In other words, an attor-

ney while representing the Trust, questioned whether the

Trust could properly hold stock in the holding company assum-

ing it did not dissent from the plan of reorganization. Under

these facts. we cannot hold as a matter of law that BTNB

breached any fiduciary duty in refusing to purchase shares in

the holding compar.y or “new” bank stock as a new investment

for the Trust.

; III.

Was BTNB guilty of a breach of its fiduciary duties in re-

fusing to concur in Henley’s recommendation that the Trust

purchase 554 shares of Birmingham Realty Company stock in

September, 1970?

Undeniably, a trustee owes undivided loyalty to the Trust.

This does not mean, however, that he is liable for a loss to the

trust estate which did not result from a breach of that duty.

III Scott on Trusts, §§ 204, 211 (3d ed. 1967).

The temporary trustee asserts that the court held on the first

appeal that BTNB had breached its duty to the Trust in re-

fusing to buy the Birmingham Realty stock. This is erroneous.

The issue was remanded for a determination of whether BTNB

had abused “its discretion in refusing to agree to the purchase. °

The temporary trustee argues that BTNB should be held liable

to the Trust for its ‘deliberate disregard of foresight.”

BINB is liable to the Trust in the Birmingham Realty

matter only if it breached some duty to the Trust in refusing

to make this investment at the time the decision was made.

Was it an investment which a prudent man, managing his own

affairs, would have made, based upon information then avail-

able? Liability cannot be based on the fact it subsequently

developed that the investment would have been a good one.

This is but the converse of the rule that a trustee is not liable

if he makes an investment in a security which subsequently de-

A.99

preciates in value. III Scott on Trusts, § 204, supra, expresses

the rule as follows:

“The failure to make a profit which does not result

from a breach of trust does not subject the trustee to lia-

bility. Thus if by the terms of the trust he is permitted

but is not directed to invest in certain securities, he is not

liable for failure to make the investment. although the

securities subsequently appreciate in value. . . .”

The rule has also been summarized by Headley, Trust In-

vestments, 110 Trusts & Estates 739 (1952), as follows:

“The first and all inclusive requirement of the law is

that a trustee shall act with complete and undivided loyalty

to his trust. Second is that a trustee shall act prudently in

the selection and management of investments. The ele-

ments of prudence are:

“(1) Care — a trustee must gather and weigh the facts

and base his decisions on them rather than on rumor or

guesswork;

“(2) Skill — a trustee must exercise the skill of the aver-

age person as a tainimum; and if he has more than average

skill he must exercise such skill as he has:

“(3) Caution — a trustee must not take chances which

will imperil the accomplishment of the purposes of the

trust.

“... There must be balance between security of prin-

cipal and amount and regularity of income: and the gov-

erning motive of the trustee must be sound investment for

a long period and not speculation for a profit. . . .”

With specific reference to a trustee's investing in common

stocks, this author says:

They represent no promise to return a dollar

amount to the investor; their dividends are dependent on

earnings and the action of a board of directors: they have

always afforded an attractive vehicle for speculation. Nev-

ertheless some of them have demonstrated, over a long pe-

riod of years, the qualities required for sound permanent

investments. Intrinsic values have been maintained and

ee oe

A-23

dividends have been adequate and regular. The principal

has been reasonably safe for a number of reasons: compe-

tent management, sound financing, position in an essen-

tial industry, a successful record and an adequate mar-

ar

Tested by this standard, we cannot say that BTNB breached

its duty to the Linn-Henley Trust in declining to invest its

funds in stock of Birmingham Realty Company in 1970. The

Trust instrument permitted the co-trustees wide discretion in

making investments, but it did not direct them to invest in any

particular security. In this instance, the co-trustees disagreed

on the advisability of investing trust funds in Birmingham

Realty stock. Henley urged the investment partly because the

price at which the 554 shares could be purchased in 1970 was

below book value and because the real estate holdings of Bir-

mingham Realty had a market value far in excess of the value

carried on the books of the company. Although the latter fact

was widely known, stock in Birmingham Realty had tradition-

ally sold at less than book value. One explanation for this was

that the dividends paid were also traditionally low. The only

way the underlying value of the real estate could be realized

by the stockholders was liquidation, which was not practical.

There were a number of witnesses, knowledgeable about

Birmingham Realty and themselves experts in the investment

field, who testified that they had been willing to pay substan-

tially more than market for all of the stock but would not be

interested in less than all at a substantially lower price. Each

of the witnesses testified that in 1970 Birmingham Realty stock

was not a good investment for the Trust.

The record demonstrates that there existed a number of

sound reasons for BT NB to reject Henley's proposal to make

this investment. It fails to show wherein it was under a duty

to do so. Therefore, it cannot be surcharged for its actions ab-

sent a showing of breach of some duty on its part. Consequent-

ly, that part of the court's decree awarding damages to the trust

in the amount of $969,500 for failure of BTNB to concur in

A-24

the purchase of 554 shares of Birmingham Realty Company is

reversed.

IV.

Was BINB properly removed as a co-trustee for the Linn-

Henley Trust?

The settlor of this Trust, over a period of 45 years, served

as a director, president and, finally, chairman of the Board of

BINB. In designating the bank as co-executor and as co-trustee

of his charitable trust he specified by his will that:

“... the Birmingham Trust National Bank, a national

banking association (or such successor corporation as shall

succeed said Birmingham Trust National Bank by pur-

chase, merger, consolidation, conversion or change of char-

ter or name).”’

The law governing removal of trustees is very clear in this

state as elsewhere.

In II Scott on Trusts (3d ed. 1967), the following appears:

Ҥ 107. A court which has supervision over the admin-

istration of trusts has power to remove a trustee for proper

cause. Unless the grounds of removal are stated in a stat-

ute, and unless the grounds so stated are exclusive, the

matter is one for the exercise of a sound discretion by the

court. ...

Ҥ 107.1. The court is less ready to remove a trustee

who was named by the settlor than it is to remove a trus-

tee appointed by the court or by a third person in the ex-

ercise of a power to appoint trustees. . . .”

Also, in IV Scott on Trusts (3d ed. 1967):

Ҥ 387. A trustee of a charitable trust may be removed

as trustee for the same reasons for which a trustee of a

private trust may be removed. Thus he may be removed

for serious breaches of trust, for unfitness, for long-con-

tinued absence and the like. He can also be removed

where his views are hostile to the purposes of the trust... .”

This court has stated the rule which prevails in this state:

— ves

eS ee |

oe

A-25

“The removal of a trustee is a drastic action which

should only be taken when the estate is actually endan-

gered and intervention is necessary to save trust property.

In re Crawford's Estate, 30 Pa. 187, 16 A.2d 521; In re

Hodgson’s Estate, 342 Pa. 250, 20 A.2d 294; Chambers v.

Mauldin, 4 Ala. 127; Satterfield v. Jolin, 53 Ala. 127. This

is especially true where the trustee is named by the settlor.

In re Crawford's Estate, supra; Taylor v. Errion, 137 N.J.

Eq. 221, 44 A.2d 346, affirmed 140 N.J.Eq. 495, 55

A.2d 11.

“While the removal of a trustee is a matter resting

largely within the sound judicial discretion of the trial

court, it is equally clear that an abuse of that discretion

renders its exercise subject to review... .’ Jngalls v. In-

galls, 257 Ala. 521, 527, 59 So.2d 898 (1952)

See also: Walker v. Amason (MS. April 6, 1979), So.2d

(Ala. 1979).

We have tediously reviewed the record in this case, which is

voluminous, as one would expect in a trial lasting six weeks or

more, and while we find evidence that the relationship between

officers of BTNB and John Henley became strained during the

merger/reorganization process and each of them took different

positions as to what was in the best interests of the Trust, there

is nothing to indicate the trust estate was endangered at any

time. BTNB was in an awkward position in connection with

the appraisal of the bank’s stock held in trust. Its undivided

loyalty to the Trust required it to attempt to have the stock

appraised at a figure to obtain for the Trust the highest

amount possible. It had a statutory obligation as ‘the receiving

association” under Title 12, § 215a(d), to promptly pay the

appraised amount to the dissenting shareholders. These con-

flicting obligations could not be reconciled and BT NB should

have, as we held on the first appeal, sought guidance from the

court. However, its failure to do so does not require its re-

moval as a co-trustee. A similar situation is unlikely ever to

recur and its having occurred one time does not disqualify

BINB from fulfilling its obligations under the trust instru-

ment. Henley conceded that he and the bank’s trust depart-

A-26

ment had worked harmoniously in the discharge of their re-

spective responsibilities to the Trust except for the matters

concerned in this litigation and could continue to do so. We

find nothing in the record to indicate otherwise. Therefore,

that portion of the decree removing BTNB as co-trustee of the

Linn-Henley Trust is reversed.

V.

The matter of attorneys’ fees and costs:

The attorney general and Henley appealed that part of the

decree awarding attorneys’ fees from the Trust. They argue

that those fees should be paid by BTNB and urge that the

cour’ erred in taxing them as costs against the Trust. They

contend that the decree is in all other respects without error,

except that Henley questions the amount of the award in fees

to attorneys for the temporary trustee and for the services of

the temporary trustee himself. BTNB asserts that the court

properly taxed costs and attorneys’ fees against the Trust, but

also questions the amount of attorneys’ fees awarded to various

parties.

The trial court correctly held that such costs and attorneys’

fees as are awardable may, under our law, be taxed against the

Trust. Code 1975, § 34-3-60.

In Zimmerman v. First National Bank of Birmingham, 348

So.2d 1359, 1367 (Ala. 1977), we addressed this issue and stated

the rule as follows:

“According to a well-established line of cases,

“ ‘[sJection 63, Title 46, Code, is largely an enactment of

the ancient principle of equitable origin, and there en-

forceable, which was referred to as costs between solici-

tor and client and said statute makes it apply at law as

well as in equity when justified. That principle is that

a complainant in equity, who at his own expense has

maintained a successful suit for the preservation pro-

tection or increase of a common fund or of common

property, or who has created at his own expense or

brought into court a fund in which others may share,

A-27

may have paid to him, or sometimes directly to his at-

torney, an attorney's fee for such services.

“Penny v. Pritchard & McCall, 255 Ala. 13, 17, 49 So.2d

782 (1950)... .”

Therefore, that part of the decree taxing attorneys’ fees

against the Trust, and made the basis of Henley and attorney

general's cross-appeal, is AFFIRMED.

Because we reverse the trial court's decree with regard to

issues delineated in Sections II, III and IV herein, we must re-

mand the attorneys’ fee issue for reconsideration by the trial

court in light of this opinion. It should determine the time

spent and the contribution made by whom in connection with

the issue in Section I (the appraisal issue) and fix attorneys’

fees accordingly.

AFFIRMED AS TO SECTION I; REVERSED AND REN-

DERED AS TO SECTIONS II, III], AND IV; AND RE-

MANDED WITH DIRECTIONS AS TO AMOUNT OF

ATTORNEYS’ FEES.

Torbert, C. J., and Bloodworth, Jones, Almon, Embry and

seatty, JJ., concur.

Maddox, J., dissents as to Secti n I, and concurs in the re-

mainder.

Faulkner, J., not sitting.

MADDOX, JUSTICE (Concurring in part and dissenting in

part).

I dissent as to Part I, on some of the same grounds which

I advanced, and which former Chief Justice Howell Heflin ad-

vanced, in our separate dissents on the original appeal. 295

Ala. at pages 50 and 56.

Even though this case involves thousands of dollars, the basic

and controlling facts are undisputed. BINB, as a co-trustee

wanted to merge. Co-trustee Henley opposed merger. Under

national banking laws, Henley, as co-trustee, became, in effect,

the sole trustee in the merger proceeding. Exercising his right,

he dissented, thus triggering the process of stock evaluation,

A-28

sale at public auction, etc. The procedure outlined by federal

law was followed in the merger proceeding. During the merger

proceeding, Henley, because of the mandate of federal law, was

the “dissenting stockholder.”

The majority upholds a finding by the trial court that the

bank acted in bad faith at the evaluation stage. The evidence

is uncontradicted that BTNB urged merger. Had Henley, as

sole trustee, not dissented, there never would have been any

necessity for the subsequent events, which Henley now com-

plains about. In short, had Henley followed the advice of

BINB, the Trust estate would have been substantially bene-

fited, not harmed. Why then should BTNB be accused of bad

faith and be saddled with a loss resulting from an event over

which it had no control, Henley’s dissent?

I, J. O. Sentell, Clerk of the Supreme Court

of Alabama, do hereby certify that the

foregoing is a full, true and correct copy

of the instrument(s) herewith set out as

same appears of record in said Court.

Witness my hand this 24 day of Aug. 1979.

J.O. Sentell

Clerk, Supreme Court of Alabama

A-29

APPENDIX A(2)

ORDER DENYING

APPLICATION FOR REHEARING

JUNE 8, 1979

77-382

BIRMINGHAM TRUST NATIONAL BANK, ET AL.

VS.

JOHN C. HENLEY, III, ET AL.

77-382A

CHARLES A. GRADDICK, ATTORNEY GENERAL

VS. JEFFERSON CIRCUIT COURT #168-659

BIRMINGHAM TRUST NATIONAL BANK, ET AL.

77-382B

JOHN C. HENLEY, Il

VS.

BIRMINGHAM TRUST NATIONAL BANK, ET AL.

IT IS ORDERED that the applications for rehearing filed

in this cause on April 20, 1979, be, and the same are hereby,

overruled.

I, J. O. Sentell, Clerk of the Supreme Court

of Alabama, do hereby certify that the

foregoing is a full, true and correct copy

of the instrument(s) herewith set out as

same appears of record in said Court.

Witness my hand this 24 day of Aug. 1979.

J.O. Sentell

Clerk, Supreme Court of Alabama

A-30

APPENDIX B(1)

PERTINENT PROVISIONS OF TITLE 12 U.S.C.A.

RELATING TO THE MERGER OF NATIONAL BANKS

AND PERTINENT PROVISIONS OF THE

REGULATIONS OF THE COMPTROLLER OF THE

CURRENCY WITH RESPECT THERETO

§ 215a. Merger of national banks or State banks into nation-

al banks — Approval of Comptroller, board and shareholders;

merger agreement; notice; capital stock; liability of receiving

association

(a) One or more national banking associations or one or

more State banks, with the approval of the Comptroller, under

an agreement not inconsistent with sections 215-215b of this

title, may merge into a national banking association located

within the same State, under the charter of the receiving asso-

ciation. The merger agreement shall —

(1) be agreed upon in writing by a majority of the board

of directors of each association or State bank participating

in the plan of merger;

(2) be ratified and confirmed by the affirmative vote of

the shareholders of each such association or State bank

owning at least two-thirds of its capital stock outstanding,

or by a greater proportion of such capital stock in the case

of a State bank if the laws of the State where it is organ-

ized so require, at a meeting to be held on the call of the

directors, after publishing notice of the time, place, and

object of the meeting for four consecutive weeks in a news-

paper of general circulation published in the place where

the association or State bank is located, or, if there is no

such newspaper, then in the newspaper of general circula-

tion published nearest thereto, and after sending such no-

tice to each shareholder of record by certified or registered

mail at least ten days prior to the meeting, except to those

shareholders who specifically waive notice, but any addi-

tional notice shall be given to the shareholders of such

;

A-3]

State bank which may be required by the laws of the State

where it is organized. Publication of notice may be waived,

in cases where the Comptroller determines that an emer-

gency exists justifying such waiver, by unanimous action

of the shareholders of the association or State bank;

(3) specify the amount of the capital stock of the receiv-

ing association, which shall not be less than that required

under existing law for the organization of a national bank

in the place in which it is located and which will be out-

standing upon completion of the merger, the amount of

stock (if any) to be allocated, and cash (if any) to be paid,

to the shareholders of the association or State bank being

merged into the receiving association; and

(4) provide that the receiving association shall be liable

for all liabilities of the association or State bank being

merged into the receiving association.

Dissenting shareholders

(b) If a merger shall be voted for at the called meetings by

the necessary majorities of the shareholders of each association

or State bank participating in the plan of merger, and there-

after the merger shall be approved by the Comptroller, any

shareholder of any association or State bank to be merged into

the receiving association who has voted against such merger at

the meeting of the association or bank of which he is a stock-

holder, or has given notice in writing at or prior to such meet-

ing to the presiding officer that he dissents from the plan of

merger, shall be entitled to receive the value of the shares so

held by him when such merger shall be approved by the Comp-

troller upon written request made to the receiving association

at any time before thirty days after the date of consummation

of the merger, accompanied by the surrender of his stock cer-

tificates.

Valuation of shares

(c) The value of the shares of any dissenting shareholder

shall be ascertained, as of the effective date of the merger, by

A-32

an appraisal made by a committee of three persons, composed

of (1) one selected by the vote of the holders of the majority of

the stock, the owners of which are entitled to payment in cash;

(2) one selected by the directors of the receiving association;

and (3) one selected by the two so selected. The valuation

agreed upon by any two of the three appraisers shall govern.

If the value so fixed shall not be satisfactory to any dissenting

shareholder who has requested payment, that shareholder may,

within five days after being notified of the appraised value of

his shares, appeal to the Comptroller, who shall cause a re-

appraisal to be made which shall be final and binding as to the

value of the shares of the appellant.

Application to shareholders of merging associations: Appraisal by

Comptroller; expenses of receiving associations; sale and resale

of shares; State appraisal and merger law

(d) If, within nine days from the date of consummation of

the merger, for any reason one or more of the appraisers is not

selected as herein provided, or the appraisers fail to determine

the value of such shares, the Comptroller shall upon written

request of any interested party cause an appraisal to be made

which shall be final and binding on all parties. The expenses

of the Comptroller in making the reappraisal or the appraisal,

as the case may be, shall be paid by the receiving association.

The value of the shares ascertained shall be promptly paid to

the dissenting shareholders by the receiving association. The

shares of stock of the receiving association which would have

been delivered to such dissenting shareholders had they not

requested payment shall be sold by the receiving association at

an advertised public auction, and the receiving association shall

have the right to purchase any of such shares at such public

auction, if it is the highest bidder therefor, for the purpose of

reselling such shares within thirty days thereafter to such per-

son or persons and at such price not less than par as its board

of directors by resolution may determine. If the shares are sold

at public auction at a price greater than the amount paid to the

dissenting shareholders, the excess in such sale price shall be

= ae

A-33

paid to such dissenting shareholders. The appraisal of such

shares of stock in any State bank shall be determined in the

manner prescribed by the law of the State in such cases, rather

than as provided in this section, if such provision is made in

the State law; and no such merger shall be in contravention of

the law of the State under which such bank is incorporated.

The provisions of this subsection shall apply only to sharehold-

ers of (and stock owned by them in) a bank or association being

merged into the receiving association.

Status of receiving association; property rights and interests

vested and held as fiduciary

(e) The corporate existence of each of the merging banks or

banking associations participating in such merger shall be

merged into and continued in the receiving association and

such receiving association shall be deemed to be the same cor-

poration as each bank or banking association participating in

the merger. All rights, franchises, and interests of the individ-

ual merging banks or banking associations in and to every type

of property (real, personal, and mixed) and choses in action

shall be transferred to and vested in the receiving association

by virtue of such merger without any deed or other transfer.

The receiving association, upon the merger and without any

order or other action on the part of any court or otherwise,

shall hold and enjoy all rights of property, franchises, and in-

terests, including appointments, designations, and nominations,

and all other rights and interests as trustee, executor, adminis-

trator, registrar of stocks and bonds, guardian of estates, as-

signee, receiver, and committee of estates of lunatics, and in

every other fiduciary capacity, in the same manner and to the

same extent as such rights, franchises, and interests were held

or enjoyed by any one of the merging banks or banking associ-

ations at the time of the merger, subject to the conditions here-

inafter provided.

Removal as fiduciary; discrimination

(f) Where any merging bank or banking association, at the

time of the merger, was acting under appointment of any court

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as trustee, executor, administrator, registrar of stocks and

bonds, guardian of estates, assignee, receiver, or committee of

estates of lunatics, or in any other fiduciary capacity, the receiv-

ing association shall be subject to removal by a court of com-

petent jurisdiction in the same manner and to the same extent

as was such merging bank or banking association prior to the

merger. Nothing contained in this section shall be considered

to impair in any manner the right of any court to remove the

receiving association and to appoint in lieu thereof a substitute

trustee, executor, or other fiduciary, except that such right shall

not be exercised in such a manner as to discriminate against

national banking associations, nor shall any receiving associa-

tion be removed solely because of the fact that it is a national

banking association.

Issuance of stock by receiving association; preemptive rights

(g) Stock of the receiving association may be issued as pro-

vided by the terms of the merger agreement, free from any pre-

emptive rights of the shareholders of the respective merging

banks. Nov. 7, 1918, c. 209, § 2, as added Sept. 8, 1959, Pub.L.

86-230, § 20, 73 Stat. 463.

§ 215b. Definitions

As used in sections 215-215b of thistitle, the term —

(1) “State bank” means any bank, banking association,

‘rust Company, savings bank (other than a mutual savings

bank), or other banking institution which is engaged in

the business of receiving deposits and which is incorpo-

rated under the laws of any State, or which is operating

under the Code of Law for the District of Columbia (ex-

cept a national banking association located in the District

of Columbia);

(2) “State” means the several States and Territories, the

Commonwealth of Puerto Rico, the Virgin Islands, and the

District of Columbia;

(3) “Comptroller” means the Comptroller of the Cur-

rency; and

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(4) “Receiving association” means the national banking

association into which one or more national banking asso-

ciations or one or more State banks, located within the

same State, merge.

Nov. 7, 1918, c. 209, § 3, as added Sept. 8, 1959, Pub.L. 86-230,

§ 20, 73 Stat. 465.

Regulation 12 C.F.R., § 11.6, Schedule B, Item 9, dealing

with solicitation of proxies:

“Item 9. Mergers, consolidations, acquisitions, and simi-

lar matters.

(a) If action is to be taken with respect to a merger, con-

solidation, acquisition, or similar matter, furnish in brief

outline the following information:

(1) The rights of appraisal or similar rights of —issenters

with respect to any matter to be acted upon, and indicate

any statutory procedure required to be followed by dis-

senting security holders in order to perfect such rights.”

(Italics ours)

7.4015. Solicitation of proxies for shareholders’ meeting

(a) Comptroller's Regulation

Solicitation of a proxy with respect to stock of a national

bank having a class of equity securities held of record by 750

or more persons (after May 1, 1967, 500 or more persons) is

subject to Regulation 11 (12 CFR 11).

A-36

APPENDIX B(2)

PERTINENT PROVISIONS OF TITLE 12 U.S.C.A.

RELATING TO TRUST POWERS OF

NATIONAL BANKS

§ 92a. Trust powers — Authority of Comptroller of the Cur-

rency

(a) The Comptroller of the Currency shall be authorized and

empowered to grant by special permit to national banks apply-

ing therefor, when not in contravention of State or local law,

the right to act as trustee, executor, administrator, registrar of

stocks and bonks, guardian of estates, assignee, receiver, com-

m'ctee of estates of lunatics, or in any other fiduciary capacity

in which State banks, trust companies, or other corporations

which come into competition with national banks are permitted

to act under the laws of the State in which the national bank

is located.

Grant and exercise of powers deemed not in

contravention of State or local law

(b) Whenever the laws of such State authorize or permit the

exercise of any or all of the foregoing powers by State banks,

trust companies, or other corporations which compete with na-

tional banks, the granting to and the exercise of such powers

by national banks shall not be deemed to be in contravention

of State or local law within the meaning of this section.

Segregation of fiduciary and general assets; separate books and

records; access of State banking authorities to reports of

examinations, books, records, and assets

(c) National banks exercising any or all of the powers enu-

merating in this section shall segregate all assets held in any

fiduciary capacity from the general assets of the bank and shall

keep a separate set of books and records showing in proper de-

tail all transactions engaged in under authority of this section.

The State banking authorities may have access to reports of ex-

amination made by the Comptroller of the Currency insofar as

‘

[CC 2 ae

A-37

such reports relate to the trust department of such bank, but

nothing in this section shall be construed as authorizing the

State banking authorities to examine the books, records, and

assets of such bank.

Prohibited operations; separate investment accounts; collateral

for certain funds used in conduct of business

(d) No national bank shall receive in its trust department

deposits of current funds subject to check or the deposit of

checks, drafts, bills of exchange, or other items for collection

or exchange purposes. Funds deposited or held in trust by the

bank awaiting investment shall be carried in a separate account

and shall not be used by the bank in the conduct of its business

unless it shall first set aside in the trust department United

States bonds or other securities approved by the Comptroller

of the Currency.

Lien and claim upon bank failure

(e) In the event of the failure of such bank the owners of

the funds held in trust for investment shall have a lien on the

bonds or other securities so set apart in addition to their claim

against the estate of the bank.

Deposits of securities for protection of private or court trusts;

execution of and exemption from bond

(f) Whenever the laws of a State require corporations acting

in a fiduciary capacity to deposit securities with the State au-

thorities for the protection of private or court trusts, national

banks so acting shall be required to make similar deposits and

securities so deposited shall be held for the protection of pri-

vate or court trusts, as provided by the State law. National

banks in such cases shall not be required to execute the bond

usually required of individuals if State corporations under sim-

ilar circumstances are exempt from this requirement. National

banks shall have power to execute such bond when so required

by the laws of the State.

A-38

Officials’ oath or affidavit

(g) In any case in which the laws of a State require that a

corporation acting as trustee, executor, administrator, or in any

capacity specified in this section, shall take an oath or make

an affidavit, the president, vice president, cashier, or trust offi-

cer of such national bank may take the necessary oath or exe-

cute the necessary affidavit.

Loans of trust funds to officers and employees prohibited; penalties

(h) It shall be unlawful for any national banking association

to lend any officer, director, or employee any funds held in

trust under the powers conferred by this section. Any officer,

director, or employee making such loan, or to whom such loan

is made, may be fined not more than $5,000, or imprisoned not

more than five years, or may be both fined and imprisoned, in

the discretion of the court.

Considerations determinative of grant or denial of applications;

minimum capital and surplus for issuance of permit

(i) In passing upon applications for permission to exercise

the powers enumerated in this section, the Comptroller of the

Currency may take into consideration the amount of capital

and surplus of the applying bank, whether or not such capital

and surplus is sufficient under the circumstances of the case,

the needs of the community to be served, and any other facts

and circumstances that seem to him proper, and may grant or

refuse the application accordingly: Provided, That no permit

shall be issued to any national banking association having a

capital and surplus less than the capital and surplus required

by State law of State banks, trust companies, and corporations

exercising such powers.

Surrender of authorization; board resolution; Comptroller

certification; activities affected; regulations

(j) Any national banking association desiring to surrender

its right to exercise the powers granted under this section, in

A-39

order to relieve itself of the necessity of complying with the re-

quirements of this section, or to have returned to it any securi-

ties which it may have deposited with the State authorities for

the protection of private or court trusts, or for any other pur-

pose, may file with the Compt. oller of the Currency a certified

copy of a resolution of its board of directors signifying such

desire. Upon receipt of such resolution, the Comptroller of the

Currency, after satisfying himself that such bank has been re-

lieved in accordance with State law of all duties as trustee,

executory, administrator, registrar of stocks and bonds, guar-

dian of estates, assignee, receiver, committee of estates of luna-

tics or other fiduciary, under court, private or other appoint-

ments previously accepted under authority of this section, may,

in his discretion, issue to such bank a certificate certifying that

such bank is no longer authorized to exercise the powers

granted by this section. Upon the issuance of such a certificate

by the Comptroller of the Currency, such bank (1) shall no

longer be subject to the provisions of this section or the regu-

lations of the Comptroller of the Currency made pursuant

thereto, (2) shall be entitled to have returned to it any securi-

ties which it may have deposited with the State authorities for

the protection of private or court trusts, and (3) shall not exer-

cise thereafter any of the powers granted by this section with-

out first applying for and obtaining a new permit to exercise

such powers pursuant to the provisions of this section. The

Comptroller of the Currency is authorized and empowered to

promulgate such regulations as he may deem necessary to en-

force compliance with the provisions of this section and the

proper exercise of the powers granted therein. Pub.L. 87-722,

§ 1, Sept. 28, 1962, 76 Stat. 668.

. A-40

APPENDIX B(3)

PERTINENT PROVISIONS OF THE REGULATIONS

OF THE COMPTROLLER OF THE CURRENCY

RELATING TO THE FIDUCIARY POWERS AND

OBLIGATIONS OF NATIONAL BANKS

PART 9—FIDUCIARY POWERS OF NATIONAL BANKS

AND COLLECTIVE INVESTMENT FUNDS

(12 CFR 9]

Sec.

9.1 Definition.

9.2 Applications.

9.3. Consideration of applications.

9.4 Consolidation or merger of two or more national banks.

9.5 [Reserved]

9.6 [Reserved]

9.7 Administration of fiduciary powers.

9.8 Books and accounts.

9.9 Audit of trust department.

9.10 Funds awaiting investment or distribution.

9.11 Investment of funds held as fiduciary.

9.12 Self-dealing.

AuTuority: §§ 9.1 to 9.19 issued under Section 1(j) of the

Act of September 28, 1962, 76 Stat. 668, 12 U.S.C. 92a.

§ 9.1 Definitions.

For the purposes of this part, the term:

(a) “Account” means the trust, estate or other fiduciary re-

lationship which has been established with a bank;

(b) “Equity security” means any stock; or similar security

convertible, with or without consideration, into such a security;

or carrying any warrant or right to subscribe to or purchase

such a security; or any such warrant or right; or any other se-

curity which the Comptroller of the Currency shall deem to

A-41

be of similar nature and considers necessary or appropriate to

treat as an equity security in the public interest;

(c) “Fiduciary” means a bank undertaking to act alone or

jointly with others primarily for the benefit of another in all

matters connected with its undertaking and includes trustee,

executor, administrator, registrar of stocks and bonds, guardian

of estates, assignee, receiver, committee of estates of lunatics,

managing agent and any other similar capacity;

(d) ‘Fiduciary powers” means the power to act in any fidu-

ciary capacity authorized by the Act of September 28, 1962, 76

Stat. 668, 12 U.S.C. 92a. Under that Act, a national bank may

be authorized to act, when not in contravention of local law,

as trustee, executor, administrator, registrar of stocks and

bonds, guardian of estates, assignee, receiver, committee of

estates of lunatics, or in any other fiduciary capacity which state

banks, trust companies, or oter corporations which come into

competition with the national bank may exercise under local

law; ,

(e) “Fiduciary records’ means al] matters which are written,

transcribed, recorded, received or otherwise come into the pos-

session of a bank and are necessary to preserve information con-

cerning the acts and events relevant to the fiduciary activities

of a bank;

(f) “Guardian” means the guardian or committee, by what-

ever name employed by local law, of the estate of an infant, an

incompetent individual, an absent individual, or a competent

individual over whose estate a court has taken jurisdiction,

other than under bankruptcy or insolvency laws;

(g) “Investment authority’ means the responsibility con-

ferred by action of law or a provision o: an appropriate govern-

ing instrument to make, select or change investments, review

investment decisions made by others, or to provide investment

advice or counsel to others;

(h) “Local laws” means the law of the State or other juris-

diction governing the fiduciary relationship;

(i) “Managing agent” means the fiduciary relationship as-

sumed by a bank upon the creation of an account which names

A-42

the bank as agent and confers investment discretion upon the

bank; :

(j) “State bank” means any bank, trust company, savings

bank, or other banking institution, which is not a national

bank and the principal office of which is located in the District

of Columbia, any state, commonwealth, or territorial possession

of the United States;

(k) ‘Trust department” means that group or groups of offi-

cers and employees of a bank organized under the supervision

of officers or employees to whom are designated by the board

of directors the performance of the fiduciary responsibilities of

the bank, whether or not the group or groups are so named.

(!) “Bank” shal: include two or more banks which are mem-

bers of the same affiliated group with respect to any fund

established pursuant to § 9.18 of which any such affiliated

banks is trustee, or two or more of such affiliated banks are

co-trustees.

(m) “Custodian under a uniform gifts to minors act” means

an account established pursuant to a state law which is substan-

tially similar to the Uniform Gifts to Minors Act as published

by the American Law Institute and with respect to which the

bank operating such account has established to the satisfaction

of the Secretary of the Treasury that it has duties and respon-

sibilities similar to duties and responsibilities of a trustee or

guardian.

§ 9.2 Applications.

A national bank desiring to exercise fiduciary powers shall

file an application with the Comptroller of the Currency pur-

suant to 12 CFR 4.7b.

§ 9.3 Consideration of applications.

In passing upon the application to exercise fiduciary powers,

the Comptroller of the Currency will give consideration to the

following matters and to any other facts and circumstances that

seem to him proper:

A-43

(a) Whether the bank has sufficient capital and surplus to

exercise the fiduciary powers applied for, which capital and

surplus in no case shall be less than that required by State law

of State banks, or other institutions exercising such powers;

(b) The needs of the community for fiduciary services and

the probable volume of such fiduciary business available to the

bank;

(c) The general condition of the bank, including the ade-

quacy of its capital and surplus in relation to the character and

condition of its assets and to its deposit liabilities and other

corporate responsibilities, including the exercise of fiduciary

powers;

(d) The general character and ability of the management of

the bank;

(e) The nature of the supervision to be given to the fiduciary

activities, including the qualifications, experience and charac-

ter of the proposed officer or officers of the trust department;

(f) Whether the bank has available legal counsel to advise

and pass upon fiduciary matters wherever necessary.

§ 9.4 Consolidation or merger of two or more national] banks.

Where two or more national banks consolidate or merge,

and any one of such banks has, prior to such consolidation or

merger, received a permit from the Board of Governors of the

Federal Reserve System or the Comptroller of the Currency to

exercise fiduciary powers which is in force at the time of the

consolidation or merger, the rights existing under such permit

pass to the resulting bank, and the resulting bank may exercise

such fiduciary powers in the same manner and to the same ex-

tent as the bank to which such permit was originally issued;

and no new application to continue to exercise such powers is

necessary. However, where the name or charter number of the

resulting bank differs from that of the bank to which the right

to exercise fiduciary powers was originally granted, in order

that the records of the resulting bank may be complete and that

it have convenient evidence of its right to exercise fiduciary

A-44

powers, the Comptroller of the Currency will issue a certificate

to that bank showing its right to exercise the fiduciary powers

theretofore granted to any of the national banks participating

in the consolidation or merger.

§$ 9.5 [Reserved]

§ 9.6 [Reserved]

§ 9.7 Administration of fiduciary powers.

(a)(1) The board of directors is responsible for the proper

exercise of fiduciary powers by the bank. All matters pertinent

thereto, including the determination of policies, the investment

and disposition of property held in a fiducary capacity, and the

direction and review of the actions of all officers, employees,

and committees utilized by the bank in the exercise of its fidu-

clary powers, are the responsibility of the board. In discharg-

ing this responsibility, the board of directors may assign, by

action duly entered in the minutes, the administration of such

of the bank's fiduciary powers as it may consider proper to

assign tc such director(s), officer(s), employee(s) or commit-

tee(s) as it may designate.

(2) No fiduciary account shall be accepted without the prior

approval of the board, or of the director(s), officer(s) or com-

mittee(s) to whom the board may have designated the perfor-

mance of that responsibility. A written record shall be made

of such acceptances and of the relinquishment or closing out of

all fiduciary accounts. Upon the acceptance of an account for

which the bank has investment responsibilities a prompt review

of the assets shall be made. The board shall also ensure that

at least once during every calendar year thereafter, and within

15 months of the last review, all the assets held in or for each

fiduciary account where the bank has investment responsibili-

ties are reviewed to determine the advisability of retaining or

disposing of such assets.

(b) All officers and employees taking part in the operation

of the trust department shall be adequately bonded.

A-45

(c) Every national bank exercising fiduciary powers shall

designate, employ or retain legal counsel who shall be readily

available to pass upon fiduciary matters and to advise the bank

and its trust department.

(d) The trust department may utilize personnel and facilities

of other departments of the bank, and other departments of the

bank may utilize the personnel and facilities of the trust de-

partment only to the extent not prohibited by law.

§ 9.8 Books and accounts.

(a) Every national bank exercising fiduciary powers shall

keep its fiduciary records separate and distinct from other rec-

ords of the bank. All fiduciary records shall be so kept and

retained for such time as to enable the bank to furnish such

information or reports with respect thereto as may be required

by the Comptroller of the Currency. The fiduciary records

shall contain full information relative to each account.

(b) Every such national bank shall keep an_ adequate record

of all pending litigation to which it is a party in connection

with its exercise of fiduciary powers.

§ 9.9 Audit of trust department.

A committee of directors, exclusive of any active officers of

the bank, shall at least once during each calendar year and

within 15 months of the last such audit, make suitable audits

of the trust department or cause suitable audits to be made by

auditors responsible only to the board of directors, and at such

time shall ascertain whether the department has been adminis-

tered in accordance with law, this Regulation and sound fidu-

ciary principles. The board of directors may elect, in lieu of

such periodic audits, to adopt an adequate continuous audit

system. A report of the audit and examination required under

this section, together with the action taken thereon, shall be

noted in the minutes of the board of directors.

A-46

§ 9.10 Funds awaiting investment or distribution.

(a) Funds held in a fiduciary capacity by a national ‘bank

awaiting investment or distribution shall not be held unin-

vested or undistributed any longer than is reasonable for the

proper management of the account.

(b) Funds held in trust by a national bank, including man-

aging agency accounts, awaiting investment or distribution

may, unless prohibited by the instrument creating the trust or

by local law, be deposited in the commercial or savings or other

department of the bank, provided it shall first set aside under

control of the trust department as collateral security:

(1) Direct obligations of the United States, or other obliga-

tions fully guaranteed by the United States as to principal and

interest; or

(2) Readily marketable securities of the classes in which state

banks exercising fiduciary powers are authorized or permitted

to invest trust funds under the laws of the state in which such

national bank is located; or

(3) Other readily marketable securities that qualify as invest-

ment securities pursuant to the Investment Securities Regula-

tion of the Comptroller of the Currency (12 CFR 1).

The securities so deposited or securities substituted therefor

as collateral] shall at all tirmes be at least equal in face value to

the amount of trust funds so deposited, but such security shall

not be required to the extent that the funds so deposited are

insured by the Federal Deposit Insurance Corporation. The

requirements of this section are met when qualifying assets of

the bank are pledged to secure a deposit in compliance with

local law, and no duplicate pledge shall be required in such

case.

§ 9.11 Investment of funds held as fiduciary.

(a) Funds held by a national bank in a fiduciary capacity

shall be invested in accordance with the instrument establish-

ing the fiduciary relationship and local law. When such instru-

A-47

ment does not specify the character or class of investments to

be made and does not vest in the bank, its directors or its offi-

cers a discretion in the matter, funds held pursuant to such

instrument shall be invested in any investment in which cor-

porate fiduciaries may invest under local law.

(b) If, under local law, corporate fiduciaries appointed by a

court are permitted to exercise a discretion in investments, or

if a national bank acting as fiduciary under appointment by a

court is vested with a discretion in investments by an order of

such court, funds of such accounts may be invested in any in-

vestments which are permitted by local law. Otherwise, a na-

tional bank acting as fiduciary under appointment by a court

must make all investments of funds in such accounts under an

order of that court. Such orders in either case shall be pre-

served with the fiduciary records of the bank.

(c) The collective investment of funds received or held by a

national bank as fiduciary is governed by section 9.18.

(d) Asa part of each examination of the trust department of

a national bank and as provided by the Comptroller’s Manual

for Representatives in Trusts, the Comptroller of the Currency

will examine the investments held by such bank as fiduciary,

including the investment of funds under the provisions of sec-

tion 9.18, in order to determine whether such investments are

in accordance with law, this Regulation and sound fiduciary

principles.

§ 9.12 Self-dealing.

(a) Unless lawfully authorized by the instrument creating

the relationship, or by court order or by local law, funds held

by a national bank as fiduciary shall not be invested ini stock

or obligations of, or property acquired from, the bank or its

directors, .officers, or employees, or individuals with whom

there exists such a connection, or organizations in which there

exists such an interest, as might affect the exercise of the best

judgment of the bank in acquiring the property, or in stock or

A-48

obligations of, or property acquired from, affiliates of the bank

or their directors, officers or employees.

(b) Property held by a national bank as fiduciary shall not

be sold or transferred, by loan or otherwise, to the bank or its

officers, or employees, or to individuals with whom there exists

such a connection, or organizations in which there exists such

an interest, as might affect the exercise of the best judgment

of the bank in selling or transferring such property, or to affil-

iates of the bank or their directors, officers or employees,

except:

(1) Where lawfully authorized by the instrument creating

the relationship or by court order or by local law;

(2) In cases in which the bank has been advised by its coun-

sel in writing that it has incurred as fiduciary a contingent or

potential liability and desires to relieve itself from such liabil-

ity, in which case such a sale or transfer may be made with the

approval of the board of directors, provided that in all such

cases the bank, upon the consummation of the sale or transfer,

shall make reimbursement in cash at no loss to the account;

(3) As is provided in section 9.18(b)(8)(ii);

(4) Where required by the Comptroller of the Currency.

(c) Except as provided in section 9.10(b), funds held by a

national bank as fiduciary shall not be invested by the purchase

of stock or obligations of the bank or its affiliates unless au-

thorized by the instrument creating the relationship or by

court order or by local law: Provided, That if the retention of

stock or obligations of the bank or its affiliates is authorized

by the instrument creating the relationship or by court order

or by local law, it may exercise rights to purchase its own stock

or securities convertible into its own stock when offered pro

rata to stockholders, unless such exercise is forbidden by local

law. When the exercise of rights or receipt of a stock dividend

results in fractional share holdings, additional fractional shares

may be purchased to complement the fractional shares so ac-

quired.

A-49

(d) A national bank may sell assets held by it as fiduciary in

one account to itself as fiduciary in another account if the

transaction is fair to both accounts and if such transaction is

not prohibited by the terms of any governing instrument or by

local law.

(e) A national bank may make a loan to an account from

the funds belonging to another such account, when the making

of such loans to a designated account is authorized by the in-

strument creating the account from which such loans are made,

and is not prohibited by local law.

(f) A national bank may make a loan to an account and may

take as security therefor assets of the account, provided such

transaction is fair to such account and is not prohibited by

local law.

A-50

APPENDIX B(4)

OPINION OF PROFESSOR LOUIS LOSS

March 15, 1977

Morris K. Sirote, Esquire

Sirote, Permutt, Friend, Friedman,

Held & Apolinsky, P.A.

Post Office Box 3364-A

Birmingham, Alabama 35205

Re: Harrison v. Birmingham Trust National Bank, et al.

Dear Mr. Sirote:

You have sent me a copy of the opinion of the Supreme

Court of Alabama in Henley v. Birmingham Trust National

Bank, 322 So.2d 687 (1975), pursuant to which the Circuit

Court on remand appointed a temporary trustee of the Linn-

Henley Charitable Trust “for the sole and limited purpose of

the retrial of this cause” (id. at 696). You are counsel for that

trustee. You have sent me also copies of your “‘Amended and

Supplemental Counter Complaint” together with the answers

of Birmingham Trust National Bank (“BIN B”) and Southern

Bancorporation of Alabama. And you have requested my opin-

ion on a number of questions arising under the federal and

Alabama securities laws.

The relevant facts, as I understand them, are as follows:

In October 1968 BTNB, purporting to act under the merger

provisions in 12 U. S. C. §215a, formed Alabama National Bank

as well as a Delaware corporation (BTNB Corporation) that

was designed to act as a bank holding company, and merged

the old bank into the new bank, which then took the name of

the old bank. The net result was a “triangular merger,” as it

is sometimes called, with the non-dissenting stockholders of the

old bank receiving stock of the holding company rather than

stock of the new bank. The details of the Merger and Reor-

ganization Plan are set out more fully in Count One of Part

IV of the Amended and Supplemental Counter Complaint.

A-51

The assets of the Trust, whose co-trustees were BTNB and

Mr. John C. Henley, III, consisted largely of 27,460 shares of

BI'NB stock. Under 12 U. S. C. § 61(3), which provides that,

when a national bank and one or more individuals are co-

trustees of a trust containing stock of the bank, the stock may

be voted by the individual co-trustee as though he were sole

trustee, Mr. Henley voted the 27,460 shares against the merger.

But the merger was approved both by the requisite vote of the

shareholders and by the Comptroller of the Currency.

Mr. Henley thereupon registered his dissent pursuant to 12

U. S. C. §215a(b). And, in the absence of the appointment of

appraisers by either of the co-trustees pursuant to 12 U. S. C.

§215a(c), BT'NB asked the Comptroller to make an appraisal

pursuant to 12 U. S. C. §215a(d). By letter dated January 21,

1970, the Comptroller advised BT NB that he had appraised the

value of the BT'NB stock as of December 31, 1968, before the

merger, at $32.80 per share, for a total of $900,688, which was

paid to the Trust.

There is a further provision in 12 U. S. C. §215a(d) to the

effect that the shares of stock of the surviving bank that would

have been delivered to dissenting shareholders if they had not

requested payment shall be sold at an advertised public auc-

tion; that the surviving bank may buy any of the shares at the

auction, if it is the highest bidder, for the purpose of resale

within thirty days to whatever persons and at whatever price

(not less than par) its board of directors determines; and that

any excess of the auction price over the amount previously paid

to dissenters shall be paid to them. In an attempt to comply

with that provision BTNB published a newspaper advertise-

ment of a public auction, with the statement

These shares have not been registered under the Securities

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 writ-

ing to issuer.

BTNB bought the block in the auction at $26 per share.

Thereafter, Mr. Henley having objected that the sale of the

ae

imal ili,

A-52

holding company stock did not constitute a sale of the stock of

the “receiving association” (that is to say, the surviving bank)

within the meaning of 12 U. S. C. §215a(d), BTNB purported

to sell at public auction 27,460 shares of its own stock (notwith-

standing the fact that all BT'NB shares except qualifying shares

had already become shares of the holding company pursuant to

the reorganization), and the holding company bought the block

at $24 per share.

On the basis of these facts, as more fully stated in the opinion

of the Alabama Supreme Court and the Amended and Supple-

mental Counter Complaint, it is my opinion as follows:

First: Section 5 of the Securities Act of 1933 (“the 1933

Act”), 15 U. S. C. § 77e, makes it unlawful, in substance, for

any person to offer or sell a security unless a registration state-

ment is effective and a prospectus is delivered to each buyer.

At the time of the events in question, and until January 1,

1973, the Securities and Exchange Commission's Rule 133,

CCH Fed. Sec. L. Rep. 43011, provided, in substance, that no

“offer” or “sale” was considered to be involved when stock-

holders were asked to vote on a “plan or agreement for a statu-

tory merger” under such circumstances that a vote of a required

favorable majority, “pursuant to statutory provisions in the

state of incorporation or provisions contained in the certificate

of incorporation,” would bind all stockholders (subject only to

any available appraisal rights for dissenters). The theory was

that this sort of group action did not involve the kind of voli-

tional element that was contemplated by Congress when it gave

every offeree of a security the right to a federally policed regis-

tration statement and prospectus so that he could make up his

own mind whether to invest on the basis of full and fair dis-

closure. On the history and development of this so-called “no

sale” theory” — which was reversed by the adoption of Rule

145, CCH § 3011A, effective January 1, 1973 — see 1 Loss,

Securities Regulation (2d ed. 1961, Supp. 1969) 518-39.

In recognition of the amendment of §368(a)(1)(C) of the In-

ternal Revenue Code in 1954 to accord tax-free reorganization

A-53

status to triangular mergers and similar transactions — whereby

X is merged into Y, but X’s stockholders receive stock in Z,

Y’s holding company, rather than stock in Y — the SEC in

October 1954 amended Rule 133 accordingly. Sec. Act Rel.

No. 3522, CCH 476,314, as further amended in a relatively

minor respect not here relevant by Sec. Act Rel. No. 4892, CCH

477,516 (1968).

Rule 133 itself, however, does not determine when a triangu-

lar merger is possible. It simply operates in circumstances

where such action is possible ‘‘pursuant to statutory provisions”

in the state of incorporation (see, e. g., the reference to “‘securi-

ties of any other corporation” in Del. Gen. Corp. Law, 8 Del.

Code §251(b)(4)) or provisions contained in the certificate of

incorporation.” I make nothing of the fact that Rule 133(a)

referred to statutory provisions in “the state of incorporation”

without mention of federal statutory provisions; that language

presumably had something to do with the fact that bank securi-

ties are exempted from registration by §3(a)(2) of the 1933 Act,

15 U. S. C. §77c(a)(2), although neither that nor any other ex-

emption extends to the securities of bank holding companies

as such. Even so, Rule 133(a) had no room for operation unless

there was an appropriate federal statutory provision on tri-

angular mergers that would have applied to the plan here in

question.

The fact is that 12 U. S. C. §215a(a) contemplates mergers

only of “One or more national banking associations or one or

more State banks * * * into a national banking association lo-

cated within the same State.” There is no reference to any sort

of triangular merger whereby the requisite vote of shareholders

and the approval of the Comptroller would bind shareholders

to take stock of a bank holding company (subject to dissenters’

appraisal rights).

In Marcou v. Federal Trust Co., 268 A. 2d 629, 635 (Me.

1970), which involved a similar transaction that resulted in a

bank holding company under Maine law without benefit of

statutory authorization (except that there the surviving bank

A-54

was the old bank rather than the new bank, which the court

referred to as “the phantom or interim bank’), the Supreme

Judicial Court of Maine stated: “We need not speculate on

why Bankshares, a banking holding company and not itself a

bank, chose not to exchange its shares for shares of the present

(bank), but to take the merger route with * * * the phantom

or interim bank.” In saying that, the court was obviously exer-

cising appropriate judicial restraint. But no speculation is re-

quired. The simplest way for an existing bank to become the

subsidiary of a 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. The difficulty

is that such a procedure, quite apart from its clearly not fitting

within 12 U. S. C. §215a, would have required registration of

the stock of the bank holding company under the 1933 Act

even before the repeal of Rule 133; for Rule 133 did not apply

to individual offers of exchange as distinct from group action.

Accordingly, it is apparent that the artisans of the reorganiza-

tion here in question caused the creation not only of a holding

company but also of a new bank, so as to make it possible to

say that there was a merger of one bank into another bank

while glossing over the inapplicability of the bank merger legis-

lation to triangular mergers.

The Maine court came to the nub of the problem when it

stated:

The Plan is a package containing a merger and an ex-

change for Bankshares. 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-

posed merger. This, however, is precisely what is proposed

in the Plan. In short, Marcou, who objects to the Plan,

would be forced out of the resulting or surviving Federal.

He is offered not shares in the merged bank, or Federal,

but shares in Bankshares.

Again, when it was actually sought in Dyer v. Eastern Trust &

Banking Co., 336 F. Supp. 890 (D. Me. 1971), to apply Rule

A-55

133 to a similar bank reorganization under Maine law, the

court, relying on Marcou, stated (at 900):

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 pur-

suant to the Maine statutory provisions relating to mergers.

It follows that Rule 133 had no impact on the offer of the

holding company stock to the shareholders of BT NB, and that,

in the absence of an exemption, that offer violated § 5 of the

1933 Act.

Second: Even if the bank merger legislation were such as to

have made Rule 133 applicable, that rule applied only to what

would otherwise have been the “offer’’ or “sale” inherent in

the shareholders’ vote on the merger, not to any reoffer or

resale. Resales of the surviving company’s stock by ordinary

shareholders would normally be exempted by §4(1), 15 U. S. C.

§77d(1), as transactions “by any person other than an issuer,

underwriter, or dealer.” But Rule 133(c) provided that any

constituent corporation in a merger (which is to say, any cor-

poration other than the surviving issuer), as well as any person

in a control relationship with any such person, would be an

“underwriter” if he acquired securities of the surviving com-

pany with a view to their distribution. Thus Rule 133 could

not have applied to the purported public auction of the stock

of the holding company.

Moreover, the offering of the holding company shares “for

investment only,” as stated in the newspaper advertisement,

did not serve to make available the further exemption in §4(2),

15 U. S. C. §77d(2), for “transactions by an issuer not involving

any public offering.’’ For an offering at public auction is by

hypothesis an offer to the highest bidder, which is to say, an

offer to the world. When an issuer does offer its stock to only

a few sophisticated persons pursuant to the §4(2) exemption, it

is implicit in the exemption that the initial buyers must take

A-56

for investment rather than redistribution; for otherwise they

would simply be intermediaries in a public offering by the

issuer. That presumably explans the “investment” reference in

the newspaper advertisement. But it does not follow that an

otherwise public offering becomes nonpublic merely because

it is a condition of the offering that all buyers agree to take for

investment. Consequently §5 was violated also in the offer of

the holding company’s stock at public auction.

Third: As a non-Alabama lawyer addressing an opinion to

a lawyer in that state, I approach the Alabama Securities Act,

53 Code of Ala. 1940, with diffidence. On the other hand,

apart from the fact that I have written on the blue sky laws

generally (see 1 and 4 Loss, supra, c. 1B; 3 and 6 id, © 329;

Lo ss& Cowett, Blue Sky Law (1958)), the Alabama Securities

Act is basically the Uniform (State) Securities Act, 7 U. L. A.

691, which I drafted at the request of the National Conference

of Commissioners on Uniform State Laws.

Section 5 of the federal statute has its analogue in §30 of the

Alabama Act, which makes it unlawful for any person to offer

or sell any security in the state unless it is registered or an ex-

emption is available. The former Rule 133 of the SEC has its

analogue in §38(n) of the state statute, which exempts “Any

transaction incident to * * * a statutory * * * reclassification,

recapitalization, reorganization, quasi reorganization, * * *

merger, consolidation or sale of assets.” And the private offer-

ing exemption in §4(2) of the federal statute has its analogue

in §38(i), which exempts, in substance, an offer directed to not

more than ten persons (apart from institutional investors) in

the state during any period of twelve consecutive months.

It follows, for the reasons stated in the Second part of this

opinion, that §30 of the Alabama statute was violated both

(1) in the offer and sale of the holding company stock incident

to the reorganization plan (there being no “statutory * * *

merger” within the meaning of §38(n) so far as the holding

company stock is concerned) and (2) in the subsequent offering

of the holding company stock at auction (there being no ex-

A-57

emption available either under §38(i) or otherwise). Bank se-

curities are exempted by §37(c) of the Alabama statute, as they

are by §3(a)(2) of the federal statute, but bank holding com-

pany securities are not.

Fourth: So far as the proxy literature is concerned:

(1) Section 12(g)(1) of the Securities Exchange Act of 1934

(“the 1934 Act’), 15 U. S. C. §781(g)(1), requires the registra-

tion with the SEC of every equity security held of record by at

least 500 persons if its issuer is a company that is engaged in

interstate commerce and has $1 million of gross assets. And

§14(a) of that statute, 15 U. S. C. §78n(a), makes it unlawful for

any person to solicit a proxy in violation of the Commission’s

rules, which require every solicitation of a proxy to be accom-

panied by a “proxy statement” that has been cleared by the

Commission. Reg. 14, 17 C. F. R. §240.14a-1 et seq. Banks are

not exempted from §12(g)(1) as they are from the registration

requirement in the 1933 Act. But §12(i), 15 U. S. C. §78I(i),

vests the SEC’s administrative functions under §§12 and 14 in

the appropriate bank regulatory authorities so far as bank se-

curities are concerned — which means the Comptroller of the

Currency with respect to national banks.

(2) When the SEC’s proxy rules under §14(a) apply, material

misstatements in soliciting proxies, whether in the “proxy state-

ment” or otherwise, give rise to an implied right of action on

the part of any person opposing the solicitation. J. J. Case Co.

v. Borak, 377 U. S. 426 (1964). By way of relief, a court of

equity may do whatever is necessary to prevent the violator

from enjoying the fruits of his violation, to the extent of un-

doing a consummated merger if a balancing of the equities so

indicates. Id. at 433-35. Moreover, in an appropriate case

there may be an award of damages. Mills v. Electric Auto-Lite

Co., 396 U. S. 375, 388-89 (1970). For this purpose the Su-

preme Court has recently held that “an omitted fact is material

if there is a substantial likelihood that a reasonable shareholder

would consider it important in deciding how to vote.” TSC In-

dustries, Inc. v. Northway, Inc., 96 S. Ct. 2126, 2133 (1976). All

this is apart from whatever remedies a shareholder may have

A-58

qua “buyer” or “seller,” under provisions other than the proxy

rules, when his proxy is solicited in connection with a merger

that involves a “sale” of the surviving company’s securities.

SEC v. National Securities, Inc., 393 U. S. 453, 464-69 (1969).

(3) This learning applies equally to the proxy rules of the

Comptroller, except that, as they read at the time of the re-

organization [12 C. F. R. (revised as of Jan. 1, 1969) Part II],

(a) they contained no general provision prohibiting false or

misleading statements in proxy solicitations along the lines of

the SEC’s Rule 14a-9, 17 C. F. R. §240.14a-9, the rule involved

in the first three Supreme Court cases just mentioned, and

(b) the Comptroller in 12 C. F. R. §10.2 disavowed any inten-

tion “to confer any private right of action on any stockholder

or other person against a national bank.” But:

(a) Item 9 of the Comptroller's Schedule B, which had to

be satisfied under §11.3 of his rules, had to ‘furnish in brief

outline,” if proxies were solicited in connection with ‘a merger

* * * or similar matter,” a statement of the “rights of appraisal

or similar rights of dissenters,” together with ‘‘any statutory

procedure required to be followed by dissenting security hold-

ers in order to perfect such right.” And the failure in this

case to disclose to stockholders their statutory right under 12

U. S. C. §215a to receive stock of the surviving bank in a

merger — as distinct from stock of a bank holding company —

seems clearly to have been not only a failure to disclose a ma-

terial fact as a matter of law within the meaning of the TSC

case but also a failure to comply with Item 9 of the Comp-

troller’s Schedule B and hence a violation of §14(a) of the 1934

Act. You have informed me that Mr. Henley would not have

dissented if he had been able to obtain stock of the surviving

bank rather than the holding company.

(b) So far as §10.2 of the Comptroller's rules is concerned, a

failure to comply with his proxy rules is no less a violation of

§14(a) of the statute than a failure to comply with the SEC’s

proxy rules that were before the Supreme Court in the cases

cited. The conclusion seems compelling, therefore, that §10.2

A-59

as it read in 1969 was ultra vires. That is to Say, once an ad-

ministrator adopts rules under a statutory provision held by

the Supreme Court to give rise to: private rights of action, it is

not for the administrator to attempt to delineate remedy as dis-

tinct from underlying substantive law. See 4 Loss, supra, at

2913; Shipman, Two Current Questions Concerning Implied

Rights of Action under the Exchange Act, 17 W. Res. L. Rev.

925, 926-63, esp. at 959 (1966).

Moreover — and this is more important — I do not suggest

that a violation of the Comptroller's proxy rules automatically

creates a private right of action. Indeed, §27 of the 1934 Act,

15 U. S. C. §78aa, gives the federal courts inclusive jurisdiction

of “all suits in equity and actions at law brought to enforce any

liability or duty created by” that statute or the rules there-

under. What /} suggest is that, purely as a matter of the

general equity powers that Alabama courts possess as a matter

of state jurisprudence, (i) they should be no less eager to re-

dress breaches of trust that are evidenced by violations of fed-

eral law, which under the Supremacy Clause is part of the total

corpus juris of Alabama, than breaches of trust that are estab-

lished in some other way, and (ii) the same considerations that

impelled the Supreme Court of the United States in the cases

cited as a matter of federal law should move the Alabama courts

in exercising their general equity powers when they find a vio-

lation of the supreme law of the land. See Loss, The SEC

Proxy Rules and State Law, 73 Harv. L. Rev. 1249, 1274-77

(1960), reprinted in 2 Loss, supra, at 996-99. I shall have more

to say on this point in the Sixth part of this opinion.

(4) In any event, even apart from looking to illegal conduct

under statutory law as a basis for a court's implying a right of

action to redress fraudulent or false proxy solicitations, there

is ample authority both in this country and in England for

courts’ simply exercising their general equity powers in order

to render appropriate relief when shareholder resolutions have

been passed as a result of what the British courts call “tricky

circulars.” Kaye v. Croydon Tramways Co., [1898] 1 Ch. 358

(C. A.) (failure to disclose that some of the consideration for a

Mimtiot os js Tete Le = | or.

A-60

sale of assets was to go to the selling company’s directors re-

sulted in failure of the notice of meeting to “specify the pur-

pose for which the meeting is called” as required by statute);

Tiessen v. Henderson, [1899] 1 Ch. 861 (failure to disclose di-

rectors’ stock options in a reorganization); Baillie v. Oriental

Telephone & Electric Co., Ltd., (1915) | Ch. 503 (C. A.) (suit

to set aside ratification of directors’ remuneration from sub-

sidiary and to enjoin company and directors from acting there-

on for failure to disclose very large amount of remuneration

that had been received); Mount v. Seagrave Corp., 112 F. Supp.

330, 334 (S. D. Ohio 1953), aff'd on other grounds sub nom.

Seagrave Corp. v. Mount, 212 F. 2d 389 (6th Cir. 1954); Pear-

son v. First Federal Savings & Loan Assn., 149 So. 2d 891, &95

(Fla. App. 1963); Lonergan v. Crucible Steel Co. of America,

37 Ill. 2d 599, 299 N. E. 2d 536 (1967).

Fifth: Section 17(a) of the 1933 Act, 15 U. S. C. §77q(a),

makes it unlawful, in broad terms, for any person to engage

in any fraudulent act or practice, to misstate a material fact,

or to omit to state a material fact necessary to prevent the facts

stated from being misleading, in connection with the sale of

any security by use of the mails or any means of interstate

commerce. And under §22(a) of that statute, 15 U. S. C.

§77v(a), as distinct from the 1934 Act, the state courts are

given concurrent jurisdiction. Because of the express rights of

action given to defrauded buyers by §§11 and 12(2) of the 1933

Act, 15 U. S. C. §§77k, 771(2), it is my own opinion that§17(a)

does not itself create a private right of action by implication.

See 3 Loss, supra, at 1784-87. And the federal courts are in

dispute on the question. See 6 id. at 3913-14. However, as with

respect to the federal proxy rules, proof of a violation of §17(a)

ought to be relevant in establishing an actionable breach of

trust as a matter of state law.

In any event, §28 of the Alabama Securities Act is substan-

tially identical with §17(a) of the 1933 Act. And a comparison

of §45(h) of the Alabama Securities Act with §410(h) of the

Uniform Securities Act, from which it was borrowed, is note-

worthy in this connection. For §45(h) of the Alabama statute

A-61

provides simply: “The rights and remedies provided by this

title are in addition to any other rights or remedies that may

exist at law or in equity.” The Alabama legislature thus

omitted the following additional language that was inserted in

§410(h) of the Uniform Securities Act for the precise purpose

of closing off the judicial implication of any private rights of

action apart from those expressly created by the statute: “but

this act does not create any cause of action not specified in this

section or section 202(e) [which has to do with certain required

surety bonds]. See Loss & Cowett, supra, at 395.

Sixth: I express no opinion with respect to any statute of

limitations, or any estoppel arguments that may be available

to the counter-complainant in that connection, except to ob-

serve that §13 of the Securities Act of 1933, 15 U. S. C. §78m,

provides that no action may be brought “‘to enforce a liability

created under” §12(1) for violation of §5 unless brought within

one year after the violation on which it is based and in any

event within three years after the security was “bona fide offer

to the public.” However, even if it be assumed that the statute

has run on an action for rescission or damages under §12(1) as

such, it is worth noting once more that the violations of the

registration requirements of §5 of the 1933 Act, like the viola-

tions of the antifraud provisions of §17(a) of that statute and

the provisions of the Alabama Securities Act that are com-

parable to both sections, go to establish the counter-complain-

ant’s allegation that the reorganization plan involved a breach

of BT'NB’s fiduciary duties in general and, more specifically, a

“squeeze-out” of the Trust.

By way of analogy, it is generally held under the blue sky

laws that expiration of the statute of limitations for a buyer's

action based on a violation of the statute does not bar his assert-

ing the violation defensively. Mechanics Loan & Savings Co.

v. Mathers, 185 Ga. 501, 195 S. E. 429 (1938); Zehring v. Foster,

184 Kan. 599, 339 P. 2d 331 (1959); Key Broadcasting System,

Inc. v. Griffith, 119 N. Y. S. 2d 174, 175-76 (Sup. Ct. 1953)

(1933 Act).

A-62

Seventh: So far as the “squeeze-out” factor is concerned.

what the Maine court said in Marcou, 268 A. 2d at 635, is

equaliy pertinent here: “An important purpose of the plan for

the proposed merger obviously is to obtain for [the holding

company] 100% of the [bank’s] stock by the elimination of the

unwilling [bank] stockholders by the device of payment for

their shares under the dissenting stockholder’s statute.” This

in itself has been held sufficient to justify investigatory and

injunctive action under the antifraud provisions of blue sky

laws comparable to §28 of the Alabama Securities Act. Berko-

witz v. Power/Mate Corp., 342 A. 2d 566 (N. J. Super. 1975);

People v. Concord Fabrics, Inc., 371 N. Y. S. 2d 550 (Sup. Ct.

1975), aff'd mem., 377 N. Y. S. 2d 84 (Ist Dept. 1975).

Eighth: I note, in conclusion, that the Amended and Sup-

plemental Counter Complaint might be read as demanding

greater relief than is contemp’ated by the instructions of the

Alabama Supreme Court in 322 So. 2d at 969-97. On the other

hand, it appears to me that the salient part of those instructions

is 91, where the Circuit Court was ordered to appoint a tem-

porary trustee for “the retrial of this cause.” It seems to be

altogether within the spirit of that paragraph, and of the court's

instructions generally, for the temporary trustee to err, if at all,

on the side of acting more rather than less rigorously to pro-

tect the Trust estate.

Very truly yours,

Louis Loss

A-63

APPENDIX C(1)

PERTINENT PROVISIONS OF THE FEDERAL

SECURITIES LAWS AND REGULATIONS OF THE

SECURITIES AND EXCHANGE COMMISSION

PROMULGATED THEREUNDER

§ 77e. Prohibitions relating to interstate commerce and the

mails

(a) Unless a registration statement is in effect as to a security,

it shall be unlawful for any person, direcily or indirectly —

(1) to make use of any means or instruments of trans-

portation or communication in interstate commerce or of

the mails to sell such security through the use or medium

of any prospectus or otherwise; or

(2) to carry or cause to be carried through the mails or

in interstate commerce, by any means or instruments of

transportation, any such security for the purpose of sale

or for delivery after sale.

(b) It shall be unlawful for any person, directly or indi-

rectly —

(1) to make use of any means or instruments of trans-

portation or communication in interstate commerce or of

the mails to carry or transmit any prospectus relating to

any security with respect to which a registration statement

has been filed under this subchapter, unless such prospec-

tus meets the requirements of section 77] of this title; or

(2) to carry or cause to be carried through the mails or

in interstate commerce any such security for the purpose

of sale or for delivery after sale, unless accompanied or pre-

ceded by a prospectus that meets the requirements of sub-

section (a) of section 77} of this title.

(c) It shall be unlawful for any person, directly or indirect-

ly, to make use of any means or instruments of transportation

A-64

or communication in interstate commerce or of the mails to

offer to sell or offer to buy through the use or medium of any

prospectus or otherwise any security, unless a registration state-

ment has been filed as to such security, or while the registra-

tion statement is the subject of a refusal order or stop order or

(prior to the effective date of the registration statement) any

public proceeding or examination under section 77h of this

title.

May 27, 1933, c. 38, Title 1, § 5, 48 Stat. 77; June 6, 1934,

c. 404, § 204, 48 Stat. 906; Aug. 10, 1954, c. 667, Title I, § 7,

68 Stat. 684.

§ 771. Civil liabilities arising in connection with prospectuses

and communications

Any person who —

(1) offers or sells a security in violation of section 77e

of this title, or

(2) offers or sells a security (whether or not exempted

by the provisions of section 77c of this title, other than

paragraph (2) of subsection (a) of said section), by the use

of any means or instruments of transportation or commu-

nication in interstate commerce or of the mails, by means

of a prospectus or oral communication, which includes an

untrue statement of a material fact or omits to state a ma-

terial fact necessary in order to make the statements, in the

light of the circumstances under which they were made,

not misleading (the purchaser not knowing of such un-

truth or omission), and who shall not sustain the burden

of proof that he did not know, and in the exercise of rea-

sonable care could not have known, of such untruth or

omission,

shall be liable to the person purchasing such security from him,

who may sue either at law or in equity in any court of compe-

tent jurisdiction, to recover the consideration paid for such

security with interest thereon, less the amount of any income

A-65

received thereon, upon the tender of such security, or for dam-

ages if he no longer owns the security.

May 27, 1933, c. 38, Title I, § 12, 48 Stat. 84; Aug. 10, 1954,

c. 667, Title I, § 9, 68 Stat. 686.

§ 77n. Contrary stipulations void

Any condition, stipulation, or provision binding any person

acquiring any security to waive compliance with any provision

of this subchapter or of the rules and regulations of the Com-

mission shall be void.

May 27, 1933, c. 38, Title I, § 14, 48 Stat. 84.

§ 770. Liability of controlling persons

Every person who, by or through stock ownership, agency,

or otherwise, or who, pursuant to or in connection with an

agreement or understanding with one or more other persons

by or through stock ownership, agency, or otherwise, controls

any person liable under sections 77k or 77/ of this title, shall

also be liable jointly and severally with and to the same extent

as such controlled person to any person to whom such con-

trolled person is liable, unless the controlling person had no

knowledge of or reasonable ground to believe in the existence

of the facts by reason of which the liability of the controlled

person is alleged to exist.

May 27, 1933, c. 38, Title I, § 15, 48 Stat. 84; June 6, 1934,

c. 404, § 208, 48 Stat. 908.

§ 77p. Additional remedies

The rights and remedies provided by this subchapter shall

be in addition to any and all other rights and remedies that

may exist at law or in equity.

May 27, 1933, c. 38, Title I, § 16, 48 Stat. 84.

§ 77q. Fraudulent interstate transactions

(a) It shall be unlawful for any person in the offer or sale

of any securities by the use of any means or instruments of

A-66

transportation or communication in interstate commerce OF by

the use of the mails, directly or indirectly —

(1) to employ any device, scheme, or artifice to defraud,

or

(2) to obtain money or property by means of any untrue

statement of a material fact or any omission to state a ma-

terial fact necessary in order to make the statements made,

in the light of the cireumstances under which they were

made, not misleading, or

(3) to engage in any transaction, practice, or course of

business which operates or would operate as a fraud or

deceit upon the purchaser.

(b) It shall be unlawful for any person, by the use of any

means or instruments of transportation or communication in

interstate commerce or by the use of the mails, to publish, give

publicity to, or circulate any notice, circular, advertisement,

newspaper, article, letter, investment service, or communica-

tion which, though not purporting to offer a security for sale,

describes such security for a consideration received or to be re-

ceived, directly or indirectly, from an issuer, underwriter, or

dealer, without fully disclosing the receipt, whether past or

prospective, of such consideration and the amount thereof.

(c) The exemptions provided in section 77c of this title shall

not apply to the provisions of this section.

May 27, 1933, c. 38, Title I, § 17, 48 Stat. 84; Aug. 10, 1954,

c. 667, Title I, § 10, 68 Stat. 686.

§ 77v. Jurisdiction of offenses and suits

(a) The district courts of the United States, and the United

States courts of any Territory, shall have jurisdiction of offenses

and violations under this subchapter and under the rules and

regulations promulgated by the Commission in respect thereto,

and, concurrent with State and Territorial courts, of all suits

in equity and actions at law brought to enforce any liability or

duty created by this subchapter. Any such suit or action may

be brought in the district wherein the defendant is found or is

A-67

an inhabitant or transacts business, or in the district where the

offer or sale took place, if the defendant participated therein,

and process in such cases may be served in any other district

of which the defendant is an inhabitant or wherever the defen-

dant may be found. Judgments and decrees so rendered shall

be subject to review as provided in sections 225 and 347 of

Title 28. No case arising under this subchapter and brought

in any State court of competent jurisdiction shall be removed

to any court of the United States. No costs shall be assessed for

or against the Commission in any proceeding under this sub-

chapter brought by or against it in the Supreme Court or such

other courts.

(b) In case of contumacy or refusal to obey a subpena issued

to any person, any of the said United States courts, within the

jurisdiction of which said person guilty of contumacy or refusal

to obey is found or resides, upon application by the Commis-

sion may issue to such person an order requiring such person

to appear before the Commission, or one of its examiners des-

ignated by it, there to produce documentary evidence if so

ordered, or there to give evidence touching the matter in ques-

tion; and any failure to obey such order of the court may be

punished by said court as a contempt thereof.

May 27, 1933, c. 38, Title I, § 22, 48 Stat. 86; June 25, 1936,

c. 804, 49 Stat. 1921; June 25, 1948, c. 646, § 32(b), 62 Stat. 991;

May 24, 1949, c. 139, § 127, 63 Stat. 107; Aug. 10, 1954, c. 667,

Title I, § 11, 68 Stat. 686; Oct. 15, 1970, Pub.L. 91-452, Title

II, § 213, 84 Stat. 929.

§ 77x. Penalties

Any person who willfully violates any of the provisions of

this subchapter, or the rules and regulations promulgated by

the Commission under authority thereof, or any person who

willfully, in a registration statement filed under this subchap-

ter, makes any untrue statement of a material fact or omits to

state any material fact required to be stated therein or neces-

sary to make the statements therein not misleading, shall upon

A-68

conviction be fined not more than $5,000 or imprisoned not

more than five years, or both.

May 27, 1933, c. 38, Title I, § 24, 48 Stat. 87.

§ 78}. Manipulative and deceptive devices

It shali be unlawful for any person, directly or indirectly, by

the use of any means or instrumentality of interstate commerce

or of the mails, or of any facility of any national securities

exchange —

(a) To effect a short sale, or to use or employ any stop-loss

order in connection with the purchase or sale, of any security

registered on a national securities exchange, in contravention

of such rules and regulations as the Commission may prescribe

as necessary or appropriate in the public interest or for the

protection of investors.

(b) To use or employ, in connection with the purchase or

sale of any security registered on a national securities exchange

or any security not so registered, any manipulative or deceptive

device or contrivance in contravention of such rules and regu-

lations as the Commission may prescribe as necessary or appro-

priate in the public interest or for the protection of investors.

June 6, 1934, c. 404, § 10, 48 Stat. 891.

§ 78n. Proxies

(a) It shall be unlawful for any person, by the use of the

mails or by any means or instrumentality of interstate com-

merce or of any facility of a nationa! securities exchange or

otherwise, in contravention of such rules and regulations as the

Commission may prescribe as necessary or appropriate in the

public interest or for the protection of investors, to solicit or

to permit the use of his name fo solicit any proxy or consent or

authorization in respect of any security (other than an ex-

empted security) registered pursuant to section 78! of this title.

(e) It shall be unlawful for any person to make any untrue

statement of a material fact or omit to state any material fact

A-69

necessary in order to make the statements made, in the light of

the circumstances under which they are made, not misleading,

or to engage in any fraudulent, deceptive, or manipulative acts

or practices, in connection with any tender offer or request or

invitation for tenders, or any solicitation of security holders in

opposition to or in favor of any such offer, request, or invita-

tion. The Commission shall, for the purposes of this subsec-

tion, by rules and regulations define, and prescribe means rea-

sonably designed to prevent, such acts and practices as are

fraudulent, deceptive, or manipulative.

June 6, 1934, c. 404, § 14, 48 Stat. 895; Aug. 20, 1964, Pub.L.

88-467, § 5, 78 Stat. 569, 570; July 29, 1968, Pub.L. 90-439, § 3,

82 Stat. 455; Dec. 22, 1970, Pub.L. 91-567, §§ 3-5, 84 Stat. 1497.

§ 78cc. Validity of contracts

(a) Any condition, stipulation, or provision binding any per-

son to waive compliance with any provision of this chapter or

of any rule or regulation thereunder, or of any rule of an ex-

change required thereby shall be void.

(b) Every contract made in violation of any provision of this

chapter or of any rule or regulation thereunder, and every con-

tract (including any contract for listing a security on an ex-

change) heretofore or hereafter made, the performance of

which involves the violation of, or the continuance of any re-

lationship or practice in violation of, any provision of this chap-

ter or any rule or regulation thereunder, shall be void (1) as

regards the rights of any person who, in violation of any such

provision, rule, or regulation, shall have made or engaged in

the performance of any such contract, and (2) as regards the

rights of any person who, not being a party to such contract,

shall have acquired any right thereunder with actual knowl-

edge of the facts by reason of which the making or performance

of such contract was in violation of any such provision, rule, or

regulation: Provided, (A) That no contract shall be void by

reason of this subsection because of any violation of any rule

or regulation prescribed pursuant to paragraph (2) or (3) of

A-70

subsection (c) of section 780 of this title, and (B) that no con-

tract shall be deemed to be void by reason of this subsection in

any action maintained in reliance upon this subsection, by any

person to or for whom any broker or dealer sells, or from or for

whom any broker or dealer purchases, a security in violation of

any rule or regulation prescribed pursuant to paragraph (1) of

subsection (c) of section 780 of this title, unless such action is

brought within one year after the discovery that such sale or

purchase involves such violation and within three years after

such violation.

Rule 10b-5, 17 CFR § 240.10b-5, provides:

“It shall be unlawful for any person, directly or indirectly,

by the use of any means or instrumentality of interstate com-

merce, or of the mails or of any facility of any national securi-

ties exchange,

(a) To employ any device, scheme, or artifice to defraud,

“(b) To make any untrue statement of a material fact or to

omit to state a material fact necessary in order to make the

statements made, in the light of the circumstances under which

they were made, not misleading, or

“(c) To encourage in any act, practice, or course of business

which operates or would operate as a fraud or deceit upon any

person, in connection with the purchase or sale of any security.”

SECURITIES AND EXCHANGE COMMISSION — Rule 14a-9. False or

Misleading Statements

(a) No solicitation subject to this regulation shall be made

by means of any proxy statement, form of proxy, notice of

meeting or other communication, written or oral, containing

any statement which, at the time and in the light of the cir-

cumstances under which it is made, is false or misleading with

respect to any material fact, or which omits to state any material

fact necessary in order to make the statements therein not false

or misleading or necessary to correct any statement in any ear-

lier communication with respect to the solicitation of a proxy

EE

A-71

for the same meeting or subject matter which has become false

or misleading.

(6) The fact that a proxy statement, form of proxy or other

soliciting material has been filed with or examined by the Com-

mission shall not be deemed a finding by the Commission that

such material is accurate or complete or not false or misleading,

or that the Commission has passed upon the merits of or ap-

proved any statement contained therein or any matter to be

acted upon by security holders. No representation contrary to

the foregoing shall be made.

a

A-72

APPENDIX D(1)

THE STAGE OF THE PROCEEDINGS IN THE TRIAL

COURT, AT WHICH, AND THE MANNER IN

WHICH, THE FEDERAL QUESTIONS

SOUGHT TO BE REVIEWED WERE RAISED

The first five paragraphs of Petitioner's Counter Complaint

set forth the following:

1. The LINN-HENLEY CHARITABLE TRUST, of which

the “Old Bank” was co-trustee, held 27,460 shares of common

capital stock of the “Old Bank”. The complaint charges that

the Merger and Plan of Reorganization was so designed by the

counter-defendants as to fraudulently and unlawfully freeze

out the “Trust” as a minority stockholder, in violation of the

state and federal securities laws, the Federal Banking laws, as

well as in breach of the common law fiduciary duties of the

counter-defendants.

2. The counter-complaint does not seek to set aside or un-

scramble the merger, per se, between the “Old Bank” and the

“New Bank”, allegedly accomplished pursuant to the banking

laws of the United States, invalid as such merger may be.’ It

may now be impracticable to unscramble “an $80,000,000

egg”.!* The gravamen of the counter-complaint is not the

merger between the two banks, but the fraud, misrepresenta-

tions and omissions of fact, unlawful conduct, unfair dealing,

and oppression of the “‘Trust”’ as a minority stockholder, which

was unlawfully and deceitfully tricked into parting with its

stock in the “Old Bank”, and, in addition, was denied the very

benefits to which it was entitled under the Federal Banking

laws?

1Mills v. Electric Auto-Lite Co., 396 U.S. 375, 24 L.Ed. 593, 90 S.Ct. 616.

SEC v. National Securities, 393 U.S. 453, 212 L.Ed.2d 668.

laMay v. Midwest Refining Company, 25 F.Sup. 560 Aff'd., 121 F.2d

431, Cert. Denied, 86 L.Ed. 534.

2SEC v. National Securities, 393 U.S. 453, 21 L.Ed.2d 668, 89 S.Ct. 564.

May v. Midwest Refining Co., Supra.

A-73

(a) The counter-complaint alleges that the “New Bank”

constituted no more than the “Old Bank” in a new shell,

the “New Bank” being “in fact the same business, at the

same stand, with the same folks, since 1897". The trans-

action by which the stock of the “Holding Company” was

exchanged for the stock of the “Old Bank” was in fact, and

in law, a tender offer to the stockholders of the “Old

Bank” on the part of the “Holding Company”, which was

not obligatory upon minority stockholders, and which re-

quired registration and full disclosure, pursuant to a pro-

spectus under the state and federal securities laws. How-

ever, the counter-defendants fraudulently and unlawfully,

by misrepresentations and omissions of material facts, dis-

guised the transaction as a so-called statutory “merger”,

which presumably was binding upon all stockholders, ex-

cept those desiring to dissent, and. which presumably was

also exempt from the registration requirements of the state

and federal securities laws, all for the purpose of oppress-

ing and freezing out by unlawful means the minority

stockholders, including the * Trust’’.4

* * *

3. Counter-complaint further seeks damages for the breach

by the counter-defendants as Trustees, of their 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 alleged

Merger and Plan of Reorganization as to make it impossible

for the “Trust” te receive the full benefits to which it was

entitled under the merger provisions of the federal banking

laws for the following reasons:

3Birmingham Trust National Bank v. State, 294 So.2d 158; 292 Ala.

335.

SSEC v. Dolnick, 501 F.2d 1279 (7th Cir. 1974); Title 53 §§ 28, 45,

Code of Ala. 1940, as supplemental; Dyer v. Eastern Trust & Banking

Company, 336 F.S. 890 (1971).

A-74

(a) Under the Plan of Reorganization, all of the stock

of the ‘New Bank” was, upon the effective date of the

merger, transferred to the “Holding Company”, and there

was no stock of the consolidated or continuing bank which

could be sold at public auction, as required by the federal

banking laws, to protect the rights of the dissenting

“Trust”’.®

(b) The stock of the “Holding Company” was not the

stock of the ‘receiving association” bank, required by the

banking laws to be sold at public auction. Additionally,

this stock was sold by the counter-defendants to themselves

at public auction at $26 per share under the advertised

caveat that it is not registered under the Securities Act of

1933, and that any purchaser must purchase under an in-

vestment letter. This constituted, first, an unlawfu) and

inexcusable self dealing, having purchased such stock at a

price below its fair value and even below the appraised

value thereof by the Comptroller of the Currency. Second-

ly, such sale violated the fiduciary duty on the part of the

counter-defendants to the “Trust” in failing to register

such stock so as-to enable such stock to be freely sold at

public auction, unhampered by the burden resulting from

non-registration. Accordingly, the counter-defendants sub-

verted and made a mockery of the appraisal process pro-

vided under the federal banking laws, and are due to com-

pensate the “Trust” for the loss of the benefits to which

it was entitled as a dissenting stockholder.

(c) The subsequent attempted sale of the stock of the

‘‘New Bank” held by the “Holding Company” was a mere

sham, and a charade, for the reason that such stock was,

under the specific terms of the Merger Agreement, to be

held by the “Holding Company” for the sole purpose of

enabling it to exchange its stock for the stock of the “Old

Bank”. Thus, neither the stock of the “receiving associa-

tion’, which would have been delivered to the “Trust”

STitle 12, § 215a (d) USCA.

A-75

had it not dissented, as required by the federal statute,

nor the unregistered stock of the “Holding Company”,

which would have been delivered to the “Trust” under

the Merger Agreement, though contrary to the federal

statute, was in fact sold at public auction, as contemplated

by the federal law.

(d) The sale of stock of the Consolidated Bank at pub-

lic auction, contemplated under the Federal Banking Act,

is designed to provide a dissenting stockholder the oppor-

tunity to receive the excess of any sale at public auction

above the appraised value made by the Comptroller of the

Currency. Such opportunity was denied by the counter-

defendants to the “Trust”. Assuming the attempted sale

of the “Holding Company” stock was designed to serve as

a substitute for the stock of the Consolidated Bank, the

sale of such stock to the affiliate of the “New Bank” was,

in addition to all other grounds, invalid as a breach of

fiduciary duty.®

(e) Accordingly, the counter-defendants have, by self

dealing, converted to themselves the benefits to which the

“Trust” was entitled under the appraisal process. set out

in the banking laws. In these circumstances, the counter-

defendants may not be permitted to profit from their own

wrong, and are liable to the “Trust’’.”

4. The counter-complainant, on jurisdictional grounds, does

not question the validity of the merger between the “Old

Bank” and the “New Bank”, per se. The counter-complainant

does charge, however, that the Reorganization Plan and Merger

and Reorganization Agreement adopted by the counter-defen-

dants is a package containing a two-step plan of reorganization.

*Stanley v. Fidelity Union Trust Co., 108 N.J. Equity 564, 138 A. 388;

Rothenberg v. Franklin Washington Trust Company, 127 N.J. Equity 406,

13 A.2d 667; Allbright v. Jefferson County National Bank, 229 N.Y. 31,

53 N.E.2d 753, Anno. 151 ALR 905.

7Title 12, §§ 24-83, USCA.

A-76

The first step consists in the merger of the two banks, as au-

thorized by Title 12, § 215a of the Federal Banking Act.*

The second step, and the one here in question, is the ex-

change of the stock by the “Holding Company” for the stock

of the “Old Bank”. This exchange was unlawful since it vio-

lated the provisions of §§ 12(1), 12(2) and 17(a) of the Federal

Securities Act of 1933, and §§ 28, 30 and 45 of Title 53, Code

of Ala. 1940, as supplemented, in that the “Holding Company”

stock was not registered either with the Federal Securities &

Exchange Commission or with the State Securities Commission.

(a) The exemptions for statutory mergers provided by

Rule 133 of the Securities & Exchange Commission and by

Title 53, § 38n, Code of Ala. 1940, do not apply to the

distribution of unregistered stock by the “Holding Com-

pany’’.®

(b) The counter-defendants erroneously relied upon the

provisions of Rule 133 of the Securities & Exchange Com-

mission as allegediy providing an exemption from the Reg-

istration provisions of the Securities Act of 1933, insofar

as the distribution of the “Holding Company’’ stock is

concerned. Even if the reliance were justified, which

counter-complainant expressly denies, and assuming that

the ‘New Bank" were to have exchanged the stock of the

“Old Bank” for the stock of the “Holding Company”, as

the Plan of Reorganization required, and which Title 12,

§ 24 USCA forbade, it could not have sold such stock at

public auction on February 10, 1970, since the stock was

unregistered and since an affiliate of the “Holding Com-

pany” cannot rely on the exemptions from registration

8Title 12, § 215a does not permit the merger of a national bank with

a non-banking association.

®Marcou v. Federal Trust Co., 268 A.2d 629 (Me. 1970); Dyer v. East-

ern Trust & Banking Co., 336 F.S. 890 (1971); SEC v. Dolnick, 501 F.2d

1279.

A-77

provided by Rule 133 of the Securities & Exchange Com-

mission.'°

(c) The issuance by the “New Bank” of 1,000,000 shares

of its stock to the “Holding Company” to enable it to ex-

change 1,000,000 shares of its stock for a like number of

shares of stock of the “Old Bank”, made the “New Bank”

an underwriter of the stock of the “Holding Company”,

within the meaning of Title 15, § 77b (11) of the Securi-

ties Act of 1933. This put the “New Bank” in the dilemma

where its participation with the “Holding Company” in

the distribution of its stock violated the provisions of Title

15, § 77e USCA, which prohibited the sale of unregistered

stock, and of Title 12, § 24, USCA of the Banking Act,

which prohibits a national bank from underwriting ‘‘any

issue of securities or stock,” whether registered or not.

(d) Accordingly, the remedy sought by the counter-com-

plainant for the “Trust” against the counter-defendants, as

trustees, under this claim is not based upon the appraisal

process, but is based rather upon the fraud, whether in-

tentiona] or not, unlawful conduct, oppression and unfair

treatment of the “Trust”, as a minority stockholder, in

disguising the stock exchange between the “Holding Com-

pany” and the stockholders of the “Old Bank” as being

part of a statutory merger, and thus forcing the “Trust”

to resort to an impossible appraisal process, the statutory

remedy of appraisal being now impossible or impractical

to apply, and not being exclusive, in any event."

'See former Rule 133 of the Securities & Exchange Commission; Dyer

v. Eastern Trust & Banking Co., 336 F.S. 890 (1971); SEC v. Dolnick,

501 F.2d 1279.

‘May v. Midwest Refining Co., 25 F.Supp. 560, Aff'd., 121 F.2d 481,

Cert. Den., 62 S.Ct. 129, 314 U.S. 668, 86 L.Ed. 534; Thruston v. National

& American Trust Co., $2 F.Supp. 929; Mills v. Electric Auto-Lite Co.,

24 L.Ed. 598, 396 U.S. 375; Lebold v. Inland Steel Co., 125 F.2d 369;

Swanson v. American Consumer Industries, Inc., 415 F.2d 1326; SEC v.

National Securities, Inc., 21 L.Ed. 668, 313 U.S. 453, 89 S. Ct. 564; Cold

v. Wells, 224 Mass. 504, 113 N.E. 189.

A-78

(e) The damages flowing from such fraud, oppression,

unlawful conduct and unfair treatment of the “Trust” in

causing it to part with its stock as a result thereof, is not

limited to an appraisal thereof at the time of the alleged

merger or at the time of the abortive sale thereof at public

auction. On the contrary, counter-complainant is entitled

to, anc does hereby claim, damages incident to the right

of rescission, conversion and restitution, that is, the highest

value of such stock at the time of trial, together with all

profits made by counter-defendants from the time the same

was acquired by the ‘Holding Company”, and costs, in-

cluding attorney's fees.”

The Fraudulent Proxy Statement

5. In addition, the counter-claimant charges that, irrespec-

tive of the validity of the merger between the two banks, the

proxy statements circulated by the counter-defendants to the

stockholders of the “Old Bank’, including the ‘Trust’, con-

tained certain untrue or misleading statements of material facts

or omitted to state material facts necessary in order to make

the statements made, in the light of circumstances under which

they were made, not misleading, and constituted an engage-

ment 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) or the Securities Act of 1933, and the fidu-

ciary duties on the part of the counter-defendants to the

“a

12Ribakove v. Rich, 173 NYS2d 306; Robb v. Eastgate Hotel, Inc., 347

Ill. App. 261, 106 N.E.2d 848; Fletcher Vol. 13 § 5906.3.

13Supt. of Insurance v. Bankers Life § C. Co., 404 U.S. 6, 30 L.Ed.2d

128; Securities § Exchange Commission v. National Securities, Supra; J. I.

Case Co. v. Borak, 377 U.S. 426, 12 L.Ed.2d 423, 84 S.Ct. 1555; Miller v.

American Telephone § Telegraph Co., 507 So.2d 759 (1974) ; Cort v. Ash,

45 L.Ed.2d 26, 422 U.S. 66, 95 S.Ct. 2080; Title 53, § 28, et seq., Code of

Ala. 1940, as supplemented; Henley v. Birmingham Trust National Bank,

$22 So.2d 688; First National Bank v. Bosham, 191 So. 873, 238 Ala. 300;

Title 58, § 44, Code of Ala. 1940, as supplemented; Anno. 170 ALR 358;

90 CJS, § 247c (2).

A-79

(a) These omissions, particularly the omission to dis-

close that the exchange of the stock of the “Holding Com-

pany” for the stock of the “Old Bank” was not part of the

merger authorized by the banking laws, and that the stock

of the “Holding Company” was unregistered and was not

exempt from registration, were material, as a matter of

law, for the reason that not only is there a substantial

likelihood that a reasonable shareholder would consider it

important in deciding how to vote, but that the established

omissions as shown by the record, and as hereinafter more

fully set out, are so obviously important to an investor

holding stock in the “Old Bank” that reasonable minds

cannot differ on the question of materiality."

That The Comptroller Cannot Approve

Violations Of Law

The seventh paragraph of the Counter-Complaint states:

“7. As previously stated, the counter-complainant does not

seek in this cause to review or revise the decision of the Comp-

troller of the Currency of the United States approving the

merger of the two banks. The fact, however, that the Comp-

troller of the Currency approved the merger in question is

immaterial, since he does not have the power or jurisdiction

to approve the second step in the reorganization plan, which

violates both the banking laws as well as the state and federal

securities laws. In short, the Comptroller of the Currency may

not violate the law, state or federal.

(a) Assuming this Court may not have jurisdiction to

review the acts of the Comptroller of the Currency, it does

not follow that it is incumbent upon this court to approve

14TSC Industries, Inc. v. Northway, Inc., 48 L.Ed.2d 757.

Title 12, §§ 1846, 215a (f), 92a (a), 24; Anderson National Bank v.

Luckett, 321 U.S. 233, 64 S.Ct. 599, 88 L.Ed. 692; New Hampshire Bankers

Association v. Nelson, 460 F.2d 307: Braeburn Securities Corporation v.

Smith, 153 N.E.2d 806, 15 II1.2d 35, appeal dismissed, 79 S.Ct. 876, 359

U.S. 311, 3 L.Ed.2d 831; Whitney National Bank in Jefferson Parish v.

James, 189 So.2d 430 (La.).

A-80

them, or to ratify and confirm the illegal transactions en-

gaged in by counter-defendants as prayed for in the coun-

ter-defendant bank's petition filed in this cause, whereby

it seeks, among others, a determination that the auction

sales of the shares of stock of counter-defendants, described

in Paragraph 17 of the petition, fully complied with the

requirements of 12 USC 215a(d), and a confirmation by

this court of such sales in all respects. This is especially

true where such transactions not only do not comply with

the federal banking laws, but violate the state and federal

securities laws, as well as the fiduciary duties of the coun-

ter-defendants to the “Trust’’.’*

The trial court in its decree fully adopted the theories of

liability advanced by the Temporary Trustee (Appendix pp.

A-10, 11), and its judgement, whatever may be its reasoning,

is clearly supportable under Federal law.

16"]_ocal Law” as used in § 92a, Title 12 USCA, is defined as “the law

of the state . . . governing the fiduciary relationship,” 12 C.F.R., § 9.1 (£)

(1974) ; American Trust Co., Inc. v. South Carolina State Board of Bank-

ing Control, 381 F.Supp. 313.

A-81

APPENDIX D(2)

THE STAGE IN THE PROCEEDINGS IN THE

APPELLATE COURT, AT WHICH, AND THE

MANNER IN WHICH, FEDERAL QUESTIONS

SOUGHT TO BE REVIEWED WERE RAISED

The decree of the trial court was handed down after a trial

lasting some six weeks. BTNB appealed to the Supreme Court

of Alabama. In the brief filed on behalf of the Petitioner, as

Appellee, the federal questions in support of the judgment of

the court below were raised as follows:

1. By Presenting In Appellee’s Brief The Following

Claims And Theories Of Liability Under The

Federal Statutes And Regulations:

“(a) Nature of the Supplemental and

Amended Counter-Complaint of

the Temporary Trustee

The Counter-Complaint, as last amended, does not seek to

set aside or unscramble the merger per se, between the “Old”

Bank and the “New” Bank, or the Plan of Reorganization

whereby the “New” Bank became the wholly-owned subsidiary

of the “Holding Company,” nor does it seek to have. the cou:t

review the appraisal of the Comptroller of the Currency. This

court has foreclosed there issues in HENLEY.

As stated on page 2 of the Counter-Complaint:

The gravamen of the Counter-Complaint is not the merger

of the two banks, but the fraud, misrepresentations and

omissions of facts, unlawful conduct, unfair dealing and

oppression of the Trust as a minority stockholder, which

was unlawfully and deceitfully tricked into parting with

its stock in the ‘Old’ Bank and, in addition, was denied the

very benefits to which it was entitled under the Federal

Banking laws.

A-82

While the Counter-complaint is lengthly and sets forth nu-

merous breaches of fiduciary duty, supported by highest author-

ity, it may be distilled into three basic claims based upon

several theories of liability which support the judgments ap-

pealed from:

CLAIM TWO

Breach of Fiduciary Duties by BTNB and the “Holding

Company” Arising Out of the Abortive Public Auctions '

of the “New” Bank and the “Holding Company” Stocks —

the Abuse of the Second Phase of the Appraisal Process.

This claim, amounting to the sum of $1,200,000, represents

the difference between the amount bid by the “Holding Com-

pany’ for the 27,460 shares of the “Holding Company” stock

at the public auction held on February 10, 1970, and the value

thereof at the date of trial. It alleges that BTNB breached its

fiduciary duties, in collaboration with the “Holding Com-

pany,” in connection with the abortive public auctions of the

“New” Bank and the “Holdng Company” stocks, pursuant to

the attempted but utterly futile compliance with the provisions

of Title 12, § 215a(d), which is in part referred to by this court

in the instructions to the court below in Syllabus [14]2(b).

Based upon newly-developed evidence and theories of liabil-

ity, the

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