The question to be decided is whether a receiver of a national bank may compel payment of a promissory note knowingly given to the bank by one of its directors as a substitute, among its assets, for shares of its own stock illegally purchased and retained by the bank but with the understanding that it was to retain its interest in the stock and that the note was not to be paid.
Petitioner, receiver appointed by the Comptroller of the Currency for the Boston-Continental Bank, a national banking association, brought suit against respondent, a director of the bank, and others, in the District Court for Massachusetts to collect an assessment upon shares of stock in the insolvent bank and to recover on respondent's promissory note, found by the receiver among its assets.
The trial court found that the Boston National Bank, predecessor of the insolvent bank had acquired by purchase, 190 shares of its outstanding capital stock in violation of R.S. § 5201, 12 U.S.C. § 83, 12 U.S.C.A. § 83, which declares that 'No association shall * * * be the purchaser or holder of any such shares'; that respondent as a means of concealing the illegal acquisition of the stock and of enabling the bank to retain its ownership of the stock, prevailed upon his co-defendant Karnow to execute an accommodation note, payable to the bank, the proceeds of which were deposited in another bank to the credit of respondent who then paid them to the Boston National Bank for the 190 shares of stock which were then transferred to the respondent on the books of the bank.
Following a renewal of the Karnow note respondent transferred the shares to him on the books of the bank and upon consolidation of the Boston with the Continental National Bank, to form the Boston-Continental National Bank of which petitioner later became receiver, new shares of the consolidated bank were issued in exchange for the old. Part of them were sold and the proceeds used in reduction of the Karnow note. Respondent then gave to the bank his own note for the balance, in substitution for Karnow's note and caused the remaining shares to be transferred to the name of Mahoney also a defendant in the suit, without informing him of the transfer.
The court found that the entire transaction was devised and carried out by respondent for the purpose of concealing the bank's ownership of the stock by ostensibly removing the shares of stock from its assets and carrying the successive notes in their stead as receivables on the books of the bank with a secret agreement that the stock should be held for the Boston and later for the Boston-Continental Bank without liability on the part of the maker of the note. The court found liability of respondent for the assessment upon the shares held by Mahoney for his account, concluded that he was estopped to deny liability on the note and decreed accordingly that respondent alone should pay the stock assessment and the amount due on the note, 23 Fed.Supp. 758.
The Court of Appeals for the First Circuit reversed so much of the decree as allowed recovery on the note. 103 F.2d 83. It confirmed the finding of the trial court. But it held that the circumstances which they detailed did not preclude the defense of want of consideration to the demand of the receiver, more than to that of the bank itself.
We granted certiorari, October 9, 1939, on petition of the receiver because of the public importance of the question in the administration of the National Bank Act and of the conflict of the decision below with that of the Court of Appeals for the Fourth Circuit, in Federal Reserve Bank v. Crothers, 289 F. 777 and that of the Fifth Circuit in Bohning v. Caldwell, 10 F.2d 298.