Case Name: John Q. Rhodes, Jr., Receiver, Etc. v. Arthur Walton, and Others
Court: Supreme Court of Appeals of Virginia
Jurisdiction: Virginia
Decision Date: 1934-09-20
Citations: 163 Va. 360
Docket Number: 
Parties: John Q. Rhodes, Jr., Receiver, Etc. v. Arthur Walton, and Others.
Judges: 
Reporter: Virginia Reports
Volume: 163
Pages: 360–393

Head Matter:
Staunton
John Q. Rhodes, Jr., Receiver, Etc. v. Arthur Walton, and Others.
September 20, 1934.
Present, Campbell, C. J., and Holt, Epes, Hudgins, Gregory and Browning, JJ.
The opinion states the case.
W. Earle Crank and John Q. Rhodes, Jr., for the plaintiff in error.
George E. Allen and H. M. Ratcliffe, for the defendants in error.

Opinion:
Holt, J.,
delivered the opinion of the court.
This is an action instituted by a notice of motion for judgment. It is brought by John Q. Rhodes, in his official capacity as receiver of the State Bank of Columbia, Virginia, against Arthur Walton and the other parties who signed and sealed this bond:
"Know all men by these presents, that we, the under- signed in consideration of the sum of ten dollars ($10) to each of the signatories hereto, the receipt of which by each is hereby acknowledged are held and firmly bound unto The State Bank, Columbia, Virginia, in the just and full sum of twenty-five thousand dollars ($25,000) whereof, each obligor binds himself, severally, his heirs, personal representatives and assigns by this obligation, and hereby each obligor also waives his homestead exemption.
"The condition of this obligation is such that whereas, upon an examination of the said The State Bank, the State Corporation Commission, through its Commissioner of Insurance and Banking, has ascertained that the capital of the said The State Bank, has been or is in danger of being impaired to the extent of twenty-five thousand dollars ($25,-000) more or less, and,
"Whereas, also the obligors herein being officers and directors of the said The State Bank, and as such, being charged with the administration, management and operation of the said The State Bank, and are desirous of guaranteeing and maintaining the safety and solvency of it, and more especially of indemnifying and saving harmless its depositors and other creditors, from any loss or damage resulting from the impairment of its capital or any other irregularities as aforesaid, do hereby waive notice from the said State Corporation Commission as provided in section 53 of the Virginia Banking Act and covenant and agree with the obligee herein to indemnify and save harmless, any depositor or other creditor of the said The State Bank, against any loss or damage by reason of the impairment of capital or any other irregularities within thirty days after demand made, and agree also that in the event of a breach that suit may be maintained against any one, all or an intermediate number of the obligors herein, according to circumstances without joining all in such suit.
"Now therefore, if each of the said obligors herein shall indemnify, save harmless and make good any loss or damage, resulting from impairment of capital or any other irregularities as aforesaid, within thirty days after demand made, this obligation shall be null and void, otherwise to remain in full force and virtue.
"Witness the following several signatures and seals at Columbia, Virginia, this 14th day of October, 1930.
Arthur Walton (Seal)
A. F. Moon, Jr. (Seal)
P. N. Stoneman (Seal)
E. M. Jordan (Seal)
S. W. Shelton (Seal)
G. P. Hodgson (Seal)
Nash P. Snead (Seal)
C. R. Sanderson (Seal)"
The defendants, upon being required to do so, filed this statement of defense:
"(1) The plaintiff, when properly authorized by the court, of his appointment, is clothed with only such rights of action as might have been maintained by The State Bank, Columbia, Virginia, the equities of the said bank whose right of action the plaintiff purports to represent, are not such as to entitle him to sue and recover from these defendants on the bond set forth in the notice of motion.
"(2) No authority has been conferred upon the plaintiff in his representative capacity as receiver, by the court of his appointment, to prosecute this action.
"(3) The bond sued on was delivered in escrow to the Honorable M. E. Bristow, Chief Examiner of Banks of Virginia, to be delivered to the said bank only in the event of a loss sustained by the bank during the period intervening between the date of the execution of the bond and the date of a contemplated merger of the said The State Bank, Columbia, with the State Bank of Louisa, or, the date of the failure and abandonment of all negotiations for the merger.
"(4) The said The State Bank of Columbia, was closed by the Chief Examiner of Banks before the said merger was effective, and before negotiations for the merger had failed, and while they were still in progress, negotiations having been abandoned only after the closing of the bank. No loss was sustained by the bank between the date of the execution of the said bond and the date of the closing of said bank, and the delivery of the said bond by the said Bank Examiner to the receiver, after the closing of the bank, was in violation of the condition upon which the bond was delivered in escrow, and it was, therefore, never delivered as a completed and binding obligation, and no action will lie thereon."
Defenses, numbered 1 and 2, appear to have been abandoned, and it is upon 3 and 4 that this case turns.
The Bank of Columbia was a State institution whose capital was $20,000. In 1930, if not before, its finances fell upon evil days. It hoped to relieve itself by merger with the Bank of Louisa, and in furtherance of that effort negotiations were begun in July of that year. This effort failed and it was closed by order of Mr. M. E. Bristow, State Commissioner of Banking and Insurance, on December 11, 1930, and Mr. Rhodes was appointed receiver on December 15, following. The bond, which was in the custody of. Mr. Bristow, was sent to him. He made demand without avail and then brought this action. The bank was hopelessly insolvent, and will pay to its creditors a dividend of somewhere about twenty-five per cent. In October negotiations with the Bank of Louisa were still pending with some promise of success. The Commissioner of Banking was anxious to give such assistance as he could, consistent with his official duties. He suggested that a bond be given in terms which he had indicated. He could not compel the directors to execute it but told them that if they were unwilling to act he would close the bank forthwith. They did express themselves as willing to comply with his demands, and on October 11 an instrument in proper form was sent to Mr. Shelton, together with this letter:
"Richmond, Virginia, October 11, 1930.
"Mr. S. W. Shelton,
"Palmyra, Virginia.
"Dear Mr. Shelton:
"In accordance with my promise there is enclosed a copy of indemnifying bond prepared 'according to our usual forms for cases like that at Columbia. If any of the directors do not wish to join in the bond that is a matter for them to decide. If a sufficient bond is given us we will be satisfied.
"When executed the bond is to be returned to this office to be held until we feel that the bank's difficulties are over. If all of the directors desire to execute a substantial agreement among themselves apportioning and allotting their liability, this office will have no objection to that course either, but we desire the bond in substantially the same shape as submitted.
"Kindly advise me of your action following the meeting Tuesday.
"Yours very truly,
"M'. E. Bristow,
"Commr. of Insurance and Banking."
The bond was signed on October 14, 1930, by all of its makers except Mr. Sanderson. Soon afterwards Mr. Shel ton, who had retained it for that purpose, secured his signature and gave or sent it to Mr. Bristow.
In inverse order we will take up defendants' contentions.
It is said that negotiations for merger were still pending when the bond was delivered by Mr. Bristow to Mr. Bhodes.
On November 29th the Louisa bank definitely rejected the Bank of Columbia's proposition and so notified it, and this ended dealings which had been in progress since July. Shelton was asked:
"Was the Bank of Louisa still negotiating with you after November 29th?" and answered, "No, sir. All my negotiations were with these three gentlemen."
These negotiations according to this witness' statement amounted to this: He saw Mr. Bhodes, Mr. Purcell and
Mr. Crank, private citizens, who told him that if he could secure the approval of Mr. Crenshaw, who was a majority stockholder in the Louisa bank, the merger would go through, and this is all.
We have no difficulty in reaching the conclusion that the negotiations for merger in progress when the bond was executed were definitely broken on November 29th and were never renewed with the Bank of Louisa at all. And so the claim that the delivery of the bond was premature, in that negotiations were still pending, goes out.
This brings us to a consideration of those conditions, if any, which attached to the bond when it was delivered to Bristow. It is contended, as we have seen, that it was delivered in escrow, and was to be redelivered and used "only in the event of a loss sustained by the bank during the period intervening between the date of the execution of the bond and the date of a contemplated merger of the said The State Bank, Columbia, with the State Bank of Louisa, or, the date of the failure and abandonment of all negotiations for the merger."
It is to be noted in limine that any such parol agreement violates the terms of the bond itself. Its controlling purpose was to protect depositors and other creditors, or as it is there expressed, of "saving harmless its depositors and other creditors."
Mr. Shelton, a maker, was asked to tell what Mr. Bristow required and did. This appears in his direct examination:
"A. Mr. Bristow required the directors of the State Bank to execute a bond in the penalty of $25,000, to be delivered to him, and to be held by him and then used by the bank, if the bank suffered a loss by reason of Mr. Bristow allowing the bank to remain open for a period of time necessary to consummate these merger proceedings.
"Q. Would he permit you to keep the bank open and continue to do business without some bond ?
"A. No.
"Q. Did he state that to you in that conference?
"A. Yes, sir."
Upon cross-examination he made somewhat the same statement:
"Mr. Bristow should hold this bond and deliver it to the bank to be enforced if there was any loss during that period, that this merger proceeding was pending."
The bond was to be enforced if there was any loss to the bank while merger negotiations were pending. That is to say, in such a case it might be delivered to Rhodes, receiver, who after demand had the right in its enforcement to take necessary legal action.
Dr. Nash P. Snead, another director, was next examined. This is an excerpt from this cross-examination:
"Q. I understand you to say on direct examination that you understood that you signed this bond and delivered it to Mr. Bristow to cover any loss which might occur between the date of the signing of the bond and the date of the merger or the closing of the bank?
"A. That is true.
"Q. Is that the condition that you signed it under?
"A. Yes, sir."
His understanding could not vary the terms of the bond itself.
Mr. M. E. Jordon, another maker, said in direct examination :
"We were negotiating with the Bank of Louisa. I was not on that committee but at. this meeting which we signed the bond they had a letter from the Bank of Louisa setting forth the terms by which they would take us over. It was taken up before this board and passed on. We accepted their terms, and after that we signed the bond, simply to take care of any loss that might be sustained during that period of time."
And further:
"Q. Did Mr. Bristow tell you that the bond was not to be delivered unless a loss was sustained?
"A. I don't know that he did."
Mr. P. N. Stoneman, another maker, was asked in direct examination:
"Q. Suppose the bank suffered no loss during that interval during the period the negotiations were pending, what was to become of the bond?
"A. The bond was to become null and void and be returned, the only answer I could give."
He was asked in cross-examination:
"Q. Where did you get that understanding from, then?
"A. I got it through discussions in the meeting.
"Q. With whom?
"A. Mr. Shelton, I was relying on him."
He further tells us that the bank's loans amounted to something like $250,000. This witness got his impressions of conditions as to delivery, not from Mr. Bristow, but from Mr. Shelton.
Mr. A. F. Moon, another maker, in direct examination, said:
"Q. In what event was that bond to be used by Mr. Bristow?
"A. In the event our banks got into any worse shape than they were in before this merger could be put through."
And on cross-examination he was asked to restate the conditions under which the bond was executed. His state ment is: "I judge from what Mr. Bristow told us, that if we allowed our bank to get into worse condition than it was on the day we signed the bond, then we were bound by that bond and if we did not everything was well and good." And again Bristow said "that he felt like he should ask us gentlemen to give him a bond to be held by him until this arrangement could be completed in order for him to allow the banks to stay open."
As we have seen, Mr. Sanderson signed at a later day. He tells us what he had been led to believe:
"The whole impression was made upon me, was that the bond was given for the proper conduct of the bank officials during the time this thing was pending."
Mr. Arthur Walton another maker, tells us: "I signed the bond thinking it was to protect the bank for the time being. My recollection was that it was to protect the bank from the time we signed the bond until the merger was complete. Never thought of the conditions at all."
Mr. A. H. Turner is the only director who did not sign. He took no part in the negotiations but was present on October 14th. When asked under what conditions it was to be used, answered, "In the event that the bank got into any worse condition from that day until the Louisa negotiations could be closed, as I understood it."
Mr. G. P. Hodgson, replying to the same question, said, "that if the directors did anything between that time and the closing of the negotiations with Louisa to make the bank in worse condition, than it was that day, that the bond would become effective, otherwise it would not."
Mr. Bristow testified that the bond was delivered to him without conditions, although of course it was not to be used if the merger went through, for then there would be no occasion to use it. He was hopeful that the consolidation might be effected but was doubtful because "the Bank of Louisa required a surety bond, with corporate security, which I was certain they could not give."
All the makers appear to have been under the impression that the bond was to cover only such losses as the bank might suffer between the date of its execution and the termination of negotiations with the Bank of Louisa. Of course this could not affect the terms of the bond itself. It would be a plain violation of the parol evidence rule.
These witnesses, however, differ as to the character of delivery. Some say that it was in escrow to be redelivered to Bristow in the event that the bank suffered loss during said period, and in that event only. The jury must have believed that there was such an agreement for it found for the defendants and their verdict the court approved.
We are not unmindful of the weight which should attach to the judgment.
Bristow demanded that this bond be given and said that if it was not given he would close the bank. The situation in many of its aspects was not unlike that in White v. Commonwealth, 158 Va. 749, 164 S. E. 375, 376, where the court said:
"The directors, in this instance, were desirous of continuing business, and so at their election they were permitted to do so, provided they were willing to pledge their personal credit. Of course they were not obliged to make any such pledge, but there was no reason why they should not have been permitted to make it, and they did make it in furtherance of what they then believed was their own interest."
The bond there provided:
"Now, therefore, if the obligors herein will indemnify and save harmless all of the depositors of the said Farmers Bank of Oak Hall, Horsey, Virginia, against loss by reason of the liability of the said bank to meet its obligations whenever demand therefor shall be made, then this obligation to be void, otherwise to remain in full force and virtue."
In the instant case is this provision:
"Whereas also the obligors herein being officers and directors of the said The State Bank, and as such, being charged with the administration, management and operation of the said The State Bank, and are desirous of guaranteeing and maintaining the safety and solvency of it, and more especially of indemnifying and saving harmless its depositors and other creditors, from any loss or damage resulting from the impairment of its capital or any other irregularities as aforesaid."
The bond itself was drafted in the office of the Commissioner of Banking and was enclosed in the letter to Mr. Shelton. Bristow there said that its execution by the directors was a matter for them to decide but that if executed it must be substantially in the shape submitted. That is to say, it must contain provisions for the protection of creditors and depositors although the makers might apportion among themselves the liability incurred. It was executed in the form submitted which we are told is a standard form.
If defendant's contention be sound it gives no protection whatever to creditors and depositors and amounts to no more than a covenant against their own possible misdeeds, for they were, in substance, the bank. In terms it was to protect creditors and depositors.
In such circumstances it is inherently improbable that Mr. Bristow agreed to conditions well calculated to defeat its primary declared purpose. If it be asked, "Why did he have the bond in his possession at all?" the answer is found in his letter: "When executed the bond is to be returned to this office to be held until we feel that the bank's difficulties are over," which is exactly what was done.
Let us, however, assume that this bond was delivered to Bristow under the express condition that it could not be used unless loss by the bank was incurred between October 14th and the time of termination of merger negotiations which negotiations ended on November 29th. And further, that it was to cover only losses suffered by the bank within that period.
If there were any such losses it was to be redelivered to the proper party, who, as we have seen, is Mr. Rhodes, the receiver of the insolvent bank.
Bouvier gives this definition of escrow: "A deed delivered to a stranger to be by him delivered to the grantee upon the happening of certain conditions, upon which last delivery the transmission of title is complete." Bouv. Law Diet. (Rawle's 3d Ed.) 1072. When there is a second proper delivery, title is complete, just as it would have been had there been in the first instance an unconditional delivery to the grantee.
This provision is now extended to many other written instruments, bonds and notes included. Conditional delivery may be proven by evidence, parol or written, for their terms are not varied by showing that they were not delivered. No bond is binding until there has been a proper delivery. That may be as of its date or it may be deferred and made contingent upon some possibility as yet undetermined, but when delivery is once made the parol evidence rule applies, which is but to say that the date of the delivery does not control the construction of the bond, which must be according to its purport and tenor, and as it would have been had delivery not been delayed.
"The rule which prohibits the admission of parol testimony to vary a deed or other writing is not infringed by the introduction of evidence relating to the delivery of the deed. Such evidence does not tend to contradict the deed or the recitals therein, but merely to show there has been no valid delivery. Towner v. Lucas, 13 Gratt. [54 Va.] 705." Nash v. Fugate, 32 Gratt. (73 Va.) 595, 34 Am. Rep. 780.
Whitaker v. Lane, 128 Va. 317, 104 S. E. 252, 261, 11 A. L. R. 1157, is a case which deals with the conditional delivery of an instrument under seal. There is this statement of the law from McFarland v. Sikes, 54 Conn. 250, 251-2, 7 Atl. 408, 1 Am. St. Rep. 111:
"Such a contract cannot become a binding obligation until it has been delivered. Its delivery may be absolute or conditional. If the latter, then it does not become a binding obligation until the condition upon which its delivery depends has been fulfilled. If the payee of a note has it in his possession, that fact would be prima facie evidence that it has been delivered; but it would be only prima facie evi dence. The facts could be shown to be otherwise and by parol evidence. Such parol evidence does not contradict the note or seek to vary its terms. It merely goes to its point of non-delivery. The note in its terms is precisely what both the maker and the payee intended it to be. No one desires to vary its terms or to contradict them."
Judge Burks then said:
"In a controversy between the immediate parties to a written instrument, the parol .evidence rule does not forbid the use of parol evidence to establish any fact that does not vary, alter or contradict the terms of the instrument, or the legal effect of the terms used. These are concluded by the writing, and the parties are estopped to deny them."
Did the bank suffer loss within said interval of time? New deposits amounted to $7,348.53. Deposits decreased, however, about $40,000 in the aggregate. Cash on October 14, 1930, was $22,164.69. When the bank closed it had dwindled down to $7,326.12. There was an actual loss in operating expenses from July 1st to December 11th of $4,000. This does not, it is true, cover interest earned but not collected, but if the insolvent bank only pays something like a twenty-five per cent dividend then collections from that source will in no wise cover the cost of operation. Bank loans in gross were somewhere around $250,000. If Mr. Bristow had not closed the bank when he did it would have closed itself in a short time. Matters were rapidly going from bad to worse.
The bond was properly redelivered and upon redelivery became, as we have seen, an obligation enforceable according to its tenor and purport.
It is not necessary that we consider .other assignments of error. They deal with no novel proposition. Upon the merits of the case there should be a judgment for the plaintiff, and it is so ordered.
Reversed.
Epes and Hudgins, JJ., dissenting.