The opinion of the court was delivered by: BRODERICK
This is an action brought by the Official Liquidators of the British American Bank, Ltd. ("B.A. Bank"), a Bahamian banking company now in compulsory liquidation, against First National City Bank ("Citibank"), a national banking association with its principal place of business in New York City.
This court has jurisdiction of this action under 28 U.S.C. § 1332(a). Plaintiffs are citizens of a foreign country; defendant is a citizen of the State of New York; and the amount in controversy, exclusive of interest and costs, exceeds $ 10,000.
Plaintiffs seek in this action (1) to recover damages for the alleged conversion of 86,874 shares of the common stock of the American National Bank and Trust Company of South Pasadena, Florida ("American Bank"), or (2) to impose a constructive trust on the allegedly converted stock or the stock's proceeds for the benefit of the B.A. Bank.
Plaintiffs allege that, as part of a conspiracy to divest the B.A. Bank and its subsidiaries of the bulk of their assets, certain control persons of the the B.A. Bank and its subsidiaries converted the American Bank stock from the B.A. Bank. Plaintiffs further allege that the converted American Bank stock was later purchased by Citibank as pledgee in a purchase money loan transaction. They assert that Citibank took no greater rights in the American Bank stock than those rights that the original converters of said stock had had.
Citibank's principal counter to plaintiffs' contentions is that Citibank was a Bona fide purchaser ("BFP") of the pledged stock and that, therefore, Citibank acquired the stock free of any adverse claim. Plaintiffs deny that Citibank was a BFP and contend (1) that Citibank had actual and constructive notice of B.A. Bank's claim to the American Bank stock at the time Citibank purchased the pledged stock, and (2) that, at least, Citibank purchased the stock under circumstances that established that the purchase was made in bad faith.
A bench trial was had herein. This opinion, which is based on the facts stipulated in the Pre-Trial Order, the evidence adduced at trial, and reasonable inferences drawn from such facts and evidence, contains my findings of facts and conclusions of law under Rule 52(a), Fed.R.Civ.P.
A. The Various Corporate Entities
1. The B.A. Bank. The B.A. Bank was incorporated under the laws of the Bahamas and was engaged in the business of banking from July 19, 1966 until February 4, 1972.
At all times between its incorporation in 1966 and at least until October 25, 1971 the B.A. Bank was controlled, managed, and operated by Robert N. Bussey, Tazwell W. Pearson, and Donald R. Baker. By January, 1971, the B.A. Bank's liabilities exceeded its assets. However, the B.A. Bank's financial statements as of February 28, 1971 failed to reflect this insolvency.
On February 4, 1972 the B.A. Bank's license was suspended by the Bahamas Ministry of Finance. On May 4, 1972 the B.A. Bank's license was revoked by the Ministry. On May 11, 1972, the Bahamas Supreme Court placed the B.A. Bank in provisional liquidation. On June 5, 1972 the Bahamas Supreme Court placed the B.A. Bank in involuntary liquidation and appointed Bernard Gadd as official liquidator. On March 30, 1973 plaintiffs Graham C. Garner and Sydney Morris were duly appointed to succeed Gadd as the official liquidators of the B.A. Bank.
2. British American Bancorporation, Inc. About November 21, 1968, the British American Bancorporation, Inc. ("Bancorp") was incorporated under the laws of Florida. Bancorp's principal place of business was in a suite of offices occupied by Bussey in St. Petersburg, Florida. From November, 1968 until August 15, 1969, Bancorp was a wholly owned subsidiary of the B.A. Bank. From November, 1968 until it was involuntarily dissolved in 1974, Bancorp was controlled, managed, and operated by Bussey, Pearson, and Baker.
3. British American Investment Fund, S.A. About April 4, 1969, the B.A. Bank caused the British American Investment Fund, S.A. ("the Fund") to be incorporated under the laws of Luxembourg. At all relevant times, the Fund was controlled, managed and operated by Bussey, Pearson and Baker. Moreover, at all relevant times, the B.A. Bank owned between 75% And 97% Of the issued and outstanding shares of the Fund.
On August 15, 1969, Bancorp became a Fund subsidiary when the B.A. Bank transferred its 100% Stock interest in Bancorp to the Fund in return for a note. The note was satisfied in November, 1969 by the issuance of 139,114 Fund shares to the B.A. Bank.
4. American Bank. Between April 1, 1969 and December 31, 1969, the B.A. Bank paid $ 1,472,519 for 75,895 common shares of the American Bank, representing 73% Of the American Bank's outstanding common stock. Bussey, Pearson and Baker caused all of that stock to be registered in the name of Bancorp, which was the United States component of the B.A. Bank Bancorp Fund complex.
At all times between April 30, 1969 and April, 1972 the American Bank was controlled, managed and operated by Bussey, Pearson and Baker.
B. Bussey, Pearson and Baker Convert American Bank's Stock
By means of a series of complicated transactions while they controlled B.A. Bank, Bancorp, the Fund and the American Bank, Bussey, Pearson and Baker obtained 82,774 shares, or 80%, of the then outstanding American Bank common stock, leaving Bancorp with only 6,600 shares (or 51/2%) of the American Bank stock. The B.A. Bank Bancorp Fund complex received nothing of value in return for the 82,774 shares of the common stock of American Bank.
Between February, 1971 and October 25, 1971, by means of yet another series of transactions, Bussey Et al. obtained virtually all of the rest of the B.A. Bank's non-Bahamian assets and left the B.A. Bank with only an unsecured long-term debt from the Fund.
C. The "Sale" of B.A. Bank
On October 25, 1971, Pearson sold 100% Of the B.A. Bank stock to Dr. Federico Cruz and Thor Brunskow for $ 3.8 million, which Cruz purportedly borrowed on that day from the B.A. Bank in an unsecured loan approved by the B.A. Bank board of directors. This purported sale of the B.A. Bank originally received conditional approval by the Bahamian authorities. However, on November 16, 1971, the conditional approval was rescinded Ab initio, and the sale transaction was rendered null and void under Bahamian law.
D. The Citibank Loan and Matters Pertaining Thereto
In September 1971, William E. Bassett was hired as executive vice president of the American Bank at an annual salary of $ 21,000, and E. Wayne Johnson was hired as vice president at an annual salary of $ 13,000. Bassett and Johnson were each given (and each later exercised) options on 1,000 shares of American Bank stock at $ 38 and $ 45 per share, respectively.
On October 14, 1971, Bussey pledged 59,260 shares of American Bank stock to the Exchange National Bank of Tampa, Florida ("Exchange") as security for a $ 925,000 loan. Thereafter, he pledged an additional 10,920 shares of American Bank stock as further security for that loan and as security for an additional loan of $ 150,000. The American Bank share certificates that Bussey pledged had been registered in his name, and his purported ownership of those shares was reflected on the stock transfer records of American Bank, which bank was, as mentioned above, under the control of Bussey Et al.
Beginning in November, 1971, defendant Citibank investigated the B.A. Bank and Dr. Cruz because a Citibank customer, Flagler Systems, Inc. ("Flagler"), wanted to sell property to Dr. Cruz in a transaction that was to include a $ 5,000,000 guaranty by B.A. Bank. The proposed sale required Citibank's approval under the security arrangements between Citibank and Flagler.
The duration of the Flagler investigation and the extent of the involvement of the relevant personnel at Citibank in that investigation are not precisely clear. One of Citibank's witnesses, Andrew Toxey, who was an officer involved in arranging the loan/pledge transaction at issue herein, testified that the investigation was over and the matter forgotten by November 22, 1971. And, indeed, that may be so.
However, Citibank was conducting another investigation of the B.A. Bank during November, 1971 with respect to a B.A. Bank request to establish banking and credit relationships with Citibank in New York. In connection with this investigation, a Citibank officer, Wasson, had a business luncheon with a B.A. Bank officer, Davies, on November 22, 1971. Wasson invited Toxey to that luncheon, and Toxey attended. In preparation for this business meeting, Wasson had obtained from another Citibank employee, Albury, an October 31, 1971 financial statement of B.A. Bank, which statement listed among B.A. Bank's assets a two million dollar investment in the American Bank. Either before or after the November 22 meeting, Wasson delivered to Toxey for his examination a copy of that B.A. Bank financial statement. At the luncheon Davies told Wasson and Toxey that among the assets of B.A. Bank was an investment in the American Bank.
On February 28, 1972, the Wall Street Journal reported that the B.A. Bank claimed that, according to its records, it owned the American Bank. This newspaper article appeared a little more than a month before Citibank accepted the pledge in issue here. The Wall Street Journal article was read by Bassett, Johnson, and Toxey.
On March 1, 1972, R. M. Stevenson, the Vice President of the Federal Reserve Bank in Atlanta, wrote to Bussey at the American Bank. In his letter, Stevenson referred to the February 28th Wall Street Journal article as one ...