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MINICHELLO v. SAXON

April 7, 1967

Albert J. MINICHELLO et al., Plaintiffs,
v.
James J. SAXON, Comptroller of Currency for the United States of America et al., Defendants



The opinion of the court was delivered by: FOLLMER

 FOLLMER, District Judge.

 This derivative stockholders' action is presently before this Court on Mandate from the Court of Appeals, 3 Cir., 337 F.2d 75. In accordance with the Mandate, this Court by Order of July 14, 1965, reinstated the Comptroller as a party defendant and also reinstated the Complaint as to all defendants.

 The Court of Appeals, in further disagreement with this Court, concluded that the Comptroller's determination respecting the existence of an emergency is reviewable and accordingly remand was necessary for consideration of the question in the first instance by this Court.

 The Court of Appeals said, inter alia:

 
"The sole issue that remains for discussion is the test to be applied by the court below on remand. While we have concluded that the Comptroller's determination respecting the existence of an emergency is reviewable, nevertheless it is manifest that the Comptroller is charged with the fundamental power of decision on this question. The standard to be applied is not whether an emergency in fact existed but whether a reasonable man on the basis of facts of which he was aware or should have been aware, could have reasonably concluded that an emergency existed. All matter relevant to a proper consideration of this question will be of course admissible into evidence. The extent if any to which it is proper to specifically define or give some sembance of meaning to the term 'emergency' as employed in Section 181 we leave initially to the judgment of the court below after consideration of the facts and the legal arguments presented. * * *"

 In accordance with the said Mandate, the Court set Monday, January 9, 1967, at 10:00 o'clock A.M., at the United States Courthouse, Lewisburg, Pennsylvania, as the time and place to take testimony as directed by said Mandate.

 At the hearing, plaintiffs moved to incorporate into the record the testimony taken before the Court in the first hearing, which began June 24, 1963, and various exhibits. Plaintiffs called the attention of the Court to the fact that George Daileda, former Cashier of the Exeter Bank, was deceased and that August Lippi, Chairman of the Board of said bank, had been convicted as to some of the defalcations at this bank. Plaintiffs then rested.

 At this point, defendants called Marshall Abrahamson who identified himself as Chief National Bank Examiner in the employ of the Comptroller of the Currency during the month of February, 1962. On questioning by the United States Attorney, who was acting by agreement for all defendants, Mr. Abrahamson testified at considerable length and was cross-examined by counsel for plaintiffs.

 Mr. Abrahamson's testimony may be condensed as follows: First National Bank of Exeter was under the jurisdiction of Mr. Abrahamson as a part of the Third Federal Reserve District whose headquarters were in Philadelphia, Pennsylvania. On January 29, 1962, Abrahamson received a call from Ettore J. Lippi, President of the Exeter Bank, that a defalcation existed occasioned by Daileda, the Cashier. Pursuant to that telephone conversation, Abrahamson in his capacity as Chief National Bank Examiner immediately telephoned Examiner Talarsky and sent him to the bank to determine the extent of the defalcation. In addition, Abrahamson arranged to be at the bank the next morning, January 30. With the aid of Talarsky and a group of assistants from the area, Abrahamson practically conducted another investigation of the bank in an effort to determine the exact condition of the bank because by that time they knew the defalcation was large, actually in excess of $200,000.00, and that it probably impaired the capital. At that time the capital structure was about $350,000.00.

 Abrahamson was at the bank off and on for the next few weeks during which time the examination of the bank continued without interruption. During all of this time the shortage was increasing daily and by February 26, 1962, it was in the neighborhood of $450,000.00 or $460,000.00. Each new lead would develop further losses. At no time were the examiners satisfied that they had determined the actual extent of the defalcation. The examiners found that the majority of the losses were liabilities not shown on the books of the bank, but rather that funds had been abstracted and the records had been withdrawn by Daileda, so that when the bank's depositors were contacted it was discovered that additional deposits were not shown on the bank books.

 The examiners knew there was in existence a primary bond of $200,000.00 and a $1,000,000.00 excess bond. They also knew that the excess bond had not been authorized by the Board of Directors; that it was obtained by the Cashier, Daileda, without the knowledge of the Board; that he could not pay for the bond in the usual way by a Cashier's check charged to expense for the reason that in that event the Board would have knowledge of it; that Daileda falsified the records and paid for it with a Cashier's check with a duplicate number and it never did appear in the expense account.

 At this point the defendant offered in evidence two letters from Scarborough and Company Insurance Counselors of Chicago, Illinois, to the Exeter Bank. The one letter stated that an investigation was being made by the Underwriters, that the Underwriters admitted no liability under said bond and expressly denied liability thereunder. The second letter stated that since there was a question as to refund due and owing, the funds had been placed in escrow pending advice as to whom refund should be made.

 Abrahamson continued that after taking the capital structure of the bank and adding to it the $200,000.00 primary bond and deducting therefrom the known loss and the paper felt to be reasonably uncollectable, there remained slightly less than $100,000.00 funds.

 As of February 26, 1962, as the result of the examination, and the fact the examiners could not say with any assurance that the million dollar bond would be paid in the light of the denial of liability, Abrahamson concluded that an emergency existed. *fn1" He was in constant communication with the Comptroller by telephone during the period from January 30, until the conservatorship was removed. These telephone reports to the Comptroller were almost daily, the frequency varying with the information which was to be submitted.

 There were some large withdrawals, one by a director amounting to between $160,000.00 and $167,000.00, which gave them concern and this was one of the factors leading up to placing the bank into conservatorship. In addition, Abrahamson reported to the Comptroller the actions of the Lippi group which constituted a majority of the Board and of this the Comptroller was fully advised. Abrahamson endeavored to have the Lippi group resign from the Board, but they refused. He testified that he certainly considered that an emergency existed at the bank and he reported this fact to the Comptroller.

 Abrahamson repeated that on telephonic inquiry from the Comptroller as to his idea or recommendations as to the existence of an emergency, he replied that in his opinion there was an emergency.

 On cross-examination, he testified: "that continued withdrawal of good assets, cash and available funds, to meet withdrawal of deposits could only continue - they would continue and then they would result in a condition existing whereby the bank would have slow assets or uncollectable assets to meet the remaining deposit liabilities. And that's what gave the Comptroller concern." (N.T. pp. 45-46). *fn2" Abrahamson also testified that although there had been a number of very substantial withdrawals, there had not been a run on the bank in the generally accepted meaning of that term and that at no time including ...


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