United States v. DIEBOLD INCORPORATED, Civ. A. No. 4485.

• Decision Date: 08 March 1961
• Docket Number: Civ. A. No. 4485.
• Citation: 197 F. Supp. 902
• Parties: UNITED STATES of America, Plaintiff, v. DIEBOLD INCORPORATED, and Herring-Hall-Marvin Safe Company, Defendants.
• Court: U.S. District Court — Southern District of Ohio

197 F. Supp. 902

UNITED STATES of America, Plaintiff, v. DIEBOLD INCORPORATED, and Herring-Hall-Marvin Safe Company, Defendants.

Civ. A. No. 4485.

United States District Court S. D. Ohio, W. D.

March 8, 1961.

Hugh K. Martin and Joseph P. Kinneary, U. S. Attys., Columbus, Ohio, Richard Pennington, Cincinnati, Ohio, Larry Williams, John Toohey, Washington, D. C., for plaintiff.

Abe Fortas and Wm. L. McGovern, Arnold, Fortas & Porter, Washington, D. C., Frederick A. Reister, Millikin, Reister, Fitton & Lattimer, Hamilton, Ohio, Murray Monroe, Cincinnati, Ohio, for Herring-Hall-Marvin.

DRUFFEL, District Judge.

Findings of Fact

Description of Acquisition

1. On September 11, 1959, Diebold, Incorporated (Diebold) acquired the assets of Herring-Hall-Marvin Safe Company (HHM) for $3,000,000 cash and the assumption of all liabilities.

2. The acquisition resulted from an offer, in May 1959, by Mr. Mosman, president of HHM, of a quick cash sale of the assets of HHM to Diebold. As a basis for negotiating the sale, Mr. Mosman tendered Diebold a balance sheet as of April 30, 1959, which reflected that HHM had a cash balance on that date of $115,507.32. Both the option agreement between Diebold and HHM of June 16, 1959, and the purchase agreement of July 17, 1959, referred to and were based on the balance sheet of April 30. Subsequently, and prior to the execution of the option agreement, Mr. Mosman informed Diebold he could not warrant the balance sheet of April 30, 1959 because, for the purpose of that sheet, he had reclassified $100,000 of "receivables" as "cash". A recent audit of the books of HHM discloses that the balance sheet of April 30, 1959, also failed to reflect $28,165.36 of outstanding April payroll checks. Instead of the purported cash balance of $115,507.32 on April 30, 1959, HHM actually had a net overall deficit cash balance (overdrafts outstanding) of $12,658.04.

3. At the closing of the purchase on September 11, 1959, Diebold representatives were informed that HHM could not present a check for the balance in its principal depository, the First National Bank and Trust Company of Hamilton, because that account was overdrawn by approximately $50,000. Checks were tendered for small amounts in other banks ranging from $800. to $9,477.90. Actually, the HHM account at the First National Bank and Trust Company of Hamilton had overdrafts outstanding on September 10, 1959, of $53,978.59. Crediting against this deficit the smaller amounts in other banks, HHM, on September 10, 1959, had a net overall deficit in all bank accounts in the amount of $35,596.61.

Financial Condition of HHM During 1959

4. At all times between June 1950 and September 11, 1959, when HHM was acquired by Diebold, HHM had been short of working capital and, from 1953 on, HHM had found it necessary to make frequent use of bank loans on a straight note basis to finance the company's annual sales volume.

5. In an effort to improve its net working capital position, HHM consistently retained substantially all of its earnings after taxes and the proceeds from the periodic liquidation of its readily disposable divisions and subsidiary companies. In 1954, the company received and retained $150,000 in insurance proceeds resulting from the complete destruction by fire of the facilities of its subsidiary, Thomas Manufacturing Company. In fiscal 1955, it sold its Quickdraft division for $100,000 on time payments. In fiscal 1959, it sold its Remington division for $98,000 and its Canadian subsidiary for $130,000.

6. HHM's balance sheets from June 1950 down through 1958 continuously reflected liabilities well in excess of tangible net worth, and its current ratio (the relationship of its current assets to its current liabilities) averaged only approximately 1.5 for the years 1951 through 1959 in contrast with an average of 2.7 during the same years for all manufacturers of fabricated metal products. By June of 1959, HHM's cash position was such that its net quick asset ratio (the relationship between cash and government securities on the one hand and current liabilities on the other) dropped to .074 the lowest in HHM's experience since 1951 and less than one-fifth the average net quick ratio of all companies in the fabricated metal products industry. By September 11, 1959 when Diebold acquired HHM, HHM's net quick asset ratio had declined to .03.

7. HHM's sales reached a peak in 1956-57 when the company had net sales of $10,672,000. In each of the next two years, fiscal 1958 and fiscal 1959, HHM's sales fell approximately $300,000 each year under the preceding year, to a low for fiscal 1959 of $10,023,000.

8. As sales fell in fiscal 1959 by approximately $300,000, inventories built up in the amount of $262,000.

9. Subsequent examination of the books and records of HHM disclosed the following financial condition that faced the company as the year 1959 wore on: out of 114 working days between April 1, 1959, and the consummation of the sale on September 11, 1959, HHM had overdrafts outstanding against balances in its principal depository (First National Bank and Trust Company of Hamilton) on 69 days (60% of the working days) in amounts ranging from $104.51 to $78,394.58. Similarly, the company had total net overdrafts outstanding on all of its commercial bank accounts on 41 days during the same period in amounts varying from $1,123.72 to $66,890.68.

10. Subsequent examination and audit of HHM accounts also disclosed that: (1) during the entire month of May 1959 the regular payroll account of HHM in the First National Bank and Trust Company of Hamilton had payroll overdrafts outstanding in amounts ranging from $24,466.29 to $54,297.52: (2) during at least half the month of May the overdrafts on the regular payroll account were subsequently reimbursed by overdrafts on HHM's general account in the First National Bank and Trust Company of Hamilton which account itself had overdrafts outstanding in amounts ranging from $38,551.37 to $116,809.86; and (3) on May 1, 1959, the HHM accounts in all banks had overdrafts outstanding against them in the amount of $79,037.17, and on May 8, the accounts in all banks had overdrafts outstanding in the amount of $57,325.79.

11. The annual examination by the HHM auditors of the books of account disclosed that the June 30, 1959, balance sheet of HHM which purported to reflect a net cash balance in the regular account at the First National Bank and Trust Company of Hamilton, Ohio of $35,942.21, failed to reflect outstanding checks in the amount of $46,858.62. When adjustment was made by the auditors to account for these undisclosed and outstanding June checks, HHM was shown to have had overdrafts outstanding on the regular account of the First National Bank and Trust Company of Hamilton as of June 30, 1959, in the amount of $10,916.41.

12. Recent audit of the HHM books and records also disclose that while HHM apparently had $13.92 on deposit in the First National Bank and Trust Company on September 3, 1959, the company actually had overdrafts outstanding as of September 3 on this bank in the amount of $73,127.80.

13. HHM's bank statements showed modest minimum monthly balances in its principal depository, the First National Bank and Trust Company of Hamilton; January, $97,535; February, $142,586; March $75,743; April, $6,143; May $27,871; June $44,741; July $33,751; August $55,308; September $13. These bank balances do not properly reflect the financial condition of HHM because (1) they failed to reflect the outstanding checks sent to creditors which represented overdrafts that had not yet cleared the bank on 60% of the working days between April 1 and September 11, 1959; and (2) they failed to reflect an inflation of bank balances created by the company itself through transfer, from time to time, of funds by check within its own bank accounts, e. g., on January 30, 1959, HHM drew a check for $34,000 on Wells Fargo Bank (San Francisco) for deposit in Irving Trust Company (New York) on the same day, a check for $34,000 was drawn on Irving for deposit in Peoples First National Bank and Trust Company (Pittsburgh); and on the same date, a check in the amount of $34,000 was drawn on Peoples for deposit in the First National Bank and Trust Company (Hamilton, Ohio). HHM only had one $34,000 deposit to transfer, but on February 2, 1959, the total aggregate balances reflected in all four banks credited $136,000.

14. On December 30, 1958, HHM borrowed $250,000 on demand notes from its principal depository, the First National Bank and Trust Company of Hamilton, which was limited by law to an indebtedness of $300,000 to any one customer. On May 6, 1959, HHM, again on demand notes, increased its loan to the limit of $300,000. On May 13, 1959, the loan was reduced to $250,000 but on September 11, 1959, HHM, again on demand notes, increased its loan to the limit of $300,000. On deposition, the president of the bank testified that the bank did not wish to carry this loan...