Giambattista v. National Bank of Commerce of Seattle

• Decision Date: 06 November 1978
• Docket Number: No. 5006-I,5006-I
• Citation: 586 P.2d 1180,21 Wn.App. 723
• Parties: Naureen M. GIAMBATTISTA, Victor W. Haller, William P. Henry, Anthony J. Murad and Roberta Murad, Kaiser Murad and Miriam Murad, Rose Murad, Appellants, v. The NATIONAL BANK OF COMMERCE OF SEATTLE, Respondent. Whitney R. TITUS, Appellant, v. The NATIONAL BANK OF COMMERCE OF SEATTLE, Respondent. Arnold VANT ZELFDE and Charlotte Vant Zelfde, Appellants, v. SECURITY SAVINGS AND LOAN ASSOCIATION, Respondent.
• Court: Washington Court of Appeals

Page 723

21 Wn.App. 723

586 P.2d 1180

Naureen M. GIAMBATTISTA, Victor W. Haller, William P. Henry, Anthony J. Murad and Roberta Murad, Kaiser Murad and Miriam Murad, Rose Murad, Appellants, v. The NATIONAL BANK OF COMMERCE OF SEATTLE, Respondent.

Whitney R. TITUS, Appellant, v. The NATIONAL BANK OF COMMERCE OF SEATTLE, Respondent.

Arnold VANT ZELFDE and Charlotte Vant Zelfde, Appellants, v. SECURITY SAVINGS AND LOAN ASSOCIATION, Respondent.

No. 5006-I.

Court of Appeals of Washington, Division 1.

Nov. 6, 1978.

Ruthford, Lind, Van Valin & Watts, Victor Van Valin, Charles E. Watts, Bellevue, for appellants.

Adair, Kasperson, Peterson & Hennessey, William F. Hennessey, Seattle, Graham & Dunn, Stephen A. Crary, Robert A. Medved, Seattle, for respondents.

ANDERSEN, Acting Chief Judge.

These consolidated cases arose out of the operations of certain New York money brokers in this state. At issue are questions involving the common-law doctrines of champerty and maintenance.

The trial court declined jurisdiction of the cases on the ground that the actions brought by the plaintiffs, as assignees of the money brokers, violated public policy against maintenance and that the actions presented a potential for attorney conflict of interest regarding settlement. The trial court also denied, or did not rule on, the various parties' cross motions for summary judgment.

BACKGROUND THE MONEY BROKERAGE BUSINESS

The issues presented by this appeal are decided on the basis of the appellate record. Some background to the unique business of money brokerage is helpful, however, to an understanding of the dealings which gave rise to this litigation.

In the September 1970 edition of Banking, an interview with the acting general counsel of the Federal Deposit Insurance Corporation, entitled "The FDIC Discusses Money Brokers," is reported. The following questions and answers from that article are informative:

Q. What is meant by the terms money broker, brokered deposit, and link financing?

A. A money broker is any person or organization who regularly engages in the solicitation of funds for deposit in banks or loans to third parties and receives a fee or other compensation for this service.

A brokered deposit is any deposit which is placed in a bank pursuant to an arrangement with a money broker and for which the depositor receives a premium (usually somewhere between 1% And 3% Of his deposit) over and above the interest paid by the bank on his deposit. This premium may be paid by the bank a practice which is considered a violation of Federal interest rate regulation if the bank is already paying interest on its deposits at the maximum legal rate or, more typically, it may be paid by one who wishes to borrow funds from the bank.

In a link financing transaction, the bank has some doubts about the credit worthiness of the proposed borrower, is simply short on lendable funds, or desires to increase the effective yield on the loan. It agrees to the loan only on condition that the borrower leave a large portion of his loan on deposit with the bank as a compensating balance or else bring in new deposits at least equal to the loan. The borrower goes to a broker who, for a fee, usually paid by the borrower, arranges to have new deposits placed with the bank. The loan is then linked to these new deposits in the sense that the deposit proceeds are used to make the loans; however, the deposits cannot be used to offset the loan in case of default. In theory, everyone is satisfied. The bank acquires new money to lend. The borrower gets his loan. The broker receives a fee. The depositor gets a premium.

Of course, the banker may find himself saddled with a bad loan, or a liquidity problem when the funds are withdrawn, or both.

Q. Is it the FDIC's position that the practice of brokering deposits is hazardous or harmful in and of itself or is it only the linked loans which constitute a danger to the bank?

A. Of course no bank has ever failed simply because it accepted additional funds for deposit. The failures really result from bad loans and from a large concentration of highly volatile funds invested in long-term loans. The fact is that most brokered deposits are placed with banks in a package with high-risk loans.

However, the argument that the whole problem turns on proper lending practices, effective credit investigations, etc., really ignores the dangerous aspects of brokerage transactions. Money brokers form a nationwide For example, money brokers operating on a nationwide basis placed $2,700,000 in The Peoples State Savings Bank in Auburn, Mich., in less than eight weeks subsequent to a regular examination of the bank. The transactions in other closed banks were equally fast. The size and speed of these transactions plus a lack of current and specific information on the part of Federal or state authorities as to the situation in each one of the nation's 14,000 banks is an open invitation to fraud and misapplication of the brokered funds received, or, at best, unwise or imprudent lending practices.

network. It has been shown that they can generate relatively large sums for deposit in a single bank in a short period.

Q. A money broker has recently stated in the press that he is merely an independent third party and has no interest in what are essentially relationships between banks and their customers. What do you think of this contention?

A. Brokers are well aware of the hazards which result from transactions of this kind, and they are the necessary element which brings together the deposit and the high-risk loan. We have reason to believe that the broker frequently takes the lead in presenting and selling a packaged transaction to the lending bank. In occupying this role a broker acts more in the capacity of a promoter than that of an independent third party. Moreover, the fee paid to the broker by a borrower is usually the source of the premium to the depositor over and above the interest rate ceilings set by the Federal agencies.

FACTS OF CASE

The facts are complex. Some detail is therefore required.

In 1970 and 1971, and at all times herein, North American International Companies, Inc. (North American) was a Delaware corporation whose offices were located in Mineola, New York. It, as well as Share Brothers Company (Share Brothers), a partnership operating out of Syracuse, New York, were money brokers.

Beginning in January 1970, the maximum rate of interest that any federally insured financial institution could legally pay on any certificate of deposit ("CD") or passbook Typically, each depositor delivered money, for example, $10,000 to Share Brothers in Syracuse, New York. Share Brothers would acknowledge receipt of the funds to purchase a $10,000 CD to be issued by an unspecified savings and loan association to bear interest at the maximum allowable interest rate, at that time 51/2 percent. Each depositor was also to be paid an additional 1 percent as his or her share of the "bonus interest." Share Brothers then transmitted the funds to North American, another money broker, which in turn transmitted them to a Washington resident (hereinafter referred to as the "intermediary" ¹ who obtained CD's for the depositors from a Pacific Northwest area financial institution, customarily a savings and loan association. The intermediary paid the total bonus interest, customarily 3 percent, and from this North American and Share Brothers deducted their fees and the depositors received their 1 percent premium.

account was uniformly limited throughout the country by various federal regulatory agencies. Nevertheless, money brokers such as North American and Share Brothers, although aware of the prohibitions against exceeding the maximum interest rate, were able to bring together depositors (such as the plaintiffs in these cases) and lending institutions which directly or through generally substandard borrowers were willing to pay an additional sum.

Since the savings and loan institution was prohibited from paying more than the specified rate of interest, if the 3 percent bonus interest was paid by a savings institution or its agent, it was illegal. It was not illegal, however, if it was paid by some high risk borrower through link financing or a similar arrangement (See "Background" above). The depositors and the principals in the money brokerage firms all testified in their depositions to the same effect, they neither knew nor cared where the 3 percent bonus interest came from. Their concern was only that the depositors get The money brokers' ignorance of the source of the bonus interest is quite remarkable when it is considered that they sent approximately $2.75 million to savings institutions in the State of Washington in 1970 and 1971, primarily through this same intermediary.

their CD's in a federally insured savings institution and that they all obtain their share of the bonus interest.

In placing these brokered funds with savings and loan associations in the State of Washington, North American physically delivered the funds to the intermediary and he then purchased CD's or passbook accounts in the names of the individual depositors. Initially, the brokered funds went into Northwest Guaranty Savings and Loan Association (Northwest Guaranty), a firm which was later placed in receivership after its president, Kenneth Grove, fled the jurisdiction. Subsequently, however, funds were also placed in savings and loan associations other than Northwest Guaranty.

North American had its first dealings with the intermediary in April 1970. In the following year, through him, North American placed over.$2.5 million with Northwest Guaranty on 18 different occasions. Each of the transactions was similar in form. North American would send the intermediary checks payable to Northwest Guaranty and letters of transmittal directing him to use the checks to purchase CD's from Northwest Guaranty. The intermediary would then deliver the checks to...