Slay v. Berry

• Decision Date: 08 October 1970
• Docket Number: 4630,No. 1,Docket Nos. 4629,1
• Citation: 27 Mich.App. 271,183 N.W.2d 436
• Parties: In the Matter of the Petition of Charles D. Slay, Commissioner of Banking of the State of Michigan, for the Appointment of a Receiver for the Public Bank of Detroit, Michigan. Petition of Charles D. SLAY, Commissioner of Banking of the State of Michigan, for the Appointment of a Receiver for the Public Bank of Detroit, Michigan, Plaintiff-Appellee, v. Louis BERRY, John Burke, Philip K. Mebus, Sr., Philip K. Mebus, Jr. Bernard J. Youngblood, in their individual capacity as stockholders, and as directors of and on behalf of respondent Public Bank, Defendants-Appellants
• Court: Court of Appeal of Michigan — District of US

Page 436

183 N.W.2d 436

27 Mich.App. 271

In the Matter of the Petition of Charles D. Slay,

Commissioner of Banking of the State of Michigan,

for the Appointment of a

Receiver for the Public Bank of Detroit, Michigan. Petition

of Charles D. SLAY, Commissioner of Banking of the State of

Michigan, for the Appointment of a Receiver for the Public

Bank of Detroit, Michigan, Plaintiff-Appellee, v. Louis BERRY, John Burke, Philip K. Mebus, Sr., Philip K.

Mebus, Jr. Bernard J. Youngblood, in their individual

capacity as stockholders, and as directors of and on behalf

of respondent Public Bank, Defendants-Appellants.

Docket Nos. 4629, 4630.

Court of Appeals of Michigan, Division No. 1.

Oct. 8, 1970.

Released for Publication Feb. 16, 1971.

Mark E. Schlussel, Schlussel, Lifton, Simon & Rands, Detroit, for Public Bank Shareholders Assn.; Kasoff, Young, Gottesman & Kovinsky, Detroit, of counsel.

Avern Cohn and John Sklar, Honigman, Miller, Schwartz & Cohn, Peter P. Thurber (co-counsel), Miller, Canfield, Paddock & Stone, Detroit, for Receiver FDIC.

David M. Miro, John Feikens and Joseph Levin, Feikens, Dice, Sweeney & Sullivan, Detroit, for Louis Berry.

Leslie Fisher, Gen. Counsel, and J. Lovering Truscott, Asst. Gen. Counsel, Federal Deposit Ins. Corp., Washington, D.C.

Joseph L. Hardig, Jr., William H. Merrill, Charles T. Hammond, Parsons, Tennent, Hammond, Hardig & Ziegelman, Detroit, for Bank of the Commonwealth.

Frank J. Kelley, Atty. Gen., Robert A. Derengoski, Sol. Gen., Maurice M. Moule, James J. Wood and William R. Rudell, Asst. Attys. Gen., for Commissioner of Banking.

Before QUINN, P.J., and V. J. BRENNAN and BRONSON, JJ.

PER CURIAM.

The two appeals involved were consolidated for purposes of appeal by an order of this Court dated February 20, 1969. Each appeal arose from the same lower court proceeding, namely: the grant of the petition of the Michigan commissioner of banking for the appointment of a receiver for Public Bank, a Michigan banking corporation. Our file No. 4629 is the appeal of Public Bank Shareholders' Association and our file No. 4630 is the appeal of the individual defendants. For a variety of reasons, discussed in detail subsequently, the appeals attack the grant of the petition, the propriety of appointing Federal Deposit Insurance Corporation as receiver, and the sale and transfer of the assets of Public Bank to Bank of the Commonwealth by the receiver.

Our review of the actions of the trial court here under attack must be in context with the facts presented to that court. In its written opinion, the trial court made detailed findings of fact, none of which are clearly erroneous (GCR 1963, 517.1), and our review of the record does not convince us that we would have found differently had we sat as triers of the fact. These findings establish the following:

Public Bank was a state bank chartered under Michigan Financial Institutions Act. Public Bank was not a member of the Federal Reserve System, but was insured with FDIC and subject to examination by it, as well as the state banking department.

From 1961, the state banking department was concerned with the operation of Public Bank. In 1963, the accounting department manager of Public Bank took exception with his superiors as to certain accounting methods employed by the bank. He questioned the handling of unearned income, a switch of accounting methods relating to unearned interest on installment loans, and he objected to the transfer of approximately $500,000 from the unearned interest account to the undivided profits account. Again in 1965, this same accounting officer questioned the handling of the unearned interest account, the renewal of consumer loans and the establishment of loss reserves pertaining to home improvement contracts purchased by the bank. These objections were voiced to several officers and directors of the bank.

In September of 1965, an officer of Public Bank brought to the attention of the state banking commissioner the method by which the bank handled the unearned interest account. During the fall of 1965, a federal grand jury investigated Public's accounting methods, especially those relating to the unearned interest account. This was a topic of discussion between the banking commissioner and officers and directors of Public during September and November of 1965.

Shortly prior to November 3, 1965, the secretary of Public Bank advised the directors of the bank that an initial accounting run had been made reflecting a deficiency in the unearned income account of $1,509,000 which would reflect in an overstatement of earnings. Such initial run was disputed and required further detailed checking in the opinion of other officers of the bank. At the November 3 meeting of the board of directors, the state banking commissioner requested an audit of the unearned interest account to determine any deficiency. There were substantial differences of opinion as to the most prudent method for accounting appropriately to reflect whether there was any deficiency. Shortly after this November 3rd meeting, the president of Public Bank, Mr. Hay, resigned effective November 30, 1965.

Soon after this meeting, the board of directors employed Touche, Ross, Bailey and Smart to conduct an audit of the unearned interest account. This audit resulted in a written opinion from the accountants which used three methods in reviewing the bank's computations of unearned interest. Under each method a deficiency in unearned interest and an overstatement of profits was disclosed in amounts of approximately $1,835,000, $2,045,000 and $1,485,000, according to the method employed.

December 22, 1965, Ernst and Ernst were employed to review the findings of Touche, Ross, Bailey and Smart. Ernst and Ernst made no examination or audit of accounts but in a letter opinion as of December 28th, reviewed the method used by Public in recognizing income on installment loans. This report reflected that Public since approximately 1962 had been recognizing income on installment loans on an 'average yield method', leaving in a deferred income account an amount approximately equal to ten or eleven per cent of the outstanding balance of the installment loans. Such practice according to the Ernst and Ernst report was 'reasonable and similar to the practice followed by other banks'. This report also suggested that such interest earned on installment loans be reflected on a 78'ths method in the future and proposed that such change be made after January 1, 1966. The opinion of Ernst and Ernst concluded that the present method be continued on the books through December 31, 1965 to avoid 'an abnormal adjustment as of December 31, 1965 which might have serious effect on the bank's image in the financial community'.

At a meeting held December 28, 1965, the board of directors considered the reports from both firms of accountants and adopted the recommendations of Ernst and Ernst. A resolution was adopted continuing the existing policy of computing earnings on installment loans through December 31, 1965 and providing that starting on January 1st, the 78'ths method be used for all new installment loans. The officers of the bank were instructed to advise interested state and federal officials of this resolution.

Walter F. Finan was elected president and director of Public Bank following the resignation of Mr. Hay. At a meeting held January 6, 1966, Mr. Finan read a prepared statement relating to the handling of the unearned income account. The statement expressed his position that if Public did not follow the practices recommended by Touche, Ross, Bailey and Smart or make a full proper footnote to the December 31st statement as Touche, Ross, Bailey and Smart might recommend, Mr. Finan would submit his resignation. According to the statement, the books of Public Bank did not properly reflect the true condition of the bank because the unearned income on installment loans was understated and its earned income overstated. Mr. Finan recommended that an immediate cure should be effectuated either by suitable bookkeeping entries prior to the closing of the books of account for the year 1965 or by causing suitable footnotes to be made to the year-end report for 1965. Mr. Finan's resignation was accepted at this meeting.

At a board of directors' meeting held January 10, 1966, the footnote suggestion was adopted, and the statement of condition of the bank as of December 31, 1965 contained a footnote which indicated a reduction in undivided profits of approximately $1,500,000. At this meeting, it was also determined to amortize this deficiency over a period of years by charging it to current earnings computed on the 78'ths method. The first amortization entry was made on Public's books in March of 1966. This was reflected in the statement of condition as of April 5, 1966, and neither the state banking department nor EDIC objected to this procedure.

FDIC and the state banking department began separate examinations of Public Bank March 28, 1966 which continued until June 10, 1966. A summary of the EDIC report of this examination stated:

'In spite of repeated criticisms of supervisory authorities and field examiners, management has continued to expand the loan account far beyond accepted banking standards, has continued to extend credit to financially weak borrowers, has continued to extend credit in excessive concentrations to a few borrowers and their interests, has failed to adhere to the basic principles of sound banking of maintaining a normal risk diversification, has continued its weak lending policies, has not formulated a reasonable collection policy, has continued to grant loans with inadequate credit information, has failed to maintain the credit files in a current and satisfactory condition, has failed to effect reasonable recoveries on charged off assets, has continued to operate the bank with an inadequate capital account, has failed to recognize...