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February 5, 1935


The opinion of the court was delivered by: INCH

INCH, District Judge.

The receiver of the First National Bank of Hempstead brings this suit against the town of Hempstead, Nassau county, Long Island, N.Y.

The plaintiff, by his bill, alleges three causes of action. The first and third causes of action relate to an alleged void pledge of assets of the bank to secure the deposit by the town supervisor of town money, representing taxes collected by the town. The second cause of action seeks to recover a certain portion of these assets so pledged on the theory that, at the time they were so pledged, the bank was insolvent and unable to meet its obligations, and that the directors and officers of the bank knew of this condition, and that the pledge was made with intent to prefer the town and with intent to hinder, delay, cheat, and defraud other creditors of said bank.

 The defendant duly answered and the issues duly came on for trial.

 At the trial the plaintiff asked and received permission to amend his complaint by adding the additional reason for alleged failure of the pledge of the bank's assets "because of total lack and failure of consideration." This amendment was consented to by the defendant.

 No oral testimony was offered at the trial except in regard to the second cause of action. As to all of the other issues, there is no substantial dispute of fact and only a question of law is presented.

 Briefly stated, the undisputed facts on which the first and third causes of action are based are as follows: In August, 1932, the bank secured the public money so deposited by the town supervisor by pledging $50,000 of Liberty bonds owned by the bank. On January 11, 1933, the amount on deposit of this public money belonging to the town was approximately $495,000, of which $400,000 was kept by way of a certificate of deposit account and the remainder in the usual demand deposit account. The certificate of deposit account required thirty days' prior notice for withdrawal.

 On January 11, 1933, the supervisor of the town charged with the due care over this fund requested further security for the town account and on or about January 17, 1933, the bank duly plesged further assets in the form of bonds and mortgages about equaling, at face value, and together with the other pledge, the deposits in question.

 Thereafter the bank continued to function in the usual manner until the bank holiday was declared in March, 1933, at which time all banks, throughout the land, temporarily suspended.

 Thereafter the bank was placed in the hands of a consevator and later plaintiff was duly appointed receiver.

 In August, 1932, the national bank examiner apparently made no objection to the pledge then existing, although her knew of it and the comptroller of the currency in no way interfered with the operation of the bank until said March, 1933, although commplete reports were before him.

 On the trial there was offered no proof sufficient on which to base a finding that the bank officials intended to hinder, delay, cheat, or defraud other creditors of the bank by the giving of security for the deposit of public money, or that the security give on January 17, 1933, which is the only one complained of in this regard, was given in contemplation of insolvency with intent to prefer the town and at a time when the directors knew or reasonably should have known that the bank was insolvent within the definition of the law. Title 12 USCA § 91.

 On the contrary, the proof shows the situation to have been of the same character as that recently found in the case of Nelson v. Lewis, 73 F.2d 521 (C.C.A. 2). See, also, McDonald v. Chemical National Bank, 174 U.S. 610, 19 S. Ct. 787, 43 L. Ed. 1106. Accordingly, such cases as Roberts v. Hill (C.C.) 24 F. 571, Cronkleton v. Ebmeier (C.C.A.) 39 F.2d 748, Federal Reserve, etc., v. Omaha Nat. Bank (C.C.A.) 45 F.2d 511, and First National Bank v. Andresen (C.C.A.) 57 F.2d 17, are distingushed because of the different facts appearing in such cases from those here presented.

 In the case before me, while the bank was facing a condition, then generally prevailing, it was considered one of the oldest and most substantial banks in the county and, but a short while before the last pledge, the directors had written to the comptroller of currency their intention to continue to make the institution continuingly useful to the county. (Defendant's Exhibit 5.) There was nothing proven to indicate that what took place on January 11 and 17, 1933, was anything but the desire by the supervisor of the town to use due care in accordance with conditions to see that the public moneys were amply secured and an equal desire on the part of the bank to amply secure same in the manner and practice which had been previously followed.

 Accordingly, I do not find that the proof justifies any finding that section 91, title 12 USCA, had been violated and this disposes of the second cause of action.

 The far more important question of law is: Did the bank have any legal right to secure either in August, 1932, or in January, 1933, the deposits of public money of the defendant town?

 It is undisputed that all of the deposits represented public money raised by the town by means of taxation. The town of Hempstead is a political ...

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