People v. Dilliard

3 N.E.2d 572, 271 N.Y. 403, 1936 N.Y. LEXIS 1217

• Court: New York Court of Appeals
• Decided: July 8, 1936
• Status: Published

Opinions

Hubbs, J.

Appellant has been convicted of a misdemeanor for violating the following statutory provision, section 47 of the Insurance Law (Cons. Laws, ch. 28), which reads:

“ Deceptive Statements Prohibited. No insurance corporation doing business in this state, or agent thereof, shall state or represent by advertisement in any newspaper, periodical or magazine, or by any sign, circular, card, policy of insurance or certificate of renewal thereof or otherwise, that any funds or assets are in possession of any such corporation not actually possessed by it and available for the payment of losses and claims, and held for the protection of its policyholders or creditors.” and section 665, subdivision 3, of the Penal Law:

“ Misconduct of directors, officers, agents and employees of Corporations.

“A director, officer, agent or employee of any corporation or joint-stock association who: * * *

“ 3. Knowingly (a), concurs in making or publishing any written report, exhibit or statement of its affairs or pecuniary condition containing any material statement which is false, or (b), omits or concurs in omitting any statement required by law to be contained therein; * * *

“ Is guilty of a misdemeanor.”

The purpose of section 47 is clear. It was enacted for the protection of the public against being misled or deceived by false statements as to the financial condition of the corporations required to make annual reports to the Superintendent of Insurance. Appellant was the president of State Title and Mortgage Company, an insurance corporation required by law to make annual reports to the Superintendent of Insurance. Section 45 of the Insurance Law requires the Superintendent to cause to be “ prepared and furnished ” to companies required to report to him “ printed forms of the reports and statements required ” by him. About the first of the year 1933, the title company submitted to the Superintendent of Insurance a statement which purported to show the financial condition of the company as of December 31, 1932. The Insurance Department suggested changes and alterations. Those changes were made by the company and on January sixteenth, the examiner in charge advised that the statement be accepted and filed. Two days later it was officially acknowledged and placed on file. It was in the form required by section 48 of the Insurance Law and showed the company’s net surplus of assets over liabilities. The statement filed was in form and wording as follows:

State Title and Mortgage Company

Statement of Condition December 31, 1932

Our Clients Hold 7,684 Mortgages, Guaranteed or in Certificates, Amounting to $69,899,491.60.

Resources:

Cash on Hand and in Banks. $558,376 16

Accrued Interest. 1,616,520 74

Loans Receivable. 2,537,256 41

(Secured by collateral)

Bonds and First Mortgages. 4,091,698 54

Stock Investments. 1,274,000 00

Stock of State Banking Company. 2,562,303 08

(Wholly owned)

Company’s Office Buildings. 1,262,753 27

(Unencumbered)

Subsidiary Real Estate Company. 652,440 11

(Investment and advances)

Accounts Receivable. 2,426 76

$14,557,775 07

Liabilities:

Accounts Payable. $5,298 03

Agency Accounts. 117,513 63

Interest Received in Advance. 59,739 08

Interest Accrued. 1,062,560 59

Bills Payable (Secured). 4,143,890 93

Mortgages Sold, Undelivered. 55,650 00

Reserves for Taxes, etc. 445,917 09

Reserve for Contingencies. 2,500,000 00

Capital . $1,000,000 00

Surplus. 5,000,000 00

Undivided Profits . 167,205 72

6,167,205 72

Total $14,557,775 07

A copy of the statement was furnished to Dun and Bradstreet, also to Moody’s Investors Service.

The statement was filed in the form usually used by companies and approved by the Insurance Department. It correctly stated the assets and liabilities of the company and gave the correct net balance. Nevertheless, appellant has been convicted for issuing that statement. How has that happened? While the State admits that the statement correctly reflects the book entries of the company and that such entries are accurate and in a form approved by the Superintendent of Insurance, still it urges that the form of the statement was misleading, false and tended to deceive. That contention is based upon two grounds: First, it is claimed that the item of “ Cash on Hand and in Banks, $558,376.16,” was misleading, as $400,000 included therein was not cash on hand or in bank as it consisted of a loan from the Brooklyn Trust Company to the title company made on December 29 or 30, 1932, evidenced by a certificate of deposit and the money was not available for use by the title company on December 31, 1932. Second, that the items “ Bonds and First Mortgages, $4,091,698.54,” was misleading, as a large part thereof had been pledged to the Reconstruction Finance Corporation, hereafter referred to as the R. F. C., also that the item “ Stock of State Banking Company (wholly owned), $2,562,303.08,” was misleading as that stock had also been pledged to the R. F. C. to secure the payment of loans and it is asserted that as the statement did not disclose such facts it was misleading and in effect false, and gave the impression that such securities were in fact in possession of the title company available for the payment of claims against it when in fact they were not in the possession of the title company and were not available for the payment of claims against it. The law does not require that a balance sheet shall give such details.

The testimony of the State’s accountants indicates that at the time in question there was no uniform practice requiring the giving of such details. The statement was prepared by tbe assistant to tbe comptroller of the title company in the usual way. Appellant did. not participate in any way in its preparation. He did, however, verify the statement. The law required that the statement should show all of the assets of the title company and all of its liabilities. It does exactly that. It also shows the correct credit balance. True it is that it did not state that most of the credit items, excepting “ Cash on Hand and in Banks ” had been pledged to the R. F. C. to secure loans but the exact amount of such loans appeared on the debit side of the statement under the item “ Bills Payable (Seemed).” As the law required all assets of the title company to be stated on the credit side of the statement, it was perfectly apparent from the statement that the items “ Bills Payable (Seemed) ” could only mean that the bills payable were seemed by some of the assets listed on the credit side of the statement. In fact, there is testimony given by a witness called by the State, an accountant, that the word “ Secured ” placed after the item “ Bills Payable ” indicated that the bills payable 'were secured by the assets of the company at least to the full amount of tbe liability. It was perfectly lawful for the title company to borrow money from the R. F. C. and to seeme the loans with collateral. We are unable to understand how in the circumstances it can be held that appellant willfully issued a false statement in so far as the R. F. C. loans are concerned.

As to the item “ Cash on Hand and in Banks,” appearing on the credit side of the balance sheet, a more detailed statement is required. Just prior to the close of the year 1932 the appellant had a conversation with the president of the Brooklyn Trust Company in which he stated in substance that the title company desired a loan of $400,000. The president of the trust company agreed to make the loan and instructed another officer of the trust company “ to put the transaction through.” The loan was made upon a demand note of the title company and a credit of $400,000 entered upon the books of the bank in favor of the title company which delivered to the trust company 12,740 shares of 778 Park Avenue Construction Corporation stock as collateral security for the loan. The day the loan was made the trust company issued an advice of deposit, addressed to the title company as follows: “We have this day credited your account as follows: Demand loan $400,000.” The title company made a proper entry upon its records showing the deposit of $400,000 to its credit by the trust company. The trust company on the same day on its records made an entry showing a demand loan of $400,000 to the title company. The transaction and entry on the books of the title company was the basis for including the $400,000 as part of the item of $558,376.16, appearing on the balance sheet as “ Cash on Hand and in Banks.” If that were all there was to the transaction, it could not be seriously urged that there was anything wrong about the transaction or the including of that amount, $400,000, in the item of “ Cash on Hand and in Banks.”

It appears, however, that certain employees of the trust company issued a thirty-one-day certificate of deposit for $400,000 in the name of the title company and retained the certificate in the trust company as security for the $400,000 loan. The certificate provided for thirty-one days’ notice and had written on it the words “ in safekeeping.” •

From such fact, it is contended by the State that the $400,000 loan was a fictitious transaction and a sham; that the trust company did not have that $400,000 on hand in the bank; that it was not in its possession available for the business of the title company but was a mere fictitious book entry made for the purpose of enabling the title company to file a statement showing $400,000 more on hand or in bank than it actually possessed. It is also urged that the fact that the title company paid the loan and took up its note three days later tends to establish the fact that the loan was fictitious, made for the purpose of deceiving the Superintendent of Insurance and the public.

If in fact the appellant verified the statement knowing that the $400,000 was not available for use by the trust company but that it simply had a ficititious cash entry of $400,000 under an agreement that it could not be drawn upon for use, then the statement that the title company had $558,376.16 “ Cash on Hand and in Banks ” was a false statement and in violation of section 47 of the Insurance Law, as such fund would not be actually possessed by it and available for the payment of losses and claims. It would also be in violation of section 665, subdivision 3, of the Penal Law, as it would constitute a “ material statement which is false.”

The question for determination narrows down to this, has the State proved beyond a reasonable doubt that on December 31, 1932, the $400,000 was not cash in bank, available for the use of the trust company for the payment of losses and claims and held for the protection of its policyholders or creditors and was the statement a material statement which was false?

In order to accept the State’s contention, it is necessary to believe that appellant was engaged in a fraudulent transaction and that the officials of the trust company were parties to such fraudulent scheme. An apparently perfectly valid business transaction must because of certain collateral suspicious circumstances be branded as a fraud and a crime. And that in view of the fact that the burden was on the State to establish the fact beyond a reasonable doubt. We believe that the State has failed to sustain that burden. In appellant’s conversation with the president of the trust company, it does not appear that there was anything said about a certificate of deposit. The evidence discloses a request by appellant to the president of the trust company for a loan of $400,000 andjhis agreement to make the loan. Standing alone, that would exclude the idea that the loan was to be evidenced by a certificate of deposit bearing a thirty-one-day notice. The presumption would be that the amount of the loan would at once be available to the borrower. Borrowers do not ordinarily borrow money and secure the loan with collateral for the purpose of receiving a certificate of deposit with a thirty-one-day notice included and agree to pay a higher rate of interest than such certificate of deposit would bear. Not only did the conversation with the president of the trust company indicate a cash loan immediately available for use, but the records of the trust company and the title company including the loan book, the promissory note of the title company, the deposit entries and the loan card evidence a demand loan. That was the kind of loan negotiated by the appellant with the president of the trust company and that was the kind of a loan evidenced by the record entries and notice from the trust company to the title company.

Subordinate employees of the trust company prepared a certificate of deposit which did not reflect the agreement but was contrary to it. The appellant did not have knowledge of that fact. He had a right to rely on the agreement as made and as evidenced by the statement sent by the trust company to the title company. It cannot be reasonably contended that by relying on the facts disclosed to him and in verifying the statement prepared by the assistant to the comptroller of the title company he knowingly made a false statement or a statement intended to deceive the public. It is urged by the State that the fact that the loan was repaid on January 3, 1933, is evidence from which the jury might reasonably have inferred that the loan was not needed but was negotiated for some improper purpose. We believe that fact is insufficient to overcome the presumption of innocence and establish the defendant’s guilt beyond a reasonable doubt.

It appears that the title company was obligated to pay over $400,000 due its creditors for interest on January first; that its bank account was overdrawn and that it was in need of funds to pay the interest to become due on January first, and which it actually paid to the amount of $431,779.65. It was in the habit of borrowing money just before each interest due date and repaying it thereafter as it collected interest due it. There was nothing unusual or illegal about that.

It is also suggested that reason existed for the prompt payment of the loan because of the discovery of the fact that the certificate of deposit had been issued contrary to the agreement. Whatever the reason for paying the loan so promptly may be, the fact that it was paid does not establish the guilt of the defendant beyond a reasonable doubt.

As we have reached the conclusion upon the merits that the judgment of conviction must be reversed, it is unnecessary to discuss the various exceptions called to our attention by the appellant.

The judgment should be reversed and the indictment dismissed.