Case Name: The People of the State of New York, Respondent, v. Saul Kagan, Jean Wolf and Torleaf Benestad, Appellants
Court: New York Court of Appeals
Jurisdiction: New York
Decision Date: 1982-05-18
Citations: 56 N.Y.2d 193
Docket Number: 
Parties: The People of the State of New York, Respondent, v Saul Kagan, Jean Wolf and Torleaf Benestad, Appellants.
Judges: 
Reporter: New York Reports
Volume: 56
Pages: 193–205

Head Matter:
The People of the State of New York, Respondent, v Saul Kagan, Jean Wolf and Torleaf Benestad, Appellants.
Argued April 1, 1982;
decided May 18, 1982
POINTS OF COUNSEL
Peter H. Morrison, Kevin T. Rover and Gerald G. Paul for Saul Kagan, appellant.
I. The conduct for which Saul Kagan was convicted is not covered by the felony statute under which he was prosecuted. (People v Stoll, 242 NY 453; People v Vetri, 309 NY 401; People v Caswell-Massey Co., 6 NY2d 497; People v Knapp, 206 NY 373; United States v Britton, 107 US 655; People v Marcus, 261 NY 268.) II. Section 673 does not give fair notice of the conduct it covers. (United States v Harriss, 347 US 612; United States v Britton, 107 US 655; People v Berck, 32 NY2d 567; Papachristou v City of Jacksonville, 405 US 156; Lanzetta v New Jersey, 306 US 451; People v Firth, 3 NY2d 472; People v Marcus, 261 NY 268; United States v Christo, 614 F2d 486.) III. The element of acting for purposes other than those of American Bank & Trust Company was neither pleaded nor proved. (United States v Britton, 107 US 655; People v Marcus, 261 NY 268; People v Kresel, 243 App Div 137.) IV. The trial court erred in its rulings on three pivotal issues. V. The trial court impermissibly directed a partial verdict of conviction. (People v Walker, 198 NY 329; People v Cuvilje, 66 AD2d 761; People v Amoroso, 38 AD2d 563; Roe v United States, 287 F2d 435, 368 US 824.) VI. The burden of proof on the issue of knowledge was impermissibly shifted to defendants. (Notaro v United States, 363 F2d 169; United States v Booz, 451 F2d 719; United States v Wolffs, 594 F2d 77; United States v Read, 658 F2d 1225; Bihn v United States, 328 US 633; United States v Corrigan, 548 F2d 879; People v Elmore, 277 NY 397; People v Barbato, 254 NY 170; People v O’Neill, 79 AD2d 429; People v Jones, 74 AD2d 515.) VII. The evidence was not sufficient to permit submission to the jury and Kagan’s guilt was not established beyond a reasonable doubt. (People v Cleague, 22 NY2d 363; United Pilots Assn. v Halecki, 358 US 613; Strobe v Netherland Co., 245 App Div 573.) VIII. The prosecutor’s misconduct requires reversal. (United States v Christo, 614 F2d 486; People v Stanard, 32 NY2d 143; People v Lopez, 67 AD2d 624, 444 US 827; People v Pryor, 70 AD2d 805.)
Herald Price Fahringer, Paul J. Cambria, Jr., and Barbara Davies Eberl for Jean Wolf, appellant.
I. The evidence against Jean Wolf is insufficient for the crimes of conspiracy and bank fraud. (People v Piazza, 48 NY2d 151; People v Santos, 38 NY2d 173; People v Cleague, 22 NY2d 363; United States v Crosby, 294 F2d 928; People v Ryan, 41 NY2d 634; People v Lewis, 275 NY 33; People v Matthew, 47 AD2d 749; People v Yonkers Contr. Co., 17 NY2d 322; People v McGee, 49 NY2d 48; People v Salko, 47 NY2d 230.) II. Sections 103 and 106 of the Banking Law have been unconstitutionally applied in the prosecution of Jean Wolf because those provisions do not place a violator on notice that he will be subjected to felony punishment. (Rabe v Washington, 405 US 313; United States v Harriss, 347 US 612; Winters v New York, 333 US 507; Lanzetta v New Jersey, 306 US 451; People v Phyfe, 136 NY 554; People v Caswell-Massey Co., 6 NY2d 497; People v Colozzo, 54 Misc 2d 687; People v Zambino, 75 Misc 2d 608; United States v Christo, 614 F2d 486; United States v Britton, 107 US 655.) III. The prosecutor’s systematic exclusion of Jews from the trial jury through the misuse of peremptory challenges deprived appellants of their constitutionally guaranteed right to a fair trial before an impartial jury. (People v Thompson, 79 AD2d 87; Swain v Alabama, 380 US 202; Taylor v Louisiana, 419 US 522; Duren v Missouri, 439 US 357; Castaneda v Partida, 430 US 482; Peters v Kiff, 407 US 493; Ballard v United States, 329 US 187; Cooper v Morin, 49 NY2d 69; Brady v Maryland, 373 US 83.) IV. Reversible error was committed when the court misadvised the jury on crucial aspects of the case. (People v Walker, 198 NY 329; United States v Singleton, 532 F2d 199; United States v Natale, 526 F2d 1160,425 US 950; United States v Bright, 517 F2d 584; United States v Cangiano, 491 F2d 906, 419 US 904; United States v Houle, 490 F2d 167, 417 US 970; United States v Painter, 314 F2d 939; United States v Phillips, 217 F2d 435; People v Rodriguez, 75 AD2d 829.) V. The court committed reversible error in amending the conspiracy count of the indictment. (Russell v United States, 369 US 749; People v Miles, 289 NY 360; People v Boyd, 59 AD2d 558; People v Brown, 59 AD2d 1006; People v Taylor, 43 AD2d 519; Stirone v United States, 361 US 212; Ex parte Bain, 121 US 1; Watson v Jago, 558 F2d 330; United States v Somers, 496 F2d 723.) VI. Jean Wolf was the victim of prosecutorial vindictiveness in that he was lulled into co-operating with the District Attorney in the belief he would not be charged with any crime but was thereafter prosecuted. (Blackledge v Perry, 417 US 21; North Carolina v Pearce, 395 US 711; United States v Ruesga-Martinez, 534 F2d 1367; United States v Johnson, 537 F2d 1170; United States v De Marco, 550 F2d 1224; United States v Jamison, 505 F2d 407; Brady v United States, 397 US 742; Santobello v New York, 404 US 257; People v Argentine, 71 AD2d 869; United States v Rodman, 519 F2d 1058.) VII. The charging of two substantive offenses arising out of the same transaction is unconstitutional and requires that the judgment be reversed. (United States v Gaddis, 424 US 544; Castle v United States, 368 US 13; Ladner v United States, 358 US 169; Prince v United States, 352 US 322; Bell v United States, 349 US 81; United States v Corral, 578 F2d 570; United States v Squires, 581 F2d 408; United States v Woods, 568 F2d 509; United States v Chrane, 529 F2d 1236; United States v Deaton, 468 F2d 541.)
Andrew J. Maloney for Torleaf Benestad, appellant.
A larcenous intent to defraud the bank is or should be a necessary element of a charge of misappropriation of bank funds under section 673 of the Banking Law where the party is not on both sides of a loan transaction. (People v Marcus, 261 NY 268; People v Kresel, 243 App Div 137; Morissette v United States, 342 US 246; United States v Northway, 120 US 327; United States v Britton, 107 US 655; United States v Docherty, 468 F2d 989; United States v Mullins, 355 F2d 883, 384 US 942; United States v Fortunato, 402 F2d 79, 394 US 933; United States v Giordano, 489 F2d 327; Ex parte Collett, 337 US 55.)
Robert M. Morgenthau, District Attorney (Vivian Berger, Robert M. Pitler and Jerrold L. Neugarten of counsel), for respondent.
I. Defendants were proved guilty beyond a reasonable doubt of the substantive crimes and the conspiracy of which they were convicted at trial. (United States v Crosby, 294 F2d 928; United States v Dubrin, 93 F2d 499, 303 US 646; People v Knapp, 206 NY 373; United Bank v Cambridge Sporting Goods Corp., 41 NY2d 254; First Empire Bank-New York v Federal Deposit Ins. Corp., 572 F2d 1361, 439 US 919; Travelers Ind. Co. v Flushing Nat. Bank, 90 Misc 2d 964; United States v Franklin, 608 F2d 241; People v McGee, 49 NY2d 48; Direct Sales Co. v United States, 319 US 703; Kelley v People, 55 NY2d 565.) II. The trial court correctly charged the jurors that, in order to convict a defendant under section 673 of the Banking Law, they had to find that he knew he was putting the money or credit of the bank to a use prohibited by law. (United States v Docherty, 468 F2d 989; Morissette v United States, 342 US 246; People v Chesler, 50 NY2d 203; United States v Arthur, 602 F2d 660, 444 US 992; United States v Beran, 546 F2d 1316, 430 US 916; United States v Schmidt, 471 F2d 385; United States v Duncan, 598 F2d 839, 444 US 871; United States v Franklin, 608 F2d 241; United States v Larson, 581 F2d 664.) III. By knowingly making loans and deposits in excess of legal limits set out in various civil provisions of the Banking Law, defendants wilfully misapplied the bank’s funds within the meaning of section 673 of the Banking Law, a criminal provision which gave defendants fair notice that their actions were felonious. (State of New York v Rutkowski, 44 NY2d 989; United States v National Dairy Corp., 372 US 29; United States v Harriss, 347 US 612; People v Cruz, 48 NY2d 419; People v Berardini, 150 Misc 311; People v Marcus, 261 NY 268; Screws v United States, 325 US 91; United States v Boyce Motor Lines, 188 F2d 889, affd sub nom. Boyce Motor Lines v United States, 342 US 337.) IV. Since defendants themselves caused the indictment to be multiplicitous, over the prosecution’s objection, defendant Wolf is not entitled to relief on this ground; in any event, Wolf suffered no prejudice from the splitting of the challenged counts since he received single, not multiple, punishment. (United States v Goldstein, 479 F2d 1061, 414 US 873; People v Tutt, 38 NY2d 1011; United States v Chrane, 529 F2d 1236; United States v Rizzo, 418 F2d 71, cert den sub nom. Tonabene v United States, 397 US 967; People v Perrin, 56 AD2d 957; People v Mulligan, 29 NY2d 20; People v Elfe, 37 AD2d 208; United States v Gaddis, 424 US 544.) V. The trial court did not impermissibly amend the conspiracy count of the indictment when it struck the portion of that count relating to Federal funds transactions. (People v Mendez, 63 AD2d 69; People v Hochberg, 62 AD2d 239; Salinger v United States, 272 US 542; United States v Colasurdo, 453 F2d 585; Overstreet v United States, 321 F2d 459, 376 US 919; People v Miles, 289 NY 360; People v Boyd, 59 AD2d 558; People v Brown, 59 AD2d 1006.) VI. The court below withdrew from the jurors’ consideration only those issues that it properly decided as a matter of law. (People v Ianniello, 36 NY2d 137, 423 US 831; People v Cuvilje, 66 AD2d 761; People v Neff, 191 NY 210.) VII. No prosecutorial vindictiveness marred defendant Wolf’s prosecution, nor was any immunity agreement with Wolf violated. (Blackledge v Perry, 417 US 21; North Carolina v Pearce, 395 US 711; Bordenkircher v Hayes, 434 US 357; Hayes v Cowan, 547 F2d 42; United States v Kurzer, 534 F2d 511; People v Caruso, 100 Misc 2d 601; Stevens v Marks, 383 US 234; People v Masiello, 28 NY2d 287; United States v Dornau, 491 F2d 473, 419 US 872; People v Tutt, 38 NY2d 1011.) VIII. The cease and desist order issued by the Banking Department in September, 1975 was correctly admitted in evidence against defendant Kagan and properly used by the People thereafter; furthermore, nothing in the cross-examination of character witnesses for Kagan warrants reversal on appeal. (Berger v United States, 295 US 78; People v Schwartzman, 24 NY2d 241, 396 US 846; People v Marino, 271 NY 317; People v Marcus, 261 NY 268; United States v Pry, 625 F2d 689; Counihan v Werbelovsky’s Sons, 5 AD2d 80; People v Helms, 243 App Div 818; Radosh v Shipstad, 20 NY2d 504.) IX. Defendants’ miscellaneous complaints about the trial court’s charge to the jury do not provide any grounds for reversal. (People v Thomas, 51 NY2d 466; People v Leyva, 38 NY2d 160; Cupp v Naughten, 414 US 141; People v Getch, 50 NY2d 456; Sandstrom v Montana, 442 US 510; People v Newton, 46 NY2d 877) People v lanniello, 36 NY2d 137; People v Ferola, 215 NY 285.) X. Under both the well-established rule of Swain v Alabama and the more recent minority rule of People v Wheeler, these defendants were not entitled to a hearing on their accusation that the People systematically excluded all Jews from the trial jury through the exercise of peremptory challenges. (People v Kagan, 101 Misc 2d 274; People v McCray, 104 Misc 2d 782; United States v Danzey, 476 F Supp 1065, 620 F2d 286; Swain v Alabama, 380 US 202; United States v Newman, 549 F2d 240; People v Thompson, 79 AD2d 87, 53 NY2d 713; People v Goodrich, 80 AD2d 562.)

Opinion:
OPINION OF THE COURT
Chief Judge Cooke.
A bank officer or employee who, without more, extends to an individual credit in amounts exceeding civil limits is not guilty of feloniously misapplying bank funds. "Wilful misapplication", as that term is used in section 673 of the Banking Law, requires that the offender have a personal pecuniary interest in the transactions before criminal liability will attach.
Subdivision 1 of section 103 of the Banking Law generally prohibits a bank from lending to any single customer "an amount which will exceed ten percentum of the [bank's] capital stock, surplus fund and undivided profits". To the extent that the loans are secured by collateral having an ascertainable market value, the amount the bank may lend to a customer may rise to 25% of its capital stock, surplus fund, and undivided profits (Banking Law, § 103, subd 1, par [d], cl [2]). Section 103 is a civil regulation only; it does not prescribe penal sanctions for its violation.
Subdivision 1 of section 106 of the Banking Law imposes various limitations on the amount of funds one bank may deposit with another. Defined in terms of percentages of the depositor bank's capital stock surplus fund, and undivided profits, the limits range from 10% to 200%. The specific limitation depends on whether the depository bank has been so designated by a majority of the depositor bank's directors and whether it is located in this State and authorized by the Superintendent of Banking to act as a -depository for purposes of section 106. As with section 103, section 106 does not prescribe penal sanctions for its violation.
Section 673 of the Banking Law, the particular statute that is at the center of controversy here, provides in full: "Any officer, director, trustee, employee or agent of any corporation to which the banking law is applicable, or any employee or agent of any private banker, who abstracts or wilfully misapplies any of the money, funds or property of such corporation or private banker, or wilfully misapplies its or his credit, is guilty of a felony. Nothing in this section shall be deemed or construed to repeal, amend or impair any existing provision of law prescribing a punishment for any such offense."
With this statutory backdrop, the general events underlying the instant case may be examined. The facts are complex as the prosecution arose from a review of daily bank transactions occurring during the period from December 31, 1975 to June 28, 1976. Only a general recitation of these events is necessary, however, to resolve the issues on appeal.
The transactions at issue were carried on between American Bank & Trust Company (ABT) and a correspondent bank in Belgium, Banque Pour L'Amerique du Sud (BAS), and between ABT and an affiliate, Bankers International (BI). Defendants were connected to ABT in varying capacities. Saul Kagan was chairman of the board of ABT's holding company, as well as an executive officer and director of ABT itself. He chaired ABT's executive committee and was particularly involved in developing ABT's international business. Jean Wolf headed ABT's international division; although a senior manager, he had limited lend ing authority. Torleaf Benestad was a director of both ABT and its holding company until his resignation on March 25, 1976. In addition, he was an executive officer of ABT until his retirement on April 15, 1976.
In spring, 1975, a contract to purchase ABT was made by the Graivers, a prominent Argentinian business family. Among the Graivers' existing holdings were interests in BAS and BI. These companies began doing business with ABT almost simultaneously with the Graivers' execution of the contract to purchase ABT. In addition, David Graiver received an office at ABT, became a director of ABT's holding company in June, 1975, and attended ABT's board and executive committee meetings as a guest until his election to the board in March, 1976.
In early August, 1975, David Graiver solicited from ABT loans for $2,000,000 each to BI and to Juan Graiver, David's father. At the time the loans were made, Juan Graiver executed a pledge and security agreement covering both loans and extending to all indebtedness then or thereafter incurred. Stock valued at $8,000,000 was delivered to ABT. Both loans were eventually repaid and a second loan for $2,200,000, also secured by the same stock, was made to Juan Graiver. In March, 1976, Juan Graiver also undertook to guarantee all extensions of credit to BAS, again pledging the stock already in ABT's possession. Thus, at all times pertinent here, ABT had $8,000,000 worth of stock to cover any extension of credit it made to BI and, after March 4, 1976, to BAS.
The specific transactions that gave rise to the indictments and convictions fall into two categories — deposits and extensions of credit. The former were three overnight deposits in BAS that ABT made at the end of December, 1975 and January and February, 1976, respectively. In each case, these were repaid on the following day. The amounts deposited, however, exceeded the 10% limit imposed by section 106 of the Banking Law.
The extensions of credit took three forms. First, BAS was permitted to overdraw its account on several occasions. This may have violated section 103 of the Banking Law when the amount of the overdraft was added to credit extended in other check transactions. In one instance, the overdraft itself exceeded the 10% limit of subdivision 1 of section 103. Second, ABT "purchased" a number of checks drawn on BAS and payable to BI. A "purchase" consisted of ABT's granting immediate credit to the payee's account rather than waiting for collection. The third alleged form of extending credit was based on a letter dated March 30, 1976, in which ABT offered to purchase certain loans from BAS. The prosecutor likened this to a letter of credit.
Defendants' roles in the transactions varied. For the most part, their activity consisted of authorizing or approving the transactions. Two critical facts must be noted especially: ABT suffered no losses on any of these transactions, even receiving interest when the overdrafts were paid; and none of the defendants made any profit or otherwise had any personal pecuniary interest in the transactions.
Nonetheless, these indictments followed. In essence, defendants were charged with felonies under section 673 for wilfully misapplying bank funds and credit. The indictment was predicated on the theory that defendants knowingly violated sections 103 and 106, and that those acts constituted "wilful misapplication" for purposes of section 673. Before trial, defendants moved to dismiss the indictments on the ground that section 673 requires more than merely violating civil regulations, but instead requires a larcenous intent or an intent to injure or defraud the bank.
Numerous counts were dismissed before the case was submitted to the jury, which eventually acquitted defendants of many more counts. Kagan was convicted on 33 counts and Wolf was convicted on 9 counts. Benestad eventually pleaded guilty to three counts, but sought to reserve a right to appeal the question whether section 673 requires a larcenous intent.
The Appellate Division affirmed the convictions, with one Justice dissenting. The majority, relying on People v Marcus (261 NY 268), approved the theory that any knowing violation of the Banking Law may provide a basis for prosecution under section 673. The dissent disagreed and would have reversed on the ground that, under the circumstances, defendants were denied due process because they had not received fair notice that violations of sections 103 and 106 would also subject them to criminal sanctions under section 673. This court now reverses the orders of the Appellate Division.
The primary question to be decided is the meaning of "wilful misapplication" — i.e., what is the nature of the mens rea, if any, that must be alleged and proven in order to sustain a prosecution for violating section 673. The People urge that knowing violation of the Banking Law's civil regulations suffices to establish a wilful misapplication. On the other hand, defendants argue that an actual intent to injure or defraud a bank is necessary. While it is concluded that the People too broadly interpret section 673, the defendants' construction similarly is found to be overly narrow.
The predecessor to section 673 was first enacted in 1913 (L 1913, ch 102). The legislation was introduced at the behest of the then Superintendent of Banks so that the State Banking Law would more closely harmonize with the Federal National Banking Act (Superintendent of Banks Ann Rep, p 21 [1912]).
The correlative Federal statute at the time was section 5209 of the Revised Statutes of the United States (since amended and now codified at US Code, tit 18, § 656). That section made it an offense for a bank officer to wilfully misapply funds with the intent to injure or defraud the bank. In United States v Britton (107 US 655), the Supreme Court determined that "wilful misapplication" meant "a misapplication for the use, benefit, or gain of the party charged, or of some company or person other than the [bank]" (id., at p 666). After concluding that an actual conversion must occur, the court went on to distinguish criminal misapplication from mere maladministration of a bank's affairs. By way of example, the opinion referred to another law limiting extensions of credit, similar to our subdivision 1 of section 103, and remarked that the directors' civil liability for such a violation was the proper sanction for what would be nothing more than maladministration (id., at pp 667-668).
This same question was confronted in People v Marcus (261 NY 268, supra). After noting that the New York statute had omitted the "intent to injure or defraud" language of the Federal law, the court concluded that the New York Legislature had taken "a broader view and made it illegal for a director knowingly to use the assets of his corporation for other than corporate purposes or proper and legitimate investment, even though [the director] had no intention of cheating or defrauding anybody." (Id., at p 278.) Wilful misapplication occurs when the defendant has misused assets "not for the benefit of the company, but for the use and benefit of other enterprises in which [he or she is] interested." (Id.)
In Marcus, the defendants were moving funds among several corporations of which they were the principal shareholders. Their attorney, Kresel, who advised them but did not hold any position with the bank, was held guiltless in a separate trial because of the absence of any "malevolent and criminal intent" (People v Kresel, 243 App Div 137, 141-142). Similarly, the son of one of the Marcus defendants was a young lawyer working for Kresel and participated in the scheme to the extent of handling paperwork and taking care of details; he, too, was exonerated for lack of criminal intent (People v Marcus, 261 NY, supra, at pp 294-295).
The clear implication is that "wilful misapplication" requires some form of self-dealing, some benefit to the accused's commercial and material interests. In short, for an individual to be convicted under section 673, there must be alleged and proven some personal pecuniary interest in the transactions. Moreover, this interest must be in more than the simple benefits flowing from the gratitude of a well-served client or owner of the bank. Such an incidental bounty is not the sort of "personal benefit" contemplated by the decision in Marcus.
In the present case, there was no evidence that defendants had any personal investments in BAS or BI. To the contrary, defendants acted solely in their, positions as officers and directors of ABT without any suggestion of personal profit. Consequently, there was no basis for the charges that they wilfully misapplied ABT's funds and credit.
Accordingly, as to defendants Kagan and Wolf, who proceeded to trial, the orders of the Appellate Division should be reversed and the indictments dismissed. As to defendant Benestad, who pleaded guilty, the order of the Appellate Division should be reversed, his plea vacated, and the case remitted for further proceedings on the indictment (see People v Thomas, 53 NY2d 338).
Judges Gabrielli, Jones, Wachtler, Fuchsberg and Meyer concur with Chief Judge Cooke; Judge Jasen dissents and votes to affirm for reasons stated in the memorandum of the Appellate Division (83 AD2d 517).
In People v Kagan and Wolf: Orders reversed and indictments dismissed.
In People v Benestad: Order reversed, plea vacated and case remitted to Supreme Court, New York County, for further proceedings on the indictment.