Court Opinion

ID: 3598053
Source: CourtListenerOpinion
Date Created: 2016-07-05 23:44:58.594258+00
Date Added: 2024-06-11T14:20:33.434125
License: Public Domain

The defendant Bernard K. Marcus was, in 1930, and for some years prior thereto, the president of The Bank of United States and the defendant Saul Singer was its vice-president. Together they, in large measure, directed and controlled the affairs of the bank and its affiliated or subsidiary corporations. The bank has been unable to meet its obligations to its depositors and none can doubt that if these defendants, as its executive officers, have been guilty of any misapplication of its funds, or criminal failure to perform their duties as officers or directors, they should be punished. They have not been charged with such wrong. They have been indicted and convicted upon the charge that as directors of the Municipal Safe Deposit Company they "did abstract and wilfully misapply the money, funds and property of the said corporation called Municipal Safe Deposit Company by wilfully and feloniously procuring and causing and wilfully and feloniously concurring in procuring and causing the said corporation * * * to pay to a certain other corporation called Bolivar Development Corporation the sum of $2,009,518.45 to enable the said corporation called Municipal Safe Deposit Company to purchase, acquire and hold for its own, twenty-five shares of the stock of another corporation called Premier Development Corporation."
The undisputed facts upon which the People's claim is based are set forth in the opinion of Judge CRANE. In January, 1930, three financial corporations, affiliated, or wholly owned, subsidiary corporations of The Bank of United States, had borrowed from the bank about twelve million dollars. To meet objections by the Banking Department to these loans, it was necessary to reduce these loans, but the borrowers had no money or marketable securities which could be used for that purpose. The complicated series of transactions, set forth in the opinion of Judge CRANE, were devised and carried out for the purpose of reducing, at least in form, the loans to the *Page 297 
three financial corporations and substituting, in place thereof, loans to three safe deposit companies, of which the Municipal Safe Deposit Company was one, all of which companies were also wholly owned subsidiary corporations of the bank. That plan may have staved off immediate disaster to the bank and permitted it to continue in business for some months. It did not otherwise work any substantial change in the bank's position. The bank parted with no money or other property and received no money or other property. Its officers could, in accordance with the terms of the contracts between the various corporations and through control of all the corporations involved, at any time reverse the entire series of transactions and enforce the original obligation of the financial corporations. On the other hand, it had acquired from the three safe deposit companies a formal obligation to pay a loan in which they had not been previously interested; but since the bank was the sole stockholder of the three safe deposit companies, this obligation on paper constituted no substantial benefit to the bank and no substantial detriment to the safe deposit companies.
In fact, all that the defendants have been charged with is the use of moneys borrowed by the safe deposit companies from the bank, for the benefit of the bank which was its sole stockholder. They claim that they believed that in serving the interests of the bank they were serving, indirectly, the interests of the safe deposit companies which constituted a part of the elaborate corporate structure centering in the bank. They acted, so they claim, in honest reliance on the advice of counsel that what they did was lawful and proper. They are charged only with dereliction of duty as directors of the Municipal Safe Deposit Company and not with dereliction of duty as directors and officers of the bank. That is the only charge which the trial judge could or did submit to the jury. They took action as directors of the Municipal Safe Deposit Company only after the loans which *Page 298 
threatened disaster to the banks had already been made and for the purpose of meeting objections to such loans.
The Penal Law provides that: "Any officer, director, trustee, employee or agent of any corporation to which the banking law is applicable who abstracts or wilfully misapplies any of the money, funds or property of such corporation, or wilfully misapplies its credit, is guilty of a felony." (§ 305.) The Municipal Safe Deposit Company is organized under article VIII of the Banking Law and the officers and directors of that corporation are subject to the penalties imposed by the Penal Law for any willful misapplication of its funds. The section of the Penal Law which has been invoked against the defendants is, I agree, broader than the analogous Federal law applicable to national banks. The Penal Law of this State is violated by a willful misapplication of the money, funds or property of a corporation to which the Banking Law is applicable even though there is no intention to injure or defraud any person or corporation. (Commonwealth v. Nichols,257 Mass. 289.)
It may be true that a diversion of the moneys of the safe deposit company from the treasury of that company to the treasury of its sole stockholder is, at least, a technical misapplication, within the meaning of section 305 of the Penal Law, of the moneys of the Municipal Safe Deposit Company, though such moneys were borrowed from the stockholder to be used for the benefit of the stockholder. The safe deposit company, as Judge CRANE points out, was, in law, an independent corporation, organized under the provisions of the Banking Law. The Legislature has placed upon officers and directors of such corporations obligations beyond those of officers and directors of other organizations and has imposed a penalty for such violation. Though the motives of the officers in disregarding such obligations may not be corrupt; though no injury may come to any party from such disregard, a willful — that is, an intentional — *Page 299 
violation of these obligations is visited under the law with severe penalties, and no director or officer who disregards such obligations can legitimately complain when the courts enforce according to their letter the provisions of law enacted for the protection of the public.
Assuming that the defendants have misapplied the moneys of the safe deposit company by using the money it borrowed for the benefit of the bank, the question still remains whether that misapplication has been willful. The State does not punish, as a felony, error of judgment on the part of a corporate officer and there can be no "willful misapplication" where a corporate officer, acting on behalf of the corporation uses the corporate moneys for what he believes to be a legitimate corporate purpose.
The trial judge charged the jury that "to constitute a violation of the statute, the People must prove that the act complained of was done with full knowledge of its nature and consequences, and while the doer is in possession of all the facts concerning the transaction, and that having all these facts before him, he intentionally and designedly commits the acts complained of, and knowingly and intentionally applies the funds of the corporation to an improper use." That charge is, I think, substantially in accordance with the construction of a similar statute of Massachusetts which was approved by the Supreme Judiciary Court of that State (Commonwealth v. Nichols,supra).
Ignorance of the extent of their duties and obligations as officers and directors of a banking corporation would constitute no defense to a charge of intentional violation of such obligations. The law fixes those obligations and even honest acceptance of the advice of counsel that no such obligation exists cannot serve to diminish or alter the obligations which the law imposes. The test in each case is whether the defendants "intentionally and designedly" committed the acts complained of and "knowingly and intentionally applied the funds of the *Page 300 
corporation to an improper use." Advice of counsel as to whether a use is lawful and proper may be a factor in applying that test. The defendants here claim, in effect, that they believed that they were acting for the benefit of the corporation when they used its funds to purchase the stock of another corporation, to be held by the safe deposit company in order to enable the seller to apply the purchase price upon the loans by The Bank of United States and thus prevent disaster to the whole chain of banking institutions. They further claim that they acted in honest reliance upon the advice of counsel that such use of the moneys of the safe deposit company was a proper and legitimate use of its corporate funds. If that be true then the defendants did not act with full knowledge of the nature and consequences of what they were doing and, though their use of the corporate moneys may have been improper, they did not knowingly misapply the corporate funds.
Though the trial judge did, in form, submit to the jury the question of whether the defendants knowingly and intentionally applied the funds of the corporation to an improper use, he also charged the jury: "That means that the party doing the act does it with full knowledge of all the facts and circumstances; that he does not act through a mistaken idea as to what the facts are; that he knows the facts at the time he acts, and knowing the facts, under my interpretation of the law, he does it intentionally. And `misapply' merely means to apply to an improper purpose." Again and again in his charge he informed the jury that to "find that the defendants were guilty of the willful misapplication of the funds, it would not be necessary for you to find that they acted maliciously or wantonly. All you would have to find is that they devoted the funds of this safe deposit company to an improper use, and that at the time they did so, they were in possession of all the facts and circumstances concerning the transaction. There you have the gist of *Page 301 
the whole case." Again he charged: "It is for you to say whether or not the defendants did burden the Municipal Safe Deposit Company with this indebtedness for a purpose from which the said company could not benefit; and whether or not, if they did so, they did it intentionally and by design * * * and it is for you to say whether or not they knew all the facts concerning this transaction at the time the transaction went through." Finally, the trial judge completely withdrew from the jury any question as to the defendants' honest belief in the advice of counsel that the acts done by them were legal; stating: "The advice of counsel as to the legality of an act is material and has a bearing in a criminal prosecution only when by the statute which defines the crime the intent of the person committing the act is an integral part of the crime * * * But there is no intent mentioned in this section under which these defendants are being prosecuted. That section simply says `abstract or wilfully misapply.' It does not say `misapply with intent to steal,' or with an intent to use, or anything of that sort, but simply says `abstract or wilfully misapply.'" The meaning of the entire charge is clear. The jury were in effect told that if these defendants knowingly applied the moneys or property of the corporation to a purpose which was in fact improper or not permitted by law, then they are guilty of willfully misapplying the corporate property and have violated the statute though their motives may have been good; though they may have had no intention of deriving any personal profit from their acts; though they may have honestly relied on advice of counsel that the law permitted them to apply the corporate funds exactly as they did and believed that such use was proper and for the ultimate benefit of the corporation.
The crime, as defined by the Legislature, is not merely a misapplication of corporate funds, but a willful misapplication, that is, a misapplication intentionally carried *Page 302 
out. To show intent, the People must prove that the defendants acted with knowledge of the nature and consequences of the acts done by them. So the trial judge correctly charged. The question remains whether knowledge of the nature and consequences of the acts done includes knowledge that the acts done constitute a misapplication, i.e., an improper or unlawful use of corporate funds. If it does, then advice of counsel and honest reliance thereon and a belief that the act done is proper, have a direct bearing in this criminal prosecution. Indeed, these would be the decisive factors in the determination of the guilt of the defendants. (People v. Clark, 242 N.Y. 313.) Such questions have never been passed upon by the jury for the trial judge charged that they were irrelevant. His construction of the statute is that there is a "willful" misapplication of corporate funds if they are intentionally applied to purposes which are in fact improper and illegitimate regardless of whether or not the defendants believed that they were proper and lawful.
The proof is so overwhelming that the officers of the safe deposit company did use its corporate funds for the purpose of benefiting The Bank of United States rather than the corporation itself, that errors in the admission of evidence might well be disregarded if that construction is correct. If, on the other hand, an essential element of the crime charged is an intent to use the funds for a purpose which to the knowledge of the defendants would constitute a misapplication of the corporate funds, then there must be a new trial, for the evidence on that point is far from strong and that question has been completely withdrawn from the jury.
The language of the statute seems to me to leave no doubt that an intent to misapply is an essential element of the crime. Without it a conscientious, careful director or officer might be guilty of a felony by the use of corporate funds in a manner which be believed to be authorized by law even though he acted with honest motives and *Page 303 
under advice of counsel. Perhaps even counsel who advised him as to the legality and propriety of his action might be charged with aiding and abetting the commission of the crime. The language of the statute should not be stretched to produce so extraordinary a result. These defendants may have been guilty of innumerable derelictions and violations of the criminal law as directors and officers of The Bank of United States. In this prosecution, however, they have not been charged with, or convicted of, such derelictions or violations. They have been convicted only of misapplying the money or property of a corporation wholly owned by The Bank of United States through the use of such funds for the benefit of The Bank of United States regardless of whether they derived any personal profit from such use; regardless of whether they acted in honest reliance on the advice of counsel; regardless of whether their motives were good or bad.
In this view of the case, it is unnecessary to consider the alleged errors in the admission and exclusion of evidence. Most of the testimony adduced at the trial is entirely immaterial and irrelevant to the charge against these defendants and, in my opinion, the admission in evidence of the transcript of Mr. Kresel's testimony before the grand jury and questions put to these defendants on cross-examination were clearly erroneous and prejudicial.
I concur in the reversal of the judgment of conviction against Herbert Singer and vote for a new trial for the other defendants.
KELLOGG, HUBBS and CROUCH, JJ., concur with CRANE, J.; POUND, Ch. J., and O'BRIEN, J., also concur with CRANE, J., except as to Herbert Singer and vote to affirm the judgment as to him; LEHMAN, J., dissents in opinion as to Saul Singer and Bernard K Marcus.
Judgment accordingly. *Page 304