Full opinion text
OPINION ON DEFENDANTS’ MOTION FOR A SUMMARY JUDGMENT AND/OR MOTION TO DISMISS KAESS, District Judge. This is an action arising out of the sale of all the assets of Public Bank, a Michigan banking corporation, to the Bank of the Commonwealth, another Michigan banking corporation, on October 12, 1966. The sale took place after Wayne County Circuit Judge Benjamin D. Burdick declared the Public Bank to be insolvent and appointed Federal Deposit Insurance Corporation as the Receiver of said bank on October 11, 1966. A subsequent hearing on the validity of the receivership proceeding and the adequacy of the sale of the assets had been scheduled before Wayne County Circuit Judge Blair Moody, Jr., for April, 1967. On September 29, 1967, Judge Moody in an exhaustive opinion, which findings are incorporated in this opinion, as all interests were properly represented, determined that, amohg other things, Public Bank was mjTÍhe brink of collapse, that the receivership proceeding was valid and that the sale of the assets was adequate and proper and, in fact, had the sale not taken place, the public would have suffered greatly. Thus, we have before the court a unique situation, in that a court of competent jurisdiction (the Wayne County Circuit Court) had conducted extensive hearings regarding this particular sale, in order to determine if the appointment of a receiver was necessary in light of the surrounding circumstances. This court will not reiterate those findings, but will attach the opinion of Judge Moody as an appendix to this opinion. The plaintiffs are maintaining this action under Title 15, U.S.C. § 15 and § 26, alleging in their complaint violations of the Federal Anti-trust Laws, more specifically Sections 1 and 2 of the Sherman Act and Section 7 of the Clayton Act, and a violation of the Fourteenth Amendment to the United States Constitution and are seeking treble damages and a restraining order prohibiting the transfer of assets of Public Bank. The defendants move to dismiss the complaint or, in the alternative, the granting of summary judgment in their favor. In- construing a complaint in a private anti-trust action, this court adopts those principles enunciated by the United States Supreme Court in Klor’s, Inc. v. Broadway-Hale Stores, Inc., 359 U.S. 207, 79 S.Ct. 705, 3 L.Ed.2d 741 (1959); Radiant Burners, Inc. v. Peoples Gas Light & Coke Co., 364 U.S. 656, 81 S.Ct. 365, 5 L.Ed.2d 358 (1960), that to state a claim upon which relief may be granted, allegations merely have to be sufficient to show a violation. It is the position of this court to read the complaint in the light most favorable to the plaintiffs. Thus, the issue for this court to decide is whether the plaintiffs’ complaint states a claim upon which relief could be granted. In resolving the motion, this court will determine if all the facts constitute a violation of the 14th Amendment, §§ 1 and 2 of the Sherman Act, or § 7 of the Clayton Act. Section 7 of the Clayton Act provides: “Sec. 7. That no corporation engaged in commerce shall acquire, directly or indirectly, the whole or any part of the stock or other share capital and no corporation subject to the jurisdiction of the Federal Trade Commission shall acquire the whole or any part of the assets of another corporation engaged also in commerce, where in any line of commerce in any section of the country, the effect of such acquisition may be substantially to lessen competition, or to tend to create a monopoly. “No corporation shall acquire, directly or indirectly, the whole or any part of the stock or other share capital and no corporation subject to the jurisdiction of the Federal Trade Commission shall acquire the whole or any part of the assets of one or more corporations engaged in commerce, where in any line of commerce in any section of the country, the effect of such acquisition, of such stocks or assets, or of the use of such stock by the voting or granting of proxies or otherwise, may be substantially to lessen competition, or to tend to create a monopoly. “This section shall not apply to corporations purchasing such stock solely for investment and not using the same by voting or otherwise to bring about, or in attempting to bring about, the substantial lessening of competition. Nor shall anything contained in this section prevent a corporation engaged in commerce from causing the formation of subsidiary corporations for the actual carrying on of their immediate lawful business, or the natural and legitimate branches or extensions thereof, or from owning and holding all or a part of the stock of such subsidiary corporations, when the effect of such formation is not to substantially lessen competition. * * * ” The purpose of § 7 was to arrest incipient threats to competition which the Sherman Act did not reach. United States v. E. I. Du Pont De Nemours & Co., 353 U.S. 586, 77 S.Ct. 872, 1 L.Ed.2d 1057 (1957); United States v. Penn-Olin Chemical Co., 378 U.S. 158, 84 S.Ct. 1710, 12 L.Ed.2d 775 (1964); United States v. Continental Can Co., 378 U.S. 441, 84 S.Ct. 1738, 12 L.Ed.2d 953 (1964). Section 7 is extended to cover three types of mergers: Vertical, Conglomerate, and Horizontal, and is applicable to bank mergers. And under Section 7, both the acquirer and acquired must be engaged in commerce. The section is broadened to cover both the acquisition of a corporation’s stock, as well as its assets. In fact, there is no need for actual anticompetitive effects — • merely a reasonable probability of a substantial lessening of competition or a tendency toward monopoly, and this is often referred to as the incipiency doctrine. The clear object of § 7 being to nip monopolistic tendencies in their incipiency. There are certain exclusions from a Section 7 violation, such as where purchases are solely for investment and the formation of a subsidiary corporation. There also exist certain defenses to Section 7, and one such defense is urged upon this court — the “failing company” defense. The court sustained the defense of a failing company in International Shoe Co. v. Federal Trade Commission, 280 U.S. 291, 50 S.Ct. 89, 74 L.Ed. 431 (1929), although this was under the old Section 7 prior to amendment. After amendment Congress did not expect that Section 7 would prevent a company in a failing or bankrupt condition from selling out. And it was not the intention of Congress to preclude a merger between a corporation which was financially healthy and a failing corporation which no longer could be a vital factor in the market. There are two views on whether it’s an absolute defense to § 7 violation to merely show a company in bankruptcy. Some say if the acquirer is the only one in a position to a company, the defense is adequate; others hold the defense would not be proper until it is determined who else would or could purchase the business. This court has before it a unique situation, in that it has the benefit of the findings of Judge Moody. Judge Moody conducted a most extensive hearing to determine whether the receivership appointment, sale of the assets, and transfer, was done in accordance with the governing laws and did not violate anyone’s rights, and, in effect, determined this precise issue, whether Public Bank was a failing company and whether the acquirer provided the best offer to the receiver. The hearing was open to all parties concerned and every interest was represented. To now, at this time, make a new fact determination as to whether the Public Bank was on the brink of bankruptcy and the sale to the Bank of the Commonwealth was done in order to protect the interests of the general public would, in effect, be attacking the work of Judge Moody. The plaintiffs are asking this court to disregard the judgment and opinion of a court of competent jurisdiction. The plaintiffs have not set forth any new justiciable issue which was not determined in the Circuit Court. They have presented to this court the same issue already determined in the Circuit Court, whether Public Bank was in such financial condition as to require the appointment of a receiver. And it was determined that Public Bank was on the brink of bankruptcy with no possibility of recovery, and in order to protect the public interest, the receiver should be appointed and a sale commenced. The sale of the assets occurred only after all offers were duly considered and the Bank of the Commonwealth provided the best offer. This court will accept the judgment of the Circuit Court and the plaintiffs may not use this court to attack the findings of the Circuit Court. Southern Md. Agr. Ass’n of Prince George’s County v. United States, 147 F.Supp. 276, 137 Ct.Cl. 176 (1957). The plaintiff is, in effect, estopped to collaterally attack the findings of Judge Moody. Partmar Corp. et al. v. Paramount Pictures Theatres Corp., et al., 347 U.S. 89, 74 S.Ct. 414, 98 L.Ed. 532 (1954); Higginson v. Schoeneman, 89 U.S.App.D.C. 126, 190 F.2d 32 (4 Cir., 1951); Fuller v. Vanwagoner, D.C., 49 F.Supp 281 (1942); Perkins v. Southern Coal Corp., D.C., 96 F.Supp. 8, aff’d 190 F.2d 692 (1951); United States v. Kusche, 56 F.Supp. 201 (1944). The defense of failing company urged by the defendants meets the tests set forth by the Supreme Court; Public Bank was on the brink of bankruptcy with no chance of rehabilitation. Bank of the Commonwealth provided the best offer in light of the circumstances. Therefore, the acquisition of Public Bank’s assets did not violate § 7 in lieu “failing company” defense. There being no facts in dispute, this court hereby grants summary judgment in favor of the defendants with regard to § 7 violation. The plaintiffs also allege a violation of § 2 of the Sherman Act, which states: “Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations, shall be deemed guilty of a misdemeanor, and, on conviction thereof, shall be punished by fine not exceeding fifty thousand dollars, or by imprisonment not exceeding one year, or by both said punishments, in the discretion of the court.” Given all of the facts, as set forth in the complaint, is this sufficient to justify a violation of § 2? The complaint is defective in that there is no showing in the complaint that the defendants possess monopoly power or any likelihood they could acquire it. This is an essential element to a § 2 violation, that the defendants have monopoly power. American Tobacco Co. v. United States, 328 U.S. 781, 66 S.Ct. 1125, 90 L.Ed. 1575 (1945). Monopoly power means the same thing in law or economics. It is the power to fix prices (market prices) or the power to exclude competitors. Power to control the market. Monopoly power differs from market power. Monopoly power means the power to control the market. Market power may be sufficient or insufficient to be monopoly power. In United States v. Aluminum Co. of America, 2 Cir., 148 F.2d 416 (1945), it was held that 90% of the market constituted monopoly power. Section 2 makes it a violation to exclude competition, provided the power is coupled with purpose or intent to exercise that power. United States v. Griffith, 334 U.S. 100, 68 S.Ct. 941, 92 L.Ed. 1236 (1948). Thus, there needs to be showing of wrongful intent. The complaint fails to disclose any wrongful intent on the part of the defendants. Therefore, by the failure to allege any existence of a monopoly power or any likelihood that the defendants would acquire it, or that the defendants have a wrongful intent, the complaint must be dismissed ás to a violation of § 2 of the Sherman Act. Section 1 of the Sherman Act provides: “Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is declared to be illegal:” 15 USC § 1 The complaint alleges a conspiracy and the court has before it only the allegation of conspiracy. There is no allegation of what was done in “restraint of trade”. The conspiracy must be a conspiracy to do some act in restraint of trade. If it is not in “restraint of trade” there can be no violation. The act in restraint of trade may be a violation per se such as price fixing or allocation of markets or an unreasonable act, such as group boycotts or refusals to deal by incorporating the Rule of Reason approach. There is presented no violation in restraint of trade, either per se or under the Rule of Reason, as all that is alleged is that the defendants merely conspired. The failure to state what violative act the defendants conspired to do is fatally defective and the complaint should be dismissed. It is noted by this court that defendants did not commit any violation per se by any stretch of the imagination and if any violation did occur, it would have to be an unreasonable act in restraint of trade. No acts performed by the defendants were unreasonable. In fact, they acted in a most reasonable manner under the circumstances as disclosed in Judge Moody’s opinion. Therefore, following Justice Brandéis’ Rule of Reason approach, it is clear that the acts of the defendants were reasonable. Since the acts of the defendants were not such as to constitute a violation per se nor were they such as to be unreasonable, the claim under § 1 of the Sherman Act must be dismissed for failure to state a cause of action. With regard to the alleged violation of the 14th Amendment, the taking of property without compensation, it is sufficient to state that the question is now moot in light of Judge Moody’s opinion and in view of the defects of this complaint, in that there was no violation of anti-trust laws and no unlawful taking. Therefore, it is this court’s opinion that summary judgment is granted to defendants on § 7 violation of the Clayton Act, based upon the defense of the failing company doctrine, the complaint is dismissed on § 2 violation of the Sherman Act as the plaintiffs fail to allege defendants have monopoly power, and it is dismissed on § 1 violation of the Sherman Act as plaintiffs fail to allege what violative act was done in restraint of trade. The question of deprivation of property without due process is moot in light of Judge Moody’s opinion that the plaintiffs will be compensated for the assets. This court is in accord with the general proposition that a complaint in a private anti-trust action should be construed most favorably for the plaintiffs, as previously stated, and this court has sought to act accordingly. However, it was presented with a unique situation in that it had the aid of the well-written opinion of Judge Blair Moody, Jr. Thus, presented with the complaint and given no facts in dispute, this court has but one course to follow, to dismiss the action for the above stated reasons. It is to be noted that the other defenses raised by the defendants, e. g. immunity, lack of standing, etc., need not be considered as the issue is now moot. An order in accordance with this opinion may be submitted by the parties. APPENDIX STATE OF MICHIGAN IN THE CIRCUIT COURT FOR THE COUNTY OF WAYNE 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. No. 74962 OPINION This ease was commenced at 5:30 p. m., October 11, 1966, when Charles D. Slay, Commissioner of Banking of the State of Michigan, filed a petition for the appointment of a receiver for the Public Bank, Detroit, Michigan. The Court granted the petition and appointed the Federal Deposit Insurance Corporation (“FDIC”) receiver without bond pursuant to Sections 115 and 125 of the Michigan Financial Institutions Act, Comp.Laws Mich. 1948, §§ 487.115, 487.125. Such order was approved and dated during the early hours of October 12, 1966. Immediately upon its appointment the receiver filed a petition for approval of a proposed sale by the receiver of assets and assumption of liabilities of Public Bank (“Public”) to the Bank of the Commonwealth (“Commonwealth”). Such petition also was approved by the Court and an order authorizing the sale was entered during the early hours of October 12, 1966. Among other items the last mentioned order specified: “IT IS FURTHER ORDERED that any party in interest who considers himself aggrieved by this order, shall appear before this court at 9:30 a. m. on the 2nd day of November, 1966 and show cause why this order should be set aside.” The order further provided that a copy of such order and the receiver sale agreement be mailed to all shareholders of Public Bank of record at least 10 days prior to the stated hearing date. On November 2nd Judge Benjamin Burdick of the Wayne County Circuit Court to whom this case was originally assigned, conducted a preliminary hearing with the purpose of developing a plan of procedure regarding the above defeasance provision in the sale order of October 12th. At this hearing Judge Burdick made a statement on the record reflecting his relationship to the parties and counsel in this case. The statement of Judge Bur-dick called attention to the fact that his son-in-law David Page was a member of the law firm of Honigman, Miller, Schwartz & Cohn, co-counsel for the receiver, although reflecting that Mr. Page would in no way participate in this matter. He also revealed that he was personally indebted to Commonwealth on several loans and had several fiduciary accounts in Commonwealth as well as in other banks. He stated his personal banking business was conducted with City National Bank. He reflected that “none of the foregoing would in anyway affect my ability to hear and adjudge all matters in this case fairly and impartially.” The case was then adjourned for two weeks until November 17, 1966. In the meantime numerous motions were filed by persons who considered themselves aggrieved by the action of the Court. One motion was filed on November 4th seeking to disqualify Judge Burdick. This motion was assigned to Judge Kaufman who set a hearing date of November 14, 1966. Judge Burdick on .November 11, 1966 made a formal statement to the Presiding Judge, Thomas G. Murphy, requesting that the Presiding Judge reassign the subject case under Michigan Court Rule 925 to another judge. On November 14, 1966 Judge Kaufman declined to rule on the motion to disqualify Judge Burdick and referred the matter to the Presiding Judge. Since Bur-dick had requested the matter be reassigned, Kaufman concluded there was nothing before him. A formal letter was sent from Judge Burdick to Judge Murphy and a copy of his statement was filed November 15, 1966. Thereupon Judge Murphy “for the reasons set forth in Judge Burdick’s statement”, reassigned the subject cause by blind draw to this Judge by order dated November 15, 1966. A motion was then filed before Murphy to set aside the reassignment on the ground that Burdick could not voluntarily withdraw. This motion was denied. Also a motion was filed before Judge Kaufman to rule one way or another on the disqualification motion. The motion was also denied. In the interim, this Court promptly presided over the adjourned hearing previously set for November 17, 1966, at which time specific ground rules for the proceeding were outlined. In order to provide opportunity to prepare for the show cause hearing and yet proceed as rapidly as possible, the show cause hearing was then scheduled to commence November 28, 1966. This Court then reflected as a part of the ground rules in view of the diversification of positions of numerous counsel, that any and all legal and factual objections to the prior orders of the Court raised by motion or at such show cause hearing, would be considered and ruled upon, if appropriate, at the termination of such hearing. However, on November 25th an interested party filed a petition with requisite supporting documents and pleadings which caused the removal of the entire receivership proceeding to the United States District Court of the Eastern District of Michigan. Accordingly, this Court, being so notified upon commencement of the November 28th hearing, promptly adjourned such hearing without date pending proceedings in the District Court. Thereafter on December 7, 1966, the Federal District Court remanded this cause back to the State Court from which it originated on the ground of improvident removal. At that point two applications for leave to appeal were being submitted to the Court of Appeals. One appeal related to the disqualification of Judge Burdick. The second tested the reassignment order of Judge Murphy. These applications were denied by the Court of Appeals on February 21, 1967 and were later denied by the Supreme Court, permitting this Court to proceed with the show cause hearing. On March 1, 1967, this Court gave notice to all parties of record that the show cause hearing would commence April 6, 1967 and run continuously until all testimony, evidence and argument would be submitted for determination. The hearing commenced April 6th and final arguments were completed August 31, 1967. ISSUES A multitude of issues were raised at the show cause hearing. A listing of these major points of contention will be followed in order by associated findings of fact and then legal and factual conclusions. These basic issues were raised by parties who considered themselves aggrieved by the actions of the Court on October 11th and October 12th, 1966 as follows: 1. Whether the proceedings which caused the designation of Judge Burdick to hear the petition of the State Banking Commissioner prior to the commencement of the action were violative of General Court Rule 925.5(1) causing sufficient error to set aside all orders of October 12, 1966; 2. Whether the proceedings before Judge Burdick relating to the hours that the court was in session were violative of the Wayne County Circuit Court Rule 1.2 causing sufficient error to set aside all orders of October 12, 1966; 3. Whether the hearing before Judge Burdick was a public hearing as required under M.S.A. 27A.1420, Comp.Laws Mich.1948, §§ 600, 1420 [Pub.Acts 1961, No. 236]; 4. Whether this Court should consider all testimony including the full record submitted at the April 6th hearing or be limited to the record made on October 11th and 12th before Judge Burdick plus only procedural testimony in evidence introduced at the April 6th hearing; 5. Whether the proceedings before Judge Burdick were contrary to the 14th and 5th Amendments of the Constitution of the United States as well as the Constitution of the State of Michigan as violative of due process since the Court appointed a receiver and then approved the sale of the property of shareholders allegedly without notice to Public Bank, its officers, directors or shareholders and without the opportunity for a fair and full hearing; 6. Whether at the time of the appointment of a receiver on October 12, 1966, Public Bank was insolvent within the purvue of Section 115 of the Michigan Financial Institutions Act; 7. Whether, at the time of the appointment of a receiver on October 12, 1966, such appointment was expedient under the Michigan Financial Institutions Act; 8. Whether the appointment of the FDIC as receiver was authorized and appropriate under the Michigan Financial Institutions Act; 9. Whether the FDIC as receiver must be a “disinterested person” under the attending facts; 10. Whether the sale contract approved by the Court on October 12, 1966, was a “fair” agreement; 11. Whether this Court may and should independently ratify the findings and orders of October 11th and 12, 1966; 12. Whether Judge Burdick was disqualified from hearing and acting upon the petition of the Banking Commissioner; 13. Whether Judge Moody could conduct the hearing of April 6th without first having scheduled and presided over a pre-trial conference and having prepared a pre-trial statement; 14. Whether the reassignment of this cause from Judge Burdick to Judge Moody was permissible and proper under Michigan Court Rules. FACTS In view of the complexities of this case combined with its great importance to all parties, not to mention depositors and the financial community, a listed finding of facts in detail is perceived by this Court to be its responsibility. Thus the following constitutes this Court’s findings of fact following in sequence as close as possible the above mentioned issues: 1. ) Approximately two or three weeks prior to October 11, 1966, the date of the filing of the instant petition by the Banking Commissioner, William R. Rudell, Assistant Attorney General of the State of Michigan as attorney for the petitioner, first disclosed to Judge Thomas G. Murphy, the Executive Judge of the Wayne Circuit Court, that “an important case” might break and possibly assistance would be needed after regular court hours. About one week or ten days before October 11, 1966, Mr. Rudell returned again and informed Judge Murphy of the specific nature of the proceedings and that Public Bank was involved. At this second meeting Judge Murphy consulted with Judge Sullivan, then Presiding Judge Pro Tem of the Wayne Circuit Court in the presence of Mr. Rudell. Thereupon the names of all judges of the Wayne County Circuit Court were placed on slips in a hat and the name of Judge Benjamin Burdick was drawn from the hat by Judge Sullivan. Thereupon Judge Burdick immediately was called to the chambers of Judge Murphy, and in the presence of Mr. Rudell, Judge Murphy and Judge Sullivan, was informed of his selection, the nature of the petition, and the banking institutions involved. Judge Burdick indicated upon inquiry that he would be in no way disqualified. He was advised if and when the petition was filed he would hear the matter and Mr. Rudell would contact him prior to such action being taken to effectuate time arrangements. 2. ) That prior to the institution of the action, the selection of Judge Burdick was related by Mr. Rudell to other representatives of the Attorney General’s office, the petitioner, a representative of the FDIC and an attorney of Commonwealth. No agent, representative or attorney of Public was informed of the Judges’ conference or of the selection of Judge Burdick. 3. ) That approximately noon on October 11, 1966, Mr. Rudell as attorney for the Petitioner, conferred with Judge Burdick advising him that the petition of the State Banking Commissioner would be filed on that date and was advised by the Court that arrangements would be made to have the Court’s personnel available for a hearing that evening. 4. ) That the petition was filed at 5:30 p. m., October 11, 1966, which was handled by Mr. Ben Williams, Deputy Wayne County Clerk, by a pre-arrangement with the Wayne County Clerk and that at such time of filing, the Deputy Clerk was advised that the matter had been assigned to Judge Burdick. 5. ) The State Banking Commissioner through his agents and attorneys promptly advised representatives of the Federal Deposit Insurance Corporation and representatives of the Bank of the Commonwealth, of the proposed filing time and that the matter would be heard by Judge Burdick that evening. Mr. Jason Honigman and Mr. Milton Miller, from a firm later to be appointed co-counsel for the receiver, were informed of the evening hearing. Neither Public Bank or any of its representatives or attorneys or agents were advised of the contemplated filing of the petition that evening or the fact that hearings were to be conducted thereon by Judge Burdick. 6. ) That the hearing before Judge Burdick on October 11, 1966, commenced at 6:35 p. m. and continued until 7:40 p. m. After a recess the Court convened at 12:35 a. m. on October 12, 1966 and continued until the conclusion of the proceedings at 1:00 a. m. on the same date. The appearances in proceedings before Judge Burdick are completely reflected in the transcript of such proceedings, being Miro Exhibit A in evidence in this cause. 7. ) Approximately 25 persons, including representatives from the Attorney General’s office, the State Banking Department, the FDIC and Commonwealth, assembled in Judge Burdick’s courtroom about 6:00 p. m. the evening of October 11, 1966. Most of these persons entered the City-County Building through the Larned Street door which was the only entrance open, together with the Jefferson entrance, after 5:30 p. m. Some of the persons in attendance headed directly to Judge Burdick’s courtroom without being asked as to their intentions. Others were queried and were permitted to proceed upon advising the doorman of their intention to attend Judge Bur-dick’s courtroom. Anyone desiring to go to Judge Burdick’s courtroom was admitted to the building. Prior arrangements were made by telephone from Judge Burdick’s office with the doorman to permit any person to enter the building to proceed to his courtroom. The door to Judge Burdick’s courtroom was open during the entire hearing. All testimony was taken in the open courtroom by an official court reporter. All persons desiring to go to Judge Burdick’s courtroom were permitted to proceed to the courtroom. The arrangements established that evening were in violation of the building supervisor’s instructions which requires the guard to receive written instructions disclosing the names of persons to be admitted, designating the area that the persons were to proceed. Although a log was maintained by the guard which ostensibly required all persons entering and leaving the building to register, such registration was carried out in some but not in every instance on the evening of October 11th and 12th, 1966. 8.) The hearing before Judge Burdick commenced at 6:35 p. m. by the taking of the testimony, from Murray Miller, a senior examiner of the State Banking Department, Paul F. O’Neill, a senior examiner of the FDIC and Commissioner Slay. The hearing recessed at 7:40 p. m. and commenced again at 12:35 a. m. on October 12, 1966. At that time the Court made a finding that the Public was insolvent and “In order to protect the depositors, the creditors and others doing business with this bank and to stop any possible interruption of business and a run on the bank or any other bank in the area, I do hereby appoint the Federal Deposit Insurance Corporation as Receiver, with all of the powers and privileges provided by the laws of the State of Michigan; and that title to all of the assets, business and property of said bank of every kind and nature' shall pass to and vest in the Federal Deposit Insurance Corporation, as Receiver, without execution of any instruments of conveyance, assignment, transfer or endorsement.” 9. ) Judge Burdick then entered an order appointing FDIC as receiver which appointment was immediately accepted. Next the Court appointed Miller, Can-field, Paddock & Stone, and, Honigman, Miller, Schwartz & Cohn as co-attorneys for the receiver and entered an order to such effect. Promptly thereafter counsel for the FDIC in its capacity as receiver petitioned both orally and in writing for approval by the Court of the sale of substantially all of the liabilities of Public (including all deposit liabilities) by Commonwealth pursuant to a receiver’s sale agreement which was attached to the petition for approval of the sale being a part of so-called Agreement B, to be identified herein. The Court was advised that the sale to Commonwealth was the only sale then available; that if not approved forthwith under the sale agreement, Commonwealth could withdraw because of the resultant interruption of banking services that the directors of Public had previously approved a direct sale agreement substantially identical to the proposed receiver’s sale agreement; that Public would lose its value as a going concern to prospective purchasers; and that the opportunities to collect claims would be more difficult in the hands of a receiver than in the ease of a going concern. The Court then authorized a sale by formal order of approval which included the defeasance clause cited heretofore. 10. ) That from the inception of the hearings commenced on October 11th and concluded on October 12, 1966, including the approval of orders by Judge Burdick appointing a receiver, appointing attorneys for the receiver and ordering the sale of the assets of Public to Commonwealth, all was conducted without the presence of or notice to Public or anyone of its agents, representatives or attorneys. 11. ) Extreme precautions were taken by the Commissioner’s agents and attorney to prevent premature publicity over the possibility of a receivership. To effectuate the provisions of the Receivership Sale Agreement, proceedings would have to be commenced after banking hours and completed overnight or over a weekend to avoid interruption of banking services. 12. ) Public Bank is a State Bank chartered under the Michigan Financial Institutions Act. It is not a member of the Federal Reserve System but is an insured bank with the Federal Deposit Insurance Corporation. It is subject to examination by both the State Banking Department and the FDIC. 13. ) As of October 11, 1966, there were 452,000 shares of $10 par common stock outstanding of Public Bank. As of the same date such stock was held by approximately 3,100 shareholders. 14. ) It was determined by Federal and State authorities that a joint examination of Public Bank be conducted in the spring of 1966. Such examination is known as the examination as of March 28, 1966. The examination commenced on March 28th and continued until June 10, 1966. Such examination was under the joint direction of Murray Miller, Senior Michigan State Bank Examiner with 14 years experience, and of Paul O’Neill, FDIC Field Examiner with 33 years experience with the FDIC. An approximate total of 40 men conducted the examination, about half from each agency. Each agency exchanged men with the other attempting to use the best qualified men for each assignment. 15. ) Prior to this examination, Michigan State Banking authorities considered Public Bank a “problem bank”. Commissioner Slay met with the Board of Public Bank from the time he became Commissioner in 1961 through October 11, 1966, more times than with all other Michigan Banks put together. 16. ) Prior to this examination, as far back as the middle of 1968, the Accounting Department Manager of Public Bank took exception with his superiors to certain accounting methods employed by Public. He raised questions with respect to the handling of the unearned income account at the time and the fact that the bank then switched from the 78th’s accounting system to a formula of maintaining approximately 12% or less of the total gross outstanding on installment loans in the unearned interest account. Furthermore, he objected to the transfer of approximately $500,000.00 from the unearned interest account to undivided profits account at one time. Again in March, 1965, the same accounting officer raised questions with respect to the handling of the unearned interest account, the renewal of consumer loans and the establishment of certain loss reserves pertaining to the originator of one of two major sources of installment home improvement contracts being purchased by the bank. These objections made to several directors and officers of Public Bank from evidence presented at this hearing, in reply he was advised that the methods used were in accordance with normal banking operation or that the matter would be looked into, but at that time no different action was taken. It was the opinion of this chief accounting officer of Public Bank in the early fall of 1965, that the “unearned interest account” was understated in Public Bank’s records which would have the effect of overstating the bank’s realized income. 17. ) The handling of the unearned interest account by Public was brought to the attention of the State Banking Commissioner in September, 1965 by an officer of Public Bank. During the fall months of 1965 a Federal Grand Jury was in the process of investigating Public’s method of accounting, in particular, relating to its unearned interest account. Meetings and discussions were had during the month of September and November between the Commissioner and directors and officers of Public Bank with respect to this matter. 18. ) Shortly prior to November 3, 1965, the secretary of Public advised the directors of the Bank that an initial accounting run had been made reflecting a deficiency in the unearned income account of $1,509,000.00 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 Public Bank. At the November 3rd meeting with the Board, the State Banking Commissioner requested that an audit of the unearned interest account be made to determine any deficiency. There were substantial differences of opinion as to the most prudent method for accounting to appropriately reflect whether there was any deficiency or not. Shortly after the meeting of November 3rd between the Commissioner and the Board of Public Bank, the President of Public Bank, Mr. Hay, resigned on November 10th, effective November 30, 1965. 19. ) The Board of Directors of Public thereupon promptly made arrangements with the accounting firm of Touche, Ross, Baily & Smart (“Touche”) to conduct an audit of the unearned interest account. Touche previously was retained to prepare an audit report and balance sheet as of November 29, 1965. 20. ) The audit report prepared by Touche as of November 29, 1965, was was not accurate, according to Touche, as it did not state fairly the financial position of Public for several reasons, including the fact that the allowance for possible losses on loans was not adequate to provide for anticipated losses and the liquidation for such loans and the method of determining unearned income on installment loans did not spread income of such loans over their terms. 21. ) Subsequently, with respect to the unearned interest investigation, a written opinion was issued by Touche on December 30, 1965, which reviewed the bank’s computations of unearned interest under three possible types of “money in use methods”. The methods were as follows: “Method No. 1 had the effect of absorbing income on the 78’ths method over a number of months equal to the number of payments stipulated by the original terms of the loan, and disclosed a deficiency in unearned discount and an overstatement of profits in the approximate amount of $1,835,000.00. “Method No. 2 would give effect to periods of nonpayment during the first months of certain home improvement loans, and disclosed a deficiency in unearned discount and an overstatement of profits in the approximate amount of $2,045,000.00. “Method No. 3 provided that amounts representing estimates of loan acquisition costs ($19.55 a loan) would be deducted from original net finance charges and recognized as earnings as loans are made, with the remainder being absorbed into earnings on a 78’ths method as in Method No. 1. It disclosed a deficiency in unearned discount and an overstatement of profits in the approximate amount of $1,485,000.00.” 22. ) The report of Touche recognized that banks employed various methods of recording earnings on consumer loans, usually being variations of either a pro rata straight line recording of such earnings over the term of the loan or computations of earnings based on yield on money in use (78’ths method) report concluded: “We believe that a method which most closely approximates yield on money in use results is the fairest presentation of earnings and unearned discounts.” 23. ) On December 22, 1965, Public’s directors determined to hire the accounting firm of Ernst & Ernst to review the findings of Touche. This firm made no examination or audit of accounts of Public 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 a “average yield method”, leaving in a deferred income account an amount approximately equal to 10 or 11 per cent of the outstanding balance of the installment loans. Such practice according to this report was “reasonable and similar to the practice followed by other banks”. This report also suggested, however, 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 concluded that the present method be continued on the books through December 31, 1965 to avoid “an abnormal adjusment as of December 31, 1965 which might have serious effect on the bank’s image in the financial community”. 24. ) At the Directors Meeting of Public on December 28th, the Board after considering the reports of both Touche and Ernst & Ernst adopted the recommendations of Ernst & Ernst. The resolution was adopted continuing the present 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 made thereafter. The officers of the bank were then instructed to advise interested State and Federal officials relating to this determination. 25. ) On January 6, 1966, Mr. Walter F. Finan who was previously elected President and Director of Public upon the resignation of Mr. Hay, read a prepared statement relating to the handling of the unearned income account of Public. It was his position that if Public did not follow the practices recommended by Touche or make a full proper footnote to the December 31st statement as Touche might recommend, he would submit his resignation. It was Mr. Finan’s position that Public’s books of account did not properly reflect its true condition and that Public’s unearned income on installment loans was presently understated and accordingly its earned income overstated. He stated that an immediate cure should be effectuated by either suitable bookkeeping entries prior to the closing of the books of account as of 1965 or by causing suitable footnotes to be made to the 1965 year end accounting report. Mr. Finan’s resignation was accepted at the meeting. 26. ) At a Board Meeting of Public on January 10, 1966, a report was made by the counsel of Public relating to his conference with United States District Attorney assistants and further heard from representatives of the two accounting firms, Touche, and Ernst & Ernst. Directors at such meeting then determined to adopt, in effect, Method No. 3 of the Touche report mentioned heretofore which would reflect that by footnote explanation, income of Public Bank had been overstated by $1,500,000.00 on December 31, 1965. The State Banking Commissioner was not present at the meeting and made no recommendation with respect to the action taken by the Board. Concern was expressed by directors relating to the effect of newspaper publicity pertaining to the action of the Board. 27. ) Accordingly, the statement of condition of Public Bank for the year ending December 31, 1965, contained a footnote which reflected the Board’s action as follows: “In 1965, the Bank, along with many other state chartered banks, became subject to the regulations of the Federal Deposit Insurance Corporation concerning disclosure of financial information to shareholders and the F. D. I. C. Accordingly, the financial statements for 1964 and prior years have been restated to conform to the presentation used in 1965 which conforms in all material respects with the presentation requirements of the regulations. This restatement increased net operating earnings for 1963 by $170,000 and reduced net operating earnings for 1964 and 1965 by approximately $740,000 and $450,-000, respectively. “During 1965, the Bank’s consumer loan accounting was converted to electronic data processing records. Concurrent with such conversion, an evaluation was made of the Bank’s method of recognizing income on such loans. Accordingly, beginning with all loans granted subsequent to January 1, 1966, income will be recognized by a method which provides for a constant yield over the term of each loan, after taking acquisition costs into account. Had this method been applied retroactively, unearned income at December 31, 1965, would have been greater and surplus and undivided profits would have been reduced by approximately $1,500,000.” 28. ) In addition to the foregoing, it was determined by the directors of Public Bank to amortize the $1,500,000.00 deficiency as reflected in the above mentioned footnote over a period of years by charging it to current earnings computed on the 78’ths method. The first entry of such amortization was made on Public’s books in March of 1966. The effect of such amortization program would be to decrease current earnings and in effect divert a portion of such current earnings in order to correct the overstatement of earnings in prior years which was recognized in the footnote mentioned above. 29. ) In Public Bank’s Statement of Condition as of the close of business on April 5, 1966, the above mentioned footnote was restated except that the undivided profits would have been reduced “by approximately $1,300,000.00” in lieu of the prior estimation of $1,500,-000.00. This difference was due to the amortization which began on March 1966 when Public Bank charged $200,000.00 against current earnings as of April 5, 1966. As of such date no objection was made to the handling of such unearned interest account by the State Banking Commissioner or any official from the Federal Deposit Insurance Corporation. No demand was then made by any banking public official that Public write off the $1,500,000.00 deficiency instead of amortizing it over a period of years. 30. ) During the 15 month period prior to December 31, 1965, Public purchased $29,264,584.21 in gross amount of home improvement installment contracts from two sources. Its purchases however diminished in 1966 when as on August 31, 1966 the bank held a total of approximately $31,500,000.00 of such home improvement installment contracts from the two sources. 31. ) Such home improvement installment contracts from one of the sources had more than doubled since February 15, 1965 through March 28, 1966 with an amount in excess of over $10,600,000.00 having been purchased in such period. In most instances such home improvement installment contracts provided for a first payment extending several months in the future which resulted in the fact that no earnings could be applicable to a large number of such contracts purchased, for instance, in the latter months of 1965 regarding earnings for the year 1965. A total of $29,000,000.00 of home improvement installment contracts were acquired within 15 months prior to December 31, 1965 which represented %rds of the total home improvement installment contracts outstanding, acquired from the two sources. In accordance with the year end statement of Public in December 1965, loan earnings in the amount of $3,548,000.00 were recorded from such home modernization installment loans of which 95% was originated from two sources. As of March 28, 1966, Public’s books reflected on the assets side, total installment loans of $51,755,588.88 of which $37,686,591.89 were home improvement installment loans. On the liability side there was then unearned income of $5,834,173.82. 32. ) The percentage of loans to total assets of Public in 1963 through March 28, 1966, was as follows: 1966 to 1963 1964 1965 March 28 60.3% 66% 61.4% 71.6% 33. ) The loan to deposit ratio of Public on March 28, 1966, was 82.1%, an all time examination high. In 1963 the loan to depositor ratio was 67.1!%; in 1964 it was 73.2% and in 1965, 68.3%. The state average in 1965 was 59.2%. 34. ) Between December 31, 1965 and the commencement of the examination on March 28, 1966, Public Bank suffered a loss of deposits of almost $14,000,000.00 as follows: Time Demand Total Dec. 31/65 $81,444,672.00 $35,721,594.00 $117,166,266.00 March 28/66 $72,695,111.00 $30,879,864.00 $103,574,976.00 35.) From January 1, 1963 to March 28, 1966, Public Bank had sustained a net loss of $318,134.91. From January 1, 1966 to the date of examination on March 28, 1966, Public sustained a net loss of $440,252.58; which included the absorption of $178,155.00, representing the amortized deficiency in the unearned income. 36.) The examinations of March 28, 1966 by the State Banking Department and by the FDIC, although jointly conducted with relation to schedules and specific accounting data, the conclusions of the separate reports of the Banking Commissioner and the FDIC were separately and independently reached by the respective examiners. 37. ) The purpose of the examination of March 28, 1966, as with all examinations, was to as of that date appraise the assets, review the liabilities and review the banking procedures followed thereby permitting examiners to report to supervisory agencies and the directors of the condition of Public. 38. ) The respective reports of examination reflect that on the date of examination Public Bank was in an exceedingly serious financial condition. A summary of the FDIC report of Examiner O’Neill 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 leading 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 operational expenses, has overstated income, has permitted excessive losses in the loan account, has repeatedly disregarded provisions of law and regulations, and has not provided the officer personnel necessary for the supervision of the large loan account which is filled with serious problems. “Although the board has been repeatedly reprimanded for these deficiencies, it is apparent from the findings of this examination that it has failed to effect corrections and the present condition of the bank discloses that the problems have become more acute and seriously threaten depositor funds.” 39.) The report of the State Banking Examiner Miller reflected the following: “This examination discloses that subject bank is faced with many monumental problems for which there are no easy or readily apparent solutions. Bank has had a troubled history, and the major perplexities now facing the bank center around new, and unresolved asset problems of the past, and management’s failure to provide sound earnings, the cumulative effects of which are now endangering the solvency of this institution. Despite the combined past efforts of supervisory personnel to point up dangerous deficiencies and inherent weaknesses, bank’s board of directors have initiated few corrections. The more important areas in which the bank as continued to be deficient are outlined below, with detailed comments following: “(1) Loans and Discounts: (a) Maintenance of an excessive loan volume. (b) Excessive concentrations of credit and lack of diversification relative to individual borrowers, and also with regard to type and source of loans. (c) Excessive loan classifications and delinquency. (d) Excessive loan losses and an unsatisfactory recovery record. (e) Failure to provide for an adequate senior loan staff to grant and properly service an expanded loan portfolio. “(2) Earnings: Failure of the bank to generate sound earnings, which are essential to the buildup of adequate loss reserves and maintenance of a strong capital account. “(3) Capital Structure: Failure to maintain an adequate capital account in relation to the deposit structure. “(4) Liquidity: Continued operation of the bank with low liquidity, particularly pronounced at this examination.” 40. ) With respect to the “excessive loan volume”, the ratio of loan to deposits was 82.1%-, an all time examination high. During the past three years much of the bank’s available funds were channeled into the purchase of home modernization loans from two major sources. 41. ) With respect to the “excessive concentration of credit and lack of diversification relative to individual borrowers”, the examination revealed loans from five loan sources had grown to 722.3% of Public’s total capital and surplus accounts and 50.4% of the total loan portfolio. As of March 1966 over $35 million of a total $51,755,588.88 of installment loans were obtained from two principal sources. With respect to home improvement installment loans in 1963, 99.1% of Public’s home improvement installment loans were purchased from one source; in 1964, 93.6% of such loans were purchased from one source; in 1965, 83.3%• of such loans were purchased from two principal sources and in 1966, as of the date of examination, 95.1% of such home improvement installment loans had been purchased from such two sources. 42.) With respect to the conclusion that Public had “excessive loan classifications”, at the date of examination 46.-6% of the total loan portfolio was adversely classified. Such sum was six times the total book capital structure of Public at the date of examination. In bank examining parlance a “classified” loan is one which is deficient and place in one of three categories: “loss”, “doubtful”, or “sub-standard”. A “loss” is when in the judgment of the examiner it is uncollectable or when it meets the statutory requirements of a bad debt. Loans classified as “loss” are charged in full against capital funds. A “doubtful” loan is one which there is serious question as to the collectability and 50% of such doubtful loans are charged against capital funds. A “sub-standard” loan are those not classified as either loss or doubtful but involve more than a normal risk of collectability. No part of a substandard loan is charged against capital funds. The FDIC Report of Examination reflected the following table which shows ratios between loans and total assets as well as ratios between adversely classified loans and total loans and book capital: 1966 to Date 1963 1964 1965 of Examination Percentage of loans to total assets 60.3% 66.0% 61.4% 71.6% 21.0% 12.3% 7.4% 46.6% Percentage of classified loans to total loans Percentage of classified loans to book capital 199.9% 133.1% 89.8% 637.6% Percentage of loss and 50% doubtful to book capital 14.9% 11.4%' 16.6% 52.3% In addition to the foregoing, the total adversely classified installment loans to be differentiated from the total loan portfolio reflected a sum of $35,764,530.05 which was equal to 69.1% of the total installment loans. This sum constituted an amount approximately equal to the total installment loans then outstanding from the two principal sources. The FDIC Report stated: “A check of the files discloses the lack of credit worthiness on the very great majority of the borrowings with borderline and weak credits predominating. A review of the past charge-offs in these accounts reflects the deterioration in the quality of the contracts purchased, as the amounts that are being charged off are increasing at a faster pace than the increase in the acquisitions indicating that probable losses still can reasonably be expected to increase further, resulting in staggering charges against capital funds. The loss reserves that were being built up when the accounts were increasing have all been used, and, as the bank has for all practical purposes shut off new acquisitions, there will be little, if any, reserve to absorb the losses that are still to be taken and the charge-offs will have to be out of capital funds.” The report then stated: “Due to the time lag of approximately a year before the contracts become statutory, the losses for most of 1965 and the first quarter of 1966 have not come to light at this time, since nearly all of the contracts have a delayed first payment of from six to eight months from origination date, after which they do not become statutory until payments are six months past due.” 43.) The State Examination Report stated: “To date the bank has experienced a punishing loss experience” on home improvement loans from the two sources. Accordingly, the examiner placed a group classification of “doubtful” to $5 million of such loans causing $2,500,000.00 to be charged against the capital account. The examination concluded: “there is little doubt that the ultimate losses that will be suffered will far exceed the $2,500,000.00 that is charged against capital account * * * and it is more probable that a loss classification of $5,000,000.00 would have been more appropriate. Likewise, as a group, these loans are not considered to represent sound banking values and a sub-standard classification is accorded all the remaining contracts.” 44. ) Aside from the excessive loan questionable classification, the delinquency rate in the loan account was 10.-2% and was 13.1% in the installment loan category. Such rate was more than twice the average in Michigan. To obviate delinquency ratios from an even higher percentage, such loans were “rewritten” or its maturity extended to take it out of the delinquent category. The State Examination Report reflected that past handling of the unearned interest account resulted in a “major understatement of the bank’s unearned discount account and conversely a substantially overstatement of earnings in prior years.” 45. ) Furthermore, the loss reserve ratio maintained by Public were severely criticized by the State Examination Report as was Public’s failure to provide for a senior loan staff adequate to serve the increased loan portfolio it had acquired. 46. ) With respect to the failure of the bank “to generate sound earnings” on January 1963 to March 28, 1966, Public had experienced a net loss of $318,134.91. As of May 31, 1966, Public had sustained a total book loss of $790,780.67 even though directors injected their own funds in the amount of $360,000.00 to purchase $900,000.00 of charged-off home improvement loans reducing such loss to approximately $440,000.00. 47. ) The State Examination Report stated as follows: “Except to the extent that new deposit money can be attracted, bank will have little reinvestment ability for the remainder of the year. Bank will have a significantly frozen asset condition for many months due to the long-term liquidation provisions that are built into the major block of its earning assets, and any conceivable run-off that will be experienced for the remaining months “of 1966 will be needed to reduce the excessive loan deposit ratio, and provide for a minimum acceptable level of liquidity. “The earnings prospects for year 1966 are indeed grim, and it is quite probable that the net deficit for the year will greatly exceed the very substantial true deficit that was experienced in 1965. Bank is faced with the task of liquidating (without benefit of remaining reserves) in excess of $35,-000,000.00 of sub-marginal loans which can reasonably be expected to produce additional losses running several hundred thousand dollars by year end.” 48.) With relation to the conclusion that Public had failed to maintain “an adequate capital account in relation to deposit structure”, the State Examination Report reflected as of the date of the examination, a