8531. First National Bank (Hagerstown, MD)

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EXPERIENCES OF A BANK RECEIVER By John A. Best EDITOR'S NOTE: This article on the experiences of a national bank receiver was written by John A. Best, president of the Commercial and Savings Bank of Springfield, O., and formerly a national bank examiner and re- NATIONAL BANK receiver A is an official of the federal government appointed by the comptroller of the currency, reporting directly to him and dealing only with national banks. State bank receivers are appointed by the commissioner of banks of the various states. Federal statutes authorize the closing of national banks, by the comptroller of the currency, for six reasons, but practically they are closed for insolvenoy only. A national bank may be closed for the following reasons: Falsely certifying checks Impairment of capital. Non-payment of circulation. Failure to dispose of its own stock. Non-maintenance of reserve Insolvency. II know of no case where the comptroller of the currency closed a bank for other than insolvency. He is authorized by statute to apply o a United States court to annul the charter of a national bank that is violating the national banking laws, but there is only one instance where he applied to court to annul the charter for violating the banking laws-in the case of The First National Bank at Hagerstown, Mid. This was a bank where the officers and directors controlled the large majority of the stock, and were persistent violators of the banking laws, and openly and continually defied the warnings and instructions from the examiners and the office of the comptroller of the currency. Their actions became so flagrant that they finally forced the office of the comptroller of the currency to take this drastic step to revoke the bank's charter. This was the first time such action had ever been taken, for the office of the comptroller of the currency had always considered the remedy too drastic. Upon filing the suit, the court appointed one of the ablest and most experienced examiners and receivers as a temporary receiver, for unless a receiver were appointed the filing of the suit would have undoubtedly precipitated a run and might have caused irreparable injury and damage. Afterwards the officers and directors controlling the bank agreed to sell their stock to parties approved by the office of the conptroller of the currency, and consent was given to the withdrawal of the suit and the temporary receiver, and he then turned the bank over to the new directors. Thus gross abuses were corrected, and an old and previously reputable bank was saved to the community. The office of the comptroller of, the currency never cares to pester the national bank, and endeavors to correct abuses by the officers and directors as tactfully and with as little publicity as possible. The public seldom hears of the vast number of banks where gross abuses have been corrected and banks have been saved from insolvency; but hears only of the loose and corrupt ones which could not be saved-sometimes after years of effort on the part of the examiners and the office of the comptroller of the currency. When we consider the few that fail out of the twenty-five or thirty thousand banks in this country, we should give our heartiest cooperation and congratulations to the office of the comptroller of the currency and the banking departments of the various states in the country. In a bank that I was able to reorganize there was elected as cashier a man of that community who had proved himself capable and who held the complete confidence of everyone for conservatism, integrity and honesty, and whose word was better than his bond, if possible. His conservatism almost became the undoing of the new bank. About a year after the bank had been reopened, an examiner showed up for inspection, and in going over the loans and other assets with the examiner, the cashier, fearful of making a misstatement, placed an ultra conservative value upon many of them; and as a result. when the examiner balanced his report, it showed the new capital of the bank impaired almost completely. The president of the new organization, who was & prominent financial man in a nearby city, wired me to take the matter up with the examiner and his chief. At a conference with them in St. Louis, I soon saw where the examiner had made his mistake, and explained to the chief examiner. Later, at the home city of the bank, after an all night session attended by the examiner, the directors of the bank. the most deeply interested stockholders and depositors, and myself, the examiner was convinced the assets had far more value than the cashier had told him, and re-arranged his report, giving the re-opened bank his O. K. A receiver cannot be a timid soul, for as a rule. when he first goes into a community to take charge of a closed bank, the public, in their aroused and excited condition, unconsciously start to blame him for the catastrophe. Later, after the tension is down, they realize what the receiver is up against, and that he is there to straighten out what is usually a very complicated situation. A receiver comes into the community an utter stranger-not knowing anyone, and above all not knowing where the trail of the closed bank might lead. It behooves him to be careful, not only for his own sake, as he is under heavy bond, but for the sake of the creditors of the bank. He should take no chance whatever but play absolutely safe. They tell a story on a receiver who was an examiner, and has now become prominent in the banking circles of the far west. Rather early in his career he was appointed receiver of a small bank in the mountain district of the southwest. He wired the office of the comptroller, asking to be transferred, and after several wires which were not answered, he unexpectedly appeared in Washington in person. Most of the depositors in this bank were hill men and they did not understand how the government could send a man to close their bank, and not give them any of their own money and their safe-keeping articles, when they wanted them. Finally, they held a mass meeting of the depositors in the mountains, and the final action of this meeting was the appointment of a committee of five determined hill men with instructions to notify the receiver that they were coming down on a certain date to get their money and belongings. On that date the receiver was in Washington, explaining to the comptroller of the currency why he wanted a transfer. Early in my work as a receiver I learned the value of a "hunch" and I picked up many leads, either in crookedness or in discovering assets. that it was almost a religion with me to follow a "hunch" from beginning to end. In a rather small receivership, early in my career. when looking through the old waste paper left by the cashier, I ran across an envelope addressed to him from an insurance company. In assuming control of a receivership I always saved the waste paper until 1 could get time to go through It thoroughly after I became a little familiar with the bank's affairs. This cashier had skipped and was in parts unknown, and understand ing he might own some insurance stock, I immediately dictated a letter to the company, inquiring what stock the bank or cashier owned. found he owned personally twenty (20) shares, but was never able to get hold of this, and found later the proceeds finally landed in the hands of his attorney. The interesting part of this "hunch" was that the secretary of this insurance company was a close friend of the United States district attorney of that district. Later the cashier wrote from his hiding place to theinsurance company, wanting to sell his stock, giving his address as a sub-station of a large city some listance away. The secretary notified his friend, the United States district attorney, of the cashier's address, who in turn notified the marshal of the proper district where they could get him, and the marshal sent his men to the sub-station and in due course arrested the cashier. In a small West Virginia receivership, everything in the bank, that could be, was manipulated, and it was one big mess. Every individual account in the bank had been misused: certificates of deposit had been misused and correspondent bank accounts were terribly out of balance, Several times prior the examiner could not check the correspondent bank accounts, and obtained transcripts of them before the next examination of this bank, doing this three times, and each time when the examiner arrived at the bank the cashier had closed those particular correspondent banks and was doing business with new ones. Finally, the examiner arrived very soon after a previous examination and unexpectedly That night the cashier shot himself. The assistant cashier, his son, claimed he knew nothing about it, while the stockholders and depositors, friends of the son, tried in every way to get him employed on the receiver's force. They would not believe in his wrong doing, until finally, one day I showed some of them about a thousand checks, written by the son and paid by the bank. totaling approximately $50,000, which either had not been charged to any individual account, or had been charged to any particular account which showed a fair balance on the day the check arrived in the bank. When I first took charge of this receivership I was able to find only about five hundred cancelled checks and deposit slips, and as every individual account in the bank had been manipulated, this hardly left anything for the receiver to work on, for there were hardly a dozen pass books in use in the whole bank, and the individual accounts had not been balanced or statements given for over ten years. Finally, in talking and nosing around, found, in a building formerly used as a banking room and owned by one of the directors, a dozen or SO boxes and barrels aipparently containing waste paper and rubbish, which, upon inspection, and getting down below the surface, were found to contain all the old deposit slips and cancelled checks for more than the past ten years. I always thought the cashier and his son had intended to have a fire in the old banking room but had never gotten around to it. These cancelled checks and deposit slips, with the waste paper, were removed to the new quarters. It took four people six weeks to file them in the proper order, and five people eight weeks to check them back to the individual accounts. called in all the pass books and statements, where any had ever been given, also the stubs of their check books, and the individual personal books of the depositors which held their bank account, taking the balance of each account. as shown by the bank's books on the day the bank was closed, and checking every deposit slip and every cancelled check with the individual bank account If we had no deposit slip for a certain deposit, and the depositor could not prove it. that item was debited on our reconcilement and taken off, and in turn if a deposit slip showed a deposit not on the depositor's account, we credited it; and the same was done with the cancelled checks After going through each depisiotr's cancelled checks and deposits, and conferring with each depositor, we struck a balance, which, I felt, was fairly accurate in the vast majority of cases, which lance was accepted on the proof of claim, and a recelver's certificate was issued for that amount. In this bank the depositors received 100 per cent and interest. In a bank where I helped to start a receiver off. the proceding president had resigned to become a high federal bank official, and the defaulting president, formerly cashier, was a protege of the former president. The defaulting president was interested in peanuts and expected to become a peanut king and incidentally wealthy, after cornering peanuts, but, as in most similar cases, he fell by the wayside When the examiner was examining the bank, just prior to its being closed. this high federal bank official called the examiner by phone and told him to "get out and leave that bank alone." The examiner replied he would do so when his chief examiner SO instructed him: and that night the president left for Mexico and is still there. Personally, L was always fortunate in my receivership work being able to obtain very capable and hard working assistants and clerks. who were loyal and interested in the receivership work. who took off my hands the routine matters, giving me more time to spend on the important phases of the work. In every receivership I had for my guidance and counsel the very best legal talent in that partioular part of the country, who were always deeply interested in the receivership and loyal to it. The legal controversies and questions that arose were generally unusual ones and of extreme interest. In one receivership I found a bank in a neighboring town. since the cashier was in parts unknown, had attached all his personal property which would have paid them in full The only thing to do was to put the cashier into bankruptcy and knock out the attachment, which was done, and afterwards we wanted to get him out of bankruptey and his assets into the hands of the receiver for the benefit of the bank in order to save double expense. Finally this was accomplished on the return of the cashier, through a compromise with his creditors and the consent of the cashier. In every receivership one of the and big things is the claim against the bonding company on the defaulting official's bond. Ordinarily these matters are thrashed out in the finest spirit imaginable, as both parties desire to settle only accordIng to law and facts, many* times being a compromise, but most frequently the companies paid up as soon as the final detail claim had been filed. Occasionally, though, a legal question arose, where both sides were honest in their contention, and an amicable law suit was necessary. Preferred claims and off-sets have always been a source of controversy and misunderstanding in every receivership. Each creditor tries, if possible, to show himself to be a preferred creditor. This they can very seldom do. as they must prove, first, that the bank was a trustee for their benefit, and, second, that actual cash has come into the hands of the receiver under this trusteeship. The ordinary relationship with most elaimants is that of debtor and creditor. There are very few preferred claims allowed in any Offsets are allowed where the claimant owes the receiership and the receivership owes the claimant. The difference is what the courts consider is actually owed either by or to the receivership. The claims offset must be similar claims: that is, individual claims against individual debts-Joint against jointpartnership against partnershipcorporation against corporation. Joint claims are not offset against individual claims, or individual or joint against corporations