Petition — Marx v. Centran Corp.

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| Supreme Court, U.S.

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No. $3-6/5°

Preemie STEVAS

CLERK i

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In the Supreme Court of the United States

October Term, 1983

SYLVESTER MARX, Individually, and as a shareholder

of Centran Corporation, on behalf of Centran Corporation

and all others similarly situated,

Petitioner,

vs.

CENTRAN CORPORATION, et al.,

Respondents.

PETITION FOR A WRIT OF CERTIORARI

To the United States Court of Appeals

For the Sixth Circuit

DonaALp WEISBERGER, Counsel of Record

Suite 1425 - 75 Public Square Bldg.

Cleveland, Ohio 44113

(216) 621-7113

Counsel for Petitioner

—_——

THE GATES LEGAL PUBLISHING CC., CLEVELAND, OHIO—TEL. (216) 621-5647

QUESTIONS PRESENTED

1. Do national banks as part of the business of bank-

ing, have the right to borrow unlimited short term monies

to finance the purchase for their own accounts, an unlim-

ited amount of long term U.S. Bonds, subject only to the

rule of prudence of the Comptroller of the Currency, 12

C.F.R. 1.4 et seq., and thereby have the concomitant right to

speculate in U.S. Bonds as part of the business of banking

for which no private right of action, directly or deriva-

tively may be brought by a stockholder of its bank holding

company, for its benefit against the directors who served

both the bank and bank holding company, for the loss

caused by their speculation and their concurrent contra-

vention of the National Banking Act, including Chapter 2

and the Bank Holding Company Act?

2. Does the enactment of the Bank Holding Company

Act, obliterate all private right of actions for the benefit

of or against bank holding companies their directors and

officers thereof, that existed prior to its enactment, thereby

immunizing bank holding companies, their directors and of-

ficers from suit in Federal Court for breach of fiduciary

duty to their shareholders and denial of their pre-emptive

rights?

PARTIES

The Petitioner to this action is:

SYLVESTER MARX, individually,

and as a shareholder of Centran

Corporation, on behalf of Centran

Corporation and all others simil-

arly situated

The Respondents to this action are:

CENTRAN CORPORATION

CENTRAL NATIONAL BANK OF CLEVELAND

JACK C. ROTHWELL, Executive Vice-

President Central National Bank

of Cleveland and Chairman of the

Credit Policy Committee of Centran

Corporation

JOHN A. GELBACH, Officer of Central

National Bank of Cleveland, Director

and Officer of Centran Corporation

WILSON M. BROWN, Jr., President

of Central National Bank of Cleveland,

Director and President of Centran

Corporation

JAMES M. LARGE, Jr., Executive Vice-

President Central National Bank and

Chairman of Credit Policy Committee

of Centran Corporation

GORDON J. SEVOLD, Senior Vice-Presi-

dent Central National Bank and Treas-

urer of Centran Corporation

Ill

OTES BENNET, Jr., Director of

Centran Corporation

GLENN R. BROWN, Director of

Centran Corporation

JOSEPH T. GORMAN, Director of

Centran Corporation

STEPHEN R. HARDIS, Director

of Centran Corporation

WILLIAM F. HAUSERMAN, Director of

Centran Corporation

ALBERT M. HIGLEY, Jr., Director of

Centran Corporation

GEORGE S. LOCKWOOD, Jr., Director of

Centran Corporation

JOHN J. LOFTUS, Director of

Centran Corporation

ROBERT D. McCREERY, Director of

Centran Corporation

JAMES S. REID, Jr., Director of

Centran Corporation

KARL H. RUDOLPH, Director of

Centran Corporation

WARD SMITH, Director of

Centran Corporation

RENOLD D. THOMPSON, Director of

Centran Corporation

ERNEST M. WULIGER, Director of

Centran Corporation

RULE 28.1 STATEMENT

Subsidiaries of Centran Corporation:

Central National Bank, Cleveland, Ohio

Centran Bank of Akron, Akron, Ohio

Richland Trust Corporation, Mansfield, Ohio

Franklin Bank, Columbus, Ohio

Farmers’ and Savings Bank, Loudonville, Ohio

Sutton State Bank, Attica, Ohio

Investor’s Income Insurance Co., Dallas, Texas

Non Bank Subsidiaries:

Colonial Financial Services, Inc., Birmingham,

Alabama

Former Subsidiaries of Centran Corporation:

C.F.S. One, Inc.

People’s Investment Corporation

Major Finance Corporation

Protective Loan Corporation

Security Capital Leasing, Inc.

TABLE OF CONTENTS

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1. National banks and their bank holding com-

panies with the Comptroller of the Currency

have developed the unlimited right of national

banks to purchase U.S. Bonds for their own ac-

counts, into an unlimited right to borrow there-

fore, resulting in a pervasive operational “specu-

lative” scheme, with irreparable consequences

to the banking system that will continue until

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TABLE OF AUTHORITIES

Cases

First National Bank of Ottawa v. Converse, 200 US.

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Western National Bank v. Armstrong, 152 U.S. 346, 38

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No.

In the Supreme Court of the United States

October Term, 1983

SYLVESTER MARX, Individually, and as a shareholder

of Centran Corporation, on behalf of Centran Corporation

and all others similarly situated,

Petitioner,

VS.

CENTRAN CORPORATION, et al.,

Respondents.

PETITION FOR A WRIT OF CERTIORARI

To the United States Court of Appeals

For the Sixth Circuit

OPINIONS BELOW

The opinion of the District Court for the Northern

District of Ohio, Eastern Division, appears in the appendix

hereto.

JURISDICTION

The final judgment of the District Court for the North-

ern District of Ohio, Eastern Division, was entered on

July 22, 1983. A Notice of Appeal to the United States

Court of Appeals for the Sixth Circuit was filed August

18, 1983. This Petition For Writ Of Certiorari has been

filed subsequent to the foregoing Notice of Appeal, but

prior to any final judgment of the Sixth Circuit, Court of

Appeals. This Court’s jurisdiction is invoked under 28

U.S.C. § 1254(1), 28 U.S.C. § 2101(e) and 28 U.S.C. § 1291.

STATUTES AND REGULATIONS INVOLVED

12 US.C. § 1, 12 USC. § 24(7), 12 US.C. § 82

(repealed October 15, 1982), 12 U.S.C. § 84(8), 12 U.S.C.

§ 93(a), 12 U.S.C. § 93(b), 12 U.S.C. § 1842(d), 12 U.S.C.

§ 1849(a), 31 U.S.C. § 3102, 12 C.F.R. § 1.4, 12 C.F.R.

§ 7.1130, 12 C.F.R. § 7.1131, and 12 C.F.R. § 7.7518 all ap-

pear in the appendix hereto.

STATEMENT OF THE CASE

Central Bank, a national bank, with a borrowing po-

tential of $71,000,000 based on its capital and surplus in

1980 bought $307,000,000 of high yield U.S., state and

municipal bonds for its own account financed with short

term borrowed money from the surplus cash flow at the

Federal Reserve Bank, with the plan of selling them at

a profit as soon as long term interest rates fell. Unfor-

tunately, it lost $50,000,000 while waiting.

Central Bank was forced to recapitalize to continue the

business of banking, at the expense of the shareholders of

Centran, the bank holding company which owned 100% of

Central Bank’s stock. Centran recapitalized by diluting

the company stock through the issue of warrants to Marine

Midland Bank in a $70,000,000 stock transaction prohibited

by 12 U.S.C. § 1842(d), damaging Centran’s shareholders

in their pre-emptive rights.

Central Bank, a national bank, doing business ex-

clusively in Ohio, formed a bank holding company,

Centran, a Delaware Corporation, with the Comptroller

of Currency and Federal Reserve Board of Governor’s

approval. There is no authority in either the National

Banking Act or Bank Holding Company Act to permit

this. Centran, in recapitalizing, denied pre-emptive rights

to shareholders of Centran’s common, on the pretext that

though no mention of pre-emptive rights was made in the

agreement of and exchange of Central Bank’s stock for

Centran’s stock, the Delaware law, which vitiates pre-

emptive rights under these circumstances, applies rather

than the Ohio law.

The Petitioner brought action for the benefit of Cen-

tran Corp., a bank holding company and Central Bank, its

wholly owned subsidiary and against the directors and of-

ficers thereof, for damages sustained by Petitioner and

others similarly situated, that were sustained as a result

of the Respondents contravening the National Banking

Act, the Bank Holding Company Act and the Pre-emptive

Rights Doctrine. Petitioner also brought a direct class

action for denial of pre-ernptive rights.

The thrust of Petitioner’s complaint was rooted in the

Respondents’ breach of their fiduciary duty to Petitioner in

speculating in U.S. Bonds in contravention of the National

Banking Act and breach of fiduciary duty in recapitalizing

by the dilution of the common stock in contravention of the

Bank Holding Company Act and Pre-emptive Rights Doc-

trine. Petitioner has contended that these actions were

authorized under 12 U.S.C. § 1849(a) and the Federal Com-

mon Law.

Discovery was had. Stipulations were entered into.

The Respondents filed a Motion for Summary Judgment

as to Count One; Petitioner filed a Motion to Limit the

Scope of the Summary Judgment to the issue of whether

there was a class action and filed a Brief supporting the

Petitioner’s theory, that a class action existed. The Dis-

trict Court found that no class action existed and dismissed

the class action. The court then dismissed the derivative

action, stating that the reasons for the dismissal of the

class action justified the dismissal of the derivative ac-

tion. The court then dismissed the pendent claims for a

class action and derivative action without prejudice.

The dismissal without prejudice as to the state pendent

claims seemingly gives the Petitioner the right to file in

state court, but since the National Banking Act and the

Bank Holding Company Act is an integral part of the

defense to the complaint, it is unlikely that jurisdiction

would lie in the state court or alternatively the case would

be removed to Federal Court. Breach of fiduciary duty

in this case, as to speculation in U.S. Bonds is strictly a

federal question, as is manifest from the 44 page printed

opinion of Judge Manos, as it appears in the appendix

herein.

The Petitioner duly and seasonably filed his Notice of

Appeal to the United States Court of Appeals for the Sixth

Circuit and is docketed as Case No. 83-3602. The Sixth

Circuit has notified the Petitioner that his Brief is due on

October 24, 1983.

The decision for which the Writ of Certiorari is ad-

dressed is from the order cf the United States District

Court granting Respondents’ joint motion for partial sum-

mary judgment as to Count 1 of the Amended Complaint

and the dismissal of Counts 2 and 3 of the Amended Com-

plaint. Count 3 of the Amended Complaint being dis-

missed without prejudice and the denial of the Petitioner’s

motion to limit the scope of Respondents’ motion for partial

summary judgment. The decision is by the Honorable

Judge John M. Manos of the Northern District of Ohio,

Eastern Division on July 22, 1983.

REASONS FOR GRANTING THE WRIT

1. NATIONAL BANKS AND THEIR BANK HOLD-

ING COMPANIES WITH THE COMPTROLLER

OF THE CURRENCY HAVE DEVELOPED THE

UNLIMITED RIGHT OF NATIONAL BANKS TO

PURCHASE U.S. BONDS FOR THEIR OWN AC.

COUNTS, INTO AN UNLIMITED RIGHT TO

BORROW THEREFORE, RESULTING IN A

PERVASIVE OPERATIONAL “SPECULATIVE”

SCHEME, WITH IRREPARABLE CONSE.

QUENCES TO THE BANKING SYSTEM THAT

WILL CONTINUE UNTIL THIS ISSUE IS AD.

DRESSED BY THIS COURT.

‘“., . no authority, express or implied, has ever been

conferred by the statutes of the United States upon a

national bank to engage or promote a purely spec-

ulative business or adventure... .”

It is doubtful the foregoing principle articulated in First

National Bank of Ottawa v. Converse, 200 U.S. 425 at page

439, has been altered.

Yet the United States District Court below has sanc-

tioned speculative activity by a national bank and its bank

holding company by denying any remedy to the stock-

holders of the bank holding company by his opinion that

any action in regard to such speculation, is now within

the sole regulatory authority of the Comptroller of the

Currency.

The District Court sanctioned the unlimited short term

borrowing of Central Bank in an amount of $307,000,000 to

finance its purchase of long term U.S., state and municipal

bonds for its own account, when its borrowing author-

ity was only $71,000,000. Central Bank lost $50,000,000

attributable to the foregoing scheme. It had no intent

to invest in U.S. Bonds because of its obvious lack of capital

to pay for them.

To cover the cost of payment for the purchase, it used

a device where it placed the purchase of U.S. Bonds with

the Federal Reserve Bank and borrowed the surplus monies

on a continuing daily basis from other banks that they

had placed in the Federal Reserve Bank.

Central Bank’s speculation was that its enormous bor-

rowing was justified by betting that its purchase of high

yield, long term U.S. Bonds would in a short period of

time become more valuable by a fall in the long term

bond market interest rate and/or the short term interest

rate would remain below the interest rate payable on

the U.S. Bonds it purchased.

The District Court has ruled that the speculation is

strictly under the aegis of the Comptroller of the Currency

who has sole and exclusive authority to act upon the

matters alleged in the Petitioner’s Amended Complaint

and the uncontroverted facts before the court. The court

held, in effect, that there was no private right of action

for breach of fiduciary duty against the directors and

officers of a bank holding company for its benefit or

against the bank holding company itself, either directly

or derivatively where the bank holding company owned

100% of the Central Bank stock and the directors of the

bank holding company and Central Bank acted in concert

through ar. identical interlocking directorate.

The court in its lengthy opinion declined to deal with

12 U.S.C. § 1849(a) which Petitioner had raised in his

Brief as a savings provision. By declining to deal with

this statute the District Court has effectively held that

the enactment of the Bank Holding Company Act precludes

any private right of action by a shareholder of a bank

holding company for its benefit or against it and its di-

rectors and officers, either directly or derivatively. The

District Court did find however, that the bank holding

company did have a private right of action as a share-

holder of its bank for violations of Chapter 2 of the

National Banking Act, pursuant tc 12 U.S.C. § 93(a). The

District Court found that 12 U.S.C. § 93(b) when read in

pari materia with 12 U.S.C. § 93(a) did not confer any

private rights whatsoever, even for the bank holding com-

pany as a shareholder.

The Petitioner’s evidence clearly establishes that 12

U.S.C, § 82 was violated by Central Bank in 1980 and 1981

which shows that Central Bank’s borrowing limit was at

$71,000,000 based on its capital and surplus when it bor-

rowed $307,000,000 to fund and finance the purchase of

$307,000,000 of long term U.S., state and municipal bonds.

The court held that the repeal of 12 U.S.C. § 82 two years

later made it inapplicable to Petitioner’s case, but even

if it was applicable the Comptroller of the Currency’s

regulations 12 C.F.R. § 7.1130, 12 C.F.R. § 7.1131 and 12

C.F.R. § 7.7518 made 12 U.S.C. § 82 inoperative.

Thus national banks operating from the perspective of

the District Court’s opinion, beautifully articulated by the

Respondents, have created for themselves the right to

borrow unlimited funds to speculate in the U.S. Bond

market subject only to the apparent but illusory authority

of the Comptroller of the Currency.

The purchase of the U.S. Bonds for Central Bank’s

own account with excessive borrowed funds for speculative

purposes was obviously no secret to the Comptroller of

the Currency due to his frequent and constant auditing

of the bank. Thus it was done with his tacit approval.

The Comptroller of the Currency’s undefined Rule of

Prudence, 12 C.F.R. § 1.4 which limits the right of purchase,

in no way limits the right to borrow. The Comptroller

of the Currency cannot very well enforce the rules of

prudence because of the chilling effect it has on the pur-

chase of U.S. Bonds and because it conflicts with the stat-

utory duty of the Secretary of the Treasury, under whose

direction he operates to issue and sell U.S. Bonds on the

credit of the United States Government. 12 U.S.C. § 1,

provides that the Comptroller of the Currency shall per-

form his duties under the general directions of the Sec-

retary of the Treasury. 31 U.S.C. § 3102 authorizes the

Secretary of the Treasury to issue U.S. Bonds and sell them

on the credit of the United States Government.

Consequently, there is no viable regulation of a na-

tional bank’s speculation in U.S. Bonds with borrowed

monies where such bank is a wholly owned subsidiary of

a bank holding company, unless shareholders of a bank

holding company can bring an action for breach of fiduci-

ary duty.

There is no direct statutory authority under the Na-

tional Banking Act for a bank to borrow money. The

borrowing of money by a bank, though not illegal is out

of the course of ordinary and legitimate banking business.

See Western National Bank v. Armstrong, 152 U.S. 346, 38

L. Ed. 470. 12 U.S.C. § 24(7) has been interpreted

by the court as allowing banks to borrow money

under the incidental power necessary for the business of

banking. This right to borrow incidental to the business of

banking was limited by 12 U.S.C. § 82 to the bank’s capital

plus 50% of its surplus. It did not except borrowing for

the purchase of U.S. Bonds for the bank’s own account for

investment, trading or speculating, nor does it authorize

borrowing for the bank’s own account. Neither did it em-

power the Comptroller of the Currency to modify 12 U.S.C.

§ 82 in any way, manner, shape or form.

The Comptroller, without any authority or factual case

before him prior to 1975. sua sponte issued an interpreta-

tive ruling in 12 C.F.R. § 1130 and 12 C.F.R. § 1131 ex-

empting banks from 12 U.S.C. § 82 when it borrows funds

from other banks through the Federal Reserve Bank. The

Comptroller of Currency, thus has sanctioned and pro-

moted the operational speculative scheme, herein not as

to the case at bar, but for the entire national banking

industry.

National banks have assumed that they have as “‘in-

cidental power,” of 12 U.S.C. § 24(7), the right to bor-

row short term monies on a daily basis from other

banks, the surplus funds that these banks have placed in

the Federal Reserve Bank, to finance the purchase of long

term U.S. Bonds. They have claimed as authority for their

right to borrow for their own accounts, enormous sums of

monies, many times their capital assets and surplus, the

Comptroller of the Currency’s regulations 12 C.F.R. § 7.1130,

12 C.F.R. § 7.1131 and 12 C.F.R. § 7.7518, when it is apparent

and patent that they can not repay the loan financing

for their purchase of U.S. Bonds from their capital assets

and surplus should they sustain a loss without seriously

impairing their ability to function as a bank.

These regulations by the Comptroller of the Currency

provide that the monies borrowed are not subject to 12

U.S.C. § 82, but are to be considered as a purchase and sale.

12 U.S.C. § 82 limited the borrowings of a bank, subject

to exceptions not relevant here, to its capital and surplus.

12 U.S.C. § 82 contains absolutely no authority for the

Comptroller of the Currency to enact any regulations

whatsoever in regard thereto. Notwithstanding, the Comp-

troller of the Currency by his foregoing enactments of regu-

lations, obliterated the substance of 12 U.S.C. § 82 in this

regard.

From reliable sources and information it is believed

that other national banks have engaged in the same prac-

tice and will continue to engage in the same practice unless

such activity is declared illegal by this court.

The questions presented are of first impression and are

of such imperative public importance as to justify the de-

viation from normal appellate practice and to require im-

mediate settlement in the Supreme Court of the United

States.

CONCLUSION

Petitioner urges this Court to grant his Petition For

Writ Of Certiorari to review the decision of the United

States District Court, for the Northern District of Ohio im-

mediately and forthwith prior to the consideration of this

case by the United States Court of Appeals for the Sixth

Circuit, in order that the current practice of speculation

by national banks and their holding companies hereinabove

detailed may be curbed, curtailed and declared illegal.

Respectfully submitted,

DONALD WEISBERGER, Counsel of Record

Suite 1425 - 75 Public Square Bldg.

Cleveland, Ohio 44113

(216) 621-7113

Counsel for Petitioner

APPENDIX

ORDER OF THE UNITED STATES

DISTRICT COURT

(Filed July 22, 1983)

Case No. C82-2720

IN THE UNITED STATES DISTRICT COURT

For THE NORTHERN DISTRICT OF OHIO

EASTERN DIVISION

SYLVESTER MARX, etc.,

Piaintiff,

CENTRAN CORPORATION, etc., et al.,

Defendants.

ORDER

Pursuant to the Memorandum of Opinion issued in the

above-captioned case this date the defendants’ joint motion

for partial summary judgment is granted; the plaintiff's

motion “to limit [the] scope’ of the defendant’s motion is

denied and the remainder of the complaint is dismissed.

Such dismissal is without prejudice to the claims alleged

in count three of the amended complaint.

IT IS SO ORDERED.

s JoHN M. Manos

United States District Judge

MEMORANDUM OF OPINION OF THE UNITED

STATES DISTRICT COURT

(Filed July 22, 1983)

Case No. C82-2720

IN THE UNITED STATES DISTRICT COURT

For THE NORTHERN District oF OHIO

EASTERN DIVISION

SYLVESTER MARX, etc.,

Plaintiff,

CENTRAN CORPORATION, etc., et al.,

Defendants.

MEMORANDUM OF OPINION

On October 8, 1982 plaintiff, Sylvester Marx, filed the

above-captioned case alleging violations of 12 U.S.C. $§ 24

and 84 and 12 C.F.R. § 1.4 by the following defendants:

(1) Centran Corporation (hereinafter, Centran); (2) Cen-

tral National Bank of Cleveland (hereinafter, CNB); (3)

Jack C. Rothwell; (4) John A. Gelbach; (5) Wilson M.

Brown, Jr.; (6) James M. Large, Jr.; (7) Gordon J. Sevold;

(8) Otes Bennet, Jr.; (9) Glenn R. Brown; (10) Joseph T.

Gorman; (11) Stephen R. Hardis; (12) William F. Hauser-

man; (13) Albert M. Higley, Jr.; (14) George S. Lockwood,

Jr.; (15) John J. Loftus; (16) Robert D. McCreery; (17)

James S. Reid, Jr.; (18) Karl H. Rudolph; (19) Ward

Smith; (20) Renald D. Thompson, and (21) Ernest M.

Wulliger. On January 26, 1983 Marx filed an amended

complaint which, in addition to the statutes and regulation

cited above, alleges violations of 12 U.S.C. §§ 82, 375(b),

1842(d) and 1847. On March 3, 1983 the parties submitted

stipulations of fact. On March 10, 1983 the defendaits filed

a joint motion for partial summary judgment. On May 25,

1983 Marx filed a motion “to limit [the] scope” of the

defendants’ motion. For the reasons which follow the de-

fendants’ joint motion is granted, the motion filed by Marx

is denied and the remainder of the complaint is dismissed.

The amended complaint contains three (3) counts:

(1) count one alleges a class action on behalf of a’' holders

of common stock of Centran; (2) count two alleges « deriva-

tive action “for the benefit of Centran and its wholly owned

subsidiary [CNB]”; and (3) count three alleges a pendent

claim of breach of fiduciary duty under the laws of Ohio.

All counts are premised on the same facts, a synopsis of

which follows below.

In 1980 CNB maintained a policy of asset management

which permitted an imbalance or “gap” between long-

term fixed assets and liabilities and short-term fixed assets

and liabilities. This “gap” was managed according to fore-

casts regarding interest rates. When such forecasts pre-

dicted that interest rates would peak and thereafter de-

cline, CNB would purchase securities for its own account

with medium and/or long-term dates of maturity at rates

of return that were fixed. Such purchases were financed

from the proceeds of liabilities with short-term dates of

maturity. It was expected that as interest rates declined

the short-term liabilities would be “rolled over” at a lower

cost, the securities purchased would continue to earn a

high rate of return and, therefore, CNB would earn a

profit. Obviously, the policy encompassed some risk. If

the forecast regarding interest rates proved incorrect and

rates on short-term liabilities began to rise, then the cost

of the debt could equal and or exceed the rates of return

on the securities purchased. Although it is unquestioned

that if such an upward spiral occurred CNB could sell the

ecurities to reduce the “gap” and restore liquidity, it is

equally clear that the market value of the securities would

decline as interest rates rose and, therefore, CNB would

suffer a loss on any such sale. This is precisely what oc-

curred to CNB’s investment portfolio in late 1980 and

throughout 1981. The parties stipulate that “... as a con-

sequence of negative carrying costs and... losses from

selling securities at market prices lower than cost/book

value... dainages sustained ny CNB... exceeded Fifty

Million Dollars.” Stipulations of Fact, pp. 6-7.

With regard to the parties the following facts are also

stipulated:

(1) In 1978 Marx purchased two hundred (200)

shares of common stock of Centran. He is one of approxi-

mately nine thousand (9,000) shareholders who own over

four million (4,000,000) shares of authorized and issued

common stock.

(2) Centran is a Delaware corporation which is quali-

fied to do business in Ohio. It is a “bank holding com-

pany” as that term is defined in 12 U.S.C. § 1841(a) and

owns all of the common stock of CNB.

(3) CNB is a national banking association chartered

by the United States. It is a member of the Federal Re-

serve System and is insured by the Federal Deposit In-

surance Corporation (hereinafter, FDIC).

(4) Jack C. Rothwell was an Executive Vice Presi-

dent of CNB and Chairman of the Finance Committee of

Centran. He was also manager of the Department of

Asset and Liability Management for each organization.

(5) John A. Gelbach was the Chairman of the Board

of Directors for each organization. From 1979 until May,

1981 he was also the Chief Executive Officer of Centran.

Currently, Gelbach is retired.

(6) Wilson M. Brown, Jr., was President of each

organization. In 1979 he became Chief Executive Officer

of CNB and in June, 1981 Chief Executive Officer of Cen-

tran. He is also a director of each organization.

(7) James M. Large, Jr., was an Executive Vice

President of CNB and Manager of the Department of

Corporate Banking. In April, 1980 he became Chairman

of the Credit Policy Committee of Centran.

(8) Gordon J. Sevold was a Senior Vice President

for Financial Planning and Control of CNB. He was also

Treasurer of Centran.

(9) From 1979 through 1981 Otes Bennet, Jr., Joseph

T. Gorman, Stephen R. Hardis, William F. Hauserman,

Albert M. Higley, Jr., George S. Lockwood, Jr., John J.

Loftus, Robert D. McCreery, James S. Reid, Jr., Karl H.

Rudolph, Ward Smith, Renold D. Thompson and Ernest

M. Wuliger were directors of each organization. In 1982

Lockwood and Wuliger did not stand for reelection. Cur-

rently, all of the other directors remain on each board.

(10) In 1980 Glenn R. Brown was elected a director

on the boards of each organization. Although he did not

participate in any of the investment decisions of the Board

of Directors of CNB, he did ratify the decisions to liqui-

date the investment portfolio in 1981 and 1982.

Finally, the parties also submitted certain stipulations

which concern a transaction between Centran and Marine

Midland Banks, Inc. (herinafter, MMBI), which is not a

party to this action.’ On March 5, 1982 Centran issued

1. Similar to Centran, however, MMBI is a “bank holding

company” under 12 U.S.C. § 1841(a). It is incorporated in a

state other than Ohio and maintains its principal place of business

in New York.

five hundred thousand (500,000) shares of preferred stock

which were purchased by MMBI for $70,000,000. MMBI

also received a warrant to purchase 2,333,333 shares of

common stock at $30. per share.

Marx contends that the court should “. . . restrict the

scope of the [the] [d]efendants motion . . . to the issue

{of} whether [he] and his class have a direct . . . class

action and not in any way rule on the merits.” For the

reasons which follow the court finds the contention to be

without merit.

Fed. R. Civ. P. 23(c) (1) provides as follows:

As soon as practicable after the commencement

of an action brought as a class action, the court shall

determine by order whether it is to be so maintained.

An order under this subdivision may be conditional,

and may be altered or amended before the decision

on the merits.

In Eisen v. Carlisle & Jacquelin, 417 U.S. 156, 94 S. Ct.

2140 (1974), the United States Supreme Court held that

what the district court had termed a “preliminary mini-

hearing” on the merits of the plaintiffs’ claim was not per-

mitted under this rule. Specifically, the Court held:

We find nothing in either the language or history

of Rule 23 that gives a court any authority to conduct

a preliminary inquiry into the merits of a suit in order

to determine whether it may be maintained as a class

action. Indeed, such a procedure contravenes the

Rule by allowing a representative plaintiff to secure

the benefits of a class action without first satisfying

the requirements for it.

He is thereby allowed to obtain a determination

on the merits of the claims advanced on behalf of the

AZT

class without any assurance that a class action may

be maintained. This procedure is directly contrary to

the command of subdivision (c)(1) that the court de-

termine whether a suit denominated a class action

may be maintained as such ‘‘[a]s soon as practicable

after the commencement of [the] action... .”

417 U.S. at 177-78, 94 S. Ct. at 2152. Thus, the precise

question presented by Marx’s motion is whether Eisen held

sub silentio that any consideration of the merits of a case

before a determination of whether it may be maintained

as a class action is impermissible. The court holds the

question should be resolved in the negative.

In Garcia v. Rush-Presbyterian-St. Luke’s Medical

Center, 80 F.R.D. 254, 260 (N.D. Ill. 1978), the court was

confronted with the same issue and held that when “.. .

defendants’ summary judgment motions allow the court to

explore and define the proper range of judicial inquiry on

the allegations of the complaint, disposition of those mo-

tions before certification is appropriate.”’ (Emphasis added).

Accord: Haas v. Pittsburgh National Bank, 381 F. Supp.

801, 803 (W.D. Pa. 1974), aff'd (rev’d) on other grounds,

526 F.2d 1083 (3d Cir. 1975), “.. . a district court may con-

sider the merits of a plaintiff's case in an action denom-

inated as a class action by ruling upon a motion for sum-

mary judgment (or a motion to dismiss) prior to ruling

upon a motion for class determination .. .”. (Footnote

omitted). A contrary rule, “... if carried to a logical ex-

treme, would require certification to precede even disposi-

tion of motions under Rule 12.” Garcia v. Rush-Presby-

terian-St Luke’s Medical Center, supra, 80 F.R.D. at 260.

Since such an “extreme” would require the court “to engage

in vain and useless effort merely for the sake of form,”

Haas v. Pittsburgh National Bank, supra, 381 F.Supp. at

806, Marx’s motion “to limit [the] scope” of the defendants’

joint motion for summary judgment is denied.

12 U.S.C. § 93(a) provides as follows:

If the directors of any national banking association

shall knowingly violate, or knowingly permit any of

the officers, agents, or servants of the association to

violate any of the provisions of this chapter, all the

rights, privileges, and franchises of the association

shall be thereby forfeited. Such violation shall, how-

ever, be determined and adjudged by a proper district

or Territorial court of the United States in a suit

brought for that purpose by the Comptroller of the

Currency, in his own name, before the association shall

be declared dissolved. And in cases of such violation,

every director who participated in or assented to the

same shall be held liable in his personal and individual

capacity for all damages which the association, its

shareholders, or any other person, shall have sustained

in consequence of such violation.

(Emphasis added). The defendants’ first contention is that

the statute does not provide a private right of action to

shareholders of a national bank. For the reasons which

follow the court holds the defendants’ first contention to

be without merit.

In Chesbrough v. Woodworth, 244 U.S. 72, 76, 37 S.

Ct. 579, 582 (1917), the United States Supreme Court af-

firmed the following ruling by the Court of Appeals for

the Sixth Circuit:

The general demurrer was rightly overruled. The

making and publishing of the reports are not merely

for the information of the Comptroller, but are to

guide the public, and he who buys stock in a bank in

reliance upon the reports has a right of action under

§ 5239, Rev.Stat. (Comp.Stat.1916, § 9831) [section

93(a)], against any officer or director who, knowing

its falsity, authorizes such report.

The general demurrer was to a complaint in which a

shareholder alleged that directors of national bank vio-

lated the provisions of what is currently 12 U.S.C. § 16"

which requires that certain reports be made to the Comp-

troller of Currency. Premised on Chesbrough, the Court

of Appeals for the Ninth Circuit has held that “it is beyond

dispute that under proper circumstances Section 93 creates

a direct cause of action by the shareholders against the

directors of a national bank.” Harmsen v. Smith, 542 F.2d

496, 500 (9th Cir. 1976). Accord: Adato v. Kagan, 599

F.2d 1111, 1117 (2d Cir. 1979), “Individual depositors may

sue in their own right... if they have suffered a wrong

that is distinctly theirs and not common to all’; Spalitta v.

National American Bank of New Orleans, 444 F.2d 291

(5th Cir.), cert. denied, 404 U.S. 883, 92 S. Ct. 212 (1971),

(shareholders’ derivative and class action); Seiden v.

Butcher, 443 F. Supp. 384 (S.D. N.Y. 1978), (shareholders’

derivative action). Other courts, however, have held that

no such standing exists. See: Russell v. Continental IIl-

linois National Bank & Trust Co., of Chicago, 479 F.2d 131

(7th Cir.), cert. denied, 414 U.S. 1040, 94 S. Ct. 541 (1973),

(investors in an ‘open-end mutual fund” established by

the bank); Gollar v. Daniels & Bell, Inc., 533 F. Supp. 1021

(S.D.N.Y. 1982), (shareholders’ derivative action); Stein

v. Galitz, 478 F. Supp. 517 (N.D. Ill. 1978), (private de-

veloper of federally subsidized rental housing); Valente

v. Dennis, 437 F. Supp. 783 (E.D. Pa. 1977), (shareholders

of a corporate borrower).

In Cort v. Ash, 422 U.S. 66, 95 S. Ct. 2080 (1975), the

United States Supreme Court held that four (4) factors are

relevant to determine whether a private right of action

should be implied under any federal statute. Specifically,

the court held:

In determining whether a private remedy is im-

plicit in a statute not expressly providing one, several

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factors are relevant. First, is the plaintiff “one of the

class for whose especial benefit the statute was en-

acted,” Texas & Pacific R. Co. v. Rigsby, 241 U.S. 33,

39, 36 S. Ct. 482, 484, 60 L.Ed. 874 (1916) (emphasis

supplied)—that is, does the statute create a federal

right in favor of the plaintiff? Second, is there any

indication of legislative intent, explicit or implicit,

either to create such a remedy or to deny one? See,

e.g., National Railroad Passenger Corp. v. National

Assn. of Railroad Passengers, 414 U.S. 453, 458, 460, 94

S. Ct. 690, 693, 694, 38 L.Ed.2d 646 (1974) (Amtrak).

Third, is it consistent with the underlying purposes of

the legislative scheme to imply such a remedy for the

plaintiff : See, e.g., Amtrak, supra; Securities Investor

Protection Corp. v. Barbour, 421 U.S. 412, 423, 95 S. Ct.

1733, 1740, 44 L.Ed.2d 263 (1975); Calhoon v. Harvey,

379 U.S. 134, 85 S. Ct. 292, 13 L.Ed.2d 190 (1964). And

finally, is the cause of action one traditionally relegated

to state law, in an area basically the concern of the

States, so that it would be inappropriate to infer a

cause of action based solely on federal law? See

Wheeldin v. Wheeler, 373 U.S. 647, 652, 83 S. Ct. 1441,

1445, 10 L.Ed.2d 605 (1963); cf. J. I. Case Co. v. Borak,

377 U.S. 426, 434, 84S. Ct. 1555, 1560, 12 L.Ed.2d 423

(1964); Bivens v. Six Unknown Federal Narcotics

Agents, 403 U.S. 388, 394-395, 91 S. Ct. 1999, 2003-2004,

29 L.Ed.2d 619 (1971); id., at 400, 91 S. Ct. at 2006

(Harlan, J., concurring in judgment).

422 U.S. at 78, 95 S. Ct. at 2088. (Emphasis added). The

Court so held because “[t]he increased complexity of fed-

eral legislation and the increased volume of federal litiga-

tion strongly supported the desirability of a more careful

serutiny of legislative intent. . .”. Merrill Lynch, Pierce,

Fenner & Smith v. Curran, 456 U.S. 353, 377, 102 S. Ct. 1825,

All

1838-39 (1982). (Footnote omitted). Although Cort “re-

fined the implied remedy doctrine to provide a more ef-

ficient means of determining whether a federal statute

includes a private right of action,” Kaschak v. Consolidated

Rail Corp., ........ We sepecks , No. 81-3383, Slip op. at 24

(6th Cir. May 26, 1983), (Celebrezze, J., concurring in

judgment), the defendants do not cite and this court is

unaware of any authority which holds that it overruled

any previous decision which implied such a right. There-

fore, in light of Chesbrough v. Woodworth, supra, this court

holds that shareholders may maintain a private right of

action against directors of a national bank under 12 U.S.C.

§ 93(a) for any knowing violations of “any of the provisions

of this chapter.’ Since 12 U.SC. § 93(a) provides that

such an action may be maintained against directors only

and *‘arx has stipulated that Rothwell, Large and Sevold

were never directors, the complaint against them, to the

extent it alleges knowing violations of “any of the pro-

visions of this chapter,” is dismissed for failure to state a

claim upon which relief can be granted. Conley v. Gibson,

355 U.S. 41, S. Ct. 99 (1957).

With regard to the defendants who are directors, Marx

alleges that they committed knowing violations of 12

U.S.C. §§ 24, 82 and 84, all of which are “provisions of this

chapter” for the purpose of 12 U.S.C. § 93(a). The defen-

dants contend that they are entitled to summary judgment

under each statute. For the reasons which follow the

court finds the defendants’ contention persuasive.

12 U.S.C. § 24 provides in pertinent part as follows:

Upon duly making and filing articles of association

and an organization certificate a national banking asso-

ciation shall become, as from the date of the execution

2. Subject matter jurisdiction may be implied under either

28 U.S.C. § 1331 or 28 U.S.C. § 1337(a).

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of its organization certificate, a body corporate, and as

such, and in the name designated in the organization

certificate, it shall have power—

Seventh. To exercise by its board of directors or

duly authorized officers or agents, subject to law, all

such incidental powers as shall be necessary to carry

on the business of banking; by discounting and nego-

tiating promissory notes, drafts, bills of exchange, and

other evidences of debt; by receiving deposits; by buy-

ing and selling exchange, coin, and bullion; by loaning

money on personal security; and by obtaining, issuing,

and circulating notes according to the provisions of this

chapter. The business of dealing in securities and stock

by the association shall be limited to purchasing and

selling such securities and stock without recourse,

solely upon the order, and for the account of, customers,

and in no case for its own account, and the association

shall not underwrite any issue of securities or stock.

Provided, That the association may purchase for its

own account investment securities under such limita-

tions and restrictions as the Comptroller of the Cur-

rency may by regulation prescribe. In no event shall

the total amount of the investment securities of any

one obligor or maker, held by the association for its

own account, exceed at any time 10 per centum of its

capital stock actually paid in and unimpaired and 10

per centum of its unimpaired surplus fund, except that

this limitation shall not require any association to dis-

pose of any securities lawfully held by it on August

23, 1935. As used in this section the term “investment

securities” shall mean marketable obligations, evidenc-

ing indebtedness of any person, copartnership, asso-

ciation, or corporation in the form of bonds, notes

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and or debentures commonly known as investment

securities under such further definition of the term

“investment securities’ as may by regulation be pre-

scribed by the Compiroller of the Currency. Except

as hereinafter provided or otherwise permitted by law,

nothing herein contained shall authorize the purchase

by the association for its own account of any shares of

stock of any corporation. The limitations and restric-

tions herein contained as to dealing in, underwriting

and purchasing for its own account, investment secu-

rities shall not apply to obligations of te United States,

or general obligations of any State or of any political

subdivision thereof,...

(Emphasis added). Although it is uncertain “whether the

enumeration of powers contained in § 24 itself imposes a

duty, the breach of which will form the basis of personal

liability of the directors,” Stein v. Galitz, supra, 478 F.

Supp. at 521, the court need not resolve the issue in this

case because the parties have stipulated that all of the

securities purchased by CNB were “type I securities”

which, as a matter of law, are not subject to any of the

limitations or restrictions contained in the statute. See:

12 C.F.R. § 1.3(c).6 Accordingly, the defendants’ joint mo-

tion for summary judgment on Marx’s claim under 12

U.S.C. § 24 is granted.

The second statute that Marx claims the defendants

knowingly violated is 12 U.S.C. § 82. This statute was

3. 12C.F.R. § 1.3(c) provides as follows:

The term “Type I security” means a security which a

bank may deal in, underwrite, purchase and sell for its own

account without limitation. These include obligations of the

United States, general obligations of any State of the United

States or any political suldivision thereof and other obliga-

tions listed in paragraph Seventh of 12 U.S.C. 24.

(Emphasis added).

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repealed seven days after Marx filed his complaint by

the Garn-St. Germain Depository Institutions Act of 1982.

Pub. L. No. 97-320, Title IV, § 402, 96 Stat. 1510 (October

15, 1982).

In Bradley v. School Board of City of Richmond, 416

U.S. 696, 711, 94 S. Ct. 2006, 2016 (1974), the United States

Supreme Court held that “a court is to apply the law in

effect at the time it renders its decision unless doing so

would result in manifest injustice or there is statutory

direction or legislative history to the contrary.” Accord:

Harper-Grace Hospitals v. Schweiker, 691 F.2d 808, 811

(6th Cir. 1982). In this case the court finds that neither

limiting condition exists.

The legislative history which concerns the repeal of

12 U.S.C. § 82 provides as follows:

Section 402 repeals 12 U.S.C. § 82, which estab-

lishes borrowing limitations for national banks. Stat-

utory limitations on the liabilities of national banks

have remained essentially unchanged since original

enactment of the National Bank Act of 1864. Since

that time, however, the nature of the banking busi-

ness—especially the manner in which banks are

funded—has altered considerably. The rigid limitations

of § 82 adversely restrain bank flexibility and com-

petitively disadvantage national banks. Many states

have no such statutory restraints upon state-chartered

institutions.

S. Rep. No. 97-536, 97th Cong., 2d Sess. 60, reprinted in

[1982] U.S. Code Cong. & Ad. News 3054 at 3114. (Em-

phasis added). It is unquestioned that Congress found

12 U.S.C. § 82 to be anachronistic. Therefore, the court

finds the legislative history supports holding that Marx

cannot state a claim under the statute because of repeal.

Ald

The court finds further that such a holding does not “result

in manifest injustice’ because even if Congress did not

repeal the statute Marx’s complaint would not state a

claim under it.

Before it was repealed, 12 U.S.C. § 82 provided as

follows:

No national banking association shall at any time

be indebted, or in any way liable, to an amount

exceeding the amount of its capital stock at such time

actually paid in and remaining undiminished by losses

or otherwise, plus 50 percent of the amount of its un-

impaired surplus fund, except on account of demands

of the nature following:

First. Notes of circulation.

Second. Moneys deposited with or collected by

the association.

Third. Bills of exchange or drafts drawn against

money actually on deposit to the credit of the asso-

ciation, or due thereto.

Fourth. Liabilities to the stockholders of the as-

sociation for dividends and reserve profits.

Fifth. Liabilities incurred under the provisions

of the Federal Reserve Act.

Sixth. Liabilities incurred under the provisions

of the Federal Deposit Insurance Act.

Seventh. Liabilities created by the indorsement

of accepted bills of exchange payable abroad actually

owned by the indorsing bank and discounted at home

or abroad.

Eighth. Liabilities incurred under the provisions

of sections 1031-1033 of this title.

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Ninth. Liabilities incurred on account of loans

made with the express approval of the Comptroller of

the Currency under paragraph (9) of section 84 of

this title.

Tenth. Liabilities incurred under the provisions

of section 352 of this title.

Eleventh. Liabilities incurred in connection with

sales of mortgages, or participations therein, to the

Federal National Mortgage Association or the Federal

Home Loan Mortgage Corporation.

Twelfth. Liabilities incurred in borrowing from

the Export-Import Benk of the United States.

(Emphasis added). The parties have stipulated that the

short-term liabilities incurred by CNB were of two (2)

types: (1) “Federal Funds Purchased”; and (2) “Repos”,

which are defined as follows:

Federal Funds Purchased: The Federal Reserve

System requires all member banks to maintain on

deposit in the Federal Reserve Bank a certain mini-

mum amount. This minimum must be in place at

the close of the banking day, to remain overnight. A

member bank which has excess deposits overnight can

sell them to another member overnight to make up

a deficiency in the borrower’s minimum, Banks gen-

erally sell or purchase “Fed. Funds” daily, and may

do both in the same day to arrive at the nightly mini-

mum. The Federal Reserve pays no interest on the

member bank’s deposit accounts, so that a bank which

maintains excess deposits overnight loses interest

earnings on those excess deposits. The structure of

the “borrowing” is a Sale by the “lending” bank of

_ some of its deposits to the “borrowing” bank which

buys that deposit at the close of the day. The “bor-

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rower” then sells the bank the purchased funds at the

beginning of the next day, but pays back an additional

charge for overnight usage which amounts to interest.

The Federal Reserve does the bookkeeping based on

wire confirmations.

Repos. The transaction called a “repo”, for con-

venience, is formally structured as a Sale and Re-

purchase Agreement. A bank which in substance

wants to borrow money for a short term, with full

security to the lender, can sell the specified security

at an agreed price (usually par) to a buyer who pays

the cull purchase price at once. The buyer then owns

the security. At the time of sale the Bank agrees

to repurchase the same security for a higher price at

the end of a specified term of days or weeks. The

difference in price can be translated into an annual

interest rate. At the end of the specified term, the

original seller buys back the security and pays the

original buyer the higher price.

Stipulations of Fact, pp. 12-13.

Before 12 U.S.C. § 82 was repealed, 12 C.F.R. § 7.1130

provided as follows:

When a bank purchas-s Federal Reserve funds

from another bank, the transaction ordinarily takes

the form of a transfer from a seller’s account in a

Federal Reserve Bank to the buyer’s account therein,

payment to be made by the purchaser, usually with a

specified fee. The transaction does not create on the

part of the buyer an obligation subject to 12 U.S.C.

84 or a borrowing subject to 12 U.S.C. 82, but is to be

considered a purchase and sale of such funds. But

see § 7.7365 for federal funds transactions between

affiliates.

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(Emphasis added). Similarly, 12 C.F.R. § 7.1131 provided:

The purchase or sale of securities by a bank,

under an agreement to resell or repurchase at the

end of a stated period is not a borrowing subject to

12 U.S.C. 82 nor an obligation subject to the lending

limit of 12 U.S.C. 84.

(Emphasis added). Finally, 12 C.F.R. § 7.7518 provided:

For purposes of 12 U.S.C. 82, a national bank’s

indebtedness or liability does not include Federal funds

purchased (see § 7.1130) obligations to repurchase se-

curities sold (see § 7.1131), or bills payable to the

Federal Reserve (12 U.S.C. 82(5)). Accordingly, for

purposes of § 14.5(b) of this chapter, a national bank’s

indebtedness or liability is determined without regard

to such items. Also see §§ 7.7355 and 7.7530.

(Emphasis added). The court finds that these regulations

were validly promulgated by the Comptroller of Currency

and that they would have precluded Marx’s complaint

under 12 U.S.C. § 82 had it not been repealed. Accord-

ingly, the defendant’s joint motion for summary judgment

on Marx’s claim under 12 U.S.C. § 82 is granted.

The third statute which Marx claims the defendants

knowingly violated is 12 U.S.C. § 84 which, provides in

pertinent part as follows:

(a)(1) The total loans and extensions of credit

by a national banking association to a person outstand-

ing at one time and not fully secured, as determined

in a manner consistent with paragraph (2) of this

subsection, by collateral having a market value at

least equal to the amount of the loan or extension of

credit shall not exceed 15 per centum of the unim-

paired capital and unimpaired surplus of the associa-

tion.

Alg

(Emphasis added). Specifically, Marx claims that ‘“[t]he

borrowing of the monies by [CNB] for the purchase of

United States, state and municipal bonds in excess of the

statutory authority as well as the purchase of the bonds

in and of itself, constituted a loan from [CNB] to Centran

and is in violation of 12 U.S.C. § 84... .”. Amended Com-

plaint, p. 8, © 23. (Emphasis added). The court finds

Marx’s claim to be without merit. It is undisputed that

CNB borrowed funds from other banks which are mem-

bers of the Federal Reserve system and used such funds

to purchase <ccurities for its own account. It is equally

clear that Centran was not a party to any of the loans nor

received any of the securities purchased. To construe

either the debt incurred or the securities purchased as

“loans” from CNB to Centran is inconceivable. Accord-

ingly, the defendants’ joint motion for summary judgment

on Marx’s claim under 12 U.S.C. § 84 is granted.

Marx also claims that the defendants violated 12 C.F.R.

§ 1.4 which provides as follows:

Type I securities are not subject to the limitations

and restrictions contained in 12 U.S.C. 24 or in this

Part other than §§ 1.3(c), 1.3(g), 1.4, 1.8, 1.9, and

1.11. Consequently, a bank may deal in, underwrite,

purchase, and sell for its own account a security of

Type I subject only to the exercise of prudent banking

judgment. Prudence will require such determinations

as are appropriate for the type of transaction involved.

For the purpose of underwriting or investment, pru-

dence will also require a consideration of the resources

and obligations of the obligor and a determination that

the obligor possesses resources sufficient to provide

for all required payments in connection with the ob-

ligations.

A20

(Emphasis added). Since a private right of action, how-

ever, may be maintained under 12 U.S.C. § 93(a) only

against directors who “.. . knowingly violate or knowingly

permit [certain others] ... to violate any of the provisions

of this chapter. ..”, (emphasis added), and not any regu-

lation promulgated pursuant to it by the Comptroller of

Currency, Marx states a claim only if a private right of

action may be maintained under 12 U.S.C. § 93(b) which

provides as follows:

(1) Any national banking association which vio-

lates, or any officer, director, employee, agent, or

other person participating in the conduct of the affairs

of such association who violates any of the provisions

of this title, or any of the provisions of section 92a

of this title, or any regulation issued pursuant thereto,

shall forfeit and pay a civil money penalty of not

more than $1,000 per day for each day during which

such violation continues. The penalty may be assessed

and collected by the Comptroller of the Currency by

written notice. As used in this section, the term

“violates” includes without any limitation any action

(alone or with another or others) for or toward caus-

ing, bringing about, participating in, counseling, or

aiding or abetting a violatior

(2) In determining the amount of the penalty

the Comptroller shall take into account the appropri-

ateness of the penalty with respect to the size of fi-

nancial resources and good faith of the association or

person charged, the gravity of the violation, the history

of previous violations, and such other matters as justice

may require.

(3) The association or person assessed shall be

afforded an opportunity for agency hearing, upon re-

quest made within ten days after issuance of the notice

A21

of assessment. In such hearing all issues shall be de-

termined on the record pursuant to section 554 of

Title 5. The agency determination shall be made by

final order which may be reviewed only as provided

in paragraph (4). If no hearing is requested as herein

provided, the assessment shall constitute a final and

unappealable order.

(4) Any association or person against whom an

order imposing a civil money penalty has been en-

tered after agency hearing under this section may ob-

tain review by the United States court of appeals for

the circuit in which the home office of the bank is lo-

cated, or in the United States Court of Appeals for

the District of Columbia Circuit, by filing a notice of

appeal in such court within thirty days from the date

of such order, and simultaneously sending a copy of

such notice by registered or certified mai] to the Comp-

troller. The Comptroller shall promptly certify and

file in such court the record upon which the penalty

was imposed, as provided in section 2112 of Title 28.

The findings of the Comptroller shall be set aside if

found to be unsupported by substantial evidence as

provided by section 706 (2) (e) of Title 5.

(5) If any association or person fails to pay an

assessment after it has become a final and unappeal-

able order, or after the court of appeals has entered

final judgment in favor of the agency, the Comptroller

shall refer the matter to the Attorney General, who

shall recover the amount assessed by action in the

appropriate United States district court. In such ac-

tion the validity and appropriateness of the final order

imposing the penalty shall not be subject to review.

(6) The Comptroller may, in his discretion, com-

promise, modify, or remit any civil money penalty

A22

which is subject to imposition or has been imposed

under this section.

(7) The Comptroller shall promulgate regula-

tions establishing procedures necessary to implement

this subsection.

(8) All penalties collected under authority of this

section shall be covered into the Treasury of the

United States.

(Emphasis added). For the reasons which follow the

court holds that such an action may not be maintained.

12 U.S.C. § 93(b) was added to the National Banking

Act by the Financial Institutions Regulatory and Interest

Rate Control Act of 1978. Pub. L. No. 95-630, Title I,

§ 103, 92 Stat. 3643 (1978). The legislative history of 12

U.S.C. § 93(b) does not indicate that Congress intended to

create a private right of action in favor of anyone. Indeed,

the legislative history reflects that the intended beneficiary

of the statute was the Comptroller of Currency:

The banking agencies have made sound arguments

in support of authorization for imposing civil money

penalties for violations of laws, rules, and orders. A

monetary penalty tied to a violation can give an agency

the flexibility it needs to secure compliance by in-

dividuals or institutions. Presently, an agency is often

faced with the option of having to ignore a violation or

imposing a penalty it often considers to be overkill.

A cease-and desist action against an institution or re-

ferral of a possible criminal action may be too severe

for the criticized action. Daily money penalties should

serve as deterrents to violations of laws, rules, regula-

tions, and orders of the agencies. The bill, for example,

provides civil money penalties for violations of:

A23

1. Section 22 and 23A of the Federal Reserve

Act. These sections place limitations on loans by

member banks to affiliates and on loans to member

bank insiders;

2. Section 19 of the Federal Reserve Act.

This section prescribes limitations on the rate of

interest paid on deposits and sets reserve require-

ments for member banks;

3. The National Banking Act. This act sets

the standards for operating national banks:

4. The Bank Holding Company Act and the

Savings and Loan Holding Company Act;

5. Insider loan limitations of state non-

member banks;

6. Final cease-and-desist orders issued by the

financial institution regulatory agencies;

7. The nonpreferential loan requirements of

Title VIII of the bill;

8. The change in bank or savings and loan

control titles of the bill.

The committee has provided that civil money pen-

alties will take effect upon enactment and will only

apply to violations which occur after that date. In ad-

dition, the provisions require that the penalties may

only be assessed and collected by written notice with

the opportunity for a hearing under the Administrative

Procedure Act and with the right to appeal a decision

to the U.S. Circuit Court of Appeals. There is also

a requirement that the agency, in determining the

amount of the penalty to be assessed “shall take into

account the appropriateness of the penalty with re-

spect to the size of the financial resources and good

A24

faith of the institution or person charged, the gravity

of the violation, the history of previous violations, and

such other matters as justice may require.” Your com-

mittee believes that these requirements will assure

that the agencies are not arbitrary and capricious in

their use of civil money penalties.

H. Rep. No. 95-1383, 95th Cong. 2d Sess. 17-18, reprinted in

[1978] U.S. Code Cong. & Ad. News 9273 and 9289-90.

(Emphasis added).

Considering that 12 U.S.C. § 93(b) was enacted to give

the Comptroller of Currency power to act against directors

or officers of a national bank, the court finds that if a

private right of action was intended by Congress it would

have expressly provided for one. Since no such provision

was enacted and evidence of a contrary intent exists, the

court holds that no private right of action may be main-

tained under 12 U.S.C. §93(b). See: Cort v. Ash, supra.

Accordingly, the defendants’ joint motion for summary

judgment on Marx’s claim under 12 C.F.R. § 1.4 is granted.

Next, Marx claims that the defendants violated 12

U.S.C. § 375b which provides as follows:

(1) No member bank shall make any loan or

extension of credit in any manner to any of its execu-

tive officers, or to any person who directly or indirectly

or acting through or in concert with one or more per-

sons owns, controls, or has the power to vote more

than 10 per centum of any class of voting securities of

such member bank, except in the case of such a bank

located in a city, town, or village with less than thirty

thousand in population, in which case such per centum

shall be 18 per centum, or to any company controlled

by such an executive officer or person, or to any polit-

ical or campaign committee the funds or services of

A25

which will benefit such an executive officer or person

or which is controlled by such an executive officer or

person, where the amount of such loan or extension

of credit, when aggregated with the amount of all other

loans or extensions of credit then outstanding by such

bank to such executive officer or person and to all

companies controlled by such executive officer or per-

son and to all political or campaign committees the

funds or services of which will benefit such executive

officer or person or which are controlled by such

executive officer or person, would exceed the limits

on loans to a single borrower established by section

84 of this title. For purposes of this paragraph, the

provisions of section 84 of this title, shall be deemed

to apply to a State member bank as if such State mem-

ber bank were a national banking association.

(2) No member bank shall make any loan or

extension of credit in any manner to any of its execu-

tive officers or directors, or to any person who directly

or indirectly or acting through or in concert with one

or more persons owns, controls, or has the power to

vote more than 10 per centum of any class of voting

securities of such member bank, or to any company

controlled by such an executive officer, director, or

person, or to any political or campaign committee the

funds or services of which will benefit such executive,

director, or person or which is controlled by such

executive officer, director, or person, where the amount

of such loan or extension of credit, when aggregated

with the amount of all other loans or extensions of

credit then outstanding by such bank to such executive

officer, director, or person and to all companies con-

trolled by such executive officer, director, or person to

all political or campaign committees the funds or ser-

A26

vices of which will benefits such executive officer,

director, or person or which are controlled by such

executive officer, director, or person, would exceed an

amount prescribed in a regulation of the appropriate

Federal banking agency, unless such loan, line of credit,

or extension of credit is approved in advance by a

majority of the entire board of directors with the in-

terested party abstaining from participating directly or

indirectly in the voting.

(3) No member bank shall make any loan or ex-

tension of credit in any manner to any of its executive

officers or directors, or to any person who directly or

acting through or in concert with one or more persons,

owns, controls, or has the power to vote more than 10

per centum of any class of voting securities of such

member bank, or to any company controlled by such

executive officer, director, or person, or to any political

or campaign committee the funds or services of which

will benefit such executive officer, director, or person

or which is controlled by such executive officer, di-

rector, or person, unless such loan or extension of

credit is made on substantially the same terms, includ-

ing interest rates and collateral, as those prevailing at

the time for comparable transactions with other per-

sons and does not involve more than the normal risk

of repayment or present other unfavorable features.

(4) No member bank may pay an overdraft on

an account at such bank of an executive officer or

director.

(5) For purposes of this section, an executive

officer, director, or person shall be considered to have

control of a company if such executive officer, director,

or person, directly or indirectly or acting through or

in concert with one or more other persons—

A27

A) owns, controls, or has power to vete 25

per centum or more of any class of voting secu-

rities of the company;

(B) controls in any manner the election of

a majority of the directors of the company; or

influence over the management or policies of such

company.

(6) For the purposes of this section—

A) the term “‘person” means an individual

or company;

(B) the term “company” means any cor-

poration, partnership, business trust, association,

joint venture, pool syndicate, sole proprietorship,

unincorporated organization, any other form of

business entity not specifically listed herein, or

any other trust, but shall not include any insured

bank or any corporation the majority of shares of

which is owned by the United States or by any

State;

tor” of a member bank or a “‘person who directly

or indirectly or acting through or in concert with

one or more persons owns, controls, or has power

to vote more than 10 per centum of any class of

voting securities of a member bank” if such per-

son has such relationship with any bank holding

company of which such member is a subsidiary, as

defined by the Bank Holding Company Act, or

with any other subsidiary of such bank holding

company;

A28

(D) a person shall be deemed to be an “of-

ficer” of a member bank if such person is an of-

ficer of any bank holding company of which such

member bank is a subsidiary, as defined by the

Bank Holding Company Act, or with any other

subsidiary of such bank holding company;

(E) the term “executive officer’ has the

same meaning assigned such term under section

375a of this title; and

(F) the term “pay an overdraft on an ac-

count” means the payment by a member bank of

an amount for an account holder in excess of the

funds on deposit in the account and does not in-

clude a payment of funds by the member bark‘in

transfer of funds from another account of the ac-

count holder at that bank.

(7) The Board of Governors of the Federal Re-

serve System may prescribe such rules and regula-

tions, including definitions of terms, as it deems neces-

sary to effectuate the purposes and to prevent evasions

of this section. The Boa-d may further prescribe rules

providing a reasonable period of time after November

10, 1978, within which the amount of outstanding loans

or extensions of credit made prior to November 10,

1978, shall be reduced so as to conform to the limita-

tions of this section.

Since the statute is not a provision of chapter 2 of the

National Banking Act, a private right of action may not

be maintained under 12 U.S.C. § 93(a).* Therefore, the

4. The statute is contained in chapter 3.

A29

first question presented by Marx’s claim is whether a

private right of action may be maintained at all. For the

reasons which follow the court holds the question should

be resolved in the negative.

Similar to 12 U.S.C. § 93(b), 12 U.S.C. § 375b was

added to the National Banking Act by the Financial In-

stitutions Regulatory and Interest Rate Control Act of

1978. Pub. L. No. 95-630, Title I, § 104, 92 Stat. 3644

(1978). The legislative history which concerns enactment

of the statute provides in pertinent as follows:

Section 104 would amend section 22 of the Federal

Reserve Act and place additional restrictions on loans

to executive officers, directors and persons who directly

or indirectly own or control more than 10 percent of

the voting shares of a member bank. The amend-

ment would prohibit loans to an executive officer or

10 percent stockholder (except that this percentum

is 18 percent for banks located in communities with less

than 30,000 in population), companies controlled by

such person, or his political or campaign committees,

where the amount of the loan, when aggregated with

all other loans outstanding to such person, his con-

trolled companies and his political or campaign com-

mittees, would exceed the limits on loans to a single

borrower established by section 5200 of the Revised

Statutes (10 percent of the capital and surplus of the

bank). This limit would be made to apply to na-

tional banks and State member banks alike. The

amendment would also require the approval of a ma-

jority of the Board of Directors of a member bank.

before a loan could be made by the bank to an execu-

tive officer, a director or a 10 percent stockholder, to

any company controlled by such a person or to any

political or campaign committee of such a person,

A30

where the amount of the loan, when aggregated with

all other loans outstanding to such person, his con-

trolled companies and his political or campaign com-

mittee, would exceed $25,000. In the case of an ex-

ecutive officer these requirements would be an ad-

dition to the existing requirements established by sec-

tion 22(g) of the Federal Reserve Act. All loans to

executive officers, directors and 10 percent stockhold-

ers, to companies controlled by such persons and to

political or campaign committees of such persons, must

be made on substantially the same terms as those pre-

vailing at the time for comparable transactions with

other persons.

Member banks would be prohibited from honor-

ing overdrafts of executive officers or directors unless

the payment of the overdraft is tied to a written pre-

authorized extension of credit to such officer or di-

rector or to a written preauthorized transfer of funds

from another account of such officer or director at the

bank. The Board of Governors would be authorized to

prescribe rules and regulations to effectuate the pur-

poses and to prevent evasions of this section, as well

as to establish a time period within which bank loans

currently outstanding shall be reduced so as to con-

form to the limitations of this section.

H. Rep. No. 95-1383, 95th Cong. 2d Sess. 39, reprinted in

[1978] U.S. Code Cong. & Ad. News 9273 at 9311. (Em-

phasis added). Upon enactment, a private right of action

for violations of certain provisions of chapter 3 of the

National Banking Act was recognized under 12 U.S.C. § 503

which provides as follows:

If the directors or officers of any member bank

shall knowingly violate or permit any of the agents,

officers, or directors of any member bank to violate

A31

any of the provisions of sections 375, 375a, and 376

of this title or regulations of the board made under

authority thereof, or any of the provisions of sections

217, 218, 219, 220, 655, 1005, 1014, 1906, or 1909 of

Title 18, every director and officer participating in or

assenting to such violation shall be held liable in his

personal and individual capacity for all damages which

the member bank, its shareholders, or any other per-

sons shall have sustained in consequence of such vio-

lation.

See, e.g., Hometowne Builders, Inc. v. Atlantic National

Bank, 477 F. Supp. 717 (E.D. Vir. 1979}. Rather than

amend this statute to include violations of 12 U.S.C.

$ 375b, however, Congress enacted 12 U.S.C. § 504 which

provides in pertinent part as follows:

(a) Any member bank which violates or any

officer, director, employee, agent, or other person par-

ticipating in the conduct of the affairs of such member

bank who violates any provision of section 37lc, 375,

375a, 375b, 376 or 503 of this title, or any regulation

issued pursuant thereto, shall forfeit aid pay a civil

penalty cf not more than $1,000 per day for each day

during which ch violation continues: Provided, That

the agency having authority to impose a civil money

penalty, may, in its discretion, compromise, modify,

or remit any civil money penalty which is subject to

imposition or has been imposed under such authority.

The penalty may be assessed and collected by the

Comptroller of the Currency in the case of a national

bank, or the Board in the case of a State member bank,

by written notice. As used in this section, the term

“violates” includes without any limitation any action

(alone or with another or others) for or toward caus-

ing, bringing about, participating in, counseling, or

aiding or abetting a violation.

A32

(Emphasis added). Once again similar to 12 USC. §

93(b), the legislative history of 12 U.S.C. § 504 indicates

that Congress intended to strengthen the powers of various

federal agencies charged with enforcement of the National

Banking Act as opposed to creation of new private rights

of action:

Section 101 adds a new section to the Federal

Reserve Act which would authorize the Board of Gov-

ernors, in the case of member banks, and the Comp-

troller of the Currency, in the case of national banks,

to assess civil money penalties against a member or

national bank, or an individual participating in the

affairs of such a bank, for any violation of sections 22

or 23A of the Federal Reserve Act. These sections

limit loans to insider and affiliates of the bank. A

civil money penalty of not more than $1,000 per day

for each violation may be assessed after notice and

consideration of the appropriateness of the penalty

with respect to the financial resources and good faith

of the member bank or person charged, the gravity of

the violation, the history of previous violations and

the data, views and arguments of the bank or person

against whom such civil penalty may be assessed.

The person assessed is given a right to an agency

determination based on a hearing on the record sub-

ject to appeal to a circuit court of appeals.

H. Rep. No. 95-1383, 95th Cong. 2d Sess. 38, reprinted in

[1978] U.S. Code Cong. & Ad. News 9273 at 9310. Con-

sidering that a private right of action may be maintained

under 12 U.S.C. § 503 for violations of 12 U.S.C. §§ 375,

375a and 376, the court finds that if a private right of ac-

tion under 12 U.S.C. § 375b was intended by Congress,

it would have expressly provided for one by including it

in the list contained in 12 U.S.C. § 503. Since no such

inclusion was made and evidence of a contrary intent

A33

exists, as contained in the enactment and legislative history

of 12 U.S.C. § 504, the court holds that no private right of

action may be maintained under 12 U.S.C. § 375b. <Ac-

cordingly, the defendants’ joint motion for summary judg-

ment on Marx’s claim under 12 U.S.C. § 375b is granted.®

Next, Marx claims that the transaction in which

Centran sold five hundred thousand (500,000) shares of

preferred stock to MMBI for $70,000,000 is violative of

12 U.S.C. § 1842(d). Marx claims further that a private

right of action for violations of this statute exists under

12 U.S.C. § 1847. For the reasons which follow the court

holds Marx’s claims to be without merit.

12 U.S.C. § 1847 provides as follows:

(a) Any company which willfully violates any

provision of this chapter, or any regulation or order

issued by the Board pursuant thereto, shall upon con-

viction be fined not more than $1,000 for each day

during which the violation continues. Any individual

who willfully participates in a violation of any pro-

vision of this chapter shall upon conviction be fined

not more than $10,000 or imprisoned not more than

one year, or both. Every officer, director, agent, and

employee of a bank holding company shal) be subject

to the same penalties for false entries in any book,

report, or statement of such bank holding company

as are applicable to officers, directors, agents, and

employees of member banks for false entries in any

books, reports, or statements of member banks under

section 1005 of Title 1°

5. The court notes that even if a private right of action

was implied under 12 U.S.C. § 375b the defendants’ joint motion

for summary judgment would remain meritorious because, as

the court has found previously, neither the debt incurred, nor

the securities purchased by CNB, constituted loans or extensions

of credit to Centran.

A34

(b)(1) Any company which violates or any in-

dividual who participates in a violation of any pro-

vision of this chapter, or any regulation or order is-

sued pursuant thereto, shall forfeit and pay a civil

penalty of not more than $1,000 per day for each day

during which such violation continues: Provided,

That the Board may, in its discretion, compromise,

modify, or remit any civil money penalty which is

subject to imposition or has been imposed under au-

thority of this subsection. The penalty may be as-

sessed and collected by the Board by written notice.

As used in the section, the term “violates’’ includes

without any limitation any action (alone or with

another or others) for or toward causing, bringing

about, participating in, counseling, or aiding or abetting

a violation.

(2) In determining the amount of the penalty

the Board shall take into account the appropriateness

of the penalty with respect to the size of financial re-

sources and good faith of the company or person

charged, the gravity of the violation, the history of

previous violations, and such other matters as justice

may require.

(3) The company or person assessed shall be af-

forded an opportunity for agency hearing, upon request

made within ten days after issuance of the notice of

assessment. In such hearing all issues shall be de-

termined on the record pursuant to section 554 of

Title 5. The agency determination shall be made by

final order which may be reviewed only as provided

in section 1848 of this title. If no hearing is requested

as herein provided, the assessment shall constitute a

final and unappealable order.

A35

(4) If any company or person fails to pay an

assessment after it has become a final and unappeal-

able order, or after the court of appeals has entered

final judgment in favor of the Board, the Board shall

refer the matter to the Attorney General, who shall

recover the amount assessed by action in the appro-

priate United States district court. In such action the

validity and appropriateness of the final order impos-

ing the penalty shall not be subject to review,

(5) The Board shall promulgate regulations

establishing procedures necessary to implement this

subsection.

(6) Ail penalties collected under authority of

this subsection shall be covered into the Treasury of

the United States,

Marx has not cited and this court is unaware of any de-

cision which holds that a private right of action may be

maintained under this statute. It is unquestioned, how-

ever, that courts have held to the contrary. See: State

of South Dakota v. National Bank of South Dakota, 219

F. Supp. 842 (D.S.D. 1963), aff'd, 335 F.2d 444 (8th Cir.

1964), cert. denied, 379 U.S, 970, 85 S, Ct. 667 (1965),

See also: Quaker City National Bank v. Hartley, 533 F.

Supp. 126 (S.D. Ohio 1981). The court has examined

these decisions and finds them persuasive. Therefore, the

court holds that no private right of action exists under

12 U.S.C. § 1847 for violations of 12 U.S.C. § 1842(d).

Assuming, however, that an action could be maintained

under 12 U.S.C. § 1847, Marx’s claim would be without

merit. 12 U.S.C. § 1842(d) provides as follows:

Notwithstanding any other provision of this sec-

tion, no application (except an application filed as a

A36

result of a transaction authorized under section 13(f)

of the Federal Deposit Insurance Act) shall be ap-

proved under this section which will permit any bank

holding company or any subsidiary thereof to acquire,

directly or indirectly, any voting shares of, interest

in, or all or substantially all of the assets of any ad-

ditional bank located outside of the State in which

the operations of such bank holding company’s bank-

ing subsidiaries were principally conducted on July

1, 1966, or the date on which such company became

a bank holding company, whichever is later, unless

the acquisition of such shares or assets of a State bank

by an out-of-State bank holding company is specifi-

cally authorized by the statute laws of the State in

which such bank is located, by language to that effect

and not merely by implication, For the purposes

of this section, the State in which the operations of

a bank holding company’s subsidiaries are principally

conducted is that State in which total deposits of all

such banking subsidiaries are largest.

(Emphasis added). Under the statute a bank holding com-

pany such at MMBI may not “. . . acquire, directly or

indirectly, any voting shares of, interest in, or all of sub-

stantially all of the assets of any additional bank [CNB}

located outside of the State |New York] in which the

operations of . . . |MMBI are) principally conducted

. unless the acquisition of such shares or assets... .

is specifically authorized by the statute laws of the State

in which such bank is located [Ohio], by language to that

effect and not merely by implication.” Although the

statutory proscription is unquestioned, it is clear that

it does not apply to the present case because MMBI ac-

quired stock in Centran, a “bank holding company” as

A387

defined in 12 U.S.C. § 1841(a)(1)* and not in CNB, a

“bank” as defined in 12 U.S.C, § 1841(c)." Accordingly,

the defendants’ joint motion for summary judgment on

Marx's claims under 12 U.S.C. §§ 1847 and 1842(d) is

granted,

The following assertion is contained in the Stipula-

tions of Fact submitted by the parties: ‘Plaintiff hereby

notifies the Court and the defendants that he intends to

add the claim that the actions of the defendants violated

12 U.S.C. § 371lc." Stipulations of Fact, p. 10. Similarly,

in Marx's Brief in Opposition to Defendants’ Motion for

6. 12 U.S.C, § 1841(a) (1) provides as follows:

Except as provided in paragraph (5) of this subsection,

“bank holding company’ means any company which has

control over any bank or over any company that is or be-

comes a bank holding company by virtue of this chapter.

(Emphasis added).

7, 12 U.S.C, § 1841(c) provides as follows:

“Bank means any institution organized under the laws

of the United States, any State of the United States, the

District of Columbia, any territory of the United States,

Puerto Rico, Guam, American Samoa, or the Virgin Islands,

except an institution the accounts of which are insured by

the Federal Savings and Loan Insurance Corporation or an

institution chartered by the Federal Home Loan Bank Board,

which (1) accepts deposits that the depositor has a legal

right to withdraw on demand, and (2) engages in the busi-

ness of making commercial loans. Such term does not in-

clude any organization operating under section 25 or section

25(a) of the Federal Reserve Act, or any organization which

does not do business within the United States except as an

incident to its activities outside the United States. ‘District

bank" means any bank organized or operating under the

Code of Law for the District of Columbia, The term “bank”

also includes a State chartered bank or a national banking

association which is owned ov (except to the extent

directors’ qualifying shares are required by law) by other

depository institutions or by a bank holding company which

is owned exclusively by other depository institutions and is

organized to engage exclusively is providing services for

other depository institutions and their officers, directors, and

employees.

(Emphasis added).

A38

Partial Summary Judgment, he asserts that on February

6, 1971, when CNB became a wholly-owned subsidiary of

Centran, the directors failed to disclose “the pre-emptive

rights status of Centran stock” in violation of 15 U.S.C.

§§ 77° and 78).°. The court construes these assertions

as if they were plead properly in a motion to amend the

complaint. For the reasons which follow such motion is

denied.

Fed. R. Civ. P. 15(a) provides as follows:

Amendments. A party may amend his pleading

once as a matter of course at any time before a respon-

8 15 U.S.C, § 77q(a) provides as follows:

It shall be unlawful for any person in the offe: or sale

of any securities by the use of any means or instruments of

transportation or communication in interstate commerce or

by the use of the mails, directly or indirectly—

(1) to employ any device, scheme, or artifice to defraud,

(2) to obtain money or property by means of any untrue

statement of a material fact or any omission to state a

material fact necessary in order to make the statements

made, in the light of the circumstances under which they

were made, not misleading, or

(3) to engage in any transaction, practice, or course of

business which operates or would operate as a fraud or

deceit upon the purchaser.

9. 15 U.S.C, § 78j)(b) provides as follows:

It shall be unlawful for any person, directly or indi-

rectly, by the use of any means or instrumentality of inter-

state commerce or of the mails, or of any facility of any

national securities exchange—

To use or employ, in connection with the purchase or

sale of eny security registered on a national securities ex-

change or any security not so registered, any manipulative

or deceptive device or contrivance in contravention of such

rules and regulations as the Commission may prescribe as

necessary or appropriate in the public interest or for the

protection of investors,

See also: 17 C.F.R. § 240.10b-5, commonly known as rule 10b-5.

A39

sive pleading is served or, if the pleading is one to

which no responsive pleading is permitted and the ac-

tion has not been placed upon the trial calendar, he

may so amend it at any time within 20 days after it is

served. Otherwise a party may amend his pleading

only by leave of court or by written consent of the

adverse party; and leave shall be freely given when

justice so requires. A party shall plead in response to

an amended pleading within the time remaining for

response to the original pleading or within 10 days

after service of the amended pleading, whichever pe-

riod may be the longer, unless the court otherwise

orders.

(Emphasis added). In Foman v. Davis, 371 U.S. 178, 182,

83 S. Ct. 227, 230 (1962), the United States Supreme Court

held that to avoid decisions on the merits because of pro-

cedural technicalities is contrary to the spirit of the Federal

Rules of Civil Procedure and that the leave to amend “shall

be freely given when justice so requires” language of Rule

15(a) is a “mandate to be heeded.” 371 U.S. at 182, 83

S. Ct. at 230. The Court held further that such deter-

minations are within the discretion of a district judge

and that leave to amend a pleading may be denied if

premised on certain reasons such as “futility of amend-

ment”: ?°

If the underlying facts or circumstances relied upon by

a plaintiff may be a proper subject of relief, he ought

10. See: Troxel Manufacturing Co. v. Schwinn Bicycle Co.,

489 F.2d 968 (6th Cir.), cert. denied, 416 U.S. 939, 94 S. Ct. 1942

(1974), in which the Court of Appeals for the Sixth Circuit held

that a misconception of law is no excuse for a late presentation

of an alternative theory of recovery. In Troxel, the court held

specifically that to deny a patent licensee’s motion to amend its

pleadings to assert an alternative ground for recovery, when

the only excuse offered for failing to present the theory was

that the licensee misconceived the law that was applicable, was

not abuse of discretion.

A40

to be afforded an opportunity to test his claim on the

merits. In the absence of any apparent or declared

reason—such as undue delay, bad faith or dilatory

motive on the part of the movant, repeated failure to

cure deficiencies by amendments previously allowed,

undue prejudice to the opposing party by virtue of

allowance of the amendment, futility of amendment,

etc.—the leave sought should, as the rules require, be

“freely given.” Of course, the grant or denial of an

opportunity to amend is within the discretion of the

District Court, but outright refusal to grant the leave

without any justifying reason appearing for the denial

is not an exercise of discretion; it is merely abuse of

that discretion and inconsistent with the spirit of the

Federal Rules.

Id. (Emphasis added). For the reasons which follow the

court finds that amendment of the complaint in this case

would be futile.

Like 12 U.S.C. § 375b, 12 U.S.C. § 371c is not a provision

of chapter 2 of the National Banking Act and, therefore, a

private right of action may not be maintained under 12

U.S.C. § 93(a). Once again similar to 12 U.S.C. § 375b,

the mandates of 12 U.S.C. § 371c are enforced by the Comp-

troller of Currency and the Board of Governors of the

Federal Reserve Board under 12 U.S.C. § 504. Therefore,

and for the reasons set out above in the portion of this

Memorandum of Opinion which concerns whether a private

right of action may be maintained under .2 U.S.C. § 375b,

the court holds that a private right of action may not be

maintained under 12 U.S.C. § 371c.

Assuming, however, that an action could be maintained

under 12 U.S.C. § 37lc, Marx’s claim would be without

A4l

merit. 12 U.S.C. § 37lc provides in pertinent part as

follows:

(a) Restrictions on transactions with affiliates—

(1) A member bank and its subsidiaries may en-

gage in a covered transaction with an affiliate only

if—

(A) in the case of any affiliate, the aggregate

amount of covered transactions of the member

bank and its subsidiaries will not exceed 10 per

“centum of the capital stock and surplus of the

member bank; and

(B) in the case of all affiliates, the aggregate

amount of covered transactions of the member

bank and its subsidiaries will not exceed 20 per

centum of the capital stock and surplus of the

member bank.

Under 12 U.S.C. § 37lc(b)(1)(A), the term “affiliate” is

defined in part as “any company that controls the member

bank,” (i.e., Centran), and under 12 U.S.C. § 371¢e(b) (7),

the term “covered transaction” is defined in part as “a loan

or extension of credit to the affiliate.” Although it is un-

questioned that in all instances other than those for which

exceptions are provided in subsections (a)(1)(A) and

(B), 12 U.S.C. § 371lc would prohibit loans from CNB to

Centran, it is equally clear that the statute does not apply

to the present case. As this court held when considering

Marx’s claims under 12 U.S.C. §§ 84 and 375b, to construe

either the debt incurred or the securities purchased as

“loans” from CNB to Centran is inconceivable. CNB

merely borrowed funds funds from other banks, used such

fun@s to invest in securities and, thereafter, suffered losses.

It is undisputed that Centran was not a party to any of

these transactions. Such facts simply cannot be construed

A42

as a “loan or extension of credit” from CNB to Centran.

Accordingly, Marx’s motion to amend the complaint to in-

clude a claim under 12 U.S.C. § 37lc is denied.

Marx also claims that the defendant directors com-

mitted certain securities law violations in 1971. Since the

Court of Appeals for the Sixth Circuit has held consistently

that Ohio’s four (4) year statute of limitations" for actions

in which fraud is alleged applies to claims under section

10b of the Securities Exchange Act of 1934 and section 17a

of the Securities Act of 1933,” Connelly v. Balkwill, 279

F.2d 685 (6th Cir. 1960), in which the statute was applied

without discussions; Nickels v. Koehler Management Corp.,

541 F.2d 611 (6th Cir. 1976), cert. denied, 429 U.S. 1074, 97

S. Ct. 813 (1977); Carothers v. Rice, 633 F.2d 7, 13 (6th

Cir. 1980), cert. denied, 450 U.S. 998, 101 S. Ct. 1702 (1981);

Herm v. Stafford, 663 F.2d 669, 678, n. 10 (Sth Cir. 1981),

Marx’s claims are barred. Accordingly, Marx’s motion to

amend the complaint to include claims under 15 U.S.C.

$$ 77q and 78j(b) is denied.

Premised on the reasons delineated above the defen-

dants’ joint motion for partial summary judgment on

11. Onto Rev. Cope ANN. § 2305.09 (Page 1962). The statute

provides as follows:

An action for any of the following causes shall be brought

within four years after the cause thereof accrued:

(A) For trespassing upon real property.

(B) For the recovery of personal property, or for taking

or detaining it.

(D) For an injury to the rights of plaintiff not arising

on contract nor enumerated in sections 2305.10 to 2305.12, in-

clusive, 2305.14 and 1304.29 of the Revised Code.

If the action is for trespassing under ground or injury

to mines, or for the wrongful taking of personal property, the

causes thereof shall not accrue until the wrongdoer is dis-

covered; nor, if it is for fraud, until the fraud is discovered.

(Emphasis added).

A43

count one of the amended complaint is granted. See:

Fed. R. Civ. P. 56(c); Smith v. Hudson, 600 F.2d 60 (6th

Cir.), cert. denied, 444 U.S. 986, 100 S. Ct. 495 (1979).

Further, the court holds that since the defendants did not

violate any of the provisions of the National Bank Act for

which Marx may maintain a private right of action, it is

axiomatic that they are entitled to judgment on the deriva-

tive claims alleged as well. Therefore, the only issue

which remains for the court is subject matter jurisdiction

over the claims raised by count three of Marx’s amended

complaint in which he alleges that the defendants breached

their fiduciary duties to shareholders under the laws of

Ohio. For the reasons which follow such claims are dis-

missed without prejudice.

As reasoned by the United States Supreme Court in

United Mine Workers of America v. Gibbs, 383 U.S. 715,

86 S. Ct. 1130 (1966), the concept of pendent jurisdiction

permits adjudication of claims under state law in con-

junction with claims under federal law, if such claims de-

rive from operative facts that are common or are of such a

nature that the parties would be expected to litigate them

in one proceeding. Whether pendent jurisdiction applies

to a claim is discretionary, United Mine Workers of Amer-

ica v. Gibbs, supra; Coleman v. Casey County Bd. of Edn.,

686 F.2d 428 (6th Cir. 1982), and in making such a deter-

mination a court must engage in “a balancing of the con-

siderations of comity, fairness to the litigants, judicial

economy, and the avoidance of needless decisions of state

law.” Federman v. Empire Fire & Marine Ins. Co., 597

F.2d 798, 809 (2d Cir. 1979). It is unquestioned that if “the

state issues substantially predominate, whether in terms of

proof, of the scope of the issues raised, or of the com-

prehensiveness of the remedy sought, the state claims may

be dismissed without prejudice and left for resolution to

A44

state tribunals.” United Mine Workers of America v.

Gibbs, supra, 383 U.S. at 726-727, 83 S. Ct. at 1139. It is

equally clear that “if the federal claims are dismissed be-

fore trial... the state claims should be dismissed as well.”

Id. at 726, 83 S. Ct. at 1139. (Footnote omitted). (Empha-

sis added). The court finds United Mine Workers of

America v. Gibbs, supra, dispositive of count three of

Marx’s complaint.

Accordingly, the defendants’ joint motion for partial

summary judgment is granted; the plaintiff’s motion “to

limit [the] scope” of the defendants’ motion is denied and

the remainder of the amended compiaint is dismissed.

IT IS SO ORDERED.

s’ JoHn M. MANnos

United States District Judge

A45

STATUTES AND REGULATIONS INVOLVED

12 U.S.C. $ 1

$1. Bureau of Comptroller of the Currency

There shall be in the Department of the Treasury a

bureau charged with the execution of all laws passed by

Congress relating to the issue and regulation of a national

currency secured by United States bonds and, under the

general supervision of the Board of Governors of the Fed-

eral Reserve System, of all Federal Reserve notes, except

for the cancellation and destruction and accounting with

respect to such cancellation and destruction, of Federal

Reserve notes unfit for circulation, the chief officer of

which bureau shall be called the Comptroller of the Cur-

rency and shall perform his duties under the general di-

rections of the Secretary of the Treasury. As amended

May 20, 1966, Pub.L. 89-427, § 1, 80 Stat. 161.

12 U.S.C. § 24(7)*

$ 24. Corporate powers of associations

Upon duly making and filing articles of association

and an organization certificate a national banking associa-

tion shall become, as from the date of the execution of its

organization certificate, a body corporate, and as such, and

in the name designated in the organization certificate, it

shall have power—

Seventh. To exercise by its board of directors or duly

authorized officers or agents, subject to law, all such in-

*Amendments have not been included, in that ag | are not

relevant, nor have they altered the law upon which Petitioner

relies.

A46

cidental powers as shall be necessary to carry on the busi-

ness of banking; by discounting and negotiating promissory

notes, drafts, bills of exchange, and other evidences of

debt; by receiving deposits; by buying and selling ex-

change, coin, and bullion: by loaning money on personal

security; and by obtaining, issuing, and circulating notes

according to the provisions of this chapter. The business

of dealing in securities and stock by the association shall

be limited to purchasing and selling such securities and

stock without recourse, solely upon the order, and for the

account of, customers, and in no case for its own account,

and the association shall not underwrite any issue of

securities or stock: Provided, That the association may

purchase for its own account investment securities under

such limitations and restrictions as the Comptroller of the

Currency may by regulation prescribe. In no event shall

the total amount of the investment securities of any one

obligor or maker, held by the association for its own ac-

count, exceed at any time 10 per centum of its capital stock

actually paid in and unimpaired and 10 per centum of its

unimpaired surplus fund, except that this limitation shall

not require any association to dispose of any securities law-

fully held by it on August 23, 1935. As used in this section

the term “investment securities” shall mean marketable

obligations, evidencing indebtedness of any person, co-

partnership, association, or corporation in the form of

bonds, notes and/or debentures commonly known as in-

vestment securities under such further definition of the

term “investment securities” as may by regulation be

prescribed by the Comptroller of the Currency. Except as

hereinafter provided or otherwise permitted by law, noth-

ing herein contained shall authorize the purchase by the

association for its own account of any shares of stock of

any corporation. The limitations and restrictions herein

contained as to dealing in, underwriting and purchasing

A47

for its own account, investment securities shall not apply

to obligations of the United States, or general obligations

of any State or of any political subdivision thereof, or ob-

ligations issued under authority of subchapters I, II, and

III of chapter 7 of this title, or issued by the Federal Home

Loan Banks or the Home Owners’ Loan Corporation, or

obligations which are insured by the Federal Housing Ad-

ministrator pursuant to section 1713 of this title, if the

debentures to be issued in payment of such insured obli-

gations are guaranteed as to principal and interest by the

United States, or obligations of national mortgage associa-

tions: Provided, That in carrying on the business com-

monly known as the safe-deposit business the association

shall not invest in the capital stock of a corporation orga-

nized under the law of any State to conduct a safe-deposit

business in an amount in excess of 15 per centum of the

capital stock of the association actually paid in and unim-

paired and 15 per centum of its unimpaired surplus.

12 U.S.C. § 82

§ 82. Limit on indebtedness incurred by bank

No national banking association shall at any time be

indebted, or in any way liable, to an amount exceeding the

amount of its capital stock at such time actually paid in

and remaining undiminished by losses or otherwise, except

on account of demands of the nature following:

First. Notes of circulation.

Second. Monies deposited with or collected by the as-

sociation.

Third. Bills of exchange or drafts drawn against

money actually on deposit to the credit of the association,

or due thereto.

A48

Fourth. Liabilities to the stockholders of the associ-

ation for dividends and reserve profits.

Fifth. Liabilities incurred under the provisions of

the Federal Reserve Act.

Sixth. Liabilities incurred under the provisions of

chapter 14, of Title 15, Commerce and Trade.

Seventh. Liabilities created by the indorsement of ac-

cepted bills of exchange payable abroad actually owned by

the indorsing bank and discounted at home or abroad.

Eighth. Liabilities incurred under the provisions of

sections 1031-1034 of this title.

Ninth. Liabilities incurred on account of loans made

with the express approval of the Comptroller of the Cur-

rency under paragraph (9) of section 84 of this title.

Tenth. Liabilities incurred under the provisions of

section 352a of this title. R.S. § 5202; Dec. 23, 1913, c. 6,

§ 13, 38 Stat. 264; Sept. 7, 1916, c. 461, 39 Stat. 753; Apr.

5, 1918, c. 45, § 20, 40 Stat. 512; Oct. 22, 1919, c. 79, § 2,

41 Stat. 297; Mar. 4, 1923, c. 252, Title V, § 504, 42 Stat.

1481; Feb. 25, 1927, c. 191, § 11, 44 Stat. 1231; Jan. 22, 1932,

c. 8, § 6, 47 Stat. 8; May 20, 1933, c. 35, § 2, 48 Stat. 73;

June 19, 1934, c. 653, § 2, 48 Stat. 1107.

$82. Repealed. Pub.L. 97-320, Title IV, § 402, Oct. 15,

1982, 96 Stat. 1510.

12 U.S.C. § 84(8)*

§ 84. Limit of liability of any person to bank

The total obligations to any national banking associa-

tion of any person, copartnership, association, or corpora-

tion shall at no time exceed 10 per centum of the amount

*Amendments have not been included, in that they are not

relevant, nor have they altered the law upon which Petitioner

relies.

A4g

of the capital stock of such association actually paid in and

unimpaired and 10 per centum of its unimpaired surplus

fund. The term “obligations” shall mean the direct lia-

bility of the maker or acceptor of paper discounted with or

sold to such association and the liability of the indorser,

drawer or guarantor who obtains a loan from or discounts

paper with or sells paper under his guaranty to such as-

sociation and shall include in the case of obligations of a

copartnership or association the obligations of the several

members thereof and shall include in the case of obliga-

tions,of a corporation all obligations of all subsidiaries

thefeof in which such corporation owns or controls a ma-

jofity interest. Such limitation of 10 per centum shall be

sybject to the following exceptions:

(8) Obligations of any person, copartnership, associa-

tion, or corporation in the form of notes secured by not less

than a like amount of bonds or notes of the United States

issued since April 24, 1917, or certificates of indebtedness

of the United States, treasury ills of the United States, or

obligations fully guaranteed both as to principal and in-

terest by the United States, shall (except to the extent

permitted by rules and regulations prescribed by the Comp-

troller of the Currency, with the approval of the Secre-

tary of the Treasury) be subject under this section to a

limitation of 15 per centum of such capital and surplus in

addition to such 10 per centum of such capital and surplus.

12 U.S.C, § 93

§ 93. Violations of provisions of chapter; for-

feiture of franchise; personal liability of directors;

civil money penalty

(a) If the directors of any national banking associa-

tion shall knowingly violate, or knowingly permit any

of the officers, agents, or servants of the association to

A50

violate any of the provisions of this chapter, all the rights,

privileges, and franchises of the association shall be thereby

forfeited. Such violation shall, however, be determined

and adjudged by a proper district or Territorial court of

the United States in a suit brought for that purpose by the

Comptroller of the Currency, in his own name, before the

association shall be declared dissolved. And in cases of

ech violation, every director who participated in or as-

sented to the same shall be held liable in his personal and

individual capacity for all damages which the association,

its shareholders, or any other person, shall have sustained

in consequence of such violation.

(b)(1) Any national banking association which vio-

lates, or any officer, director, employee, agent, or other

person participating in the conduct of the affairs of such

association who violates any of the provisions of this title,

or any of the provisions of section 92a of this title, or any

regulation issued pursuant thereto, shall forfeit and pay 4

civil money penalty of not more than $1,000 per day for

each day during which such violation continues, The

penalty may be assessed and collected by the Comptroller

of the Currency by written notice. As used in the section,

the term ‘‘violates” includes without any limitation any

action (alone or with another or others) for or toward

causing, bringing about, participating in, counseling, or

aiding or abetting a violation.

(2) In determining the amount of the penalty the

Comptroller shall take into account the appropriateness

of the penalty with respect to the size of financial re-

sources and good faith of the association or person charged,

the gravity of the violation, the history of previous viola-

tions, and such other matters as justice may require,

(3) The association or person assessed shall be af-

forded an opportunity for agency hearing, upon request

Adl

made within ten days after issuance of the notice of assess-

ment. In such hearing all issues shal] be determined on the

record pursuant to section 554 of Title 5. The agency de-

termination shall be made by final orderswhich may be

reviewed only as provided in paragraph (4). Tf ne hearing

is requested as herein provided, the assessment shall con-

stitute a final and unappealable order.

(4) Any association or person against whom an order

imposing a civil money penalty has been entered after

agency hearing under this section may obtain review by

the United States court of appeals for the circuit in which

the home office of the bank is located, or in the United

States Court of Appeals for the District of Columbia Cir-

cuit, by filing a notice of appeal in such court within thirty

days from the date of such order, and simultaneously send-

ing a copy of such notice by registered or certified mail to

the Comptroller, The Comptroller shall promptly certify

and file in such court the record upon which the penalty

was imposed, as provided in section 2112 of Title 28. The

findings of the Comptroller shall be set aside if found to

be unsupported by substantial evidence as provided by

section 706(2)(e) of Title 5.

(5) If any association or person fails to pay an as-

sessment after it has become a final and unappealable or-

der, or after the court of appeals has entered final judg-

ment in favor of the agency, the Comptroller shall refer the

matter to the Attorney General, who shall recover the

amount assessed by action in the appropriate United States

district court. In such action the validity and appropriate-

ness of the final order imposing the penalty shall not be

subject to review,

(6) The Comptroller may, in his diseretion, compro-

mise, modify, or remit any civil money penalty which is

subject to imposition or has been imposed under this sec-

tion,

A52

(7) The Comptroller shall promulgate regulations

establishing procedures necessary to implement this sub-

section,

(8) All penalties collected under authority of this

section shall be covered into the Treasury of the United

States,

As amended Nov. 10, 1978, Pub.L. 95-630, Title I, § 103,

92 Stat. 3643; Oct. 15, 1982, Pub.L. 97-320, Title IV, § 424

(d) (3), (£), (g), 96 Stat. 1523; Oct. 15, 1982, Pub.L. 97-320,

Title IV, § 424(g), as amended Jan. 12, 1983, Pub,L, 97-457,

§ 24, 96 Stat. 2510.

12 U.S.C. § 1842(d)

(d) Limitation by State boundaries. Notwith-

standing any other provision of this section, no application

Shall be approved under this section which will permit

any bank holding company or any subsidiary thereof to

acquire, directly or indirectly, any voting shares of, in-

terest in, or all or substantially all of the assets of any

additional bank located outside of the State in which the

operations of such bank holding company’s banking sub-

sidiaries were principally conducted on the effective date

of this amendment [enacted July 1, 19°68] or the date on

which such company became a bank holding company,

whichever is later, unless the acquisition of such shares

or assets of a State bank by an out-of-State bank holding

company is specifically authorized by the statute laws of

the State in which such bank is located, by language to

that effect and not merely by implication, For the pur-

poses of this section, the State in which the operations of

a bank holding company’s subsidiaries are principally con-

ducted is that State in which total deposits of all such

banking subsidiaries are largest.

A53

12 U.S.C, § 1849(a)

(a) General rule. Nothing herein contained shall

be interpreted or construed as approving any act, action,

or conduct which is or has been or may be in violation

of existing law, nor shall anything herein contained con-

stitute » defense to any action, suit, or proceeding pending

or hereafter instituted on account of any prohibited anti-

trust or monopolistic act, action, or conduct, except as

specifically provided in this section.

31 U.S.C. § 3102

§ 3102. Bonds

(a) With the approval of the President, the Secretary

of the Treasury may borrow on the credit of the United

States Government amounts necessary for expenditures

authorized by law and may issue bonds of the Government

for the amounts borrowed and may buy, redeem, and make

refunds under section 3111 of this title [31 USCS § 3111].

The Secretary may issue bonds authorized by this section to

the public and to Government accounts at any annual in-

terest rate and prescribe conditions under section 3121 of

this title [31 USCS § 3121]. However, the face amount of

bonds issued under this section and held by the public with

interest rates of more than 4.25 percent a year may not

be more than $110,000,000,000.

(b) The Secretary shall offer the bonds authorized

under this section first as a popular loan under regulations

of the Secretary that allow the people of the United States

as nearly as possible an equal opportunity to participate

in subscribing to the offered bonds. However, the bonds

may be offered in a way other than as a popular loan when

the Secretary decides the other way is in the public

interest.

A54

(c)(1) When the Secretary decides it is in the public

interest in making a bond offering under this section, the

Secretary may—

(A) make full allotments on receiving applica-

tions for smaller amounts of bonds to subscribers ap-

plying before the closing date the Secretary sets for

filing applications;

(B) reject or reduce allotments on receiving ap-

plications filed after the closing date or for larger

amounts;

plications from incorporated banks and trust companies

for their own account and make full allotments or in-

crease allotments to other subscribers; and

(D) prescribed a graduated scale of allotments.

(2) The Secretary shall prescribe regulations apply-

ing to all popular loan subscribers similarly situated gov-

erning a reduction or increase of an allotment under para-

graph (1) of this subsection.

(d) The Secretary may make special arrangements

for subscriptions from members of the armed forces. How-

ever, bonds issued to those members must be the same as

other bonds of the same issue.

(e) The Secretary may dispose of any part of a bond

offering not taken and may prescribe the price and way of

disposition.

(Sept. 13, 1982, P.L. 97-258, § 1, 96 Stat, 938; Jan. 12,

1983, P.L. 97-452, § 1(5), 96 Stat. 2467. )

A55

12 C.F.R. § 1.4

$14 Type I securities; standards for authorized

transactions.

Type I securities are not subject to the limitations

and restrictions contained in 12 U.S.C. 24 or in this Part

other than §§ 1.3(c), 13(g), 1.4, 1.8, 1.9, and 1.11. Con-

sequently, a bank may deal in, underwrite, purchase, and

sell for its own account a security of Type I subject only

to the exercise of prudent banking judgment. Prudence

will require such determinations as are appropriate for

the type of transaction involved. For the purpose of under-

writing or investment, prudence will also require a con-

sideration of the resources and obligations of the obligor

and a determination that the obligor possesses resources

sufficient to provide for all required payments in connec-

tion with the obligations.

(36 FR 6737, Apr. 8, 1971)

12 C.F.R. § 7.1130

$ 7.1130 Sale of Federal Reserve funds to another

bank.

When a bank purchases Federal Reserve funds from

another bank, the transaction ordinarily takes the form of

a transfer from a seller’s account in a Federal Reserve

Bank to the buyer’s account therein, payment to be made

by the purchaser, usually with a specified fee. The trans-

action does not create on the part of the buyer an obliga-

tion subject to 12 U.S.C. 84 or a borrowing subject to 12

U.S.C. 82, but is to be considered a purchase and sale

of such funds. But see § 7.7365 for federal funds transac-

tions between affiliates.

A56

12 C.F.R. § 7.1131

§ 7.1131 Purchase or sale of securities: resale or re-

purchase agreement.

The purchase or sale of securities by a bank, under an

agreement to resell or repurchase at the end of a stated

period is not a borrowing subject to 12 U.S.C. 82 nor an

obligation subject to the lending limit of 12 U.S.C. 84.

12 C.F.R. § 7.7518

$ 7.7518 Bank indebtedness; Federal funds, securities

repurchase agreements, Federal Reserve

bills payable.

For purposes of 12 U.S.C. 82, a national bank’s in-

debtedness or liability does not include Federal funds pur-

chased (see § 7.1130) obligations to repurchase securities

sold (see § 7.1131), or bills payable to the Federal Reserve

(12 U.S.C, 82(5)). Accordingly, for purposes of § 14.5(b)

of this chapter, a national bank’s indebtedness or liability

is determined without regard to such items. Also see

$$ 7.7355 and 7.7530.

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.