A-23544, JULY 11, 1928, 8 COMP. GEN. 8

A-23544: Jul 11, 1928

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"NO PAYMENT UPON ANY NOTE" IS AUTHORIZED TO BE MADE TO A BANK WHERE AN OFFICER OR EMPLOYEE THEREOF. 1928: THERE IS BEFORE THIS OFFICE FOR PREAUDIT A VOUCHER SCHEDULE EXECUTED IN FAVOR OF THE FEDERATION BANK AND TRUST CO. THERE IS PRESENTED A QUESTION WHETHER SUCH REIMBURSEMENT MAY BE MADE UNDER THE TERMS OF THE STATUTE. THAT LOANS WERE MADE TO THE VETERANS AS REQUESTED. HAVE BEEN FORWARDED BY THE BANK TO THE VETERANS' BUREAU FOR REDEMPTION. IN THE EXAMINATION OF THESE NOTES CERTAIN IRREGULARITIES AND DISCREPANCIES WERE OBSERVED IN THE AMOUNTS THEREOF. THEY APPEAR TO HAVE BEEN RETURNED TO THE BANK FOR PROPER EXPLANATION AND RECTIFICATION OF THE IRREGULARITIES DISCLOSED. APPEARS TO HAVE REPORTED.

A-23544, JULY 11, 1928, 8 COMP. GEN. 8

WORLD WAR ADJUSTED COMPENSATION - LOANS TO VETERANS - USURIOUS CHARGES UNDER SECTION 502/H) OF THE ACT OF MAY 19, 1924, 43 STAT. 128,"NO PAYMENT UPON ANY NOTE" IS AUTHORIZED TO BE MADE TO A BANK WHERE AN OFFICER OR EMPLOYEE THEREOF, EVEN FOR HIS OWN PERSONAL BENEFIT, COLLECTS FROM THE VETERAN CHARGES IN EXCESS OF THE INTEREST SPECIFIED IN THE STATUTE FOR MAKING THE LOAN. THE PROHIBITION OF THE STATUTE CAN NOT BE REMOVED BY AN OFFER ON THE PART OF THE BANK TO CREDIT THE VETERAN WITH THE EXCESS CHARGES COLLECTED.

COMPTROLLER GENERAL MCCARL TO THE DIRECTOR, UNITED STATES VETERANS' BUREAU, JULY 11, 1928:

THERE IS BEFORE THIS OFFICE FOR PREAUDIT A VOUCHER SCHEDULE EXECUTED IN FAVOR OF THE FEDERATION BANK AND TRUST CO., NEW YORK, N.Y., FOR AN AGGREGATE OF $2,987 AS REIMBURSEMENT UNDER SECTION 502 OF THE ACT OF MAY 19, 1925, 43 STAT. 126, 128, OF LOANS MADE TO VETERANS OF THE WORLD WAR WITH INTEREST THEREON. THERE IS PRESENTED A QUESTION WHETHER SUCH REIMBURSEMENT MAY BE MADE UNDER THE TERMS OF THE STATUTE.

IT APPEARS THAT AT VARIOUS TIMES DURING THE PERIOD FROM FEBRUARY TO JULY, 1927, CERTAIN VETERANS PRESENTED THEIR ADJUSTED SERVICE CERTIFICATES TO THE FEDERATION BANK AND TRUST CO. FOR THE PURPOSE OF SECURING LOANS UNDER SECTION 502 OF THE ACT OF MAY 19, 1924, AS AMENDED, AND THAT LOANS WERE MADE TO THE VETERANS AS REQUESTED, UPON THEIR EXECUTION OF NOTES PREPARED BY THE BANK TELLER. THE VETERANS FAILED TO MEET THEIR OBLIGATIONS UPON MATURITY OF THESE NOTES AND IN ACCORDANCE WITH THE PROVISIONS OF SECTION 502 OF THE ADJUSTED COMPENSATION ACT THE NOTES, TOGETHER WITH THE CERTIFICATES, HAVE BEEN FORWARDED BY THE BANK TO THE VETERANS' BUREAU FOR REDEMPTION. IN THE EXAMINATION OF THESE NOTES CERTAIN IRREGULARITIES AND DISCREPANCIES WERE OBSERVED IN THE AMOUNTS THEREOF, AND UNDER DATE OF FEBRUARY 13, 1928, THEY APPEAR TO HAVE BEEN RETURNED TO THE BANK FOR PROPER EXPLANATION AND RECTIFICATION OF THE IRREGULARITIES DISCLOSED.

THE FEDERATION BANK AND TRUST CO. APPEARS TO HAVE REPORTED, IN ITS LETTER OF FEBRUARY 15, 1928, THAT AN EMPLOYEE OF THE BANK HAD TAKEN ADVANTAGE OF THE ILLITERACY OF THE BORROWERS BY DELIBERATELY CHEATING SOME OF THEM, AND THAT THE PLAN WAS TO HAVE THE VETERAN SIGN A NOTE, TOGETHER WITH A RECEIPT FOR THE FULL AMOUNT OF MONEY TO WHICH THE CERTIFICATE ENTITLED HIM, BUT PERSUADED THE VETERAN TO ACCEPT A SMALLER AMOUNT, AVERAGING $25 TO $35 IN EACH CASE LESS THAN THE AMOUNT OF THE NOTE, WHICH DIFFERENCE THE TELLER CONVERTED TO HIS PERSONAL USE. THE BANK FURTHER REPORTED THAT OTHER CONDITIONS AROSE IN THE BANK WHICH LED THE OFFICERS THEREOF TO DISPENSE WITH THE SERVICES OF THE TELLER, BUT THAT IT WAS NOT UNTIL AFTER HIS DISMISSAL THE ACTUAL DISCREPANCIES BEGAN TO APPEAR. IT IS FURTHER REPORTED THAT THE TELLER MADE A CONFESSION, WAS INDICTED FOR GRAND LARCENY IN THE COURT OF GENERAL SESSIONS, NEW YORK CITY, AND THAT, ON DECEMBER 12, 1927, HE PLEADED GUILTY, RECEIVING A SUSPENDED SENTENCE OF ONE YEAR. THE FEDERATION BANK AND TRUST CO. RESUBMITTED THE NOTES ON MARCH 2, 1928, AND HAS AGREED TO ACCEPT THE AMOUNT ACTUALLY LOANED THE VETERANS, INDORSING AS A PART PAYMENT ON THE RESPECTIVE NOTES THE SUMS COLLECTED BY ITS TELLER IN EACH CASE.

SECTION 502/H) OF THE ACT OF MAY 19, 1924, 43 STAT. 128, PROVIDED THAT:

NO PAYMENT UPON ANY NOTE SHALL BE MADE UNDER THIS SECTION BY THE DIRECTOR TO ANY BANK, UNLESS THE NOTE WHEN PRESENTED TO HIM IS ACCOMPANIED BY AN AFFIDAVIT MADE BY AN OFFICER OF THE BANK WHICH MADE THE LOAN, BEFORE A NOTARY PUBLIC OR OTHER OFFICER DESIGNATED FOR THE PURPOSE BY REGULATION OF THE DIRECTOR, AND STATING THAT SUCH BANK HAS NOT CHARGED OR COLLECTED, OR ATTEMPTED TO CHARGE OR COLLECT, DIRECTLY OR INDIRECTLY, ANY FEE OR OTHER COMPENSATION (EXCEPT INTEREST AS AUTHORIZED BY THIS SECTION) IN RESPECT OF ANY LOAN MADE UNDER THIS SECTION BY THE BANK TO A VETERAN. ANY BANK WHICH, OR DIRECTOR, OFFICER, OR EMPLOYEE THEREOF WHO, DOES SO CHARGE, COLLECT, OR ATTEMPT TO CHARGE OR COLLECT ANY SUCH FEE OR COMPENSATION, SHALL BE LIABLE TO THE VETERAN FOR A PENALTY OF $100, TO BE RECOVERED IN A CIVIL SUIT BROUGHT BY THE VETERAN. THE DIRECTOR SHALL UPON REQUEST OF ANY BANK OR VETERAN FURNISH A BLANK FORM FOR SUCH AFFIDAVIT.

UNQUESTIONABLY THE TELLER IN EXACTING A BONUS OR COMPENSATION FROM THE VETERANS WAS ACTING AS AN EMPLOYEE OF THE FEDERATION BANK AND TRUST CO., AND THE REDEMPTION CLAIM NOW SUBMITTED BY THE BANK TO THE VETERANS' BUREAU IS BASED ON THE NOTES NEGOTIATED BY SAID TELLER. IN OTHER WORDS, THESE NOTES FALL WITHIN THE "TAINTED CHANNEL DOCTRINE," AS TO WHICH SEE AUTHORITIES COLLECTED IN 1 VIRGINIA LAW REVIEW 76. SEE ALSO MCCARTHY V. LIBERTY NATIONAL BANK, 175 PACIFIC 940, 7 A.L.R. 137. IN THE CASE LAST CITED THE PRESIDENT OF THE BANK EXACTED A COMMISSION FOR HIS OWN PERSONAL BENEFIT FOR MAKING A LOAN. THE BORROWER PAID THE LOAN IN FULL AND THEN BROUGHT SUIT AGAINST THE BANK FOR DOUBLE THE AMOUNT COLLECTED FROM HIM AS INTEREST AND COMMISSION. THE BANK DEFENDED ON THE GROUND, AMONG OTHERS, THAT THE COMMISSION WAS CHARGED BY THE PRESIDENT IN HIS INDIVIDUAL CAPACITY AND RETAINED BY HIM AS A COMMISSION FOR MAKING THE LOAN AND DID NOT ACCRUE TO THE BENEFIT OF THE BANK. THE COURT ENTERED JUDGMENT AS CLAIMED AND SAID:

THE UNCONTROVERTED TESTIMONY SHOWS THAT LEWIS HAD NOT EXERCISED THE RIGHT OF MAKING LOANS FOR THE BANK; HE WAS CLEARLY A GENERAL AGENT FOR THAT PURPOSE. THE FUNDS OF THE BANK WERE IN HIS POSSESSION TO BE LOANED. HIS OFFICIAL POSITION WAS SUCH THAT HIS KNOWLEDGE WOULD BE THE KNOWLEDGE OF THE CORPORATION. THE AUTHORITIES AMPLY SUSTAIN THE POSITION THAT COMPENSATION RECEIVED FOR A LOAN UNDER SUCH CONDITIONS CAN NOT BE CALLED A COMMISSION, AND THE PAINS OF USURY THUS AVOIDED. BEAN V. RUMRILL,--- OKLA.--- 172 PAC. 453; NOTES IN 46 L.R.A. (N.S.) 1157, AND 19 L.R.A. (N.S.) 391.

IT MAY BE THAT THE MAN LEWIS WAS GUILTY OF A FRAUD ON HIS BANK, AND WAS SECRETLY APPROPRIATING PART OF THE COMPENSATION WHICH HE RECEIVED FOR LOANS, WITHOUT THE KNOWLEDGE OF THE STOCKHOLDERS AND DIRECTORS. IF SO, THE BANK HAS ITS REMEDY AGAINST LEWIS; BUT IT CAN NOT DENY THAT HIS KNOWLEDGE WAS ITS KNOWLEDGE, OR ESCAPE LIABILITY TO THIRD PERSONS FOR THE ACTS OF LEWIS WITHIN THE SCOPE OF HIS AUTHORITY IN DOING THAT WHICH IT HAD PUT INTO HIS POWER TO DO. IF THE BANK SUFFERS A LOSS BY REASON OF UNAUTHORIZED CHARGE OR USURY BY LEWIS, THE BANK MAY HAVE A REMEDY AGAINST EWIS; BUT CERTAINLY THIS DOES NOT PURGE THE TRANSACTION OF USURY.

THE SUBSECTION OF THE WORLD WAR ADJUSTED COMPENSATION ACT, HEREINBEFORE QUOTED, EVIDENCES AN INTENTION TO PREVENT BANKS, AND OFFICERS OR EMPLOYEES THEREOF FROM CHARGING AND COLLECTING FROM VETERANS ANY SUM FOR MAKING LOANS IN EXCESS OF THE INTEREST STATED IN SUBSECTION (B) OF SAID SECTION, AND IN ORDER TO EFFECTUATE THAT INTENTION IT UNQUALIFIEDLY PROHIBITS "PAYMENT UPON ANY NOTE" WHERE THERE HAVE BEEN CHARGES COLLECTED IN EXCESS OF THE CHARGE SPECIFIED IN THE STATUTE. SEE FOWLER V. EQUITABLE TRUST COMPANY, 141 U.S. 384, 408. IN VIEW OF THE TERMS OF THE STATUTE, THE PURPOSE THEREOF, AND THE DECISIONS CITED, THE RULE STATED IN CALL V. PALMER, 116 U.S. 98, CAN NOT BE APPLIED.

ACCORDINGLY, YOU ARE ADVISED THAT NO PAYMENTS WHATEVER ARE AUTHORIZED UNDER THE ACT OF MAY 19, 1924, TO BE MADE TO THE FEDERATION BANK AND TRUST CO.'UPON ANY NOTE" WHERE THE TELLER OR OTHER EMPLOYEE OF THE BANK HAS MADE A LOAN TO THE VETERAN CHARGING AND COLLECTING FROM HIM MORE THAN THE INTEREST SPECIFIED IN THE STATUTE, AND THAT SAID STATUTE DOES NOT AUTHORIZE "PAYMENT UPON ANY NOTE" WHEN THE BANK MAY ATTEMPT TO RECTIFY THE EXCESSIVE AND ILLEGAL CHARGE WHEN BROUGHT TO ITS ATTENTION BY THE GOVERNMENT.