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N E W S R E L E A SE
FEDERAL DEPOSIT INSURANCE CORPORATION

PR - 74- 74 (1 2 - 12-74)

FOR R E L E A SE ON D E L IV E R Y

Status R e p o rt to the C o n g re ss on the R e c e iv e r s h ip o f
United States N ational Bank

Statem ent by
F rank W ille , C hairm an
F e d e r a l D ep osit In suran ce C o rp o ra tio n
b e fo r e the
S u bcom m ittee on Bank S u p e rv isio n and Insurance
C om m ittee on Banking and C u rre n cy
H ouse o f R e p re se n ta tiv e s

D e c e m b e r 12, 1974

FEDERAL DEPOSIT INSURANCE CORPORATION, 550 Seventeenth St. N.W ., Washington, D. C. 20429



202-389*4221

INTRODUCTION

T h is statem ent is in re s p o n s e to the S u b co m m itte e 's re q u e st
fo r a cu r re n t status r e p o r t o f the r e c e iv e r s h ip o f the United States
N ational B ank, San D ie g o , C a lifo rn ia ("U SN B ") and supplem ents the
in itia l r e p o r t I gave the S u bcom m ittee a y e a r a g o .

The r e c e iv e r s h ip

i s , o f c o u r s e , s till in p r o g r e s s and the b o tto m line o f F D IC 's c o lle c tio n
e ffo r t s w ill not be known fo r m any y e a r s .

E ven with that ca v e a t, h ow ­

e v e r , it a p p ea rs lik e ly that this one fa ilu re w ill re su lt in a final net
lo s s to the fe d e r a l d e p o sit in su ra n ce fund su b sta n tia lly g r e a te r than
the a g g reg a te o f a ll lo s s e s re su ltin g fr o m the fa ilu re o f a ll oth er F D IC */
in su red banks sin ce 1933.
USNB w as d e c la r e d in so lv e n t b y the C o m p tr o lle r o f the C u rre n cy
on O c to b e r 18, 1973, and the F e d e r a l D e p o sit In suran ce C o rp o ra tio n
w as im m e d ia te ly appointed R e c e iv e r th e r e o f pursuant to law .

Under

the te rm s o f the P u rch a se and A ssu m p tio n A g re e m e n t e n te re d into on
the sam e date (the "A g r e e m e n t") b etw een F D IC , as R e c e iv e r , and
C r o c k e r N ational B ank, San F r a n c is c o , C a lifo rn ia ( " C r o c k e r " ) , C r o c k e r

!|| F r o m January 1, 1934, to date, 506 F D IC -in su re d banks have
c lo s e d , in clu d in g USNB and F ran k lin N ational B ank, New Y o rk . T his
statem en t a ssu m e s a final net lo s s to the fe d e r a l d e p o sit-in su ra n ce
fund o f a p p ro x im a te ly $75 m illio n fo r the 5 01 bank fa ilu r e s p r io r to
USNB and a sig n ifica n tly s m a lle r fig u re fo r the 4 bank fa ilu r e s that
have o c c u r r e d so fa r in 1974.




-

2

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w as re q u ir e d to a ssu m e v irtu a lly a ll o f U SN B's d e p o sits and oth er non su b ord in a ted b a la n ce sheet lia b ilitie s (other than a s e cu re d $30 m illio n
"w in d o w " loan fr o m the F e d e r a l R e s e r v e Bank o f San F r a n c is c o to
USNB w h ich the R e c e iv e r paid in full p r io r to con su m m a tion o f the
A g r e e m e n t) and to p u rch a se in exch an ge o ffse ttin g a s s e ts le s s the
$89. 5 m illio n p r ic e it bid fo r the o v e r a ll tra n sa ctio n .

E xclu d ed fr o m

the tra n s a ctio n , h o w e v e r , fo r the re a s o n s stated in m y te stim o n y la st
y e a r , w e re a ll a s s e t s , d e p o sits and oth er lia b ilitie s re la te d to USNB's
c o n tr o l s h a r e h o ld e r , M r. C. A rn h olt Sm ith, his b u sin e ss a s s o c ia t e s
and th e ir v a rio u s a ffilia te d in te re s ts (r e fe r r e d to in the A g re e m e n t as
the "D esig n a ted G r o u p ").

The FDIC as R e c e iv e r in turn reta in ed

r e s p o n s ib ilit y fo r w ork in g out such S m ith -re la te d a s s e ts and lia b ilit ie s ,
and sin ce this a rra n g e m e n t p rod u ced a substantial sh o r tfa ll in the USNB
a s s e ts w h ich C r o c k e r cou ld a cq u ire to o ffs e t the USNB lia b ilitie s it
a s s u m e d , FDIC as R e c e iv e r a g re e d to m ake up any such sh o r tfa ll in
ca sh .

The A g r e e m e n t a ls o p ro v id e d that C r o c k e r cou ld retu rn to FDIC

as R e c e iv e r up to $15 m illio n in n o n -S m ith -r e la te d loans fo r any re a so n
and r e c e iv e ca sh t h e r e fo r in a co r r e s p o n d in g am ount.
Under this A g r e e m e n t, with a ll fig u re s r e fle c tin g p o s t -c lo s in g
a d ju stm en ts m ade to d ate, C r o c k e r a ssu m e d the lia b ility to pay a p p r o x i­
m a te ly $924 m illio n in USNB d e p o sits and a p p ro x im a te ly $201 m illio n




in oth er USNB non subord in ated b a la n ce sh eet lia b ilit ie s , including
standby le tte r s o f c r e d it iss u e d b y USNB a g g re g a tin g $47. 7 m illio n
in p rin cip a l am ount w h ich FDIC as R e c e iv e r d eterm in ed in June o f
this y e a r re p re s e n te d d ir e c t interbank loan s o r d e p o sits b etw een the
o r ig in a l h o ld e r o f the le tte r and USNB.

C r o c k e r has r e c e iv e d o f f ­

setting a s s e ts o f a p p ro x im a te ly $1, 036, 0 0 0 ,0 0 0 co n s istin g o f:

USNB

ca sh and due fr o m banks o f a p p ro x im a te ly $121 m illio n , n o n -S m ith re la te d loa n s o f a p p ro x im a te ly $265 m illio n , s e c u r itie s w orth $331
m illio n , bank p r e m is e s and equipm ent a p p ra ise d at a p p ro x im a te ly
$20 m illio n , o th e r USNB a s s e ts o f a p p ro x im a te ly $18 m illio n and
b a la n cin g ca sh fr o m the R e c e iv e r o f a p p ro x im a te ly $281 m illio n .
Under the F D IC 's in v itation to bid on the A g r e e m e n t, C r o c k e r
o r its parent holding com p an y was a ls o given an option to p la ce a fiv e y e a r $50 m illio n note with FDIC in its co r p o r a te ca p a c ity , at 7 1 /2
p e rce n t p er annum .

T h is op tion , w h ich w as p ro m p tly e x e r c is e d , was

d esig n ed to enable the s u c c e s s fu l b id d e r to in c r e a s e its ca p ita l a ccou n t
im m e d ia te ly upon con su m m a tion o f the A g re e m e n t so as to su p p ort the
v e r y la rg e ex p a n sion in its d e p o sit lia b ilitie s w h ich would o c c u r b y
v irtu e o f the p u rch a se and a ssu m p tion tra n sa ctio n .

The note issu e d

b y C r o c k e r 's p arent is to be r e tir e d w h en ever C r o c k e r finds m a rk et
con d ition s fa v o ra b le fo r r a is in g m o r e perm anent ca p ita l, but in no
even t la te r than O c to b e r 22, 1978.




- 4 -

F o r c o n v e n ie n ce , the b a la n ce o f this statem ent is d ivided into
fiv e s e c t io n s :
I.
II.

C u rren t Status o f C erta in USNB Standby L e tte r s o f C red it

III.

An O v e rv ie w o f F D IC 's C o lle c tio n E ffo r ts

IV .

A S p e c ific E x a m p le :

V.

I.

F D IC 's C ash A d v a n ce s to date and the S o u rce s o f R epaym ent

W e s tg a te -C a lifo r n ia C o rp o ra tio n

L itig a tio n B y and A ga in st the R e c e iv e r s h ip E state

F D IC 's C ash A d v a n ce s to date and the S o u rce s o f R epaym en t
The FDIC B o a rd o f D ir e c t o r s to date has a u th orized ca sh

a d v a n ces fr o m the fe d e r a l d e p o s it in su ra n ce fund o f a p p ro x im a te ly
$372 m illio n in co n n e ctio n w ith the USNB fa ilu r e .

F ifty m illio n d o lla r s

o f this total am ount r e p r e s e n ts a d ir e c t o b lig a tio n o f C r o c k e r N ational
C o rp o r a tio n on a cco u n t o f the 7 1 /2 p e rce n t f iv e - y e a r note it iss u e d to
FDIC la st O c to b e r in o r d e r to in c r e a s e C r o c k e r 's ca p ita l a cco u n ts b y
a lik e am ount.

FDIC e x p e c ts rep a ym en t in fu ll o f this am ount not la ter

than O c to b e r 22, 1978.

The rem a in in g $322 m illio n has b een advanced

to the r e c e iv e r s h ip esta te to p ro v id e :

the $281 m illio n in ca sh needed

b y C r o c k e r to b a la n ce the lia b ilit ie s it a s s u m e d , the $30 m illio n
n e c e s s a r y to pay o ff the w indow loan w h ich the F e d e r a l R e s e r v e Bank
o f San F r a n c is c o had extended to USNB as o f the tim e o f c lo s in g ,
a p p ro x im a te ly $9 m illio n subsequ ent to U SN B's c lo s in g to p r o te c t




r e c e iv e r s h ip a s s e t s and the b a la n ce fo r a v a r ie ty o f m is c e lla n e o u s
settlem en t a dju stm en ts re q u ire d b y the A g re e m e n t and fo r ce rta in
liq u id a tion e x p e n s e s .

A s o f la st F rid a y , D e c e m b e r 6, 1974, the

R e c e iv e r had c o lle c t e d about $28 m illio n on r e c e iv e r s h ip a s s e ts and
had rep a id about $19 m illio n to the in su ra n ce fund.

T h u s, the b a la n ce

ow ing fr o m the r e c e iv e r s h ip esta te to the fe d e r a l d e p o sit in su ra n ce
fund now stands at slig h tly m o re than $300 m illio n .
T o re p a y this $300 m illio n , the R e c e iv e r c u r re n tly holds USNB
a s s e t s having an a p p rox im a te b ook v a lu e , net o f re a liz e d lo s s e s , o f
$438 m illio n .

In a d d ition , there a re unbooked cla im s on w h ich the

R e c e iv e r m a y be able to r e a liz e sig n ifica n t am ounts, such as its cla im s
fo r fid e lity lo s s e s under U SN B's blanket bond and its litig a tio n against
f o r m e r USNB d ir e c t o r s .
The b o o k value fig u re o f $438 m illio n in r e c e iv e r s h ip a s s e ts is
m is le a d in g , h o w e v e r , sin ce it r e fle c t s USNB's le a s t a ttra ctiv e and
le a s t c o lle c t ib le a s s e t s .

A bou t $345 m illio n o f this total re p re s e n ts

in d eb ted n ess in one fo r m o r anoth er o f S m ith -re la te d b o r r o w e r s , w hile
the b a la n ce in clu d es such ite m s as u n d e sira b le non-S m ith -r e la te d loans
retu rn ed b y C r o c k e r , loans ch a rg ed o ff o r a s s e ts not b ook ed b y USNB
p r io r to its c lo s in g , m u n icip a l s e c u r itie s fo r w h ich there* is no rea d y
m a rk e t, fo r e ig n tim e and dem and d e p o sits w h ich have b e e n o ffs e t




-

6

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a g a in st unpaid le t t e r s o f c r e d it , p repa id USNB e x p e n se s o f little value
to the R e c e iv e r , and lo n g -t e r m p u rch a se o b lig a tio n s held in co n n e ction
w ith the sa le o f b o r r o w e r s ' a s s e t s .

W hile m any o f th ese r e c e iv e r s h ip

a s s e t s have som e v a lu e , we c u r r e n tly e stim a te a g g re g a te r e c o v e r ie s
fa r b e lo w not on ly the b o o k value o f th ese a s s e t s , but fa r b e lo w the
rem a in in g $300 m illio n in FDIC a d v a n ces to the r e c e iv e r s h ip e s ta te .
L a st January, b a s e d on d e v e lo p m e n ts in the r e c e iv e r s h ip through
y e a r -e n d 1973 and ou r v e r y p r e lim in a r y a p p r a is a ls o f the a s s e t s then
h eld , the FDIC B o a rd o f D ir e c t o r s e s ta b lis h e d a r e s e r v e fo r lo s s on
a cco u n t o f the USNB r e c e iv e r s h ip o f $48. 3 m illio n .

Subsequent e v e n ts ,

in clu d in g the paym ent o f $47. 7 m illio n in d ispu ted le tte r o f c r e d it c la im s
and the re tu rn b y C r o c k e r o f a p p ro x im a te ly $35 m illio n in D esign ated
G rou p loa n s not p r e v io u s ly id e n tifie d as su ch , w ith the re su ltin g r e c e ip t
o f a s s e t s in exch a n ge w h ich added little in value to the R e c e iv e r 's
a n ticip a ted r e c o v e r i e s , in d ica te that a substantial addition to this
r e s e r v e w ill b e re q u ir e d at the end o f January 1975 b a se d on d e v e lo p ­
m en ts in the r e c e iv e r s h ip through this co m in g y e a r -e n d .

W hile it is

p rem a tu re to e stim a te the add ition to la s t y e a r 's r e s e r v e w h ich the
FDIC B o a rd o f D ir e c t o r s w ill c o n s id e r a p p ro p ria te under a ll the c i r ­
c u m s ta n c e s , it is lik e ly to fa ll b etw een $50 m illio n and $100 m illio n .
W h atever the tota l r e s e r v e e s ta b lis h e d , it w ill b e s u b je c t to fu rth er




- 7 -

a d ju stm en ts in the y e a r s ahead as m o r e a ccu r a te a p p ra isa ls b e c o m e
p o s s ib le on both the a s s e t and lia b ility side o f the r e c e iv e r s h ip 's b o o k s .
A s the e x is te n ce o f any FDIC r e s e r v e fo r lo s s would im p ly , I see little
ch an ce o f r e c o v e r y ev en in part fo r USNB sh a re h o ld e rs o r deben tu re
h o ld e rs u n less they su c ce e d in ov ertu rn in g th e ir subord in ated status
o r in m aking r e c o v e r ie s fr o m fo r m e r USNB o f f ic e r s and d ir e c t o r s through
litig a tio n .

II.

C u rren t Status o f C ertain USNB Standby L e tte r s o f C re d it
In m y te stim o n y b e fo r e this S u bcom m ittee la st N o v e m b e r , I

re v ie w e d fo r you F D IC 's p o sitio n and the a ctio n s taken b y FDIC up to
that tim e with re g a rd to ce rta in standby le tte rs o f c r e d it iss u e d b y USNB.
In b r ie f , p r io r to its c lo s in g la s t O c to b e r , USNB had outstanding le tte r s
o f c r e d it in the p rin cip a l am ount o f a p p ro x im a te ly $91. 3 m illio n w hich
w e r e c a r r ie d on its b o o k s as standby le tte r s o f c r e d it iss u e d to guarantee
the o b lig a tion s o f a cco u n t p a rtie s a ffilia te d with o r c lo s e ly re la te d to
C. A rn h olt Sm ith, the s o - c a lle d "D esig n a ted G r o u p ."

B e ca u se these

le tte r s o f c r e d it , and the re la te d ob lig a tio n o f the a cco u n t p a rty , a p p ea red
to be am ong U SN B's S m ith -re la te d a s s e ts and lia b ilit ie s , they w e re
reta in ed in the r e c e iv e r s h ip .

S h ortly a fte r USNB w as c lo s e d , a n u m ber

o f the 39 h o ld e rs o f th ese reta in ed le tte r s o f c r e d it a d v ise d FDIC that,
in th eir op in ion , the o b lig a tio n s e v id e n ce d th e re b y w e re not USNB




-

8

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gu a ra n tees o f c u s to m e r lo a n s , but ra th er USNB d ir e c t o b lig a tio n s fo r
d e p o s its in o r loa n s to USNB b y the holder*

FDIC th ereu p on a sk ed e a ch

o f the h o ld e rs o f th ese standby le tte rs o f c r e d it to file a p r o o f o f c la im
outlin ing its v e r s io n o f the tra n s a ctio n , and b y January 1974 v irtu a lly
a ll o f th em had file d d eta iled c la im s .

I a ls o a d v ise d you that FDIC it s e lf

w as in the p r o c e s s o f conductin g an e x te n siv e in v e stig a tio n into the fa cts
u n d erly in g the iss u a n ce o f th ese standby le tte r s o f cto d it«
B etw een January when a ll known r e c o r d s w e re gath ered and
June 1974, the FDIC sta ff re v ie w e d e a ch c la im to d e te rm in e w heth er
the le tte r o f c r e d it is s u e d b y USNB re p re s e n te d U SN B's guarantee o f
an o b lig a tio n due fr o m the a cco u n t p arty to the b e n e fic ia r y , as FDIC
at fir s t b e lie v e d and as U SN B's r e c o r d s in d ica te d , o r w hether it
e v id e n ce d a d ir e c t d e p o sit o r loan tra n sa ctio n b etw een USNB and the
b e n e fic ia r y as m any o f the h o ld e rs cla im e d .

T o m ake this d e te r m in a ­

tio n , the FDIC sta ff r e lie d on in fo rm a tio n obtained fr o m in te rv ie w s with
b r o k e r s , f o r m e r USNB o f f ic e r s and a cco u n t p arty o f f i c e r s , as w e ll as
a ll o f the d ocu m en ta tion su rrou n d in g the tr a n s a c tio n s , in clu d in g the file s
o f USNB, the file s kept in C. A rn h o lt S m ith 's p riv a te o ffic e s (w hich f r e ­
quently con tain ed in fo rm a tio n d iffe re n t fr o m that found in U SN B's f ile s ),
and c o r r e s p o n d e n c e am ong USNB, the b e n e f ic ia r ie s , the a ccou n t p a rties
and the b r o k e r s .
a ls o r e v ie w e d .




W here a v a ila b le , r e c o r d s o f the a cco u n t p a rtie s w ere
M any o f the le t t e r s o f c r e d it w h ich w e re outstanding at

- 9 -

the tim e USNB c lo s e d a p p ea red to e v id e n ce tra n sa ctio n s w h ich w ere
r o llo v e r s o f p r io r tra n sa ctio n s b etw een USNB and the b e n e fic ia r ie s .
In o r d e r to d e te rm in e the in itia l intention o f the p a rtie s at the tim e
tra n s a ctio n s betw een them w e re f ir s t begun, it w as n e c e s s a r y to r e v ie w
not on ly the in fo rm a tio n contained in open file s but a ls o the in fo rm a tio n
con tain ed in file s p ertain in g to p r io r tra n s a ctio n s .
A ll to ld , in fo rm a tio n w as re v ie w e d re g a rd in g 59 standby le tte r s
o f c r e d it iss u e d b y USNB and s till outstanding at the tim e it c lo s e d .

In

a nu m ber o f c a s e s , it was n e c e s s a r y to re q u e st fu rth er in fo rm a tio n fr o m
the h o ld e rs o f le tte r s o f c r e d it re g a rd in g apparent in c o n s is te n c ie s betw een
d ocu m en ta tion in F D IC 's p o s s e s s io n and in fo rm a tio n p rov id ed b y the
cla im a n ts.
It is im p o s s ib le to g e n e ra liz e about th ese le tte r o f c r e d it c la im s ,
as v ir tu a lly e a ch tra n sa ctio n was d iffe re n t.

H o w e v e r, the b a s ic p u rp ose

o f the re v ie w w a s , as in d ica te d , to attem pt to d e te rm in e w hether the
tra n sa ctio n s w e re two p a rty d e p o sit o r loan tra n sa ctio n s in volvin g only
USNB and the b e n e fic ia r ie s (and thus the type o f ob lig a tion s a ssu m a b le
b y C r o c k e r under the A g re e m e n t) o r w hether they w e re guarantee o r
ty p ica l standby le tte r o f c r e d it tra n sa ctio n s in v olv in g three p a r tie s , one
o f w h om w as a m e m b e r o f the D esign ated G roup.

A s a re s u lt o f this

r e v ie w , it a p p ea red that in 37 o f the 59 le tte r o f c r e d it tra n sa ctio n s
a g g reg a tin g $47. 7 m illio n in p rin cip a l am ount, the h o ld e rs o f the le tte r s




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o f c r e d it had no p riv ity o f c o n tr a c t, and no co n ta ct, o r at m o s t m minpal
co n ta ct, w ith the a cco u n t p a r tie s ; fu rth e r , the a cco u n t p a r t ie s 1 r e c o r d s
r e fle c t e d loans fr o m USNB ra th er than U SN B -guaranteed loa n s fr o m the
b e n e fic ia r ie s .

C o rre s p o n d e n ce with the b r o k e r s in v o lv e d in so m e o f

th ese tra n sa ctio n s v e r ifie d that the b e n e fic ia r y had b een a sk ed t o , and
in fa ct intended to , m ake a d e p o sit with o r loan m o n e y d ir e c t ly to USNB.
USNB, on the o th e r hand, had in d ica ted in its r e c o r d s and on its b o o k s
that a loan had b e e n m ade not b y the b e n e fic ia r y to USNB but b y the
b e n e fic ia r y to the a cco u n t p arty , and that USNB had is s u e d its le tte r o f
c r e d it to guarantee the loa n .

In o th e r w o r d s , w h ile U SN B's r e c o r d s

r e fle c t e d a t h r e e -p a r t y tr a n s a c tio n , the r e c o r d s o f the b e n e fic ia r ie s
and b r o k e r s r e fle c t e d a tw o -p a r ty tra n sa ctio n b etw een the b e n e fic ia r ie s
and USNB.

A t the sam e tim e , the r e c o r d s o f the a cco u n t p a rtie s

r e fle c t e d a n oth er t w o -p a r ty tra n sa ctio n b etw een the a cco u n t p arty and
USNB.

A p p a ren tly what USNB had done in th ese 37 tra n sa ctio n s w as

to b o r r o w m o n e y fr o m the b e n e fic ia r y and iss u e a s o - c a lle d " c le a n "
le tte r o f c r e d it to e v id e n ce the loa n .

USNB then u sed the loa n p r o c e e d s

to m ake a loan to the a cco u n t p arty nam ed in the le tte r o f c r e d it .

Having

is s u e d a "le t te r o f c r e d it " to e v id e n ce its p r im a r y o b lig a tio n , USNB
b ook e d the le tte r o f c r e d it as a contin gen t lia b ility o r guarantee ra th er
than as a p r im a r y o b lig a tio n and did not b o o k the o ffse ttin g loan to the




11

a cco u n t p a rty at a ll, thus a void in g sta tu tory lending and b o rro w in g
*/
lim it s , r e s e r v e re q u ire m e n ts and a d ir e c t b a la n ce sheet lia b ility .
A t the tim e USNB c lo s e d , o f c o u r s e , FDIC had a v a ila b le to it on ly that
in fo rm a tio n contained on USN B's b o o k s and in the C o m p t r o lle r 's R e p o rts
o f E xa m in a tion .

O nly a fte r re v ie w in g a ll o f the r e c o r d s and file s a v a il­

a ble did we le a rn the true nature o f th ese tr a n s a c tio n s .

Jxt v iew o f th ese

fin d in g s, F D IC 's B o a rd o f D ir e c t o r s d e te rm in e d that, had the true fa cts
o f th ese 37 tra n sa ctio n s b een known at the tim e USNB c lo s e d , USNB's
lia b ility to the b e n e fic ia r ie s on the le tte r s o f cr e d it w ould have been
a ssu m ed b y C r o c k e r under the te rm s o f the A g re e m e n t.

In June 1974,

FDIC a rra n g e d fo r this a ssu m p tion to take p la ce under re im b u rs e m e n t
b y FD IC .
A s a re su lt o f this r e v ie w , FDIC a ls o d e te rm in e d that 22 o f the
le t t e r s o f c r e d it in q u estion (a ggrega tin g a p p ro x im a te ly $ 4 2 .4 m illio n in
p r in c ip a l am ount) w e r e , in its op in ion , p r o p e r ly b ook ed b y USNB as t h r e e p a rty guarantee tra n s a ctio n s .

That i s , the le tte r s o f c r e d it t h e m s e lv e s ,

v iew ed tog e th e r with the c o r r e s p o n d e n c e and oth er e v id e n ce su rrou n d in g
the tr a n s a c tio n s , in d ica ted that the b e n e fic ia r y o f the le tte r o f c r e d it
intended to and did m ake a loan to a D esign ated G roup m e m b e r , with

* / R ulings adopted b y the C o m p tr o lle r o f the C u rre n cy A ugust 9, 1974
in r e s p e c t o f standby le tte rs o f c r e d it w ould tend to fru s tra te a s im ila r
r e s u lt today.




12

-

the le tte r o f c r e d it it r e c e iv e d b e in g U SN B's guarantee o f that loa n .
The h o ld e rs o f the le tte rs o f c r e d it not tr a n s fe r r e d to C r o c k e r fo r p a y ­
m ent w e r e a d v ise d o f this d e c is io n and that, to the exten t a llo w a b le by
la w , they had cla im s a gain st the r e c e iv e r s h ip .

T hey w e re fu rth er

a d v ise d that FDIC w as w illin g to co o p e ra te w ith them in th e ir attem pt
to c o lle c t fr o m the a cco u n t p a rty , the p a rty p r im a r ily lia b le on the o b l i ­
gation .

The a ctio n s taken b y FDIC a re re v ie w e d in g r e a te r d eta il in two

p r e s s r e le a s e s iss u e d on June 19 and July 2, 1974, c o p ie s o f w h ich have
b e e n subm itted to the S u bcom m ittee fo r its co n v e n ie n ce .
Subsequent to these d e te r m in a tio n s , the FDIC sta ff has b een
w o rk in g with a n u m ber o f the b e n e fic ia r ie s o f th ese le t t e r s o f c r e d it to
a s s is t them in c o lle c tin g the am ounts due them fr o m the v a rio u s a ccou n t
p a r tie s .

In e a ch ca se the a cco u n t p arty a ls o ow es substantial sum s o f

m o n e y to the FDIC as R e c e iv e r o f USNB.

A g r e e m e n ts a re b ein g negotiated

b etw e e n FDIC and som e o f the b e n e fic ia r ie s re g a rd in g such m a tte rs as the
p r io r it y o f future cla im s a g a in st th ese a cco u n t p a rtie s and the m a x im iz a ­
tion o f the r e c o v e r y o f the R e c e iv e r and the b e n e fic ia r ie s .
A nu m ber o f the h o ld e r s o f le tte r s o f c r e d it w h ich w e re not tr a n s ­
fe r r e d to C r o c k e r have a d v ise d FDIC that they d is a g r e e w ith F D IC 's
fin d in gs and have file d with us a d d ition a l in fo rm a tio n re g a rd in g th eir
tra n s a ctio n s with USNB.

The FDIC sta ff and one o r m o r e m e m b e r s of

the FDIC B o a rd o f D ir e c t o r s have m et with th ese cla im a n ts re g a rd in g




13 -

th eir re q u e sts fo r r e c o n s id e r a tio n .

E ach o f th ese cla im a n ts w ill be

a d v ised in due c o u r s e o f the d is p o s itio n o f its p a r tic u la r re q u e st fo r
r e c o n s id e r a tio n and o f the status o f its p a r tic u la r c la im .
In a d d ition , a n u m ber o f p e rso n s h olding le tte r s o f c r e d it w h ich
C r o c k e r paid have cla im e d that they a re ow ed a d d ition al sum s fo r in t e r ­
e st fr o m the date o f the m a tu rity o f the le tte r o f c r e d it until the date o f
a ctu a l paym ent.

With re g a rd to these c la im s , FDIC has taken the

p o sitio n that paym ent o f such p o s t-m a tu r ity in te r e s t w ould be im p r o p e r
at this tim e and under the c ir c u m s ta n c e s p re se n t in these c a s e s .
C o n cu rre n tly w ith the r e v ie w o f the le tte r o f c r e d it cla im s file d
by the v a rio u s h o ld e r s , two co u r t a ctio n s have b een file d a lle g in g , in
su b sta n ce, that FDIC in both its ca p a c ity as R e c e iv e r o f USNB and in
its c o r p o r a te ca p a c ity a cted im p r o p e r ly with r e s p e c t to th e ir c la im s .
The fir s t o f th ese su its , a c la s s a ctio n , w as file d on N o v e m b e r E l, 1973,
on b e h a lf o f Intern ation al W e stm in ste r Bank and o th e rs w h ose c la im s
w ere not a ssu m e d by C r o c k e r (this suit w as r e fe r r e d to in m y te stim o n y
b e fo r e this S u bcom m ittee la st N o v e m b e r ).

T h is suit sought to have the

A g re e m e n t d e c la r e d ille g a l on the th e o ry that it v io la te d the p ro v is io n s
o f 12 U. S. C. § 194 w h ich c a lls fo r the paym ent o f ratable dividen ds to
a ll c r e d it o r s o f an in so lv e n t national bank w h ose c la im s have b een
p rov ed to the s a tis fa ctio n o f the R e c e iv e r o r a dju dica ted in a co u r t o f




14

com p ete n t ju r is d ic t io n .

Subsequent to m y p r io r te stim o n y , the D is tr ic t

C ourt fo r the Southern D is tr ic t o f C a lifo rn ia d is m is s e d the suit holding
that it w as file d p re m a tu r e ly and that it fa ile d to state a ca u se o f a ctio n
upon w h ich r e l i e f cou ld be granted.

An app eal fr o m that d is m is s a l is

p r e s e n tly pending b e fo r e the United States C ourt o f A p p ea ls fp r the Ninth
C ir c u it.

A s o f this d ate, no d e c is io n has b e e n handed down by that C ou rt,

A se co n d suit was file d in the D is t r ic t C ou rt fo r the D is tr ic t o f
C olu m bia b y Banque F ra n c a is du C o m m e r c e E x te r ie u r and fo u r oth er
le tte r o f c r e d it h o ld e r s .

It sought a d e c la r a tio n that both the FDXC and

the C o m p tr o lle r o f the C u rre n cy a cted ille g a lly with r e s p e c t to fhe USNB
tra n s a ctio n .

T h is suit is su b sta n tiv ely s im ila r to the International

W e stm in ste r co m p la in t although it se e k s a som ew h at d iffe re n t fo r m o f
r e lie f.

The D is tr ic t C ou rt ru led that venue in the D is tr ic t o f C olum bia

w as im p r o p e r and o r d e r e d the ca s e tr a n s fe r r e d to the United States
D is t r ic t C ou rt fo r the Southern D is t r ic t o f C a lifo rn ia .

That d e c is io n

w as a ffir m e d b y the United States C ou rt o f A p p ea ls fo r the D is tr ic t o f
C olu m bia and the ca s e has now b e e n tr a n s fe r r e d to C a lifo rn ia .

The

c o u r s e it w ill take w ill p ro b a b ly depend upon the ultim ate d e c is io n o f
the C ourt o f A p p ea ls fo r the Ninth C ircu it in the ca s e p re se n tly b e fo r e it.
An e a r ly re s o lu tio n o f these law suits is u n lik ely , •and fu rth er
litig a tio n m a y be e x p e cte d fr o m h o ld e rs o f le tte r s o f c r e d it .




15

HI.

An O v e rv ie w o f F D IC 's C o lle c tio n E ffo r ts
A bou t 30 FDIC e m p lo y e e s a re c u r r e n tly engaged fu ll tim e in

San D ieg o in the c o lle c t io n a ctiv itie s o f the USNB r e c e iv e r s h ip .

T hey

a re aid ed b y s e v e r a l W est C oast law fir m s reta in ed as s p e c ia l co u n se l
fo r v a rio u s a s p e cts o f this r e c e iv e r s h ip , and the total o p e ra tio n is
su p e rv is e d and co o rd in a te d b y m e m b e r s o f the FDIC liq u id ation sta ff
in W ashington and b y the FDIC B o a rd o f D ir e c t o r s .

O v e r the next ten

y e a r s , w h ich we a n ticip ate to be the m in im u m life o f this co m p le x
r e c e iv e r s h ip , we e x p e c t ou r p e rso n n e l re q u ire m e n ts and d ir e c t liq u id a ­
tion c o s t s to d e clin e g ra d u a lly .

T o d ate, our d ir e c t s a la r y , op era tin g

and le g a l ex p en se has a p p ro x im a te d $2 m illio n .
The r e c e iv e r s h ip con tain s a p p ro x im a te ly 4 ,4 0 0 a s s e ts not
counting unbooked ca u se s o f a ctio n , but 3, 600 o f th ese a re r e la tiv e ly
sm a ll c la im s , a g g re g a tin g on ly $24. 9 m illio n in b o o k v a lu e .

A s I have

p r e v io u s ly in d ica te d , the bulk o f the r e c e iv e r s h ip a s s e ts (a p p ro x im a te ly
$345 m illio n ) r e p r e s e n ts in d eb ted n ess in one fo r m o r anoth er o f S m ithre la te d b o r r o w e r s .

O ur L iq u id a tion O ffic e b e lie v e s that this in d ebtedn ess

m a y be b ro k e n down as fo llo w s , although p a rticu la r b o r r o w in g groups
m a y a lle g e , fo r re a s o n s to w h ich I w ill r e f e r s h o r tly , that som e oth er
grou p is r e s p o n s ib le fo r at le a s t part o f the in d eb ted n ess-a ttrib u ted to
them .




-

16

-

$126. 7 m illio n

B C IC and re la te d co m p a n ie s
H o llis R o b e r ts and re la te d
co m p a n ie s

79. 2 m illio n

W e s tg a te -C a lifo r n ia C o rp o r a tio n and
re la te d co m p a n ie s

44. 2 m illio n

—/

San L u is R e y D ev e lo p m e n t P r o je c t

47. 3 m illio n

M . J. C oen and re la te d co m p a n ie s
oth er than B CIC

19. 9 m illio n

J. A . Sm ith and re la te d co m p a n ie s

7. 9 m illio n

M is ce lla n e o u s loan s re la te d to the above
T ota l

20. 5 m illio n
$345. 7 m illio n

In e a ch o f the s ix m a jo r lin es fir s t lis t e d , th ere a p p e a rs to have
b e e n a c lo s e re la tio n sh ip b etw een C. A rn h o lt Sm ith and one o r m o re o f
the p rin cip a ls in v o lv e d , although at the p re se n t tim e we do not know the
fu ll extent o f that re la tio n sh ip .

T h e re a ls o a p p e a rs to have b e e n sig n ifica n t

and r e c u r r in g re la tio n sh ip s b etw een the d iffe re n t g ro u p s , in a dd ition to

* / The San L u is R e y lin e d o e s not r e p r e s e n t loans to a grou p ca lle d San
L u is R e y , but ra th er loans se cu re d b y p ro p e r ty in a p o rtio n o f C a lifo rn ia
ca lle d San L u is R ey. T h is is a p p ro x im a te ly 60 m ile s north o f San D iego
and in clu d es a p p ro x im a te ly 2 ,4 5 7 a c r e s under v a rio u s d eed s o f tru st now
held b y the r e c e iv e r s h ip . T h ese d eed s o f tru st re la te to land owned by
22 d iffe re n t co m p a n ie s . The p ro p e r ty a p p e a rs to be p a r t 'o f a sp ecu la tiv e
ven tu re on the part o f th ose who b o r r o w e d m o n e y fr o m USNB to in v e st in
this a r e a . Many b o r r o w e r s in clu d ed in oth er grou p s a re a ls o b o r r o w e r s
in this lin e .




17 -

th eir sep a ra te re la tio n sh ip s with USNB.

S u ffice it to sa y , h o w e v e r,

that this r e c e iv e r s h ip is unusual fr o m the standpoint o f the c o n c e n t r a ­
tion o f v e r y la rg e loan lin e s in the hands o f o n ly a few in d iv id u a ls, o r
in the hands o f co m p a n ie s they on ce c o n tr o lle d , a ll o f w hom se e m to have
had a c lo s e w ork in g re la tio n sh ip with C. A rn h olt Sm ith.
W hile the num ber o f co n tro llin g in d ivid u als o r ig in a lly in volved
in th ese s ix lin e s m a y be s m a ll, the num ber o f co r p o r a te en tities
e n co m p a sse d w ithin e a ch lin e is su bstan tial.

O rg a n iz a tio n a lly , B C IC ,

fo r e x a m p le , can be grou p ed into five m a jo r headings totallin g 26 c o m ­
p an ies: b oa t c o m p a n ie s , op e ra tin g c o m p a n ie s , r e a l esta te holding
co m p a n ie s, sh e ll c o m p a n ie s , and m is c e lla n e o u s oth er co m p a n ie s.

E ach

o f the b oa t co m p a n ie s , o f w h ich th ere a re eig h t, owns o r has owned in
the past a tuna fish in g b oa t.

Tw o o f the op era tin g co m p a n ie s own shopping

ce n te rs and one o p e ra te s an a irlin e te rm in a l and s e r v ic e fa c ility .

The

five r e a l esta te holding co m p a n ie s e ith e r own re a l esta te in the San L uis
R ey a re a o r in the K ern County a r e a , and one o f them owns nothing but
sh a res o f W e s tg a te -C a lifo rn ia co m m o n sto ck .

T h ere app ear to be fou r

com p a n ies w h ich w e re sim p ly sh e ll co m p a n ie s and w ere u sed fo r m a n ip u ­
lation o f a s s e ts b y the c o n tr o l g rou p , on ly one o f w h ich has any a s s e ts
at the p re se n t tim e .

The m is c e lla n e o u s oth er com p an ies' rem a in in g in

the BCIC grou p own fu rn itu re and fix t u r e s , fou r sm a ll a irp la n e s , r e a l




18

-

esta te in C hino, C a lifo r n ia , and O n ta rio , sto ck in W e stg a te -C a lifo r n ia
C o rp o r a tio n and a c o m m e r c ia l p r o p e r ty in B e v e r ly H ills .

E ven w h ere

th ese c o r p o r a tio n s own a s s e t s , th e ir net w orth is freq u en tly so s m a ll and
th e ir o p e ra tio n s so m in im a l that th ere is little lik e lih o o d that su fficie n t
funds can be g en era ted to re p a y th eir o b lig a tio n s in fu ll.

The sam e

pattern is p re se n t in the oth er fiv e m a jo r lin e s .
The c o lle c t io n e ffo r t s o f the USNB r e c e iv e r s h ip a re com pounded
b y the n e c e s s it y o f fo llo w in g n u m erou s s p e c ific tr a n s fe r s o f a s s e t s ,
lia b ilit ie s , o w n e rsh ip r ig h ts , d ebt, and s e c u r ity in te re s ts am ong and
b etw een this la rg e nu m ber o f co m p a n ie s .

L oans w h ich on the b o o k s o f

USNB at c lo s in g m igh t a pp ea r to be the r e s p o n s ib ility o f C om pany X turn
out to b e , in r e a lit y , the r e s p o n s ib ilit y o f C om pany Y o r Individual A
a fte r the r e c e iv e r s h ip has tr a c e d the p a ssa g e o f loan p r o c e e d s fr o m
com p an y to com p an y o r in d ivid u al to in d iv id u a l.

W hile we fe e l that we

have u n ra veled som e o f this co m p le x ity and have begun litig a tio n to a s s e r t
cla im s we have u n c o v e r e d , we a re not y et su re that we know a ll the fa cts
about the m u ltip le m an ipu lation s that have o c c u r r e d .

Som e p e rso n s who

cou ld shed ligh t on this a r e a , such as C. A rn h olt Sm ith h im s e lf, have
re fu s e d to a n sw er our q u e stio n s , pleadin g th eir con stitu tion a l righ t
a g ain st s e lf-in c r im in a t io n .

T h ese a re m a tte rs that w ill be so rte d out,

i f at a ll, o n ly o v e r tim e as our tra cin g s a re c o m p le te d , new in fo rm a tio n
is d is c o v e r e d , o r litig a tio n p r o g r e s s e s .




- 19 -

It w ould be too tim e -c o n s u m in g at this point to go into g rea t
d eta il on the c o lle c t io n stra te g y that the R e c e iv e r is adopting with
r e s p e c t to e a ch o f th ese s ix m a jo r lin e s .

L ik e w is e , to r e v e a l that

stra teg y o r to r e v e a l our e stim a te s o f s p e c ific a n ticip ated r e c o v e r ie s
m igh t in som e c a s e s c o m p r o m is e n eg otia tion s c u r re n tly under w ay
with som e o f the d e b to r s .

T o give the S u bcom m ittee som e idea o f the

nature o f the p ro b le m s b e in g e n co u n te re d , h o w e v e r, we have included
in the next s e ctio n o f this r e p o r t a ra th er fu ll d e s c r ip tio n o f our c o l l e c ­
tion e ffo r t s w ith r e s p e c t to one o f the s ix m a jo r lin e s , i. e . , We stgate C a lifo rn ia C o rp o r a tio n and its re la te d co m p a n ie s.

IV.

A S p e c ific E x a m p le :

W e s tg a te -C a lifo rn ia C o rp o ra tio n

W e s tg a te -C a lifo rn ia C o rp o ra tio n is a la rg e co n g lo m e ra te w hose
a ffilia te s and s u b s id ia r ie s can be grouped into eight g ro u p s:

s e a fo o d ,

su rfa ce tra n sp o rta tio n , a ir tra n sp o rta tio n , re a l e s ta te , h o t e l/r e s o r t ,
p ro d u ce , le a s in g , and in s u ra n ce .

A t the tim e o f U SN B's fa ilu r e , these

eight grou p s in clu d ed e le v e n sep a ra te co m p a n ie s.

F iv e o f the com p a n ies

a re in v olv ed in the tuna b u s in e s s , ow ning three c a n n e r ie s , fou r tuna
b o a ts , and a le a s e d te rm in a l with dockin g fa c ilit ie s and w a re h o u se .

Tw o

o f the com p a n ie s own c o n tr o l o f taxi cab com p a n ies and op era te co m m u te r
a irlin e ro u te s .

T h ey a ls o le a s e and own th ree c o m m e r c ia l je t s .

com p a n ies own re a l e sta te .




S e v e ra l

-

20

-

W e s tg a te -C a lifo r n ia C o rp o r a tio n and its s u b s id ia rie s (c o lle c t iv e ly
r e fe r r e d to h e re in as "W e s t g a t e -C a lifo r n ia " ) now has debt o f a p p r o x i­
m a te ly $44 m illio n on the b o o k s o f the r e c e iv e r s h ip , a re d u ctio n o f $ 2 4 .4
*/
m illio n sin ce USNB fa ile d .
S h ortly a fte r USNB fa ile d , We s t g a te -C a lifo r n ia , re p re s e n te d by
a p re sid e n t and b o a rd o f d ir e c t o r s appointed b y the C ourt a few m onths
e a r lie r fo llo w in g c o m p r o m is e and se ttle m e n t o f litig a tio n b rou gh t by the
S E C , re q u e ste d fr o m the FDIC a $500, 000 ca sh advance to m e e t p a y ro lls
due in W e s tg a te -C a lifo r n ia and to pay p re m iu m s on d ir e c t o r s ' lia b ility
in su ra n ce p o lic ie s .

W e s tg a te -C a lifo r n ia told the R e c e iv e r that adva n ces

w e r e n eeded b e ca u se USNB had b e e n We s t g a te -C a lifo r n ia 's bank, that it
w as not able to a cq u ire q u ick ly oth er bank lin e s , and that if the adva n ces
w e r e not fo rth co m in g the m e m b e r s o f We s t g a t e -C a lifo r n ia 's b o a rd o f
d ir e c t o r s w ould r e s ig n and the com p an y w ould be p la ce d in v olu n ta ry
b a n k ru p tcy .

W e s tg a te -C a lifo r n ia a ls o re q u e ste d an a d d ition al $6 m illio n

on a s h o r t -t e r m b a s is fo r w ork in g ca p ita l to p e rm it its se a fo o d com p a n ies
to p u rch a se tuna during the fir s t two o r th ree m onths o f ca le n d a r 1974.
In o r d e r to p e rm it the r e c e iv e r s h ip tim e to analyze the o p e ra tion s
o f We s t g a te -C a lifo r n ia , and to p e rm it oth er banks and in su ra n ce com p an ies

* / T h is re d u ctio n re su lte d fr o m the a p p lica tio n o f $7. 2 m illio n m ca sh
p a y m en ts, $ 2 0 0 ,0 0 0 in o ffs e ts m ade with USNB d e p o s its , and the tr a n s fe r
o f a p p ro x im a te ly $17 m illio n to p u rch a s e rs o f a s s e ts who a ssu m e d
W e s t g a te -C a lifo r n ia 's re la te d debt to USNB o r substituted th e ir own
o b lig a tio n s fo r such debt.




-

21

-

w hich had b ee n financing the o p e ra tio n s o f that co n g lo m e ra te on both
a sh ort and lo n g -t e r m b a s is tim e to m ake th e ir re v ie w o f the situation,
the C o rp o r a tio n advan ced $ 5 0 0 ,0 0 0 on N o v e m b e r 29» 1973.

That

$500, 000 advance w as su b seq u en tly rep a id on M ay 6, 1974.
A few w eek s la t e r , the FDIC B o a rd o f D ir e c t o r s r e je c te d
W e s t g a te -C a lifo r n ia 's re q u e st fo r an a d d ition al $6 m illio n advance
follow in g ex te n siv e a n a ly sis and m e e tin g s , both in W ashington and in
San D ie g o , on the grounds that it could not s a tis fy it s e lf that any advance
beyond the $ 5 0 0 ,0 0 0 p r e v io u s ly t r a n s fe r r e d w ould s e rv e to p ro te ct the
total a s s e ts in the r e c e iv e r s h ip esta te attribu table to We s tg a te -C a lifo r n ia .
This judgm ent w as su pported b y the d e c is io n o f the banks and in su ra n ce
com p a n ies w h ich had b een lo n g -t e r m c r e d it o r s o f We s tg a te -C a lifo rn ia
not to m ake fu rth er loan s to the c o n g lo m e r a te , and b y the fa ct that c o m ­
m e r c ia l banks w h ich had b een fin an cin g We s t g a te -C a lifo r n ia 's se a fo o d
op era tion s had e ith e r w ithdraw n the lin es outstanding o r had lim ite d the
size o f the lin e s then on th e ir b o o k s .
N otw ithstanding the R e c e iv e r 's d en ial o f the $ 6 ,0 0 0 ,0 0 0 re q u e s t,
We s tg a te -C a lifo r n ia did not go into ban k ru ptcy at that tim e .

R a th e r, in

an attem pt to r a is e the needed w ork in g ca p ita l, We s tg a te -C a lifo r n ia
m ade a c o r p o r a te d e c is io n to s e ll the 1 ,8 2 3 ,5 6 6 sh a res o f co m m o n
stock o f G olcon d a C o rp o ra tio n w h ich it held and fo r m a lly app lied to
the C ourt w h ich w as o v e r s e e in g its a ffa ir s fo r the re q u is ite p e r m is s io n .




-

22

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Since the R e c e iv e r held su bstan tial am ounts o f the G olcon d a sto ck as
s e c u r it y fo r a loa n o f $ 4 ,5 0 0 ,0 0 0 to W e sca l P r o p e r t ie s , Inc. (a w h olly
ow ned su b s id ia ry o f W e s tg a te -C a lifo r n ia C o r p o r a tio n ), and sin ce the
R e c e iv e r cla im e d an in te r e s t in any a d d ition a l p r o c e e d s that m ight be
r e a liz e d fr o m the sa le o f the s to ck on a c o n s tr u ctiv e tru st th e o r y ,
n eg otia tion s b etw een We s tg a te -C a lifo r n ia and the R e c e iv e r w e re u n d e r­
taken to see w hether som e a m ica b le a g re e m e n t fo r the d istrib u tio n o f
the p r o c e e d s o f the sale o f the G olcon d a s to ck cou ld be re a ch e d .
We s tg a te -C a lifo r n ia c la im e d , am ong oth er th in g s, that there
w as substantial q u estion w h eth er W e s ca l P r o p e r t ie s , Inc. had e v e r
r e c e iv e d the b e n e fits o f the $4, 500, 000 debt shown on the b o o k s o f the
R e c e iv e r , and, t h e r e fo r e , w h eth er it in fa ct ow ed $ 4 ,5 0 0 ,0 0 0 to the
USNB r e c e iv e r s h ip .

It fu rth er a rgu ed that any add ition a l c la im in the

p r o c e e d s beyond $ 4 ,5 0 0 , 000 w as to ta lly w ithout foundation.

It cla im e d

in fa ct that th e re w as substantial doubt that We s tg a te -C a lifo r n ia had
obtain ed the b e n e fits o f a la r g e p o rtio n o f the oth er loa n s due fr o m its
s u b s id ia r ie s on the b o o k s o f the r e c e iv e r s h ip , and su g g ested that it was
p re p a re d to litig a te e x t e n s iv e ly , in b a n k ru p tcy if n e c e s s a r y , to p ro v e
the point.

F in a lly , it cla im e d that the e n tire p r o c e e d s o f the sa le o f the

G olcon d a sto ck w e re n eeded to p rov id e w ork in g ca p ita l fo r We stgate C a lifo r n ia , and that without it, We s tg a te -C a lifo r n ia w ould c o lla p s e and




- 23 -

the c o lle c t io n o f the e n tire debt ow ed b y W e stg a te -C a lifo r n ia to the
r e c e iv e r s h ip w ould be je o p a r d iz e d .

The situation w as co m p lica te d by

a lien w h ich the Internal R evenue S e r v ic e had obtained on a ll a s s e ts o f
W e stg a te -C a lifo r n ia , in clu d in g the G olcon d a s to ck , fo r the p u rp ose o f
in su rin g paym ent b y W e stg a te -C a lifo r n ia o f a tax c la im fo r $4, 200, 000
a lle g e d ly ow ed the United States b y W e stg a te -C a lifo r n ia .
F o llo w in g e x te n siv e n e g o tia tio n s, W e stg a te -C a lifo r n ia m ade a
fo r m a l re q u e st to the R e c e iv e r on F e b ru a ry 13, 1974

that the R e c e iv e r :

(1) d e fe r a ll p rin cip a l paym ents on the debt ow ed b y W e stg a te -C a lifo r n ia
to so m e u n s p e c ifie d date, (2) c a n c e l any in te r e s t now due o r to a c c r u e on
that d ebt, (3) w aive the R e c e iv e r 's s e c u r it y in te r e s t in the sto ck o f
G olcon d a C o rp o r a tio n , and (4) w aive the R e c e iv e r 's righ ts to any p r o c e e d s
o f the con tem p lated sale o f G olcon d a s to ck .

A s c o n s id e r a tio n , W e stg a te -

C a lifo rn ia o ffe r e d to c o n fir m and not co n te st a ll debt ow ed b y W e stg a te C a lifo rn ia to the R e c e iv e r (in am ounts to w h ich the two p a rtie s m igh t
a g re e b a se d on in fo rm a tio n then known) and a ll c o lla t e r a l p u rp o rte d ly
held b y the R e c e iv e r as s e c u r it y t h e r e fo r .

A s a fu rth er in d u cem en t,

W e stg a te -C a lifo r n ia a ls o subm itted fin a n cia l p r o je c tio n s w h ich it cla im e d
show ed that, upon a g re e m e n t b y the R e c e iv e r to its o f f e r , W e stg a te C a lifo rn ia w ould be able to pay the p rin cip a l am ount o f thé debt to the
R e c e iv e r at so m e u n sp e c ifie d tim e in the future.




. - 24 -

In due c o u r s e , the R e c e iv e r r e je c te d that p r o p o s a l s in c e , upon
a n a ly s is , it w as c le a r that a cce p ta n ce o f the p r o p o s a l w ould not have
le d to a g r e a te r r e c o v e r y fo r the r e c e iv e r s h ip esta te and, in fa c t, m ight
have led to a l e s s e r r e c o v e r y fo r the e s ta te .

N eg otia tion s continued

with We s tg a te -C a lifo r n ia , but no a g re e m e n t w as re a ch e d until the parent
We s tg a te -C a lifo r n ia C o rp o r a tio n and its su b s id ia ry We se a l P r o p e r t ie s ,
In c. v o lu n ta rily w ent into a C hapter X p r o c e e d in g on F e b r u a r y 26, 1974.
The R e c e iv e r was unable to r e a c h an a cco m m o d a tio n with
We s tg a te -C a lifo r n ia p r io r to its b a n k ru p tcy p etition , sin ce in a ll c a s e s
the o ffe r s m ade b y We s tg a te -C a lifo r n ia con tem p lated the s e r io u s w eakening
o f the R e c e iv e r 's p o sitio n v i s - a - v i s oth er c r e d it o r s , a ctu a l o r p r o s p e c t iv e ,
and o ffe r e d as c o n s id e r a tio n on ly the p r o s p e c t s o f lo n g -t e r m p a rtia l
rep a y m en t that was sp e cu la tiv e at b e s t .

We s tg a te -C a lifo r n ia se e m e d

to fe e l that the r e c e iv e r s h ip had a continuing in te r e s t, as a s u c c e s s o r
bank, to fund its o p e r a tio n s , and that We s t g a t e -C a lifo r n ia 's rep a ym en t
o f debt a lr e a d y in defau lt w as s e co n d a ry to p ro te ctin g the eq u ity in te re s ts
o f We s t g a t e -C a lifo r n ia 's ca p ita l n o te h o ld e rs and s h a r e h o ld e r s .

Its

a rg u m en ts w e re su p p orted o n ly b y unaudited fig u r e s , and th ese se e m e d
to change sig n ifica n tly with e a ch re q u e st.

Upon a n a ly s is , none o f the

fig u r e s show ed that the r e c e iv e r s h ip w ould b e n e fit fr o m the req u e sts
b ein g m a d e .




- 25 -

The p re v a ilin g attitude o f W e s tg a te -C a lifo rn ia had b e e n , until
the appointm ent o f a T ru ste e in B an k ru p tcy , that the co n g lo m e ra te
should be run as if it was an un trou bled and bankable b u s in e s s , and
that no part o f the co n g lo m e ra te should be liquidated (with the p o s s ib le
e x ce p tio n o f ce rta in r e a l esta te it owned in downtown San D ie g o ).

The

R e c e iv e r ’ s a n a ly sis w as that none o f this w as p o s s ib le u n less the R e c e iv e r
su rre n d e re d substantial righ ts and in te re s ts it held, a su rre n d e r w hich
show ed no p r o m is e o f ultim ate rep a ym en t.

In d ir e c t co n tra st to this

a p p ro a ch , the new T r u s te e , M r. C urvin T r o n e , su ggested to the B oard
o f D ir e c t o r s o f the FDIC in a m eetin g held in W ashington, D. C. , on
M a rch 15, 1974, that th e re should be an o r d e r ly liqu id a tion o f som e
parts o f the We s tg a te -C a lifo r n ia o p e ra tio n .

He a ls o su ggested that the

FD IC , as w e ll as oth er c r e d it o r s , had som e rep a ym en t due them and
co n s id e r a tio n should be given to th em as w e ll as to e m p lo y e e s , s t o c k ­
h o ld e r s , and d eben tu re h o ld e rs o f We s tg a te -C a lifo r n ia .
The T ru ste e had file d a p etition under C hapter X cla im in g that
it cou ld r e o r g a n iz e We s tg a te -C a lifo r n ia s u c c e s s fu lly .

E ven though

the R e c e iv e r fo r m a lly o b je cte d to that p etition , cla im in g that any
re o rg a n iz a tio n w ould be u n s u c c e s s fu l, the R e c e iv e r fe lt that with the
changed attitude r e fle c t e d b y the new T ru ste e it cou ld p r o p e r ly b e g in
n egotia tion s to see if th ere was som e w ay to re a ch an a cco m m o d a tio n




-

26

-

w h ich w ould p e rm it the p r o c e e d s fr o m the sa le o f the G olcon d a sto ck to be
d istrib u te d to the b e n e fit o f the In tern al R evenue S e r v ic e , the R e c e iv e r ,
and the T r u s te e , and p e rm it him a p e rio d o f tim e to apply his s k ills and
b u s in e s s e x p e r ie n c e to W e s t g a te -C a lifo r n ia 's p e r v a s iv e p r o b le m s .
The R e c e iv e r c o n s id e r e d it e s s e n tia l to in su re that its p o sitio n
v i s - a - v i s the T r u s te e , oth er c r e d it o r s o f W est g a te -C a lifo r n ia , and
eq u ity h o ld e rs o f W e s tg a te -C a lifo r n ia w ould not be d im in ish ed b y any
a g re e m e n t re a ch e d w ith the T r u s te e , and that the We s tg a te -C a lifo r n ia
a s s e t s did not d im in ish in v a lu e .

L ik e w is e , IRS found it s e lf hard p r e s s e d

to a c c e p t anything but fu ll ca sh paym ent fo r the $ 4 ,2 0 0 ,0 0 0 a lle g e d ly
ow ed it b y We s t g a te -C a lifo r n ia .

We s t g a te -C a lifo r n ia , on the oth er hand,

need ed a sig n ifica n t part o f the p r o c e e d s o f the sale o f G olcon d a sto ck
fo r w ork in g ca p ita l o r it w as m e a n in g le ss fo r it to en ter into any a g r e e ­
m en t.

Since the p r o c e e d s o f the sa le o f the G olcon d a sto ck am ounted to

on ly $9, 7 5 2 ,9 8 5 . 50, it was c le a r that a ll p a rtie s cou ld not be sa tisfie d
c o m p le te ly .

In due c o u r s e , a c o m p r o m is e a g re e m e n t fo r the d istrib u tion

o f the p r o c e e d s o f this sa le w as e n te re d into on A p r il 9, 1974.
The a g re e m e n t is lengthy and d e ta ile d , but fr o m the standpoint
o f the R e c e iv e r , it se e m e d d e s ir a b le sin ce (1) the R e c e iv e r im m e d ia te ly
r e c e iv e d $ 3 ,5 0 0 , 000 fr o m the sa le o f the G olcon d a sto ck without lit ig a ­
tion , (2) the T ru ste e a g re e d s y s te m a tic a lly to use his b e s t e ffo r t s to




- 27 -

liquidate in an o r d e r ly fa sh ion co m p a n ie s in W e s tg a te -C a lifo rn ia oth er
than th ose in the se a fo o d d iv is io n , w ithin the fo llo w in g two y e a r s , (3)
paym ent w as co m m itte d to the R e c e iv e r o f am ounts obtain ed fr o m the
sa le o f c e r ta in s u b s id ia ry co m p a n ie s ev en though no loan outstanding to
such com p a n ie s then a p p ea red on the R e c e iv e r 's b o o k s , (4) the T ru ste e
a g re e d to a sch ed u le o f debt rep a ym en t w h ich w ould a llo w rep a ym en ts
m ade to be a p p lied at the d is c r e t io n o f the R e c e iv e r (w hich m eant such
rep a ym en ts cou ld be a p p lied fir s t to u n se cu re d o r p o o r ly s e cu re d loan s
th e re b y k eep in g the R e c e iv e r 's good s e c u r ity in ta ct), and (5) the T ru ste e
gave the R e c e iv e r s e c u r ity fo r loa n s o r b a n k ers a cce p ta n ce s that w ere
u n secu red at the tim e .

M ost im p o rta n tly , the a g re e m e n t r e fle c t e d that

one o f the p u rp o se s o f the T ru ste e in re o rg a n iz a tio n w as to pay c r e d it o r s
o f We s tg a te -C a lifo r n ia .
F r o m the standpoint o f We s t g a te -C a lifo r n ia , and in d ir e c tly fr o m
the standpoint o f the r e c e iv e r s h ip , the a g re e m e n t p rov id ed a m eans
w h e re b y We s tg a te -C a lifo r n ia cou ld continue n o rm a l o p e ra tio n s w hile
attem pting to s e ll c e rta in a s s e ts and co m p a n ie s .

S ch edu les w h ich

We s tg a te -C a lifo r n ia fu rn ish ed at that tim e show ed p r o je c tio n s o f in co m e
and ca sh flow w h ich in d ica ted that it cou ld and w ould pay the r e c e iv e r s h ip
a p p ro x im a te ly $4. 5 m illio n b y the end o f 1974, som e o f it fr o m the p r o ­
ce e d s o f liq u id a tion and som e fr o m cu rre n t e a rn in g s.




- 28 -

Since A p r il 9» th e re has b e e n so m e d e te r io r a tio n in the ca sh
flow and in c o m e r e s u lts o f W e s t g a te -C a lifo r n ia 1s o p e ra tio n s v i s - a - v i s
the fo r e c a s t e d r e s u lt s , but th ere has a ls o b een substantial re d u ctio n
o f d ebt.

W hile it a p p e a rs at this tim e that W e s tg a te -C a lifo r n ia w ill

not be a ble to pay d ir e c t ly any part o f the $4, 500, 000 p r o je c te d fo r
1974, and that the T ru ste e has fa ile d to m e e t so m e o f the ta rg e t dates
e s ta b lis h e d fo r se llin g ce rta in o f the a s s e t s in the c o n g lo m e r a te , the
R e c e iv e r n e v e rth e le s s b e lie v e s that th ere have b e e n substantial b e n e fits
a c c r u in g to the r e c e iv e r s h ip fr o m the A p r il a g re e m e n t.

We stgate -

C a lifo rn ia has b e e n a ble to o p e ra te in a n o rm a l m a n n er and has not
b e e n fo r c e d to liquidate a s s e ts at d is t r e s s e d p r ic e s .

T h ese con d ition s

m ade it p o s s ib le to re a c h a fa v o ra b le sa le o f the downtown San D iego
b lo c k containing the We stgate P la za H otel in the su m m e r o f 1974.
S im ila r ly , an add ition a l $2, 0 7 0 ,2 8 0 w as paid to the R e c e iv e r fr o m the
p r o c e e d s o f the G olcon d a sa le when the IRS r e le a s e d so m e o f its cla im s
e a r lie r this s u m m e r , b rin g in g to $ 5 .5 m illio n the tota l am ount r e a liz e d
b y the R e c e iv e r in this tra n sa ctio n w ithout litig a tio n .

We fu rth er

b e lie v e that the A p r il c o m p r o m is e has p ro b a b ly in c r e a s e d our lik e ly
net r e c o v e r y in the w h ole We s tg a te -C a lifo r n ia lin e .
A t the p re se n t tim e , the R e c e iv e r is co n s id e r in g a re q u e st by
We s t g a t e -C a lifo r n ia 's T ru ste e to r e s tr u c tu r e the debt fr o m We stg a te C a lifo rn ia to the R e c e iv e r on a lo n g -t e r m b a s is and to p ro v id e an




- 29 -

additional $5 m illio n o f w ork in g ca p ita l on a s h o r t -t e r m b a s is .

We

a re in the m id s t o f a n a lyzin g that re q u e st at the p re se n t tim e and have
not yet re a ch e d any co n c lu s io n s with r e s p e c t to it.

V.

L itig a tio n B y and A ga in st the R e c e iv e r s h ip E state
E v e r y r e c e iv e r s h ip in v o lv e s the FDIC in litig a tio n , and th ere

is o b v io u s ly m o r e o f it when the r e c e iv e r s h ip is as la rg e and as c o m p le x
as the USNB r e c e iv e r s h ip .

The p rin cip a l litig a tio n e ffo r t s in w hich we

are c u r re n tly engaged include the fo llo w in g :
A tta ck s on the P u rch a se and A ssu m p tion A g re e m e n t with C r o c k e r .
In addition to the two la w su its file d b y h o ld e rs o f USNB standby le tte r s o f
cre d it to w h ich I have p r e v io u s ly r e fe r r e d in P a rt II o f this statem en t, a
m ore re ce n t ca s e has b een file d w h ich a ls o attacks ce rta in p r o v is io n s o f
the A g re e m e n t b etw een FDIC as R e c e iv e r and C r o c k e r .

T his c a s e ,

340 Spring St. C o. v , F D IC , re p r e s e n ts a c r o s s - c l a i m a gain st FDIC by
the ow n er o f a bu ild in g w hich USNB le a se d as a b ra n ch o ffic e .

The

building w as o ccu p ie d t e m p o r a r ily b y C r o c k e r , but the le a s e has sin ce
been term in a te d b y the R e c e iv e r .

The p la in tiffs seek dam ages fo r

a lleg ed defau lt on the le a se and a d e cla ra tio n that the p u rch a se and
assu m p tion tra n sa ctio n w ith C r o c k e r was ille g a l to the extent it did not
re q u ire fu ll p e rfo rm a n ce o f USNB's le a se o b lig a tio n s.

T his a ctio n was

com m en ced ju st r e c e n tly , and no a n sw er has yet b e e n file d b y FD IC .




- 30 -

B ond C la im s and D ir e c t o r 's L ia b ility M a tte r s .

FDIC p e rso n n e l

have b een con d u ctin g a thorough ex a m in a tion o f U SN B's r e c o r d s sin ce
O c to b e r 1973 with a v iew to d e v e lo p in g and p re se n tin g substantial cla im s
under USNB’ s b a n k ers blan ket bon d .

T o date c la im s to ta llin g $153 m illio n

have b e e n file d w ith the bonding com p a n y w h ich w ro te U SN B's p o lic y ,
although r e c o v e r y w ould be lim ite d to no m o r e than $10 m illio n fo r e a ch
USNB o f f ic e r shown to have co m m itte d independent v io la tio n s it its te rm s
w h ich m ay as a p r a c t ic a l m a tte r lim it total r e c o v e r y to $10 m illio n .
The FDIC is a ls o attem pting to p ro s e cu te c la im s a g a in st fo r m e r
d ir e c t o r s o f USNB.

T h e se e ffo r t s have b een co m p lica te d b y re a s o n o f

two a ctio n s file d a gain st such d ir e c t o r s b y m in o rity s h a re h o ld e r s o f
USNB s h o rtly a fte r the bank c lo s e d .

T h e se co m p la in ts , H a rm sen v.

S m ith , et a l. and H ansen v . Sm ith, et a l. (w hich have sin ce b een c o n ­
solid a te d ) sought r e c o v e r y a g a in st ce rta in d ir e c t o r s o f USNB f o r a lle g e d
v io la tio n s o f the S e cu ritie s E xchange A c t o f 1934, fo r v io la tio n s o f the
N ational Bank A c t, and fo r b r e a c h e s o f th e ir fid u c ia r y d u tie s.

The

FDIC b e lie v e s that th ese a ctio n s a re e s s e n tia lly d e riv a tiv e in nature
and th e r e fo r e has sought and r e c e iv e d p e r m is s io n to in terv en e as USNB's
R e c e iv e r .

H o w e v e r, the FDIC has b e e n denied the e x c lu s iv e righ t to

p r o s e c u te this c la im and is in the p r o c e s s o f m aking an in te r lo c u to r y
app eal o f that ru lin g to the United States C ourt o f A p p ea ls fo r the Ninth




- 31 -

C ircu it.

A s p la in tiff in in terv en tion , the FDIC has file d its own

com plaint a gain st the d ir e c t o r s w h ich se e k s r e c o v e r y , am ong oth er
things, fo r a lle g e d v io la tio n s o f the N ational Bank A ct and o f the
d ir e c t o r s ' co m m o n law duties o f c a r e and lo y a lty .
F ra n k lin N ational Bank v . USNB.

S h ortly a fte r USNB was

d ecla red in s o lv e n t, F ra n k lin N ational Bank file d a suit req u estin g
r e s c is s io n and d am a ges in co n n e ctio n with $5 m illio n in ca p ita l d e b e n ­
tures it had p u rch a sed fr o m USNB.

The suit a lle g e s v io la tio n s o f the

fed era l s e c u r it ie s law s and co m m o n law fra u d .

A s o f O c to b e r 8, 1974,

the date o f F ra n k lin N ational B a n k 's own fa ilu r e , the a ctio n was in v olv ed
in p onderous d is c o v e r y e ffo r t s and had not y et p ro ce e d e d to tr ia l.

H ow ­

e v e r, in the wake o f F ra n k lin N ational B a n k 's c lo s in g and the appointm ent
of FDIC as it£ R e c e iv e r as w e ll, the ca se has b e e n stayed.

The FDIC

is cu r re n tly d ev e lo p in g plans to d eal e ffe c t iv e ly and fa ir ly w ith its
sta tu torily im p o s e d r e s p o n s ib ilit y fo r handling r e c e iv e r s h ip e sta te s
with c le a r ly d iv e rg e n t in t e r e s ts .
W e s tg a te -C a lifo r n ia P r o c e e d in g s .

In addition to taking the p r o ­

tective le g a l steps in We s t g a te -C a lifo r n ia 's C hapter X re o rg a n iz a tio n
p roceed in g s w h ich led to the c o m p r o m is e a g re e m e n t o f A p r il 9, 1974,
the FDIC as R e c e iv e r instituted a suit in the United State’s D is tr ic t
Court fo r the Southern D is tr ic t o f C a lifo rn ia a gain st fou r com p a n ies o f




- 32 -

the W e s tg a te -C a lifo r n ia co n g lo m e r a te .

T h is su it, a gain st W estgate

L ife In su ra n ce C o. , South P la z a , Inc. , W estgate C a r ib e , Inc. , and
We s tg a te -C a lifo r n ia F o o d s , se e k s r e c o v e r y o f $ 3 .9 9 m illio n .

The

co m p la in t is b a se d on the app aren t p r a c t ic e o f shiftin g the loan o b lig a ­
tion s o f m a jo r W estgate s u b s id ia r ie s to oth er e n titie s w ith the r e s u lt
that the loa n s a re s t ill outstanding.

The R e c e iv e r is c u r r e n tly p r e p a r ­

ing an am ended co m p la in t in this m a tte r.
A d d itio n a lly , the R e c e iv e r has file d su bstan tial cla im s in
W e s t g a te -C a lifo r n ia 's C hapter X r e o rg a n iz a tio n p r o c e e d in g s .

T h ese

c la im s seek r e c o v e r y o f $48 m illio n b a se d on continuing guaran tees b y
the parent c o r p o r a tio n o f s u b s id ia ry debts and fu rth er se e k s r e c o v e r y
o f $110 m illio n on the th e o ry that the p arent is indebted to USNB b y
re a s o n o f:




(a)

M on eys obtain ed fr o m USNB on loa n s m ade under
fa ls e p re te n s e s and b y m is r e p r e s e n ta tio n as to the
id e n titie s o f the b o r r o w e r s o r u s e r s o f such m o n e y s ,
the u se s o f such m o n e y s and the s o u r c e s o f rep a ym en t
o f such m o n e y s , a ll o f w h ich m on ey s w e re in fa ct
r e c e iv e d and u sed b y and fo r the b e n e fit o f the paren t;
and

(b)

The p a re n t's a s s is tin g , a g r e e in g , aiding and abetting
C. A rn h olt Sm ith, a d ir e c t o r , o f f ic e r and co n tro llin g

- 33 -

sh a re h o ld e r o f USNB, in v io la tin g his fid u c ia r y
duties and duties o f c a r e to USNB b y obtaining
m o n e y s in said am ount fr o m USNB fo r the use
and b e n e fit o f W e s tg a te -C a lifo r n ia , without
a p p ro v a l o f the b o a rd o f d ir e c t o r s o r sto ck h o ld e rs
o f USNB, in v io la tio n o f 12 U. S. C. § 84, w ithout
r e g a r d to sound banking and c r e d it p r a c tic e s and
fo r the p u rp ose o f b en efitin g We s tg a te -C a lifo r n ia
at the e x p e n se o f USNB.
T o d a te, We s tg a te -C a lifo r n ia C o r p o r a tio n 's T ru ste e has not a cted on
th ese cla im s o r any o f the oth er c la im s file d again st it b y o th e rs w hich
to g e th e r a g g re g a te a p p ro x im a te ly $ 1 .5 b illio n .
O ther L itig a tio n .

T h e re a r e , o f c o u r s e , m any m o r e c a s e s both

b y and a g a in st the FDIC as R e c e iv e r o f USNB.

H o w e v e r, m o s t o f th ese

c a s e s w e r e pending p r io r to the b a n k 's c lo s in g and a re routine in s o fa r as
they p re se n t le g a l q u estion s not unlike th ose a s s o c ia t e d w ith n o rm a l
banking o p e r a tio n s .

T h ese c a s e s in v o lv e such q u estion s as v io la tio n s o f

m a rg in re q u ir e m e n ts b y USNB, b r e a c h e s o f c o n tr a c t, g en era l to rt c la im s ,
etc.

W hile th e re a re a p p ro x im a te ly two hundred c a s e s o f a ll types p en d ­

ing in the USNB r e c e iv e r s h ip , the m a tte rs d is c u s s e d a bove re la te to le g a l
is s u e s o f s p e c ia l s ig n ifica n ce in the conduct o f the r e c e iv e r s h ip .