74-2

74-2

San Francisco, California

May 20, 1974

Re: ________: Interpretation of Section 3350 of Financial Code

Dear ________:

This is in response to your letter of January 14, 1974.

In your letter, you requested our opinion as to whether certain transactions violated Section 3350 of the Financial Code. The facts as we understand them are as follows:

The problem arises over certain transactions between the Bank and ________ (hereinafter “X”). X is an affiliate of a national brokerage firm. The national brokerage firm has ten stockholders and a majority of the stock is held individually by ten major principals of the national company. Y is president, a director, and a 25% stockholder of X. Y also serves as a director of the Bank.

The various transactions in which Y’s corporation will be involved with the bank can be divided into three distinct classes.

The first class involves the situation in which the bank has a customer to which it will make an interim loan provided that take-out financing becomes available. X finds the take-out lender and charges the borrower a fee.

The second class involves the situation in which X is employed by a borrower to find an interim loan. In this case, X finds not only the take-out commitment but also the interim loan, which for our purposes would be presumed to be with the Bank. For these services, X charges a fee to the borrower.

The third class involves the situation in which X charges a brokerage fee for other services. Included in the term “other services” is the situation in which X arranges for a letter of credit for the buyer upon which a bank, which, for our purposes is the Bank, relies in making the loan to the buyer.

Section 3350 of the Financial Code provides:

“Any director, officer, or employee of a bank or a foreign banking corporation who asks for or receives, or consents or agrees to receive any commission, employment, or gratuity or any money, property, or thing of value for his own personal benefit or of personal advantage for procuring or endeavoring to procure for any person any loan from such bank, or the purchase of discount of any note, draft, check, bill of exchange, or other obligation by such bank, or for permitting any person to overdraw any account with such bank, is guilty of a felony.”

Due to Y’s status as a director of the Bank, it is clear that the statute would apply to him provided all the other conditions have been met.

We have very little difficulty in handling the transactions under class one and class three. We are in agreement with the rationale of the case of United States v. Gerken, 182 F. Supp. 738 (E.D.N.Y. 1960). This case stands for the proposition that 18 U.S.C. 215 (the counterpart of Section 3350 in Federal law) does not apply to a situation in which a director of a bank endeavors to procure a loan from an unrelated bank. Inasmuch as the services performed by Y’s corporation relative to class one and class three transactions would be with nonrelated banks, we feel confident that the provisions of Section 3350 would not be violated by such transactions.

The second class of transaction section is not so easily disposed of as the first and third. The Attorney General has stated in regards to the relationship between Section 3350 and loan broker’s fees, “Further, we believe the Legislature and Congress intended to include such fee within the phrase ‘for procuring or endeavoring to procure’ a loan.” 47 Ops. Cal.Atty.Gen. 100, 104 (1966). We are in agreement with this analysis. Therefore, the critical issue appears to be whether Y has received a thing of value for his own personal benefit or personal advantage.

At the outset, it is clear that if Y, himself, was acting as a loan broker, he would fall within the above-mentioned Attorney General’s Opinion. However, in this case, Y is the president, a director, and a shareholder of a corporation engaged in the loan brokerage business. As you have correctly pointed out, the fee is payable to the corporation and constitutes a benefit or advantage to it. However, we are not at all convinced that an advantage which inures to the corporation prevents an advantage from inuring to Y. In order to reach this conclusion, we do not believe it is necessary to overlook or pierce the corporate fiction.

As above noted, Y is an officer, a director, and shareholder of X. In accepting these brokerage fees, the possibility of the corporation’s success is enhanced. It cannot be said that Y as president of a successful corporation is not receiving some personal benefit or advantage from the success of that corporation. The success of the corporation might be evidenced by his being retained, obtaining a salary increase, or being granted other benefits. Moreover, it cannot be said that a director of a successful corporation does not receive a personal benefit from its success. In the case of a director, the success would be most clearly evidenced by an increase in his stature within the community. Finally, it cannot be said that a shareholder of a successful corporation does not receive a personal benefit by its success. Certainly, the book value of a shareholder’s shares are increased ratably with the success of the corporation. We would point out that the word “benefit” is not limited to pecuniary or material gain but denotes any form of advantage. People v. Vaughn, 196 Cal.App.2d 622, 630 (1961).

It can be argued that these benefits or advantages are indirect. Nonetheless they are traceable to the success of the corporation which is effected by the brokerage fees. You state that several other penal sections of the Financial Code specify “directly or indirectly receiving something.” You argue by implication that since Section 3350 does not specify “directly or indirectly” that the statute only covers direct benefits or advantages. While we are not in agreement with this reasoning, we would point out that there is a reasonable explanation for the apparent inconsistency. In the sections of the Financial Code to which you allude, the actionable wrong is in receiving something either directly or indirectly. In Section 3350, as was pointed out in the above-mentioned Attorney General’s Opinion, the actionable wrong is asking for or receiving or consenting or agreeing to receive. On the one hand, sections to which you alluded are very particular in that they attempt to define the actionable wrong. On the other hand, Section 3350 is less particular because the actionable wrong is defined elsewhere in the statute. Therefore, we cannot agree that the argument which you have raised controls the situation.

Finally, you argue that these transactions are made in the ordinary course of business and, therefore, should not be subject to the statute. We would point out to you that the Attorney General’s Opinion’ above mentioned, did not seek to differentiate between transactions made in the ordinary course of business and those made outside the ordinary course. Moreover, the legislature has seen fit to classify these transactions as unlawful even though in the ordinary course of business because of the possibility of abuse. As the Ninth Circuit Court of Appeals stated in interpreting the analogous federal statute, “There can be no doubt that Congress intended, by the enactment of this statute, to remove from the path of bank officials the temptation to enrich themselves at the expense of the borrowers of the bank, and also to prevent improvident loans.” (Emphasis Added) Ryan v. United States, 278 F2d 836, 838 (9th Cir. 1960). Therefore, under the facts as outlined, we are not prepared to say that if Y’s firm received a brokerage fee for negotiating a loan with the bank, it would not constitute a violation of Section 3350. We are amenable to further argument on the point, however, until this opinion is revoked, it constitutes the official position of this Department.

If you have any further questions in regard to this matter, please do not hesitate to contact us.

Very truly yours,

DONALD E. PEARSON
Superintendent of Banks
By

JOHN F. STUART
Counsel

JFS:ols