I ' • } Note;F.mphasisadded to this affidavit with Yellow Highlighting! STATE OFMJCHIGAN TN THE CIRCUIT COURT FOR IBE COUNTY OF OAKLAND ) BANK ONE, N.A., ) ) Plaintiff, ) ) .v. ) ) HARSHAVARDHAN DAVE and ) PRATIMA DAVE,jointly and severally, ) ) Defendants. ) Harshavardban Dave and Pratirna H. Dave Clo 5128 Echo Road Bloomfield Hills, Ml48302 DefendantS,inpropria pe rsona 1: Case No. QJ-047448.C.Z Hon. · i.<il> AFFIDAVJT OF WALKER F.TODD, EXPERT WITNESSFOR DEFENDANTS Michael C.Hammer (,1>4 l705) Ryan 0.Lawlor (P64693) Dickinson Wright Pl.LC Attorneys for Bank One, N.A. 500 Woodward Avenue, Suite 4000 Detroit, Michigan 48226 I . , I : I I l I ; LJ· ! L I ·····1 ( :.
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183768670 Walker Todd Affidavit Complete Signed Copy With Decision
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Note;F.mphasisadded to this affidavit with Yellow Highlighting!
STATE OFMJCHIGAN
TN THE CIRCUIT COURT FOR IBE COUNTY OF OAKLAND
)BANK ONE, N.A., )
)Plaintiff, )
).v. )
)HARSHAVARDHAN DAVE and )PRATIMA DAVE,jointly and severally, )
)Defendants. )
Harshavardban Dave and Pratirna H. DaveClo 5128 Echo Road Bloomfield Hills, Ml48302 DefendantS,inpropriapersona
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Case No. QJ-047448.C.Z
Hon. · i.<il>
AFFIDAVJT OF WALKER F.TODD,EXPERT WITNESSFOR DEFENDANTS
Michael C.Hammer (,1>4 l705) Ryan 0.Lawlor (P64693) Dickinson Wright Pl.LC Attorneys for Bank One, N.A.500 Woodward Avenue, Suite 4000Detroit, Michigan 48226
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F. Todd, a citizen of the Uorted States and the State of Ohio over the age of 21 years,
and declares as follows, under penalty of perjury:
I. That I arn familiar with the Promissory Note and Disbursement Request and
Authorization, dated November 23, 1999, together sometimes referred to in
other documents filed by Defendants in this case as ihe "alleged agreement"
between
Defendants and Plaintiff but called the "Note» inthis Affidavit. If called as a witness,
I would testify as stated herein. I make this Affidavit based on my own
personal knowledge of the I.economic, and historical principles stated herein,
except that I have relied entirely on documents provided to me, including the
Note, regarding
·--. . . . - .
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I certain facts at issue in this case of which I previously had no direct snd personal:'. f -:-·: ::·'":;..... "
III
lmow! ge: I iam making this affidavit based on my experience and expertise as an
.attorney, economist, research writer. and teacher. I am competent to make the
following statements.
PR O FESSI O NAL BA C KGR O UND O UA L IFICATIQNS
2. My qualifications as an expert witness in monetary and banking instruments are asI follows. For 20
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.rked as an attorney legal oflieer for the legal
years, l wo and
:: ···:· -
.·
·.:.·'"cients of the Feder3J Reserve Banks ofNew York 3Dd Cleveland. Among other
'.•···.··-
·· '-- --·
········-··• things,Iwas assigned responsibility for questions involving bolh nove_I and routine
. ..:....._ .. ··--- :...: _
..
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:,!
' 111 ,;! •
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-- o;.- --·batikers' ap : es, and OiiiCi financial instruments in '"7:::=::- . .
·connection with my work for the Reserve Banks' discount windows and parts of the
open market trading desk functio-n in New. York. In addition. fur nine years, I
worked as an economic research officer at the Federal Reserve Bank of
Clevelaod. I became one of the Federal Reserve System's recognized experts on
the legal history of central
banking and the pledging of notes, bonds, and other financial instruments at the
discount window to enable the Federal Reserve ·to make advances of credit
that became or could become money. l also have read extensively treatises on
the legal and financial history of money and banking and have publi shed
several articles covering all of the subjec:ts just mentioned. l have served as an
expert witness in several trials involving bankin& practices and monetary
instrum.eots. A summary biographical sketcll and resume inclucliog further
details of my work experience, readings, publications, and education will be
tendered to Defendants and may be made available to the Court and toPlaintifl's
counsel upon request.
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-- GEN E RA L LY ACCEPTED A CC Q UNTING PRINCIPLES
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3. Banks are required to adhere to Generally Ac.cepted Accounting Principles (GAAP).
·'(;A.AP follows an accounting convention that lies at the heart of the double-
entry bookkeeping system called the Matching Principle. This principle worlts as
follows: When a bank accepts bullion, coin, currency,checks, drafts, promissory
notes, or any
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other similar instruments (hereinafter "instruments") from rustomers and deposits or
reGOfds the instruments as assets, it must record offsetting liabilities that match the
assets that it accepted from rustomers. The liabilities represent the aniounts that the
... bank oiiei the rustomers, ..funds accepted from rustomers. In a fractiooal reserve
[" " · · ' · "'· ···- ----- •·baDking system like the United States banking system, most of tbe funds advanced to
: :-.· - ::, :.- -
merely transferred from ooe set of depositors to anotbcr set ofborrowers.
RELEVANCE OF SUB 1LE DISTINCTION S ABOUT IYP ES OF M ONEY
4. From my study of historical and economic writings on the subject, J conclude that a
common misconception about the nature of money unfortnnately has been
perpetuated in the U.S.monetary and banking systems,especially since the
1930s. Jn classical economic theory, once economic exchange has moved beyond
the barter stage, there arctwo types of money: money of er.change and money of
acccrml.. For
neatly 300 years in both Europe and the United States, confusion about the
I distinctiveness of these two concepts has led to persistent attempts to treat
money of account as the equiwlent of money of exchange. In reality,
especially in a fractional reserve banking system, a comparatively small
amount of money of exchange (e.g.,
I gold, silver, and official currency notes) may support a vastly larger quantity of
business transactions denominated in money of account. The sum of
these transactions is the sum of credit extensions in the economy. Wtth the
exception of
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··-·-·..-· ... >Lo ·-...._ -
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rostomar
y stores
of value
like gold
and
silver,
the
monetary
e of the
«:0nomy
Iaigely
consists
of credit
instrume
nts.
Aninst
this
backgrou
nd, I
condude
that the
Note.
despite
some
faniruage
about
"I.awful
money"
explained
below,
clearly conWllplam beth disbursement of funds and eventual rwaymr.nl or
settlement in money · of account ( that is. money of ex cbance w ould be
welcome but is not required to rway or settle the Note). The factual basis of
this conclusion is the reference in the Disbursement Request and
Authorization to repayment of
$95,905.16 to Michigan National Bank fro.m the proceeds of the Note. That was an
exchange of the credit pf Bank .One (Plaintiff) for credit apparently and previously .... ·
Ji;;;·i0 DefendantS.by Michi o , nk. so. -- · -; n- ..::=::.. -
=
believe that Plaintiff would refuse a substitution of the credit of another bank or
banker as complete p1y. meot of the Defendants' repayment obligation under the Note.
This is a case about exchan.ges of money of account (cred.it),not about exchanges of
money of exchange (lawful money or even legal tender).
5. Ironically, the Note explicitly refers to repayment in "lawful money of the United
States of America" (.su "Promise to Pay" clause). Traditionally and
legally, Congress defines the phrase "lawful money" for the United States. Lawful
DlOney the foim of DlOnty of exchange that the federal government (or any state)
could
be required by statule to receive inpayment of Wees or other debts. Traditionally,as
defined by Congress, lawful money only included gold, silver, and currency
notes redeemable fur gold or silver on demand. In a banking Jaw context, lawfu l
money was only those forms of money of exchange (the forms ju st mentioned,
plus U.S. bonds and notes redeemable for gold) that constituted the·reserves of a
national bank prior to 1913 (date of creation of the Federal Reserve Banks). See,
a concept that somdimes surfaces in cases of this nature.. lk
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referenced Official Comment notes that the definition of mo'W' isnot limited to leW.
tender under the iJ.C.C, Money is defined in Section 1-201 (24) as "a medium of
_ ._exchange authorized or adopted by a domestic or foreign govttnment and }!lludes a ..
.. / .·: -:,.·":" :-.··--· ··::-·····-... ·-·· - . - .·····:-monetary uillt of 8cc:ount established by an intergovernmental organization or by . ..
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· ' .:_·=-agreement between two or more nations." The relevant Official Comment states that
:·1;--·. -=-·_ . =hi·iesiaao --, t of sanction of governm
: :by..,:;: :r?.•=--===Ii . . ·· · ,;.15Sue or adoptioo .which recognizes the circul.3ting media ;;:i·br tbe ·
• official currency of that govcmment. The narrow view that money is limited to!rel
I; tmt ! er i s rej w et!" Thus, I conclude that the U.C.C. tends to validate the classical
theorEtical view of money.
HOW BANKS BEGAN TO LEND THEIR OWN CREDIT INSTEAD OP REAL MONEY
I 8. In my opinion, the best sources of information on the origins and use of qcdit as
l!lQ!!llY are in Alfred Marshal MONEY, CREDIT & COMMERCE 249-251 (1929)•i and Charles P.Kindleberger, A FINANCIAL EnSTORY OF WESIERN EUROPEIi 50-53 (1984). A synthesis of these sources, asapplied to tbe facts of the present case,I
! is as follows: As commercial banks and discount houses (private bankers) becam e
I established in parts of Europe (especially Great Britain) and North America, by t!ie
mid-nineteenth century they commonly made loans to borrowers by extending
their own credit to the borrowers or, at the borrowers ' direction, to third
parties. The
I typical fonn of such exrensions of credit was drafts or bills of exchange drawn
upon themselves (claims on the credit of the drawees) instead of disbursements
of bullion,
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coin, or other forms of money. In transactions with third partie'these drafts and bills -
··::::....:·= . came to serve most of the o rdinarv functions of money. The third parties
had to "ili:teimine for themselves whether such "credit money" had value and, if so, how
..:
I ··· much. · The Federal Reserve Act of 1913 was drafted with this model of
the commercial ecenomy in mind and provided at least two mechanisms (the discount
····· window and the open-market trading desk) by which certain types of bankers' credits ····-···- .. . ·.-··· . .·· -- -.-· ·-··- .,.·===; ·
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. uld be exchangcid for Federal Reserve credits, which in turn could be Withdrawn in ·'·...... .
·. ' · ·-·. .·- ;fu1monei. Credit at thi:FcideriilReserve eventuaJlybecame the p iiri c ipa l form or- -·-· ··
: 1.:.:!oiT.; ;.; ·:-:;"'·°''.:r-< · ;: o :erci- n : :O.·es;i;tb· ; in .;.::; ·: . -:
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..._ ::of domestic transactions in gold in 1933. Thus credit money is not alien to the
aureot official monetary systeID.; it is just rarely used as a device for the creation of
· ···Federal Reserve a-edit that, in tum, in the funn of either Federal Reserve notes or
----· banks• deposits at Federal Reserve Banks, functions as money in the
curregt monetazy syi;rem In met, a means by which the Federal Reserve expands
the money
I supply, loosely defined, is to set banks' reserve requirements (CUITelltly, usually ten
1 1 · percen1 of demand liabil.ities) at levels that would encourage banks to extend
new credit to borrowers on their own books that third parties would have to present to the
I same banks for redemption, thus leading to an expansion of bank-created credit
money. In the modem economy, many non-bank providers of credit also extend book
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credit to their customers without previously setting aside an equivalent amount of
I monetary reserves (credit card line of credit atcess checks issued by non-banks are a
' I good example of thi.stype of credit), wbicb also causes an expansion of the aggregate quantity of credit money. The discussion of money taken from Federal Reserve and
I other modern sources in paragraphs 11 et seq. is consistent with the account of the
exbangel is money, and credit pr promissory notes (money of acc:ooot) become '·;;;o y wh ·ban deposit promlssorv notes with the intent or treating them
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. .. .....-·: . 'like deposits of cash. See, 12 U.S.C. Section 1813 (lj(J) (definition of "deposit"
under Federal Deposit Insurance Act). The Plaintiff acts 'in the capacity of a lending
or banking institution, and the newly issued qedit 01 mone y is similar o equivaient
to a .promisSOJY notC.'winch may be treated as a dl:llosit of money when received
by
'4-·- . ..
M T.
... ,....... -·- ..
· -lending bank..-·Federal Reserve Bank of DaUas publication MONEY AND ·. . . .
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G. page .... . .
that when bJ111ks grant loan they =ate ow_ l!loney. .. _ .. ·-
BANK.JN 11, explains
: , The .new money is created because a new "loan becomes a deposit, just like a
•._-::---=..:::.· ·.... eek does.n:.M MO _ cs,..p;;- ; yS; ":O\