Source: https://supreme.justia.com/cases/federal/us/291/245/
Timestamp: 2019-04-20 20:50:09+00:00

Document:
l. A national bank has no power to pledge its assets to secure private deposit. P. 291 U. S. 253.
2. Such pledges are neither customary nor necessary in the business of such banks, and are inconsistent with provisions of the National Banking Act designed to secure uniform treatment of depositors and ratable distribution of assets in case of disaster. Pp. 291 U. S. 254-255.
3. The Acts of Congress authorizing national banks to give security for deposits of specified public funds do not impart or imply power to pledge assets to secure private deposits. P. 291 U. S. 257.
money upon a pledge of assets, it my likewise pledge assets to secure private deposit is untenable. The difference between deposits and loans is fundamental and far-reaching. P. 291 U. S. 259.
5. A national bank is not estopped to deny the legality of an ultra vires pledge of assets by which it obtained deposits; still less is its receiver when the bank has become insolvent. P. 291 U. S. 260.
6. The fact that a general deposit was obtained by the bank on the faith of an ultra vires pledge of its assets does not create a constructive trust or confer upon the depositor a preference over other creditors in the event of the bank's insolvency. P. 291 U. S. 261.
Certiorari, 290 U.S. 609, to review the affirmance of a decree dismissing a bill brought by the Railway against the receiver of a national bank, and granting relief to the receiver on a cross-bill.
The First National Bank of El Paso, Texas, failed on September 4, 1931, and S. O. Pottorff was appointed receiver. The Texas & Pacific Railway Company was then, and long had been, a depositor. To secure it as such, the bank had, in January, 1931, pledged $50,000 Liberty bonds and held them for the railway in the trust department of the bank. The balance in the railway's regular checking account at the time of the failure was $54,646.94. Of this claim, it made proof as a secured creditor. The receiver approved the amount of the claim, but denied the validity of the pledge, and he tendered a dividend check only for the amount to which the railway would have been entitled as an unsecured creditor. Thereupon, the railway brought, in the federal court for western Texas, this suit against the receiver, praying, in the alternative, that the bonds be delivered to it, or that they be sold for its benefit, or that the claim be paid in full with interest. The receiver filed a cross-bill praying that the bank's title to the bonds be quieted.
a decree for the receiver upon the cross-bill, holding that the pledge was void and that the Liberty bonds constituted assets to be administered for the benefit of the general creditors of the bank. The Circuit Court of Appeals affirmed the decree. 63 F.2d 1. This Court granted certiorari. The railway contends that the bank had power to make the pledge; that, even if the bank did not have such power, the receiver is not in a position to question the validity of the pledge, and that, even if he is not estopped from doing so, he may not disaffirm it without returning the consideration therefor received by the bank. We are of opinion that none of these contentions is sound.
for the surety bonds, and these were cancelled. Without that assurance, the railway would not have consented to the cancellation of the surety bonds, or, if they had been cancelled without its consent, would have immediately withdrawn all of its deposits. In reliance upon the assurances and the pledge, the railway continued until the failure to make deposits, and in fact increased its deposits.
National bank examiners commenced on August 6, 1931, an examination of the bank. Within a few days, they learned from the bank's books that the pledge had been made, but neither the examiners nor the comptroller of the currency advised the bank's officers that the pledge was beyond the powers of the bank or that it was irregular or otherwise objectionable. The bank had frequently secured private deposits by surety bonds, but never before by a pledge of assets. The examiners concluded their investigation on August 20, 1931. The failure occurred on September 4, 1931.
There is no basis for the claim that the power to pledge assets is necessary to deposit banking. The record is barren of evidence that the practice of so pledging assets has ever prevailed among national banks. And facts of which we take judicial notice indicate that among national banks such action must have been deemed contrary to good banking practice. [Footnote 4] From the establishment of the system in 1864 to March 1, 1933, 2,159 national banks failed, [Footnote 5] and there has been much litigation arising from their insolvency; but only two other reported cases have been found involving a pledge of assets to secure a private deposit, and in those cases, very recent ones, the existence of the power was denied. [Footnote 6] Smith v. Baltimore & O. R.
liabilities. [Footnote 8] The immediate safety of unsecured creditors depends on the bank's remaining open and solvent; the pledge reduces the fund of quick assets available to meet unusual demands without any assurance that the deposit will be used to replenish this fund.
"Any association may, upon the deposit with it of public money of a State or any political subdivision thereof, give security for the safekeeping and prompt payment of the money so deposited, of the same kind as is authorized by the law of the State in which such association is located in the case of other banking institutions in the State."
the 1930 amendment was passed merely in order to settle doubts as to the power of a national bank to pledge its assets to secure deposits, the amendment would naturally have been made not to § 45, but to § 8 which contains the grant of "incidental" powers.
Often the loan is made in the hope of averting insolvency. Loans made by one bank to another commonly involve a pledge of assets, since only upon such a condition is the transaction possible. Wyman v. Wallace, supra.
of misconduct, confer a preference over other creditors. The pledge here challenged having failed because illegal, the railway is entitled only to a dividend as a general creditor. [Footnote 20] Its right thereto is conceded.
First National Bank v. National Exchange Bank, 92 U. S. 122, 92 U. S. 128; Logan County Nat. Bank v. Townsend, 139 U. S. 67, 139 U. S. 73; California National Bank v. Kennedy, 167 U. S. 362; Concord First National Bank v. Hawkins, 174 U. S. 364; First National Bank v. Converse, 200 U. S. 425, 200 U. S. 439. Compare McCormick v. Market Nat. Bank, 165 U. S. 538, 165 U. S. 549; Merchants National Bank v. Wehrmann, 202 U. S. 295.
Act of June 3, 1864, c. 106, § 8, 13 Stat. 101; R.S. § 5136; 12 U.S.C. § 24, Seventh.
Compare Jacob Ruppert, Inc. v. Caffey, 251 U. S. 264, 251 U. S. 301.
"during, before, and after the said period of February 23, 1928, to July 31, 1930, when the said Comptroller was requested by national banks or others for an opinion upon the power of national banks to pledge securities to secure a private depositor, in every instance the Comptroller disapproved of such pledges by stating that, in his opinion, national banks had no such power."
Compare Federal Reserve Bank v. Malloy, 264 U. S. 160, 264 U. S. 167. A practice is not within the incidental powers of a corporation merely because it is convenient in the performance of an express power. Merrill v. Monticello, 138 U. S. 673, 138 U. S. 692; compare 29 U. S. Knowler, 4 Pet. 152, 29 U. S. 168-171.
These arguments seem to ignore the realities of the banking business. The primary interest of a depositor is that the bank shall be able to pay as and when he demands payment. The ability to do so depends not on the bulk of the assets, but on their liquidity. The law applicable to national banks requires them to maintain as reserves in the form of cash or of cash balances with a federal reserve bank, fixed percentages of their demand deposits in order to assure ability to meet probable demands as they arise; but such reserve is commonly deemed insufficient to meet possible emergencies. Because of this, soundly managed banks maintain so-called "secondary reserves," usually in the form of government obligations which can be liquidated quickly with little or no loss. The effect of pledging quick assets for particular deposits is to reduce the fund available for meeting current demands of an unexpected nature. The funds received from the deposit are not necessarily an equivalent for the securities withdrawn from available resources. In the first place, the deposit, in the process of clearing and collection, may serve merely to cancel liabilities against the bank. This may mean that there will be fewer competing claims in case of insolvency, but it will still be true that the reserves have been depleted considerably beyond what would be justified by reason of the cancellation of the liability. In the second place, to the extent that the deposit represents free funds, it is not probable that the deposit will be used to buy other low-yield quick assets to take the place of those which have been pledged.
See note 4 However, compare Lunt, Surety Bonds (1930), 206.
Nebraska v. First National Bank of Orleans, 88 F. 947, and Interstate National Bank v. Ferguson, 48 Kan. 732, 30 P. 237, held, in the case of a deposit of public funds, that the practice was legal. Two Attorneys General have expressed the opinion that national banks lacked the power to pay for guaranteeing all depositors. 27 Op.Atty.Gen. 37, 40; 27 Op.Atty.Gen. 272, 279. But see 30 Op.Atty.Gen. 341, contra.
The original national bank act of 1864 had provided merely that the Secretary of the Treasury might deposit public moneys in national banks. By legislation subsequent to 1864, national banks have been made depositaries of moneys of bankrupt estates, Act of July 1, 1898, c. 541, § 61, 30 Stat. 562; of Indian moneys, Act March 3, 1911, c. 210, § 17, 36 Stat. 1070; Act May 25, 1918, c. 86, § 28, 40 Stat. 591; of funds in the hands of the receivers of insolvent national banks, Act May 15, 1916, c. 121, 39 Stat. 121; of postal funds, Act May 18, 1916, c. 126, § 2, 39 Stat. 159; of proceeds from the sale of bonds, Act Sept. 24, 1917, c. 56, § 8, 40 Stat. 291, amended by Act April 4, 1918, c. 44, § 5, 40 Stat. 504; Act July 9, 1918, c. 142, § 4, 40 Stat. 845, and of a number of other public funds. In all of these statutes, the depositor is required to take security, but therein likewise nothing is said as to the power of the bank to pledge the required securities. Two of these statutes, those relating to deposits of the funds of insolvent banks and of bankrupt estates, have reference to the deposit of private funds. In some of the legislation, not only national, but state, banks also are made depositaries. It is true that Congress cannot make valid a pledge by a state bank, but that does not make it any the less likely that Congress intended to make valid every pledge by a national bank that would be called for under the statute. It would be the duty of a public officer depositing in a state bank to make sure that it had the power to give the security required by Congress.
Where a statute specifically forbids a preferential pledge, it has been held that a public officer's duty to demand a pledge impliedly gives power to pledge in that specific case. Maryland Casualty Co. v. Board of Comm'rs, 128 Okl. 58, 260 P. 1112; 31 Op.Attys.Gen. (U.S.) 41.
"It is a bill simply to confer on a national bank the same opportunity for the giving of security for the safekeeping and prompt payment of state and county moneys as is authorized with reference to state banking institutions."
Farmers' & Merchants' State Bank v. Consolidated School District, 174 Minn. 286, 291, 219 N.W. 163; State Bank of Commerce v. Stone, 261 N.Y. 175, 184 N.E. 750; Divide County v. Baird, 55 N.D. 45, 52, 212 N.W. 236; Commercial Banking & Trust Co. v. Citizens' Trust & Guaranty Co., 153 Ky. 566, 574, 156 S.W. 160; 27 Colum.Law Rev. 88; 79 U. of Penn L.Rev. 608, 614.
To insure fulfillment of this function, the government subjects national banks to close and constant supervision so as to maintain the solvency of the bank. It is made a crime to accept a deposit with knowledge of insolvency. Only when the bank's condition measures up to the prescribed standards of safety and liquidity may deposits be received.
The Comptroller of the Currency has insisted on the distinction between deposits and borrowings, and has stated that to list borrowings as deposits -- e.g., as certificates of deposit -- is a grave misrepresentation of the condition of the bank. Annual Report 1890, p. 13; 1892, p. 39.
"The fact that more than one-half of the national banks reporting were not borrowing from any source is additional evidence of the stability of the national banking system."
Annual Report of Comptroller of the Currency (1922), p. 26.
See also Pearce v. Madison & I. R. Co., 21 How. 441; Thomas v. West Jersey Railroad Co., 101 U. S. 71; Pennsylvania R. Co. v. St. Louis, A. & T.H. R. Co., 118 U. S. 290; Oregon Ry. & N. Co. v. Oregonian Ry. Co., 130 U. S. 1; Concord First Nat. Bank v. Hawkins, 174 U. S. 364,; De La Vergne Co. v. German Savings Inst., 176 U. S. 40.
And, on the matter of estoppel in pledge cases, see authorities cited in note 14 Also Smith v. Baltimore & Ohio R. Co., 48 F.2d 861, 869, aff'd, 56 F.2d 799; contra, State Bank of Commerce v. Stone, 261, N.Y. 175, 184 N.E. 750. Also compare West Penn Chemical & Mfg. Co. v. Prentice, 236 F. 891.
King v. Pomeroy, 121 F. 287; Hamor v. Taylor-Rice Engineering Co., 84 F. 392, 399; In re O'Gara & McGuire, Inc., 259 F. 935, 936; In re K-T Sandwich Shoppe, 34 F.2d 962, 963; Shooter's Island Shipyard Co. v. Standard Shipbuilding Corp., 293 F. 706.
The claimant has the burden of identifying the property in its original or altered form. Schuyler v. Littlefield, 232 U. S. 707. It is not enough to show that, at the time of receipt, the general assets of the insolvent were increased, or that debts were discharged. Wuerpel v. Commercial Germania Trust & Savings Bank, 238 F. 269, 272, 273; Knauth v. Knight, 255 F. 677; State Bank of Winfield v. Alva Security Bank, 232 F. 847; In re See, 209 F. 172; In re Dorr, 196 F. 292; City Bank v. Blackmore, 75 F. 771; compare St. Louis & S.F. R. Co. v. Spiller, 274 U. S. 304, 274 U. S. 311; Cunningham v. Brown, 265 U. S. 1.
Compare Blakey v. Brinson, 286 U. S. 254; Handelsman v. Chicago Fuel Co., 6 F.2d 163.

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