Opinion ID: 1664672
Heading Depth: 1
Heading Rank: 6

Heading: can a national bank be estopped from asserting its lack of authority to guarantee debts of its customer?

Text: We first observe that national banks derive their power from 12 U.S.C.A. § 24 (1945). This statute does not grant the authority to guarantee debts of another. It is therefore generally held that a national bank cannot lend its credit by guaranteeing the debt of another solely for his benefit. 9 C.J.S. Banks and Banking § 661, at 1214 (1938). See also, Kimen v. Atlas Exchange Nat'l Bank of Chicago, 92 F.2d 615 (7th Cir.1937), cert. denied, 303 U.S. 650, 58 S.Ct. 746, 82 L.Ed. 1110 (1938); Berylwood Inv. Co. v. Graham, 43 Cal. App.2d 659, 111 P.2d 467 (1941); Cervenka v. Lawndale Nat'l Bank, 299 Ill.App. 621, 20 N.E.2d 314 (1939); First Empire Bank v. Federal Deposit Ins. Corp., 572 F.2d 1361, 1367 (9th Cir.1978), cert. denied, 439 U.S. 919, 99 S.Ct. 293, 58 L.Ed.2d 265 (1978). A national bank has no power to lend its credit to any person or corporation, or to become guarantor of the obligations of another.... 7 Michie, Banks and Banking § 163, at 279 (1980) (footnotes omitted). Two exceptions to this rule do exist. A national bank may guarantee the debts of another if done in the ordinary course of banking or if it owns or has an interest in the obligation guaranteed. Id. at 279-80. It is also said that a bank may also become liable because the benefits of the transaction have inured to it as a result of its guaranty or indorsement, which consequence would render it highly inequitable for the bank to repudiate the transaction.... 10 Am.Jur.2d Banks § 300, at 268 (1963). The trial court found that the letter in question allowed Diedtrich and Norman to continue in business longer than they could have without it; that they deposited funds with the Bank and made payments on loans to the Bank during this time; that the Bank earned money on the deposited funds; and that none of the above would have occurred if the Bank did not issue the letter. The trial court thus concluded, in Conclusion of Law XXXVI, that the Bank received material benefits by virtue of issuing the letter to Western and was therefore estopped from raising the defense of ultra vires. We disagree. The Bank cites extensive authority for the proposition that an ultra vires act of a national bank is totally void and unenforceable even under the doctrine of equitable estoppel. The Bank does concede, however, the validity of the two exceptions noted above. The trial court's ruling appears to be that the guaranty was not issued for the sole benefit of the debtor. Rather, the trial court's finding is that the Bank had an interest in the obligation guaranteed and derived benefits therefrom and thus fell within one of the two defined exceptions. The Bank contends that the facts of this case do not support the decision below. Bank asserts that it did not own or have an interest in the petroleum products supplied to Diedtrich and thus does not fall within the stated exception. [T]he fact that a national bank is creditor of a debtor company, and interested in its securing money or merchandise, does not make the bank's guaranty binding, nor would such guaranty be valid because plaintiff extended credit because of it. 7 Michie, Banks and Banking § 163, at 281 (1980) (footnote omitted). The Bank also argues, in the alternative, that enforcement of the ultra vires guaranty is against public policy because these guaranties are liabilities that are not reflected in the Bank's accounting system and the general public is therefore deceived about its financial stability. Western counters that the trial court's ruling is correct under the facts of this case and it cites respectable authority for enforcing a national bank's ultra vires act when the bank had or received some interest, benefit or consideration from the act. Western contends that failing to enforce the guaranty would be tantamount to commercial piracy. The trial court found that the Bank had been benefited by the issuance of the letter because it allowed Diedtrich to continue to run his business and make deposits and loan repayments to the Bank. The Bank, it is clear, did not own or have a security interest in the petroleum products delivered on credit to Diedtrich because of this letter. We conclude that the facts of this case do not fall within the two exceptions to the general rule. Neither party has maintained that this debt was guaranteed in the ordinary course of banking. And it appears to us that the Bank did not have an interest in the petroleum products delivered to Diedtrich, nor was it benefited thereby. By the issuance of the letter, no consideration flowed to the Bank, no property was transferred to it, no security interest was created, and no direct pecuniary interest arose. Simply because the Bank was a creditor of Diedtrich and interested in his success does not justify a legal condonation of an ultra vires act. Rice & Hutchins Atlanta Co. v. Commercial Nat'l Bank, 18 Ga.App. 151, 153, 88 S.E. 999, 1000 (1916). When the letter [of guaranty] is not purchased, but is purely an accommodation, or simply a guaranty of the payment of an account to be created in the future, it is not binding on a national bank, for such an institution has no power to thus jeopardize its capital. Such transactions are not necessary to the exercise of powers granted to national banks, and are therefore without their charter powers, and invalid. Thilmany v. Iowa Paper-Bag Co., 108 Iowa 333, 336, 79 N.W. 68, 69 (1899) (cited with approval in First Nat'l Bank of Council Bluffs v. Rosebud Housing Authority, 291 N.W.2d 41, 46 (Iowa 1980)). Deeming the resolution of these two issues decides the four issues addressed in both briefs, we deem it unnecessary to treat the other two issues. Reversed. WOLLMAN and MORGAN, JJ., concur.