Sneeden v. City of Marion, Ill.

• Decision Date: 01 June 1933
• Docket Number: No. 4784.,4784.
• Citation: 64 F.2d 721
• Parties: SNEEDEN v. CITY OF MARION, ILL., et al.
• Court: U.S. Court of Appeals — Seventh Circuit

64 F.2d 721 (1933)

SNEEDEN v. CITY OF MARION, ILL., et al.

No. 4784.

Circuit Court of Appeals, Seventh Circuit.

April 25, 1933.

Rehearing Denied June 1, 1933.

Hosea V. Ferrell and John Hay, both of Marion, Ill., for appellant.

Carl Meyer, Richard Mayer, and David F. Rosenthal, all of Chicago, Ill., C. E. Pope and H. F. Driemeyer, both of East St. Louis, Ill., and R. T. Cook, of Herrin, Ill., for appellees.

Leland K. Neeves, of Chicago, Ill. (Scott, MacLeish & Falk, of Chicago, Ill., of counsel), amici curiæ.

Before ALSCHULER and SPARKS, Circuit Judges, and LINDLEY, District Judge.

SPARKS, Circuit Judge (after stating the facts as above).

The questions presented are: (1) Whether the pledge of securities was within the powers of the Bank and therefore valid; and (2) assuming the pledge to be invalid for lack of power, whether the receiver may recover the securities so pledged.

The courts in this country are not in accord as to whether national or state banks may pledge their assets as security for deposits of public or private money. This diversity of opinion has arisen by reason of the difference of state statutes, and a contrariety of economic views in applying the Federal statute and in formulating state policies.

National banks have only such powers as are given by statute. Their general powers which are applicable to the question before us are to be found in the Act of 1864, as amended, clause 7, par. 8, c. 106, 13 Stat. 101; R. S. § 5136, 12 USCA § 24, clause seventh, and are as follows:

"To exercise by its board of directors, or duly authorized officers or agents, subject to law, all such incidental powers as shall be necessary to carry on the business of banking; by discounting and negotiating promissory notes, drafts, bills of exchange, and other evidences of debt; by receiving deposits; * * *." (Our italics.)

Under the amended Act of June 25, 1930, c. 604, 46 Stat. 809, 12 USCA § 90, which relates to depositories of public moneys and financial agents of the Government, it is provided that:

"Any association may, upon the deposit with it of public money of a State or any political subdivision thereof, give security for the safe-keeping 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 National Banking Act of 1864 did not expressly give the power to pledge a bank's assets to secure deposits, and if it were thereby granted it was by virtue of an implied power contained in the clause "all such incidental powers as shall be necessary to carry on the business of banking; * * * by receiving deposits; * * *" supra. Since 1864 it seems that Congress has assumed the right of national banks to pledge their assets to secure deposits of certain public funds.¹ Appellant, however, contends that those statutes grant additional powers to national banks relative to the respective funds referred to. This position cannot be maintained because each of the acts, except the one relating to land bank and joint stock land bank deposits, provides for deposits in state as well as in national banks, and of course Congress did not intend to enlarge the powers of state banks. Hence we conclude that in enacting those statutes Congress did not intend to create additional power for national banks in the respect mentioned, but incidentally recognized a power which it thought already existed under a former statute.

Those enactments, however, are not decisive of the question before us, and they are indirectly pertinent only as they may bear upon the intention of Congress in passing the amended Act of June 25, 1930, which grants power to national banks to give the same kind of security for the safe-keeping and prompt payment of deposits of the public money of a state or any political subdivision thereof as is authorized by the law of the state in which such bank is located. The 1930 enactment, therefore, narrows the present controversy to a construction of the law of Illinois relative to the authority, if any, granted by that state to its own banks to secure, by pledge of their assets, public moneys deposited by the treasurer of an Illinois city which is operating under the commission form of government.

The Federal courts have consistently held that the right of priority in the payment of debts due to the government is not an attribute of sovereignty but depends upon the Acts of Congress. United States v. State Bank of North Carolina, 6 Pet. 29, 8 L. Ed. 308; United States v. State of Oklahoma, 261 U. S. 253, 43 S. Ct. 295, 67 L. Ed. 638; Mellon v. Michigan Trust Co., 271 U. S. 236, 46 S. Ct. 511, 70 L. Ed. 924; Liberty Mutual Ins. Co. v. Johnson Shipyards Corp. (C. C. A.) 6 F.(2d) 752; United States v. Middle States Oil Corp. (C. C. A.) 18 F.(2d) 231, 57 A. L. R. 848. We know of no state which has held otherwise, and that principle is not here controverted.

Illinois corporations have only such powers as the laws of that state have given them. Those powers may be either express or implied, and the latter class is limited to those powers which are reasonably necessary to carry out those of the former class. People v. Chicago Gas Trust Co., 130 Ill. 268, 22 N. E. 798, 8 L. R. A. 497, 17 Am. St. Rep. 319; Calumet, etc., Dock Co. v. Conkling, 273 Ill. 318, 112 N. E. 982, L. R. A. 1917B, 814. In this respect banks are no different from any other corporations. If therefore the appellees in the instant case are permitted to prevail it must be on the theory that express statutory power is given by the State of Illinois to pledge assets of the bank as security for deposits; or that such power arises by implication out of the express power granted by the charter to receive deposits. The fact that Federal statutes have impliedly recognized such a procedure in certain instances relative to national banks, does not answer the question now before us, because the only Federal statute here pertinent provides in effect that national banks in Illinois shall not be permitted to guaranty their deposits by a pledge of their assets unless that right is authorized by the law of Illinois in the case of other banking institutions in that State. It must be conceded that Illinois has not expressly granted such right, and if it exists it must be by implication.

Ward v. Johnson, 95 Ill. 215, a case decided in 1880, is relied upon by appellees as holding that such implied right exists in that jurisdiction. In that case the bank had been organized under a special charter which, so far as the record discloses, gave no express power to the bank to pledge assets for the security of deposits. After it had engaged in the general banking business for some time it created an "investment department." This was not done by creating a new corporation or a new agency; it was done by merely giving a new name to a branch of business clearly within the original corporate power. Pursuant thereto it segregated and placed in the hands of a trustee for that purpose, a certain amount of mortgage notes which the bank had received as security from those to whom it had loaned money, and upon which loans the bank was receiving annual interest at the rate of ten per cent. Using this trust fund as a basis, the bank thereupon issued its investment certificates upon which it guaranteed annual interest at the rate of 7.3 per cent, payable quarterly. These certificates, after sale or transfer, were exchangeable for other like certificates in the trustee's hands, or they were redeemable in currency, in the order of their presentation, out of the funds in the hands of the trustee, or which might next come to his hands from the collection of the notes and securities pledged for the redemption thereof. The purchasing of these certificates was open alike to all, including the depositors of the bank. Some general depositors of the bank purchased certain of the certificates, for which they paid by transferring a corresponding amount of their general deposits to the investment department. Others purchased certificates of investment who were not then and had never been depositors of the bank. The bank became insolvent, and the question arose whether the securities assigned to the trustee were held primarily for the protection of the certificate holders, or were available for payment of demands of depositors generally. The court held that the pledge was valid and that the securities were held by the trustee primarily for the protection of the certificate holders. That decision has been cited in many other jurisdictions as holding that Illinois state banks may pledge their assets to secure general deposits, but we think that question was neither raised nor decided in the Ward Case. After enumerating the express powers of the corporation, which includes the power to receive money on deposit, the court said (at page 237):

"In addition to these express powers there can be no doubt that such corporations possess, also, the implied power to borrow money. Morse on Banks and Banking, 4; Planters' Bank v. Sharp, 6 How. (U. S.) 323 12 L. Ed. 447; Curtis v. Leavitt, 15 N. Y. 52-53; Brice on Ultra Vires, 122 (Seward's Ed. 109).

"It will not, therefore, be important to determine whether the certificate holders, claiming under the trust deed, are to be regarded as having made deposits or loans for which their certificates were obtained, for in the one case that of receiving deposits the requisite power is expressly given to the corporation by its charter, and in the other case that of borrowing money it possesses the power by necessary implication. Nor can the right of the corporation to assign or mortgage negotiable instruments which it is authorized to take be questioned. McIntire v. Preston, 5 Gilman 48 48 Am. Dec. 321; Planters' Bank v. Sharp, supra."

It is quite obvious that in using the first two sentences just quoted the Court was...