American Southern National Bank v. Smith

• Decision Date: 01 June 1916
• Parties: American Southern National Bank v. Smith, Banking Commissioner, et al.
• Court: Kentucky Court of Appeals

170 Ky. 512

American Southern National Bank v. Smith, Banking Commissioner, et al.

Court of Appeals of Kentucky.

Decided June 1, 1916.

Appeal from Jefferson Circuit Court (Common Pleas Branch, Third Division).

HENRY BURNETT, W. H. BATSON and GRADDY CARY for appellant.

JOHN J. WILLIAMS and JOHN M. LASSING for appellees.

OPINION OF THE COURT BY JUDGE THOMAS — Affirming.

In 1906, the George Alexander & Company bank was duly incorporated as a banking institution with its principal office and place of business at Paris, Ky., and had a capital of $40,000.00, divided into shares of $100.00 each; and by its charter, which was executed on the 11th day of April of that year, it was authorized to engage in and conduct a general banking business in the State of Kentucky. Since that time its charter has been amended to the extent of changing its name to "George Alexander & Company State Bank." In all other respects its articles of incorporation are the same as when first executed and reference will hereafter be made to it as the Alexander bank. The eighth clause of its charter is in these words:

"8th. The highest amount of indebtedness or liability which the corporation may incur, shall not at any time exceed ten thousand dollars ($10,000.00), over and above its liabilities to depositors and its liabilities upon bills of exchange, checks or drafts upon other banks having its funds upon deposit."

The appellant (whom we shall hereafter refer to as defendant), is a banking institution with its principal place of business located in the city of Louisville, and when first organized, its name was American National Bank, but since then its name has been changed by proper proceeding to the one it now has, American Southern National Bank.

On July 1, 1907, the Alexander bank borrowed from the defendant the sum of $15,000.00, executing its note therefor, and on December 31, of the same year, it borrowed an additional $18,000.00, for which it executed its note, and to secure the payment of both these notes, it entered into a contract with the defendant by which it pledged to the latter, solvent notes to the aggregate amount of $35,000.00, and in addition thereto, agreed to keep on deposit with the defendant until the payment of the two notes, a sum of not less than $10,000.00. The indebtedness represented by these two notes was not reduced by the Alexander bank, nor was there any change in the collaterals except, perhaps, that some of them were from time to time removed, and other collaterals with equal solvency would be substituted for the originals.

With matters in this condition, the Alexander bank was, on May 19, 1914, under the Act of the Legislature of 1912, relating to banks and providing for a Banking Commissioner, duly and regularly placed in the hands of the appellant, who was then and is now the Banking Commissioner for this State. There is no question made in the case but that the Alexander bank was at that time hopelessly insolvent, it being agreed that its indebtedness to its depositors and some other creditors amounted to more than $100,000.00 above its assets. After taking charge of the Alexander bank, the plaintiff demanded of the defendant the payment to him of the deposits which the Alexander bank had with defendant then amounting to $10,837.45, and further demanded that it deliver to him the collaterals which it held to secure the payment of the two notes mentioned, but both of these requests were refused. The plaintiff, as such commissioner, in making these demands, proceeded upon the theory that inasmuch as the two notes aggregating $33,000.00 exceeded the limitation provided for in clause eight of the charter of the Alexander bank, supra, it was ultra vires and void, and that he was entitled to recover, not only the deposit, but the collaterals as well, all to go into the general fund for distribution among the creditors.

After the refusal of the defendant to comply with these requests, this suit was instituted against it for the purpose of compelling it to do so, which resulted in a judgment against it for the excess of the combined sum of the collaterals which it had collected, plus the deposits over $10,000.00, the limit of the indebtedness which the Alexander bank could contract. The defendant, after the declared insolvency of the Alexander bank, had collected a sufficiency of the collaterals, together with the deposit to pay its entire indebtedness, and it delivered to the plaintiff the remaining collaterals, which it had not collected; the total amount of the judgment being $25,573.64, with interest from January 5, 1916, the date of its rendition.

It is first insisted that the right to bring this character of action, if one exists at all, is not vested in the Banking Commissioner; but the relief sought, if available at all, can be prosecuted only by a creditor, or creditors. In other words, that the Act of 1912 and the general laws of the land, as is announced by the courts and text-writers, do not vest the Commissioner with any greater powers or rights than were possessed by the insolvent bank, whose business he is engaged in winding up, and that the bank, as such, would not have had the right to maintain this action without at least tendering back to the defendant the consideration which it received for the two notes. It seems to be conceded that the execution of the two notes by the Alexander bank was ultra vires at least as to the excess of $10,000.00. The decisions of the courts in regard to the powers and rights of a receiver, or an assignee for the benefit of creditors, are not by any means binding precedents in the determination of the question which we have before us. The Banking Commissioner is not a receiver appointed by the court, nor is he an assignee for the benefit of creditors in the ordinary acceptation of that term. In the one case, the authority, rights, and powers of the receiver are qualified and restricted by the court appointing him, while the assignee for the benefit of creditors obtains his authority, rights and powers from his assignor; and in the very nature of things, he cannot confer upon his assignee that which he did not possess. The banking business throughout the country has in modern times grown to such an extent that almost the entire commercial activities of the country are conducted through and by banks. Thep are the repositories of the larger per cent. of all the money of the country, and because of these and other conditions, through and by which they are so intimately associated with business and with the individual citizen, the countries under which they are organized have long since considered them appropriate institutions for statutory regulation, to the end that their solvency may be safeguarded, and that the citizen depositing his money therein may be assured, as much as possible, that upon demand it will be forthcoming. Sound public policy, therefore, has long since determined that this character of corporations are subject to the visitorial powers of the government creating them, which is manifested by the character of legislation embodied in the Act of 1912, passed by our legislature. These observations are fortified by the author of Thompson on Corporations, 1st ed., sec. 460, wherein it is said:

"Perhaps no class of corporations are more completely under police regulations of the States than banking companies. The police power, in its visitorial aspect, as exercised by Congress and the several States, extends to the minutest details of the banking business. These corporations are not, strictly speaking, quasi public in their nature; but they are of such a character that the State can and does protect the public by any and all reasonable regulations necessary to that end. The peculiar relation that banks sustain to the public, and by this is meant their depositors, is such that it is the business and the duty of the State to see that corporations embarking in such an enterprise are entitled to the confidence of the public, and that depositors who in good faith entrust their money to these institutions shall be protected. It was said by one court that `it is conceded that the business of banking, by reason of its very intimate relations to the fiscal affairs of the people, and the revenues of the State, is, and has ever been considered a proper subject of legislative control, and strictly within the domain of the internal police power of every State.'"

And in the same section, quoting with approval from Blaker v. Wood, 53 Kans. 499, 24 L. R. A. 854, it is said:

"Enactments controlling the loaning of money, and regulating the rate of interest upon the same, have been sanctioned from the earliest times, and the nature of the business done by banks in dealing in money, receiving deposits for safekeeping, discounting paper, and loaning money, is such, and is so affected with a public interest, as to justify reasonable regulation for the protection of the people. The confidential and trust relations which exist between the bank and its patrons, and the difficulty that depositors and those dealing with the bank necessarily encounter in detecting irregular practices and in ascertaining the real financial condition of banks, are sufficient to justify inspection and control."

In furtherance of these general purposes which it is evident the statute was intended to foster and encourage, we are disposed, if the question was one of first impression, to construe the statute so as to vest the Banking Commissioner, when winding up the affairs of an insolvent bank, with all the powers and authority in the collection of the distributable assets of the bank, that a creditor himself would have in a proceeding which he might institute for that purpose. As illustrating the general doctrine in regard to the powers, rights, and authority of those entrusted with the duty of winding up the affairs of insolvent corporations, as well as the modern tendency of the...