Cantley v. Drainage District

• Decision Date: 04 February 1928
• Docket Number: No. 28185.,28185.
• Citation: 2 S.W.2d 607
• Parties: S.L. CANTLEY, Commissioner of Finance, Appellant, v. LITTLE RIVER DRAINAGE DISTRICT.
• Court: Missouri Supreme Court

2 S.W.2d 607

S.L. CANTLEY, Commissioner of Finance, Appellant, v. LITTLE RIVER DRAINAGE DISTRICT.

No. 28185.

Supreme Court of Missouri, Court en Banc.

February 4, 1928.

Appeal from Cape Girardeau Court of Common Pleas. — Hon. Oscar A. Knehans, Judge.

AFFIRMED.

Bailey & Bailey and Gallivan & Finch for appellant.

(1) A bank has no statutory power to prefer one class of depositors by pledging its bills receivable to secure same. Chap. 90, art. 1, R.S. 1919, particularly Sec. 9749. (2) Only such powers and rights can be exercised under corporation franchises as are clearly comprehended under the words of the grants or derived therefrom by necessary implications, regard being had for the object of the grant. Wright v. Board of Education, 246 S.W. 45; Watson's Seminary v. Pike County Court, 149 Mo. 57; State ex rel. v. Murphy, 130 Mo. 10; State ex rel. v. O'Rear, 144 Mo. 157. (3) To permit a bank to favor some of its depositors by securing such deposits with its bills receivable would be to sanction a fraud upon other depositors. Commercial Bank v. Trust & Guaranty Co., 156 S.W. 160. (4) The Commissioner of Finance is a statutory receiver who represents primarily the creditors. Secs. 11700, 11701, 11702, 11723, R.S. 1919; Alexander v. Relfe, 74 Mo. 495; Weldon v. Farm Loan Co., 213 S.W. 57. (5) A receiver of an insolvent corporation may repudiate the void contracts made by the corporation, and to the general rule that a receiver takes only the title of the corporation whose receiver he is there is a recognized exception which permits a receiver of an insolvent corporation, in the interest of creditors, to disaffirm dealings of the debtor in violation of the law and in fraud of the rights of creditors, where the receiver represents the creditors, or where the receiver by statute represents the creditors and stockholders. Commercial Bank v. Trust & Guaranty Co., 156 S.W. 160; Fisher v. Adams, 63 Fed. 674; In re Wilcox Co., 70 Conn. 220; Green v. Mfg. Co., 52 Conn. 33; Franklin Nat. Bank v. Whitehead, 149 Ind. 560; State v. Sullivan, 120 Ind. 197. (6) A receiver who represents creditors and stockholders is not required to restore what was received as a condition to maintaining a suit against a third party who had possession of corporate assets. Guild v. Parker, 43 N.J.L. 430.

Oliver & Oliver for respondent.

(1) A certificate of deposit is the same in its legal effect as a promissory note or bills payable. 7 Cyc. 646, secs. 334, 336; Howey Co. v. Cole, 269 S.W. 956; Dickey v. Adler, 143 Mo. App. 332; First Natl. Bank v. Lanier, 11 Wall. 369; Elmore Co. Bank v. Avant, 189 Ala. 418; Kavanaugh v. Bank, 239 Ill. 404; Pryor v. Bank, 240 Ill. 100; Kushner v. Abbott, 156 Iowa, 598; Bank v. Bank, 72 W. Va. 534; Kirkwood v. Bank, 40 Neb. 484; Tiedeman on Com. Paper, par. 485; Daniels on Neg. Instruments (6 Ed.) par. 1698. (2) A certificate of deposit being the same in its legal effect as a promissory note, the bank has the same power to secure a certificate of deposit as it has to secure a bill payable, and no one will question the right of a bank to secure the lender of money to it. The chief difference between a certificate of deposit and a bill payable is the phraseology used in expressing the obligation of the bank to repay the money obtained. The relation of debtor and creditor exists in both cases. (3) The money having been obtained from the district upon condition that it be satisfactorily secured, the transaction became a closed one, and the Finance Commissioner cannot now set aside the transaction. The bank having obtained the benefit of the loan (deposit) and pledged the collateral, it must live up to its contract, even though it may have been an ultra vires act on the part of the bank in pledging the collateral. There is no statute prohibiting the doing of what was done, and one party receiving a benefit will not be permitted to plead ultra vires when the contract has been executed. McCormick v. Bank, 304 Mo. 289; Schlitz v. Poultry Co., 287 Mo. 400; Winscott v. Inv. Co., 63 Mo. App. 369. (4) It has always been the policy of the State to throw every safeguard around the public funds of not only the State itself, but all of its political subdivisions. Both the State and its political subdivisions are required to take security for the deposit of public funds. The statutes are mandatory. Mo. Const., art. 10, sec. 15; Secs. 9582, 11269, 11245, 10806, 13379, 4401, 4497, R.S. 1919. To hold that a bank could not secure funds of these political subdivisions placed on deposit with it would be in the face of these mandatory sections. (5) It is interesting to note that at one time it was doubted in Missouri as to whether banks could borrow money since the power was not expressly granted in the statute. The courts unequivocally held, when the question was first presented to them, that the banks possessed such an implied power, even though not expressly stated in the statute. Ringling v. Kohn, 6 Mo. App. 333; Donnell v. Lewis Co. Bank, 80 Mo. 165. Subsequently it was not only held that the implied power to borrow existed but that the power to pledge collateral to secure the loan also existed. Powers v. Woolfolk, 132 Mo. App. 358; Sloan v. Bank, 158 Mo. 439. (6) The banks of this State have the implied power to pledge collateral to secure a certificate of deposit. The courts of many states as well as the National courts, including the Supreme Court of the United States, have uniformly held, with the exception of one state court (Ky.) that banks have implied power to pledge assets to secure certificates of deposit. The great weight of authority supports this view. Sec. 11737, R.S. 1919; Cameron v. Christy, 133 Atl. 551; City of Williston v. Ludowese, 208 N.W. 82; Richards v. Osceola Bank, 70 Iowa, 707; Ward v. Johnson, 95 Ill. 215; Ahl v. Rhodes, 84 Pac. 319; McPherson Bank Co. v. Nat. Surety Co., 212 Pac. 489; Interstate National Bank v. Ferguson, 48 Kan. 732; Merrill v. Bank, 173 U.S. 131; 7 C.J. 592; Morse, Banks & Banking (5 Ed.) 142; Zane, Banks & Banking, sec. 125; 1 Patton's Digest Banking, 1926, sec. 641, p. 101, Vol. 2, sec. 519A; Page Trust Co. v. Rose, 135 S.E. 795; Williams v. Hall, 249 Pac. 758.

GRAVES, J.

This is an action by the Commissioner of Finance for the State of Missouri against the Little River Drainage District. The present Commissioner of Finance, S.L. Cantley, was substituted for the Commissioner originally bringing the suit. The action is in two counts. The first count is an ordinary action in replevin, wherein the plaintiff seeks to recover some thirty-eight specifically described notes, and $500 damages for the detention thereof. The second count is one for money had and received. The material portion of this count is as follows:

"Plaintiff states that on the tenth day of January, 1924, at the time the said Bank of Oran closed its doors, the defendant was in possession of a large number of notes, chattel mortgages, and deeds of trust, which belonged to the Bank of Oran and in which the defendant had no right, title, or interest; that the defendant thereafter converted a large number of said notes, mortgages, and deeds of trust into cash, the exact number and description of which are unknown to the plaintiff, collecting thereon the sum of $20,000, which said $20,000 having been had and received by the defendant as stated herein belongs to the plaintiff and is the property of the plaintiff in his official capacity as Finance Commissioner of the State of Missouri, but that the defendant has not paid the same or any part there of to the plaintiff.

"Wherefore, the plaintiff prays for judgment against the defendant in the sum of $20,000, and for costs."

The answer is quite long, but counsel for the defendant say this as to the defense urged:

"The plaintiff's position is that under the law the bank was without authority to pledge collateral to secure the funds obtained from the drainage district. The defendant's position, broadly stated, is that the bank had the express power to pledge the collateral if the transaction be declared a loan, and had the implied power if the transaction constituted a deposit.

"The defendant contends more specifically:

"(1) That the money obtained was in fact borrowed from the drainage district by the bank, and that instead of the obligation to repay being in the form of a promissory note, it was placed in the form of a certificate of deposit, and that since the certificate of deposit stands on the same legal basis as a promissory note, there can be no question about the power of the bank to pledge the collateral to secure the obligation to repay.

"(2) That the plaintiff is barred and estopped by reason of the action of the bank examiners, agents and employees of the Finance Department with respect to the collateral pledged by the bank.

"(3) The third defense interposed by the defendant obviates any controversy about the facts and raises the clean-cut legal issue as to whether or not a bank in Missouri has the implied power to pledge collateral to secure a certificate of deposit. The defendant contends that it does have such power, and that it was lawfully exercised by the now defunct Bank of Oran at the time that it pledged the collateral sued for, and that the plaintiff cannot recover the remaining collateral nor can it recover any of the funds collected by the district from the collateral so pledged."

The learned trial judge filed a written opinion in the case, which has been of much value to us. As to the pleadings he says:

"The petition in the first count is an ordinary action in replevin in usual form. The second count is a simple action for money had and received in usual form. The answer admits that plaintiff is Commissioner of Finance of the State of Missouri; that defendant is a drainage district organized under and by virtue of the laws of the State of Missouri; that plaintiff, Commissioner of Finance, is in charge of the liquidation of the Bank...