Hoenig v. Huntington Nat. Bank of Columbus

• Decision Date: 29 June 1932
• Docket Number: No. 6001.,6001.
• Citation: 59 F.2d 479
• Parties: HOENIG, County Treasurer, v. HUNTINGTON NAT. BANK OF COLUMBUS et al.
• Court: U.S. Court of Appeals — Sixth Circuit

59 F.2d 479 (1932)

HOENIG, County Treasurer, v. HUNTINGTON NAT. BANK OF COLUMBUS et al.

No. 6001.

Circuit Court of Appeals, Sixth Circuit.

June 29, 1932.

Clarence D. Laylin, of Columbus, Ohio (Donald J. Hoskins, Eugene Carlin, and Robert J. Odell, all of Columbus, Ohio, on the brief), for appellant.

John Weld Peck, of Cincinnati, Ohio, and J. M. Hengst, of Columbus, Ohio (Peck, Shaffer & Williams, of Cincinnati, Ohio, and James M. Hengst, of Columbus, Ohio, on the brief), for appellees.

Before HICKS and HICKENLOOPER, Circuit Judges, and TUTTLE, District Judge.

HICKENLOOPER, Circuit Judge.

This cause presents for determination the question whether Rev. St. § 5219 as amended (12 USCA § 548) has been violated in respect of the assessment of local taxes upon the shares of stock of three national banks in the city of Columbus, Ohio, for the years 1926 and 1927. Such banks are instrumentalities of the federal government, and neither their assets nor the shares of their capital stock may be subjected to property taxes except by and with the consent of the federal government. The applicable condition upon which this consent is given is printed in the margin.¹ The District Court held this condition to have been breached and issued a permanent injunction. 45 F.(2d) 213. The defendant appeals.

The restriction imposed upon the power of the state to tax the shares of stock of a national bank is concerned only with that part of moneyed capital in the hands of individual citizens of the state which comes "into competition with the business of national banks." Its main purpose is to prevent "an unequal and unfriendly competition with national banks, by favoring shareholders in state banks or individuals interested in private banking or engaged in operations and investments normally common to the business of banking." First National Bank v. Hartford, 273 U. S. 548, 558, 47 S. Ct. 462, 71 L. Ed. 767, 59 A. L. R. 1; First National Bank v. Anderson, 269 U. S. 341, 347, 348, 46 S. Ct. 135, 138, 70 L. Ed. 295; Des Moines National Bank v. Fairweather, 263 U. S. 103, 116, 44 S. Ct. 23, 68 L. Ed. 191; Mercantile Nat. Bank v. New York, 121 U. S. 138, 155, 7 S. Ct. 826, 30 L. Ed. 895. Obviously this discrimination may be practiced as well by applying unequal and discriminatory rules for the valuation of property (Des Moines National Bank v. Fairweather, supra; Whitbeck v. Mercantile National Bank, 127 U. S. 193, 198, 8 S. Ct. 1121, 32 L. Ed. 118; New York v. Weaver, 100 U. S. 539, 545, 25 L. Ed. 705), as by taxing the shares of stock of national banks at higher rates than are applied to other moneyed capital, as in Minnesota v. First National Bank, 273 U. S. 561, 47 S. Ct. 468, 71 L. Ed. 774; First National Bank v. Anderson, supra, and other cases where the discrimination was the indirect outgrowth of a general change in the system of taxation of the state from that of ad valorem taxes to one of an income tax; but before the tax upon the shares of stock of a national bank may be held invalid it must appear not only that other moneyed capital, within the definition uniformly adopted by the Supreme Court, is favored by a lighter burden of taxation than that imposed upon bank stock, but also that the manner in which such other moneyed capital is employed brings it into direct and substantial competition with the business of national banks. A similarity of investment use must be shown, for it is from the manner of use that competition arises, if at all, in the sense intended. First National Bank v. Hartford, supra, 273 U. S. 557, 558, 47 S. Ct. 462, 71 L. Ed. 767, 59 A. L. R. 1.

In the instant case, it is claimed that competition with national banks exists in the manner in which building and loan associations lend money on mortgage and on collateral security, and receive deposits payable on demand, constructing and equipping their offices or counting rooms in semblance to those of banks; and in the manner in which mortgage companies and finance companies, organized under the Ohio law, loan money on mortgage of real estate, chattel mortgage, or collateral security, and discount or deal in commercial paper and installment contracts. In respect of building and loan associations, it is said that discrimination exists in that the owners of the stock of these associations are permitted to deduct their debts from the face value of the stock in returning it for taxation; in that the stock is not taxed at the source, and thus much of it is not returned by the owners and wholly escapes taxation; in that, if returned at all, it is returned at the owner's domicile, and such domicile may be in a low tax rate district; and in that the accumulated surplus and undivided profits are not taxed at all. In respect of finance and mortgage companies, the claim of discrimination is founded upon the fact that these companies are permitted to select corporate domiciles at the time of incorporation, and that these technical domiciles need not be, and frequently are not, where the company actually does business, but in districts having a very much lower tax rate; and upon the fact that, in making return upon their assets for taxation purposes, such companies are permitted to deduct the value of any nontaxable securities they may hold (principally shown to be Liberty bonds).

As to Building Associations: The tax laws of Ohio, in practically the same form as those with which we are here concerned, were held not to be discriminatory as against the owners of shares in national banks in First National Bank v. Chapman, 173 U.S. 205, 213, 19 S.Ct. 407, 43 L.Ed. 669. This case recognizes and reaffirms so much of the doctrine of Mercantile Nat. Bank v. New York, supra, as holds that savings banks do not come into competition with national banks, and justifies the exemption of the moneyed capital in the possession of savings banks, including deposits, upon the ground of a sound public policy to promote an accumulation of savings by the industrious and thrifty. The fundamental distinction between the generally non-commercial purpose of the savings bank and the distinctly commercial character of national banks was recognized. In People of State of New York v. Commissioners, 4 Wall. 244, 18 L. Ed. 344, the same principle was applied in regard to insurance companies, which admittedly employ moneyed capital in much the same way as national banks, in the purchase of investments, in the making of loans upon collateral security or that of the reserve value of the policies of insurance, and upon mortgage of real estate, and the like; and in Mercantile National Bank v. Hubbard (C. C.) 98 F. 465, the identical doctrine was applied to Ohio building associations by Mr. Chief Justice Taft, then Circuit Judge. Judge Taft there says (page 471 of 98 F.): "It seems to me that building associations are certainly not to be differentiated in their purpose or object, or practical effect, from savings banks, and that the capital invested in them, though subject to a somewhat different rule of taxation, cannot be regarded as moneyed capital in competition with the moneyed capital in national banks, any more than is capital invested in savings banks;" nor, we might add, from that invested in or possessed by insurance companies. This conclusion seems implicit in the very nature of the building association. The case was later affirmed by the Supreme Court. Sub nomine Lander v. Mercantile Nat. Bank, 186 U. S. 458, 22 S. Ct. 908, 46 L. Ed. 1247.

It is insisted, however, that the present day building association is a very different type of institution from the "small, neighborhood, mutual associations of Judge Taft's time," and emphasis is laid upon the construction of offices in similitude to those of banks, the competition for deposits, the payment of deposits on demand, and the making of loans upon collateral security. We do not think that the general nature of the business of building associations has so far changed as to make the law established by the above-cited cases inapplicable. Compare United States v. Cambridge Loan & Bldg. Co., 278 U. S. 55, 49 S. Ct. 39, 73 L. Ed. 180. The chief purpose of these institutions is still "to encourage the building of small houses by poor people, and the saving from their earnings, week by week, of an amount sufficient to pay the mortgage debts incurred in the purchase of the land and the construction of the house." Mercantile National Bank v. Hubbard, supra (C. C.) 98 F. 465, 471. Practically all loans are of the amortized type in which payment is spread over a period of from ten to twelve years. National banks perhaps might, but as a matter of fact do not, and in the interest of good banking should not, invest their funds generally in this manner. The two types of institutions have essentially different characteristics; the one is purely commercial in character, in which the assets must be kept liquid; the other is sui generis, noncommercial, and without a comparable need for liquid assets. The one is founded and conducted upon banking principles; the other was created in answer to a need which the banks could not and did not satisfy, and in furtherance of a wholesome public policy to promote building, especially the building of homes, and to develop the habit of thrift.

It is quite true that national banks, subject to certain restrictions, are now permitted to loan money upon the security of real estate mortgages, and that the plaintiffs below had taken advantage of this privilege. It is also true that building associations have invested some of their funds in Liberty bonds, and, to a very limited extent, may have made a few investments of idle capital in collateral loans or so-called "straight" mortgages. But we cannot concede that even as to these investments the building associations are in substantial competition with national banks, or that, as claimed by plaintiffs below, the mere facts that money is loaned by building associations upon...