In re Allen

• Decision Date: 02 March 1922
• Citation: 240 Mass. 478,134 N.E. 253
• Parties: Petition of ALLEN, Com'r of Banks. In re PRUDENTIAL TRUST CO.
• Court: United States State Supreme Judicial Court of Massachusetts Supreme Court

240 Mass. 478

134 N.E. 253

Petition of ALLEN, Com'r of Banks.

In re PRUDENTIAL TRUST CO.

Supreme Judicial Court of Massachusetts, Suffolk.

March 2, 1922.

Case Reserved from Supreme Judicial Court; Suffolk County.

Proceeding by Joseph C. Allen, commissioner of banks, against Stella Aronson and others for authority to transfer securities from the savings department to the commercial department of the Prudential Trust Company and to transfer cash from the commercial department to the savings department. Reserved by a single justice on the petition, answers and master's report for determination by the full court. Decree authorizing the transfer.

The petition alleged the petitioner had possession of the property and business of the trust company, that the officials of the trust company from time to time withdrew from the deposits and funds of the savings department sums aggregating $282,767.61, and placed them to the credit of the commercial department and undertook to discharge the obligation of the commercial department to the savings department by checks of the commercial department and by a transfer to the savings department of notes constituting unlawful investments, because not falling within any of the classes provided by law and because not approved by the board of investment or investment committee. Various depositors in the commercial department answered the petition and opposed the granting of the relief sought while certain depositors in the savings department answered and prayed that the petition be allowed. The master found the facts concerning the various transfers and that there was no examination, approval or confirmation of the transfers by the investment committee.

1. Banks and banking k315(3)-Statutory provisions as to handling of savings deposits by trust companies are mandatory and not directory.

The statutory requirements that depositis in Savings Departments of trust companies shall be special deposits, that they shall be placed in a separate department, that all investments shall be made in accordance with the laws governing savings banks, and that such deposits and investments shall be appropriated solely to the security and payment of savings deposits and not mingled with other property of the trust company, are mandatory and not directory.

2. Banks and banking k315(3)-Equivalent must be restored to savings department in case of transactions for benefit of commercial department.

Under the statutory provisions for the separation and safeguarding of savings deposits with trust companies, an equivalent must be restored to the savings department in case of withdrawal, swapping of investments or other transactions between it and the commercial department made contrary to the statutes to the injury of the savings department and for the apparent or supposed advantage of the commercial department.

3. Banks and banking k315(3)-Commercial depositors presumed to have become such with knowledge of preferences in favor of savings depositors.

Depositors in the commercial department of a trust company must be presumed to become customers with knowledge of all preferences established by law for the benefit of the savings department.

4. Banks and banking k315(3)-When funds of savings department diverted to commercial department rights not worked out on theory of tracing trust funds.

Though in many respects the relation of a trust company to its savings depositors is that of a trustee and to its commercial depositors that of common-law debtor, where money and securities of the savings department are transferred to the commercial department in exchange for securities not constituting lawful investments for savings deposits, or not approved by the investment committee, the conflicting interests of the two classes of depositors are not to be worked out on the theory of tracing trust funds.

5. Banks and banking k315(3)-Loss to savings department from illegal exchange of securities with commercial department must be made good from funds of commercial department.

Where money and securities of the savings department of a trust company were transferred to the commercial department in exchange for securities that were not lawful investments for savings funds, or not approved by the investment committee, losses suffered by reason of the transactions must be made good out of the commercial department.

6. Banks and banking k317-Interest not allowed in adjusting rights because of illegal exchange of securities between savings and commercial departments.

Where moneys and securities of a trust company's savings department were transferred to its commercial department in exchange for securities not constituting lawful investments for savings deposits, or not approved by the investment committee, interest cannot be allowed or charged in adjusting the conflicting rights between the two sets of depositors upon the insolvency of the company.

7. Banks and banking k317-Costs allowed as between solicitor and client payable out of funds of savings department.

In a proceeding by the commissioner of banks in possession of the property and business of a trust company for leave to transfer securities from its savings to its commercial department, where counsel were required to prepare a brief and present arguments in favor of savings depositors whose individual interests were too small to render it practicable for them to retain counsel in their own behalf, costs as between solicitor and client will be allowed, to be paid out of the funds of the savings department.H. R. Bygrave, of Boston, for Prudential Trust Co.

Harold Williams, Jr., of Boston, amicus curiae.

John E. Hannigan, of Boston, for Commissioner of Banks.

J. F., J. E. & D. T. O'Connell, of Boston, for J. E. Doherty of Co., and others, depositors.

Francis J. Carney, of Boston, for savings depositors.

RUGG, C. J.

This is a petition by the commissioner of banks in possession of the property and business of the Prudential Trust Company. That company was opened for business in 1915 with both a commercial and a savings department, and continued its operations until closed by the commissioner under the authority of the statutes on September 10, 1920. The purpose of this petition is to secure permission to pay to the savings department of the trust company from funds of the commercial department the unpaid balance of moneys turned over to the commercial department from the savings department in a series of transactions alleged to have been illegal. It is not necessary to pursue the details of these transactions. The separation of the activities of the savings department and of the commercial department of the trust company was never very clearly marked as its business was actually carried on. Separate sets of books were kept. But the business of both departments was carried on in the same banking rooms and the executive officials of both were the same. When the president and treasurer decided for any reason to transfer funds or securities from one department to the other, they could do so immediately without consulting anyone. From the beginning of the transactions here in question, on substantially every day the cash and actual reserve in the commercial department was below the amount required by law to be maintained. The commercial department needed money in order to replenish an insufficient reserve of cash which ought to be kept on hand for the purpose of meeting clearing house and counter demands. It was impossible to determine whether this need would be met by increased deposits. Cash and securities were at hand in the savings department, to which recourse was simple. The savings department had cash, notes about to fall due, railroad and government...