Loughman v. Town of Pelham

• Decision Date: 09 March 1942
• Docket Number: No. 190.,190.
• Citation: 126 F.2d 714
• Parties: LOUGHMAN, v. TOWN OF PELHAM (EMPLOYERS LIABILITY ASSUR. CORPORATION, LIMITED, Third-Party Defendant).
• Court: U.S. Court of Appeals — Second Circuit

126 F.2d 714 (1942)

LOUGHMAN, v. TOWN OF PELHAM (EMPLOYERS LIABILITY ASSUR. CORPORATION, LIMITED, Third-Party Defendant).

No. 190.

Circuit Court of Appeals, Second Circuit.

March 9, 1942.

Before SWAN, AUGUSTUS N. HAND, and CLARK, Circuit Judges.

Hardy, Stancliffe & Hardy, of New York City (William F. McDermott and George T. Barker, both of New York City, of counsel), for appellant.

Whitman, Ransom, Coulson & Goetz, of New York City (William L. Ransom and Henry S. Reeder, both of New York City, of counsel), for appellee.

SWAN, Circuit Judge.

This case was tried to the court without a jury upon stipulated facts which are set out in full in the opinion of the district court reported in 41 F.Supp. 584. A short summary will suffice here. As a result of the banking holiday proclaimed in March 1933 the Pelham National Bank was closed on March 4th; it never reopened. Pursuant to the provisions of Title 12 of the United States Code Annotated §§ 192, 203, a conservator of the bank was appointed on March 21 and a receiver on July 21, 1933. The appellant is successor to the original receiver. When the bank closed, the Town of Pelham had on deposit with the bank the sum of $27,862.92. As security for repayment of deposits by the Town the bank had pledged $25,000 of Westchester County bonds, registered in the name of the bank and deposited in escrow under an agreement dated December 28, 1931 between the bank and the Town. Pursuant to the terms of this agreement, the escrow agent delivered the bonds to the Town on October 23, 1933, and thereafter, on November 10, 1933, an order was entered in the district court directing the receiver of the bank to execute a general power under which the bonds could be negotiated and sold. This order, which the receiver did not oppose, expressly provided that execution of the general bond power should not be deemed a waiver of any of the rights of the receiver, and "if it shall later appear" that the Town "was not entitled" to the bonds or their proceeds, then the Town, "upon demand therefor" by the receiver or his successor, should forthwith pay him "the proceeds of the sale of said bonds with interest thereon from the date of sale thereof." The bonds were registered in the name of the Town Supervisor on November 20, 1933 and were sold on May 3, 1934 for $25,122.99. Thereafter in October 1934 and January 1935 the Town was paid two dividends aggregating $2,749.93. Thus the Town received payment in full of its bank deposit of $27,862.92. As a general creditor without security it would have received dividends of only $10,030.65. For the difference between these two amounts, namely, $17,832.27, the receiver made demand on September 16, 1939 and brought the present action on April 1, 1940. The Town defended on the ground that its security was valid and, if not, the action was barred by the statute of limitations. It brought in as a third party defendant a surety company against which liability over was asserted in case judgment should go against the Town. The district court sustained the validity of the pledge and dismissed the complaint against the Town. The third party complaint was dismissed without prejudice, and the appeal raises no question as to this part of the judgment.

Prior to the Act of June 25, 1930, 12 U.S.C.A. § 90, a national bank could not legally pledge assets to secure funds of a state or a political subdivision thereof; thereafter it could do so, if located in a state in which state banks had such power. City of Marion v. Sneeden, 291 U.S. 262, 268, 54 S.Ct. 421, 78 L.Ed. 787. The validity of the pledge under consideration therefore turns on whether the law of New York conferred on state banks authority to pledge assets as security for deposits by a town. Concededly a pledge to secure a deposit of city funds is ultra vires. City of Yonkers v. Downey, 309 U.S. 590, 60 S.Ct. 796, 84 L. Ed. 964; New Rochelle Trust Co. v. White, 283 N.Y. 223, 28 N.E.2d 387. The appellee contends, however, that the law of New York recognizes a distinction in respect to the power of a bank to give security between deposits of town funds and city funds. Reliance is placed upon the decision by Mr. Justice Love sustaining a pledge to secure a deposit of town funds. Matter of Bank of Spencerport, 143 Misc. 196, 255 N.Y.S. 482. This was followed by Judge Inch in Hellawell v. Town of Hempstead, D.C.E.D.N.Y., 10 F.Supp. 771. It might be the duty of this court, "in the absence of more convincing evidence of what the state law is," to accept Mr. Justice Love's interpretation of the state law. Fidelity Trust Co. v. Field, 311 U.S. 169, 178, 61 S.Ct. 176, 178, 85 L.Ed. 109. But we agree with the appellant that subsequent decisions of the highest court of the state show that his decision did not correctly declare the New York law. New Rochelle Trust Co. v. White, 283 N.Y. 223, 228, 28 N.E.2d 387; City of Mt. Vernon v. Mt. Vernon Trust Co., 270 N.Y. 400, 406, 1 N.E.2d 825; State Bank of Commerce v. Stone, 261 N.Y. 175, 184, 184 N.E. 750, 87 A.L.R. 1449; see, also, City of Yonkers v. Downey, 309 U.S. 590, 594, 60 S.Ct. 796, 84 L.Ed. 964. These opinions state without qualification that neither under statute nor the common law do state banks have power to pledge assets as security for deposits, "even where the deposits are made by a municipal corporation." 283 N.Y. 223, 28 N.E. 388. It is true that none of these cases involved a deposit of town funds; but we can see no sound reason to distinguish between town and city deposits, nor did Mr. Justice Love make any such distinction in his opinion. He relied upon the absence of statutory prohibition, the "general practice" of banks to give security for the deposit of public funds and the absence of judicial disapproval of such practice. He did, it is true, refer to section 101 of the Town Law of 1909, Consol.Laws N.Y.1909, c. 62, which authorized the supervisor of any town to purchase at the town's expense a surety bond to secure the safety of town funds deposited in a state bank. This is a far cry from a statute authorizing a bank to pledge its assets, and we do not read Justice Love's opinion as construing section 101 to give such authority. He mentioned the statute merely as a make-weight in support of the argument that the public policy of the state did not forbid the general practice to which he referred.

In sustaining the validity of the pledge in suit, the district judge placed principal reliance upon amendments to the Town Law, Consol.Laws N.Y., c. 62, enacted subsequently to the closing of the bank. See Ch. 751, Laws of 1933 (effective January 1, 1934); Ch. 468, Laws of 1937, amending Town Law § 64, subd. 1. These amendments authorized the town board to require a bank in which town funds were deposited to give security, and the 1937 amendment purported to validate "all acts done prior to the effective date of this section which would have been valid hereunder." Sec. 1, Ch. 468, Laws of 1937. They cannot be given retroactive effect as against the bank's receiver. The appointment of a receiver in July 1933 seized the bank's assets for "ratable" distribution in accordance with the provisions of 12 U.S.C.A. § 194. This requires that dividends be declared proportionately upon the amount of all claims as they stood at the date of insolvency. American Surety Co. v. Bethlehem Nat. Bank, 314 U.S. 314, 62 S.Ct. 226, 86 L.Ed. ___. It is well settled that state statutes which attempt to create preferences arising upon the bank's insolvency must be disregarded. Old Company's Lehigh v. Meeker, 294 U.S. 227, 230, 55 S.Ct. 392, 79 L.Ed. 876; Downey v. City of Yonkers, 2 Cir., 106 F.2d 69, 73, affirmed 309 U.S. 590, 60 S.Ct. 796, 84 L.Ed. 964. A fortiori preferences cannot be created by retroactive state legislation enacted subsequent to the receiver's appointment. McNair v. Knott, 302 U.S. 369, 58 S.Ct. 245, 82 L.Ed. 307, relied upon by the appellee, contains nothing to the contrary. There the question was whether the Act of June 25, 1930, 12 U.S. C.A. § 90, validated a prior pledge of assets as security for a deposit of county funds. It was held that it did, but the bank was not closed until October 18, 1930, several months after the enactment of the enabling amendment. In City of Fort Worth v. McCamey, 5 Cir., 93 F.2d 964, 969, certiorari denied 304 U.S. 571, 58 S.Ct. 1041, 82 L.Ed. 1535, where the bank closed prior to June 25, 1930, the pledge was not validated because "on the appointment of a receiver the rights of everyone concerned become fixed." To the same effect are Webb v. American Surety Co., 5 Cir., 88 F.2d 171, and Ross v. Lee, D.C.S.D.Fla., 15 F.Supp. 972; see 112 A.L.R. 483, 484. We are constrained to hold that the bank's pledge to the Town was ultra vires.

There remains for consideration the question whether dismissal of the complaint can be sustained under the defense of limitations. The appellant first contends that the order of November 10, 1933, entered upon the Town's motion, tolled all statutes of limitations and required a demand by the receiver before any action could be commenced to reach the bonds or their proceeds. This argument must fail. The order provided that execution of the general bond power should prejudice none of the receiver's rights; it contemplated the possibility of a suit in which it might "later appear" that the Town was not entitled to the bonds or their proceeds. A suit to recover possession of the bonds might have been brought the next day; the order contained no restraint. And if the district court could lawfully impose as a condition upon the receiver's right to collect the bank's assets that he first make a demand upon the Town (which we do not decide), the right to make such demand arose immediately and his delay in making it would not defer the running of the applicable statute of limitations. N.Y. Civil Practice Act, sec. 15(1); see Wood v. Young, 141 N. Y. 211, 36 N.E. 193; Watkins v. Madison County Trust &...