Schramm v. Bank of California, Nat. Ass'n

• Decision Date: 11 April 1933
• Citation: 143 Or. 546,20 P.2d 1093
• Parties: SCHRAMM, Superintendent of Banks, v. BANK OF CALIFORNIA, NAT. ASS'N.
• Court: Oregon Supreme Court

20 P.2d 1093

143 Or. 546

SCHRAMM, Superintendent of Banks, v. BANK OF CALIFORNIA, NAT. ASS'N.

Supreme Court of Oregon

April 11, 1933

Department 1.

Appeal from Circuit Court, Multnomah County; Walter H. Evans, Judge.

This is a suit brought by A. A. Schramm, Superintendent of Banks of the state of Oregon, as liquidator of the Bank of Kenton against the Bank of California, National Association, to recover assets of the former which it had pledged with the latter as security for debts. From a decree in favor of the Bank of California, the bank superintendent appeals.

Reversed and remanded, with instructions.

RAND C.J., dissenting.

State statute limiting borrowing and pledging powers of banks held not unconstitutional as impairing particular bank's contractual rights allegedly conferred by charter placing no restriction on such powers. ORS 708.210-708.220.

John P. Winter, of Portland (Winter & Maguire and Wilson & Reilly, all of Portland, on the brief), for appellant.

Thomas G. Greene, of Portland, for respondent.

ROSSMAN Justice.

The Bank of Kenton was incorporated under the laws of this state in the year 1909, and until December 2, 1926, when insolvency forced it to discontinue business, continuously conducted a commercial and savings bank business in a suburb of Portland. Its capitalization was $66,000, and its deposits approximately $1,000,000.

The defendant, which is a national bank with its principal place of business in San Francisco, has a branch located in the business district of Portland. In 1919 the Kenton bank opened a checking account with the defendant, which continued until the Kenton bank discontinued business. According to the defendant's brief, "this account differed in no respect from the ordinary and usual commercial checking accounts of individuals." The Kepton bank also borrowed money from the defendant. During 1926 it made twenty-seven borrowings ranging in amount from $2,500 to $50,000, and aggregating a total of $536,000. In each instance the loan was evidenced by a note. October 31, 1919, the Kenton bank in anticipation of incurring indebtedness in favor of the defendant, signed the following document addressed to the defendant: "In anticipation of becoming indebted to you by way of loans on promissory notes or overdraft, or both, and as a continuing security to you in consideration of the credit created to us or others for whom I may be endorser, guarantor or maker, by you, we hereby stipulate and agree that all promissory notes, bills of lading, shipping or warehouse receipts, bonds, bills, stocks, or other personal property or choses in action now assigned, hypothecated to or otherwise deposited with you or in your possession or which may at any time hereafter be so assigned, hypothecated, deposited or placed in your possession by us or any one representing us shall be held by you as collateral security for any and all indebtedness from us, or others as aforesaid, either created or existing at the time of the deposit of such security or prior or subsequent thereto, and we hereby constitute and appoint the manager of The Bank of California, N. A., or his successor in office our attorney. ***"

Whenever the Kenton bank borrowed money from the defendant it made a pledge of collateral taken from its assets, unless the defendant already possessed sufficient collateral to secure payment of the loan. On November 19, 1926, the Kenton bank owed the defendant $23,500 on account of borrowed money, and the defendant held as security collateral belonging to the Kenton bank of the face value of $76,150. On November 22 the Kenton bank borrowed from the defendant an additional $40,000, thus increasing its indebtedness to $63,500, and at the same time pledged with the defendant an additional $18,000 of collateral, thus making its total pledge $94,150. On November 23 the defendant credited the Kenton bank with $3,026 paid on account, thereby reducing the Kenton bank's debt to $60,474, and on the same day the Kenton bank delivered to the defendant $27,770 more collateral, which thereby increased the collateral to $121,920. Later in the day $7,500 of collateral was returned to the Kenton bank, which reduced the amount to $114,420. On November 24 there was paid to the defendant $14,033.87 which reduced the Kenton bank's debt to $46,440.13. On the same day $18,000 of collateral was released by the defendant, thereby decreasing the total to $96,420. November 29 the Kenton bank borrowed an additional $10,000, thus increasing its debt to $56,440.13 and at the same time pledged an additional $22,500 of collateral, thereby increasing the total to $118,920. On November 30 the defendant credited the Kenton bank with the payment of $1,512.99, reducing the debt to $54,927.14. On the same day the Kenton bank withdrew $1,512 collateral, thus reducing the amount to $117,408. On December 1 the Kenton bank borrowed from the defendant an additional $50,000 increasing its debt to $104,927.14, and on the same day deposited an additional $43,098 of collateral, increasing the total of pledged collateral to $160,506. On December 2 the defendant credited the Kenton bank with the payment of $14,000 on account, and charged it with a loan of $2,500, thus making the indebtedness existing on that day in favor of the defendant, $93,427.14. On the same day the Kenton bank withdrew $11,500 collateral, reducing that item to $149,006.

In addition to the above indebtedness, all of which arose out of loans made by the defendant to the Bank of Kenton, the latter owed the defendant an additional $3,106.39 upon an overdraft; $3,513,11 upon an item guaranteed by the Bank of Kenton; and $33,714.51 for money advanced to that bank on its checks against a deposit by it on December 2, 1926, of 48 checks and drafts aggregating $33,714.51. Thus, on the day when the Kenton bank closed, it owed the defendant on

                            Notes
                          
                            $93,427.14
                          
                            Overdrafts
                          
                            3,106.39
                          
                            A guaranteed item
                          
                            3,513.11
                          
                            Endorsements
                          
                            33,714.51
                          
                            
                          
                            -----------
                          
                            
                          
                            $133,761.15
                          
                

Later, the defendant, by recourse to the courts and other methods, made sufficient collections upon the above-mentioned item of 48 checks to reduce the $33,714.51 debt to $11,055.49 at the time when the decree was entered in the circuit court.

The plaintiff freely concedes that the defendant at no time prior to December 3, 1926, had any knowledge of the insolvency of the Kenton bank, or of any impairment of its capital investment.

Section 88 of 1925 Session Laws, chapter 207, p. 340 (section 22-802, Oregon Code 1930), provides: "No bank or trust company shall give preference to any depositor or creditor by pledging the assets of such bank or trust company, except as otherwise authorized by this act; provided, that any bank or trust company is authorized and empowered for any temporary purpose to borrow money or to borrow money and pledge or hypothecate as collateral security therefor its assets not exceeding 25 per centum in excess of the amount borrowed, except that with the previous consent and approval of the superintendent of banks such collateral may be pledged up to but in no case to exceed 50 per centum in excess of the amount borrowed, but only to the extent and upon terms and conditions as follows: 1. Any amount up to but not exceeding the amount of its capital and surplus, without consent of the superintendent of banks; provided, however, that any amount borrowed, except as otherwise provided in this section, in excess of the amount of its capital and surplus at such time actually paid in and remaining undiminished by losses or otherwise, must first be approved in writing by the superintendent of banks; provided also, that no excess loan made to any such bank or trust company shall be invalid or illegal as to the lender, even though made without the consent of the superintendent of banks; provided also, that the rediscounting with or without guarantee or indorsement of notes, drafts, bills of exchange or loans is hereby authorized and shall not be limited by the terms of this act, and shall not be considered as borrowed money within the meaning of this section."

The plaintiff contends that the pledges of security by the Kenton bank to the defendant were made in violation of the above statute, and that they are void. He concedes, however, that the statute justifies a bank in securing a lender with a pledge whenever the pledge and the borrowing are simultaneous, and when neither exceeds the limits specified in the act. The defendant admits that this statute renders void a pledge made to secure a pre-existing debt, whether the indebtedness be due to a depositor or any other creditor. We quote from its brief: "as heretofore pointed out in the discussion of 'preferences' security given for a pre-existing debt comes within the condemnation of the statute and is void as a preference."

Since section 195 of the act (section 22-803, Oregon Code 1930) prescribes a penalty of a fine and imprisonment for violation of section 88, the act is penal in character and should be strictly construed. Pacific Title & Trust Co. v. Sargent, 73 Or. 485, 144 P. 452. Likewise, since the statute restricts common-law rights, we are further cautioned to construe its provisions strictly.

Since we are compelled to determine whether the Kenton bank's borrowings exceeded the statutory limitation, and are also compelled to determine what portion, if any, of the pledged collateral the defendant may retain, we deem it advisable at this point to decide what portion of the...