State Bank of Commerce of Brockport v. Stone

• Decision Date: 28 February 1933
• Parties: STATE BANK OF COMMERCE OF BROCKPORT v. STONE.
• Court: New York Court of Appeals Court of Appeals

261 N.Y. 175

184 N.E. 750

STATE BANK OF COMMERCE OF BROCKPORT

v.STONE.

Court of Appeals of New York.

Feb. 28, 1933.

Action by the State Bank of Commerce of Brockport, by Joseph A. Broderick, State Superintendent of Banks, against Howard G. Stone, as Treasurer of the Farm Department of the Monroe County Farm & Home Bureau Association. From a judgment of the Appellate late Division (237 App. Div. --, 260 N. Y. S. 940), which affirmed a judgment of the Special Term (144 Misc. 393, 258 N. Y. S. 717) dismissing the complaint and directing the payment of a certain fund to defendant, and which also affirmed a previous order of the Special Term, ordering a certain sum paid to defendant, plaintiff appeals by leave of the Appellate Division.

Affirmed.

Appeal from Supreme Court, Appellate Division, Fourth Department.

Harlan W. Rippey and Harold G. Hutchens, for appellant.

Earl F. Case, of Rochester, for respondent.

CRANE, Judge.

This appeal, by leave of the Appellate Division, brings up for review a question which in recent years has been growing in importance with the development of the banking business throughout the country, and which has finally resulted in the expression of very firm and sound views by the highest courts, although the point is here now for the first time in this court. May a bank, to retain or obtain general deposits of private funds, pledge its assets for the security of such deposits? The facts of this particular case are the following:

This action was brought to recover possession of fifteen bonds of $1,000 each, owned by the State Bank of Commerce of Brockport, N. Y., and transferred to the defendant on October 2, 1931, as collateral security for deposits of the defendant at the bank, then amounting to the sum of $5,638.84. The defendant is the treasurer of the Farm Department of the Monroe County Farm & Home Bureau Association, formed pursuant to subdivision 28-a of section 12 of the County Law (Consol. Laws, c. 11, amended by Laws 1924, c. 248). This association is for the improvement of agricultural and home conditions and to conduct demonstration work in agricultural and home economics. Its work is carried on under the direction of Cornell University. Part of its funds are furnished through the State College of Agriculture; other sums are received from the federal government, and dues of $5 a year, from its membership, open to the public. The budget of its receipts and expenditures is approved by Cornell University. It is not a municipal corporation. General Corporation Law (Consol. Laws, c. 23), § 3, subd. 1.

On or about October 2, 1931, the defendant had on deposit with the State Bank of Commerce of Brockport, N. Y., $2,228.71, and after that date deposited additional moneys to the amount of $2,915. To retain this deposit and to obtain the additional money, the bank, through its executive committee, of less than the required number, executed a contract to secure the sum, and thereafter delivered to the defendant $10,000 Goodyear Tire & Rubber Company first mortgage and collateral trust 5 per cent. bonds due May 1, 1957, with May 1, 1932, and future coupons attached; $5,000 Missouri Pacific Railroad Company first and refunding mortgage 5 per cent. gold bond, Series F, due March 1, 1977, with March 1, 1932, and future coupons attached.

The bank having become insolvent, the superintendent took possession on December 16, 1931, at which time the above-stated amounts were on deposit with the bank, and passed into the hands of the liquidator. The superintendent of banks brought this action to recover the bonds, as having been transferred and pledged with the defendant, contrary to law. There is no statute requiring or authorizing such a disposition of bank assets.

At the close of the trial, the Special Term ordered that the possession of the bonds be delivered to the superintendent of banks, upon his depositing with the Central Trust Company of Rochester, N. Y., in place of the bonds, the sum of $6,000 to the credit of the defendant, and subject to the further order of the court. Later, an order was made that the trust company pay to the defendant $4,000, on or after August 15, 1932. The judgment of the Special Term, made August 3, 1932, dismissed the complaint upon the merits, and directed the payment of the balance of the $6,000 fund to the defendant. The appeal to this court is from this judgment and the previous order, by leave of the Appellate Division, which affirmed both.

The objections which have been made to the pledging of a bank's assets to secure deposits are, first, that it gives extra, secret protection to the secured depositor at the expense of the unsecured; and, second, that the bank invites the public to deposit moneys upon a misrepresentation of its financial condition, as its published periodical statements contain no mention of these secret withdrawals of its assets.

Whatever confusion there may have been in the decisions of the courts bearing upon this question has been due very largely to the treatment of deposits as if they were loans. The distinction has not always been recognized. That banks, incorporated under our banking laws, have the capacity to borrow money, as incidental to the banking business, and the powers expressly granted, has long been established. To do so, they necessarily must give security to obtain the loans. Curtis v. Leavitt, 15 N. Y. 9, 52;Auten v. United States Nat. Bank of New York, 174 U. S. 125, 19 S. Ct. 628, 43 L. Ed. 920. But even in Curtis v. Leavitt, decided in 1857, the court recognized the possibility of a distinction between a deposit and a loan. As Comstock, J., in the prevailing opinion, said: ‘A general deposit in a bank, in its exact legal result, is a loan of money (Chapman v. White, 6 N. Y. [2 Seld.] 412 ; yet it may be true, as my learned associate, Judge Selden, thinks, that a power to receive deposits is not a power to borrow money in the more general and appropriate sense of those words.’

The recent case of Farmers' & Merchants' State Bank of Ogilvie, by Veigel, v. Consolidated School District No. 3, Kanabec County, 174 Minn. 286, 291, 219 N. W. 163, 165, 65 A. L. R. 1407 (April, 1928), in opinion by Stone, J., has made the distinction very clear in deciding that a bank has no power to pledge any of its assets to secure the repayment of general deposits, except as authorized by statute regarding state and municipal funds. Referring to the earlier decisions which held that a deposit was simply a loan of money and that the power to borrow money carries the power to secure its payment by collateral, the opinion states: ‘The essential premise of that opinion is that with respect to the power to give security bank deposits and bank borrowings are alike. That seems to us unsound. Bank deposits and bank borrowings are alike in but the one respect that one result of each is the relation of debtor and creditor. In every other respect the two operations are not only different but in complete antithesis. Deposits are attracted by the strength of a bank, whereas its borrowings are compelled by weakness or other adverse circumstance. (The borrowing of money has been said to be ‘so much out of the course of ordinary and legitimate banking as to require those making the loan to see to it that the officer or agent acting for the bank had special authority to borrow money.’ Western Nat. Bank v. Armstrong, 152 U. S. 346, 351, 14 S. Ct. 572, 38 L. Ed. 470.) Large deposits signify health, and large borrowings banking disease. Springing from opposite causes, the two by their existence signify opposite conditions-deposits the normal, and borrowings the abnormal. Moreover the antithesis holds to the end, for the withdrawal of a deposit is a loss, whereas the payment of a loan is a gain. Deposits continued and increased evidence banking success, whereas borrowings continued and increased portend failure. Save in the relation of debtor and creditor common to both, the two are different in their every incident-not only different but opposed in origin, in purpose, and in effect. How it comes then that the obvious truth that a bank may pledge collateral for borrowed money can be used to sustain the same power in the case of deposits we cannot understand. The former is clearly necessary, usual and incidental, whereas the latter is neither necessary, usual or incidental, but is positively dangerous.'

As dealing with the question of the power to pledge assets for deposits, the opinion further states views which we quote because of their succinctness and sound reasoning: ‘At the outset it [pledge of assets] evinces a willingness to favor the secured depositor at the expense of those less favored. Then it actually sets apart for his exclusive benefit part of a fund to no part of which he should have any such right, and in every part of which the other depositors should have the same right as himself. It is in derogation of that fair and equal treatment of all depositors which is fundamental in the ethics of banking. A conclusive test is that no bank can make a practice of securing deposits by pledging assets and live. A few such transactions made known to its clientele would put any bank out of business. The practice would properly be taken to show that the institution was intrinsically so little deserving of deposits that resort to the too attractive lure of collateral was compelled by adverse circumstances. * * * So, if the practice of securing deposits by pledge of assets is resorted to at all, it must be done secretly. That is enough to condemn it. Any power the exercise of which will not stand the light of publicity cannot be allowed to banks.’

The Supreme Court of Minnesota had the support of two previous cases cited in all the discussions upon this subject. Commercial Banking & Trust Co. v. Citizens' Trust & Guaranty Co., 153 Ky. 566, 572, 156 S. W. 160, 163,45 L. R. A. (N. S.) 950, Ann. Cas. 1915C, 166, and Divide County v. Baird,...