Texas Pac Ry Co v. Pottorff, No. 128

CourtUnited States Supreme Court
Writing for the CourtBRANDEIS
Citation291 U.S. 245,54 S.Ct. 416,78 L.Ed. 777
PartiesTEXAS & PAC. RY. CO. v. POTTORFF
Docket NumberNo. 128
Decision Date05 February 1934

291 U.S. 245
54 S.Ct. 416
78 L.Ed. 777
TEXAS & PAC. RY. CO.

v.

POTTORFF.

No. 128.
Argued Dec. 7, 1933.
Decided Feb. 5, 1934.

[Syllabus from pages 245-246 intentionally omitted]

Page 246

Messrs. M. E. Clinton and T. D. Gresham, both of Dallas, Tex., for petitioner.

[Argument of Counsel from pages 246-251 intentionally omitted]

Page 251

Messrs. Thornton Hardie, of El Paso, Tex., and Henry E. Hackney, of Uniontown, Pa., for respondent.

Mr. Justice BRANDEIS delivered the opinion of the Court.

The main question for decision is whether a national bank has power to pledge a part of its assets to secure a private deposit.

The First National Bank of El Paso, Tex., failed on September 4, 1931, and S. O. Pottorff was appointed receiver. The Texas & Pacific Railway Company was then, and long had been, a depositor. To secure it as such the bank had, in January, 1931, pledged $50,000 Liberty bonds and held them for the railway in the trust department of the bank. The balance in the railway's regular checking account at the time of the failure was $54,646.94. Of this claim it made proof as a secured creditor. The receiver approved the amount of the claim, but denied the validity of the pledge; and he tendered a dividend check only for the amount to which the railway would have been entitled as an unsecured creditor. Thereupon, the railway brought, in the federal court for western Texas, this suit against the receiver, praying, in the alternative, that the bonds be delivered to it; or that they be sold for its benefit; or that the claim be paid in full with interest. The receiver filed a cross-bill praying that the bank's title to the bonds be quieted.

The case was first heard upon motions to dismiss the bill and the cross-bill. The decision on the motions was postponed until after hearing the case upon the evidence. Thereupon the court dismissed the bill and en-

Page 252

tered a decree for the receiver upon the cross-bill, holding that the pledge was void and that the Liberty bonds constituted assets to be administered for the benefit of the general creditors of the bank. The Circuit Court of Appeals affirmed the decree. 63 F.(2d) 1. This Court granted certiorari. 290 U.S. 609, 54 S.Ct. 55, 78 L.Ed. —-. The railway contends that the bank had power to make the pledge; that even if the bank did not have such power, the receiver is not in a position to question the validity of the pledge; and that even if he is not estopped from doing so, he may not disaffirm it without returning the consideration therefor received by the bank. We are of opinion that none of these contentions is sound.

The District Court found the following additional facts: The relation between the railway and the bank began in 1922 when the railway was in receivership. Then, an order was entered appointing the bank a depositary upon condition that it should furnish a bond with solvent sureties. An acceptable bond was then given in the sum of $25,000. When, in 1924, the receivership terminated, the railway continued its deposit account; and a bond in like amount was given with the National Surety Company as surety. When, in 1927, the average deposits had increased to about $50,000, an additional bond of $25,000 was given with the Maryland Casualty Company as surety. While these bonds were in full force and effect and the bank was solvent, it requested the railway to accept, in substitution for the surety bonds, the pledge of the $50,000 Liberty bonds, giving as its reason for the request that the premiums payable on the surety bonds were a burden from which it wished to be relieved. The railway expressed willingness to assent to the substitution, but only on condition that thereby it would be as fully protected as by the surety bonds. The bank and its attorney gave this assurance; and thereupon the pledge was substituted

Page 253

for the surety bonds and these were canceled. Without that assurance, the railway would not have consented to the cancellation of the surety bonds; or if they had been canceled without its consent, would have immediately withdrawn all of its deposits. In reliance upon the assurances and the pledge, the railway continued until the failure to make deposits; and in fact increased its deposits.

National bank examiners commenced on August 6, 1931, an examination of the bank. Within a few days, they learned from the bank's books that the pledge had been made; but neither the examiners nor the comptroller of the currency advised the bank's officers that the pledge was beyond the powers of the bank or that it was irregular or otherwise objectionable. The bank had frequently secured private deposits by surety bonds; but never before by a pledge of assets. The examiners concluded their investigation on August 20, 1931. The failure occurred on September 4, 1931.

First. National banks lack power to pledge their assets to secure a private deposit. The measure of their powers is the statutory grant; and powers not conferred by Congress are denied.1 For the act2 under which national banks are organized constitutes a complete system for their government. Cook County National Bank v. United States, 107 U.S. 445, 448, 2 S.Ct. 561, 27 L.Ed. 537; California Bank v. Kennedy,

Page 254

167 U.S. 362, 366, 17 S.Ct. 831, 42 L.Ed. 198; First National Bank in St. Louis v. Missouri, 263 U.S. 640, 44 S.Ct. 213, 68 L.Ed. 486. Confessedly the power to pledge assets to secure a private deposit was not granted in specific terms. The contention is that this power is incidental to the general grant of powers 'necessary to carry on the business of banking * * * by receiving deposits'; and, hence, is implied.3

There is no basis for the claim that the power to pledge assets is necessary to deposit banking. The record is barren of evidence that the practice of so pledging assets has ever prevailed among national banks. And facts of which we take judicial notice indicate that among national banks such action must have been deemed contrary to good banking practice.4 From the establishment of the system in 1864 to March 1, 1933, 2,159 national banks failed5 and there has been much litigation arising from their insolvency; but only two other reported cases have been found involving a pledge of assets to secure a private deposit, and in those cases, very recent ones, the existence of the power was denied.6 Smith v. Baltimore & O.R.

Page 255

Co. (D.C.) 48 F.(2d) 861; Id. (C.C.A.) 56 F.(2d) 799; Illinois Central R. Co. v. Rawlings (C.C.A.) 66 F.(2d) 146. In the case at bar, there is a specific finding that the transaction challenged was the only instance in which this bank had ever pledged assets to secure a private deposit. Surely action cannot be deemed a necessary incident of a business when only a single instance has been found in which it was taken. Moreover, even a practice commonly pursued may not be a necessary one.7

To permit the pledge would be inconsistent with many provisions of the National Bank Act which are designed to ensure, in case of disaster, uniformity in the treatment of depositors and a ratable distribution of assets. Compare Davis v. Elmira Savings Bank, 161 U.S. 275, 290, 16 S.Ct. 502, 40 L.Ed. 700. This policy of equal treatment was held to preclude, in case of a national bank, even the preference under section 3466 of the Revised Statutes (31 USCA § 191), which otherwise is accorded to the United States when its debtor becomes insolvent. Cook County National Bank v. United States, 107 U.S. 445, 2 S.Ct. 561, 27 L.Ed. 537. The effect of a pledge is to withdraw for the benefit of one depositor part of the fund to which all look for protection. Thereby the legitimate expectations of a great body of the depositors are defeated and confidence in the fairness of the national banking laws and administration is impaired. It is no answer to say that the other depositors are benefited by the increased resources which the pledge brings to the bank, or at least are not harmed, since the new funds take the place of the securities pledged and are available to meet

Page 256

liabilities.8 The immediate safety of unsecured creditors depends on the bank remaining open and solvent; the pledge reduces the fund of quick assets available to meet unusual demands without any assurance that the deposit will be used to replenish this fund.

The fact that this bank had frequently secured private deposits by surety bonds lends no support to the contention that the power to pledge assets is necessary to carrying on the business of deposit banking. Such a practice would likewise be a departure from the policy of equal treatment of depositors; but the loss to other depositors resulting from such action would be far less serious. A pledge withdraws capital assets, while the giving of a surety bond merely increases the bank's expenses. There is, however, no finding that among national banks

Page 257

there exists the practice of securing by surety bonds some private deposits. If there has been such a practice, it must have been a secret one; for reference to it has not been found in either official reports, or the books on banking or other publications dealing with financial affairs. 9 Whether a national bank could legally engage in such a practice we have no occasion to decide.10

The railway insists that Congress in providing that the Secretary of the Treasury might deposit public money in national banks upon receiving satisfactory security by 'the deposit of United States bonds or otherwise,' Act of June 3, 1864, c. 106, § 45, 13 Stat. 113,11 assumed a gen-

Page 258

eral power in national banks to pledge their assets to secure deposits; and that the assumption indicates that it intended this power to be among the 'incidental' powers granted by section 8. But without such assumption, the duty of the Secretary to demand a pledge authorizes a national bank to make it.12 We may not import into section 8 a meaning not...

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148 practice notes
  • Guttman v. Fabian (In re Fabian), Case No. 08-27450-JS
    • United States
    • U.S. Bankruptcy Court — District of Maryland
    • September 13, 2011
    ...to unauthorized purposes. McCandless v. Furlaud, supra, 296 U.S. [140,] at 159-61, 56 S.Ct. [41,] at 47]; Texas & Pacific Ry. v. Pottorff, 291 U.S. 245, 260-61, 54 S. Ct. 416, 420, 78 L. Ed. 777 (1934); Southmark Corp. v. Cagan, 999 F.2d 216, 222 (7th Cir. 1993). That the return would benef......
  • Communications Satellite Corp. v. F. C. C., No. 75-2193
    • United States
    • United States Courts of Appeals. United States Court of Appeals (District of Columbia)
    • October 14, 1977
    ...and COMSAT. Tampa Electric Co. v. Nashville Coal Co., 365 U.S. 320, 332, 81 S.Ct. 623, 5 L.Ed.2d 580 (1961); Texas & P.R. Co. v. Pattorff, 291 U.S. 245, 54 S.Ct. 416, 78 L.Ed. 777 32 COMSAT's argument that a majority of the Commissioners did not concur in the finding that COMSAT was no more......
  • Guttman v. Fabian (In re Fabian), Case No. 08-27450-JS
    • United States
    • U.S. Bankruptcy Court — District of Maryland
    • September 13, 2011
    ...to unauthorized purposes. McCandless v. Furlaud, supra, 296 U.S. [140,] at 159-61, 56 S.Ct. [41,] at 47]; Texas & Pacific Ry. v. Pottorff, 291 U.S. 245, 260-61, 54 S. Ct. 416, 420, 78 L. Ed. 777 (1934); Southmark Corp. v. Cagan, 999 F.2d 216, 222 (7th Cir. 1993). That the return would benef......
  • La Caisse Populaire Ste-Marie (St. Mary's Bank) v. US, Civ. A. No. 75-383.
    • United States
    • United States District Courts. 1st Circuit. United States District Courts. 1st Circuit. District of New Hampshire
    • December 10, 1976
    ...17 L.Ed.2d 343 (1966); Franklin National Bank v. New York, 347 U.S. 373, 74 S.Ct. 550, 98 L.Ed. 767 (1954); Texas & P. R. Co. v. Pottorff, 291 U.S. 245, 54 S.Ct. 416, 78 L.Ed. 777 (1934); Smith v. Kansas City Title & T. Co., 255 U.S. 180, 41 S.Ct. 243, 65 L.Ed. 577 (1921); First National Ba......
  • Request a trial to view additional results
145 cases
  • Guttman v. Fabian (In re Fabian), Case No. 08-27450-JS
    • United States
    • U.S. Bankruptcy Court — District of Maryland
    • September 13, 2011
    ...to unauthorized purposes. McCandless v. Furlaud, supra, 296 U.S. [140,] at 159-61, 56 S.Ct. [41,] at 47]; Texas & Pacific Ry. v. Pottorff, 291 U.S. 245, 260-61, 54 S. Ct. 416, 420, 78 L. Ed. 777 (1934); Southmark Corp. v. Cagan, 999 F.2d 216, 222 (7th Cir. 1993). That the return would benef......
  • Communications Satellite Corp. v. F. C. C., No. 75-2193
    • United States
    • United States Courts of Appeals. United States Court of Appeals (District of Columbia)
    • October 14, 1977
    ...and COMSAT. Tampa Electric Co. v. Nashville Coal Co., 365 U.S. 320, 332, 81 S.Ct. 623, 5 L.Ed.2d 580 (1961); Texas & P.R. Co. v. Pattorff, 291 U.S. 245, 54 S.Ct. 416, 78 L.Ed. 777 32 COMSAT's argument that a majority of the Commissioners did not concur in the finding that COMSAT was no more......
  • Guttman v. Fabian (In re Fabian), Case No. 08-27450-JS
    • United States
    • U.S. Bankruptcy Court — District of Maryland
    • September 13, 2011
    ...to unauthorized purposes. McCandless v. Furlaud, supra, 296 U.S. [140,] at 159-61, 56 S.Ct. [41,] at 47]; Texas & Pacific Ry. v. Pottorff, 291 U.S. 245, 260-61, 54 S. Ct. 416, 420, 78 L. Ed. 777 (1934); Southmark Corp. v. Cagan, 999 F.2d 216, 222 (7th Cir. 1993). That the return would benef......
  • La Caisse Populaire Ste-Marie (St. Mary's Bank) v. US, Civ. A. No. 75-383.
    • United States
    • United States District Courts. 1st Circuit. United States District Courts. 1st Circuit. District of New Hampshire
    • December 10, 1976
    ...17 L.Ed.2d 343 (1966); Franklin National Bank v. New York, 347 U.S. 373, 74 S.Ct. 550, 98 L.Ed. 767 (1954); Texas & P. R. Co. v. Pottorff, 291 U.S. 245, 54 S.Ct. 416, 78 L.Ed. 777 (1934); Smith v. Kansas City Title & T. Co., 255 U.S. 180, 41 S.Ct. 243, 65 L.Ed. 577 (1921); First National Ba......
  • Request a trial to view additional results

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