Reichert v. Farmers' & Workingmen's Savings Bank

[EDITORS' NOTE: THIS PAGE CONTAINS HEADNOTES. HEADNOTES ARE NOT AN OFFICIAL PRODUCT OF THE COURT, THEREFORE THEY ARE NOT DISPLAYED.] Certified questions from the Jackson circuit court arising upon petition of receiver of defendant bank for directions to govern administration of his trust.

First question: "Under section 11928, 3 Comp. Laws 1929, must the investments of the savings department of a State bank be held solely for the benefit of savings depositors?"

Answer: Yes.

The statute cited is in part:

"Any bank combining the business of a commercial bank and a savings bank, and operating an industrial loan department shall keep separate books of account for each kind of business:Provided, That all receipts, investments and transactions relating to each of said classes of business shall be governed by the provisions and restrictions herein specifically provided for the respective kinds of banks: Provided further, That all the investments relating to the savings department shall be kept entirely separate and apart from the other business of the bank, and that the reserve required by the provisions of this act to be kept on the savings deposits, shall be kept separate and distinct on the books of the bank from the reserve required on the commercial deposits, and that such portion of said savings deposits as are on hand unloaned or deposited with other banks or reserve agents and the investments made with the funds deposited by savings depositors shall be held solely for the payment of depositors of said funds."

This statute is so perfectly clear and unambiguous that no comment on its meaning is necessary.

Conflict is urged in respect of 3 Comp. Laws 1929, § 11962, quoting in part:

"From time to time, under the direction of the commissioner of the banking department, the receiver shall make ratable dividends of the moneys realized or collected by him on all such claims as may have been proved to his satisfaction or adjudicated in a court of competent jurisdiction, and the remainder of the proceeds, if any, after the costs and expenses of such proceedings and all debts and obligations of the bank are satisfied, shall be paid over to the stockholders of such bank, or their legal representatives, in proportion to the stock by them respectively held."

Application of this statute would, of course, be obvious if there were here just one bank, say a general or commercial bank, and we think it hardly less obvious where, as here, there are two banks, commercial and savings, combined as the statute permits. 3 Comp. Laws 1929, §§ 11898, 11899.

The savings deposits on hand and investments made from savings deposits are impressed with a trust in favor of savings depositors, who are entitled to have such assets applied first to the payment of their claims, and such of them as make due claim to the receiver may share, ratably, as the statute provides.

The statute last quoted must be read in connection with that first quoted and with the sections cited, permitting combination of banks, and when so read it appears that distribution of savings assets must be ratable, likewise distribution of commercial assets.

This question was, in substance, presented to the court inPeters v. Union Trust Co., 131 Mich. 322, and answered as here.

A leading and supporting case, in which this question and others hereinafter noted were considered, is Upham v. Bramwell,105 Ore. 597 (209 P. 100, 25 A.L.R. 919). See, also, Com'rof Banks, in re Prudential Trust Co., 240 Mass. 478 (134 N.E. 253); Com'r of Banks, in re Cosmopolitan Trust Co.,241 Mass. 346 (136 N.E. 269); Dole v. Chattabriga, 82 N.H. 396 (134 A. 347); Kelly v. Com'r of Banks, 239 Mass. 298 (131 N.E. 855).

It is urged that inconvenience in banking results from enforcement of the law. As was said in the Peters Case, we are not concerned in this, the legislative intent being clear. It is also contended that in practice the law is not well observed. Violation of the law does not accomplish its repeal. Because of today's financial stress we are urged by counsel to overrule the Peters Case, and, in effect, to give construction to the statute without its meaning. Other counsel vigorously urged adherence to the Peters Case.

The obligations of the depository bank, created by the statute, were carried into and became a part of every contract of deposit in the savings department. Upham v. Bramwell, supra, 622. By the insolvency, the depositors' rights have become fixed and may not be impaired.

Moreover, this statute, then substantially the same, was passed upon in the Peters Case nearly 30 years ago, and decision made unanimously after due consideration. Depositors in this State have a right to expect, with confidence, that the decision, while the statute remains, will be adhered to. 15 C. J. p. 919, and cases cited.

Savings banks in their beginning were authorized in aid of persons of small means to provide security for their money and to engender "habits of industry and frugality." 7 C. J. p. 851. And from the public standpoint that is their chief purpose today. The statute, in furtherance of such purpose, is supported by sound considerations of public policy, and the decision in thePeters Case is likewise supported. This holding is not affected by amendatory Act No. 21, Pub. Acts 1931 (amending 3 Comp. Laws 1929, § 11932).

Second question: "If there be insufficient proceeds from the liquidation of investments of the savings department to pay the savings depositors in full, are the savings depositors entitled to share in the balance of the assets of the bank with other claimants, and if so in what ratio?"

Answer: Yes, ratably.

Savings depositors are general creditors in the amount of their deposits remaining unpaid after application of the savings assets.

The banking corporation itself is entitled to all profits and is liable for all debts.

The commercial bank is the general bank. If there be an actual excess of savings assets over total of claims of savings depositors, such excess is free from the trust imposed and goes to the general bank for ratable distribution. If there be insufficient savings assets to pay claims of savings depositors, it follows that such depositors are general creditors of the banking corporation for the amounts of insufficiency, and in this regard they share ratably with other general creditors of the bank. The general creditors as a whole class are (1) commercial depositors, (2) other unsecured general creditors, and (3) the savings depositors for the amounts due them after their statutory preference is exhausted. Among general creditors the statute creates no preference. When, in the savings department, the total of reserve and investments equals the total of deposits the law is satisfied. Third question: "Where a portion of the investments of the savings department of a bank are so involved in litigation that it will be impossible to ascertain what amount will be ultimately available from the savings investments of the bank, is the receiver justified in paying any liquidation dividends to other than savings depositors?"

Answer: No, on facts stated in the question, but see answer to the next question.

Fourth question: "Under section 11962, 3 Comp. Laws 1929, is the receiver justified in paying any dividends to other than savings depositors until it has been finally determined what assets are available?"

Answer: Yes, with limitations.

We quote from brief of counsel:

"We can conceive of no difficulty for a receiver who is acquainted with the banking business and knows values of securities, being able to determine at least within reasonable limits the net assets of each department in his charge. When cash becomes available, certainly a dividend can be paid out of the commercial department provided that dividend is kept within a range of safety."

This implies use of judgment. Caution must be exercised by the court to keep within the "range of safety" to the end that no detriment shall be suffered by savings depositors in respect of their right discussed in answer to first question.

Fifth question: "Where loans are made by a bank and securities which belong to the savings department are pledged as collateral security for the repayment of such loans, must such loans be paid from the general assets of the bank and such pledged securities held solely for the benefit of savings depositors?"

Answer: Yes.

All counsel are agreed that, the first question being answered in the affirmative, this question must be answered likewise. We quote from Com'r of Banks v. Cosmopolitan TrustCo., 240 Mass. 254 (133 N.E. 630):

"The securities of the savings department, which were pledged by the trust company as security for a loan used by its commercial department were trust property. * * * It became the instant duty of the plaintiff, when he took possession, to restore to the savings department the securities abstracted therefrom and put to the unlawful use. It was his obligation to use the resources of the commercial department for the purpose of repairing the breach of trust committed by the trust company against the depositors in the savings department. His duty was to pay the notes, thus to release the pledged securities and to replace them in position to protect the depositors in the savings department."

The question and the decision imply the tracing to and finding in the general bank the trust funds of the savings depositors. The question merely touches the matter of tracing trust funds. A variety of situations may confront receivers, which cannot be anticipated. There is abundant authority on the question. We cite a few cases. See Patek v. Patek, 166 Mich. 446 (35 L.R.A. [N. S.] 461); Sherwood v. Central MichiganSavings Bank, 103 Mich. 109; State Banking Com'r v. E. JossmanState Bank, 185 Mich. 24 (Ann. Cas. 1917 C, 1203); Wisconsin,etc., Bank v. Manistee Salt Lbr. Co., 77 Mich. 76.

Sixth question: "Under section 11928, 3 Comp. Laws 1929, providing for the keeping of investments relating to savings department entirely separate and apart, is the receiver justified in permitting a set-off of a savings deposit against a commercial obligation?" Answer: Yes.

We are requested by counsel to speak further on the question of set-off. We do it, and quote the true rule fromUpham v. Bramwell, supra:

"To allow a depositor in the commercial department of the bank to set off his deposit against his debt to the savings department would have the effect of diverting funds and assets held solely for the special purpose of repaying savings depositors, and using them to pay the liability and obligation of the bank to a commercial depositor. This, we think, is prohibited by the statute, and in such cases the right of set-off cannot be allowed, and to that extent the general rules of equitable set-off are limited by the statute.

"Diversion of savings assets to a prohibited use or purpose does not result where a savings deposit is offset by a debt to the savings department or to the commercial department, or where a commercial deposit is offset by a debt to the commercial department, and in those cases the right of set-off is not affected by the statute."

Seventh question: "From what source should the expenses of administration of the receivership be taken, and should the savings investments be charged with any portion of such expense?"

Answer: There is primary liability for expenses of administration to be paid from funds in hands of receiver, and savings assets are chargeable with a just and equitable part of the expenses of liquidation. What is a just and equitable part must depend on the circumstances of the particular case.

Eighth question: "Can the proceeds of stock assessments under the statutory double liability be paid out by way of liquidation dividends before it is actually determined that there will be insufficient assets with which to meet the obligations of the bank?"

Answer: Yes.

All counsel agree on this question. See Foster v. Row,120 Mich. 1 (77 Am. St. Rep. 565); 3 Comp. Laws 1929, §§ 11959, 11962, 11945, 12028.

Ninth question: "How should the general assets of the bank, which are carried as combined account assets and which do not relate specifically to either savings investments or commercial investments, be apportioned among the claimants of the bank?"

Answer: Any and all assets of the bank, not assigned or allocated to savings department, and to which no trust in favor of savings depositors is attachable, are general assets of the bank.

Tenth question: "If it be determined that the savings depositors are entitled to share in the balance of the assets of the bank after the savings department assets are exhausted, shall the ratio of division be determined by the proportion of savings claimants to commercial claimants as of the date of the closing of the bank or on the basis of claims actually filed?"

Answer: On the basis of claims actually filed. 3 Comp. Laws 1929, § 11961; Citizens' Sav. Bank v. Ingham Circuit Judge,98 Mich. 173; Bissell v. Heath, 98 Mich. 472; 53 C. J. p. 237.

Eleventh question: "Can a deposit in the bank be set off where the depositor's debt to the bank is secured by collateral?"

Answer: Yes.

All counsel agree. The matter is fully covered in brief of the attorney general, to which attention of those desiring to pursue the question is directed. Twelfth question: "Can a deposit in the bank, in case the bank becomes insolvent, be set off against a stockholder's statutory liability?"

Answer: No, with this qualification — where the statutory assessment against the stockholder has not been paid, the receiver may and should apply any dividend on the deposit of the stockholder toward payment of his assessment. Wedemeyer v.Hindelang, 161 Mich. 600.

Ordered transmitted and the circuit court advised accordingly.

McDONALD and WIEST, JJ., concurred with CLARK, C.J.