County of Divide v. Baird

I cannot concur in the result reached by Judge Johnson in his opinion.

This appeal is taken on the judgment roll. The findings of the trial court are before us and we cannot go beyond them. The trial court found that the First State Bank of Wild Rose was designated as a depositary for Divide county in September, 1923; that thereafter the bank procured and filed a personal bond as such depositary; that on October 18th, 1923, the deposit here involved was made by Divide county; that "as a part of the negotiations leading up to the use of defendant bank as a depositary, the defendant bank agreed to pledge as collateral security for the repayment of such moneys as the county might deposit in said bank, the following certificates of indebtedness then owned by said bank, to wit: (the securities here sought to be foreclosed), which certificates were in addition to said bond as a part of the same transaction; that said agreement was carried into effect and said certificates of indebtedness duly pledged with and surrendered to the county as collateral security as aforesaid, and that upon execution of said bond and pledging of said certificates of indebtedness, the county did on October 18th, 1923, deposit in said bank the sum of $6,500, and for which sum the bank issued to the county its certificates of deposit" (on which this action is brought).

Of course we are bound by these findings. So the only conclusion to which we can come is that the deposit was made before the bond was effective and that simultaneously with the filing of the bond and as a part of the same transaction, the bank of Wild Rose pledged as collateral the certificates of indebtedness which the plaintiff now claims, and that as a result of the pledging of these collaterals the deposit was made in the bank. While the findings do not say so, we must assume that this was done by reason of an understanding with the proper county authorities. It further appears that these certificates totaled $6,475. The amount deposited was $6,500, or $25 more than the total of the certificates. The bank received the money; the county the certificates.

As I read Judge Johnson's opinion it holds that the transaction between the county of Divide and the Bank of Wild Rose was a deposit transaction and not a loan transaction; that there is such a distinction between a deposit and a loan, that while a bank has either the express or implied power to pledge its assets as security for a loan, it has no such power to pledge them as security for a deposit; that not only has it no such power but to do so is prohibited and contrary to the express policy of the law; that therefore such transactions are not only ultra vires, but are unlawful as well; and that no relief thereunder or therefrom will be awarded by the courts; that it is the policy of the law to protect depositors of banking institutions; that when a banking institution becomes insolvent and a receiver therefor is appointed, consistent with such a policy the receiver stands in a better position than the bank itself would occupy with reference to transactions which violate those statutes and policies having in view the protection of depositors; that the principle amounted in the case of Vallely v. Devaney, 49 N.D. 1107, 194 N.W. 903, is applicable in the instant case to the extent that the receiver may set up the invalidity of the transaction and repudiate it, and while retaining that which the bank received under the transaction, secure back that which it gave.

I do not challenge the conclusion reached by Judge Johnson that a bank has no power to pledge its assets as security for a deposit made with it, but I do think that this conclusion is not material to a determination of the case. It seems to me that whether the transaction here involved was merely ultra vires, or whether it was prohibited and unlawful, can make no difference with reference to the rights of the county of Divide with respect to the security which it received for its deposit. The fact remains that the bank received and retains the money; the county has the securities which were given to it in return for the deposit. To hold that the bank may retain the $6,500 which it received and recover back the securities which it gave for the money, is abhorrent to natural justice. The fact that it is the receiver who now asserts his rights to the securities can make no difference. A receiver takes the estate of an insolvent for the benefit of the creditors. He is, in fact, an assignee and stands in the shoes of the insolvent with the same rights and obligations that the latter had at the moment of insolvency. This rule applies as well to receivers of insolvent banks as to receivers of other insolvents. See Gilbertson v. Northern Trust Co. 53 N.D. 502, 42 A.L.R. 1353, 207 N.W. 42. And, on the other hand, where a transaction is malum prohibitum the law will not lend its aid to either of the parties thereto. It will leave them where it found them. Neither may invoke the law to break the law. See Oakes Nat. Bank v. Farmers State Bank, 52 N.D. 49,201 N.W. 696; Smith v. Rennix, 52 N.D. 938, 204 N.W. 843; Jarski v. Farmers' M. State Bank, 53 N.D. 470, 206 N.W. 773; Emanuel v. Engst, 54 N.D. 141, 208 N.W. 840. It seems to me that the mere fact that the Wild Rose Bank has, since this transaction was consummated, become insolvent and is now in the hands of the defendant Baird, as receiver, can make no difference in the application of this latter principle. If, for instance, in the Jarski Case, supra, the bank had bought the land from Jarski and had given to him as consideration therefor securities owned by the bank, and thereafter the bank had become insolvent and the receiver had sought to compel a return thereof, certainly this court would not have said that because the transaction was unlawful and securities must be returned to the bank, the bank permitted to retain the land, and Jarski compelled to file his claim and share rateably with the other creditors. Such a case would be parallel to the instant case. Judge Johnson, however, reasons that because in the instant case the bank is insolvent, and Baird, as receiver of the Wild Rose bank, claims the securities, this principle does not apply. He bases this distinction upon the rule laid down in the case of Vallely v. Devaney, supra. I think, however, that this distinction or exception, is not justified by the rule in the Vallely case. In the latter case Devaney gave his note to the bank without consideration and with the understanding that he should not be required to pay it. He did this for the purpose, known to him and to the bank, of swelling the apparent assets of the bank and deceiving the examiner. This note remained in the possession of the bank and was there when the bank became insolvent and Vallely as receiver took charge. Vallely sued upon the note and this court held that Devaney was estopped to set up lack of consideration or any collateral agreement that he might have had with the bank. When he gave the note with the known purpose of deceiving the bank examiner he knew that it was a fraud upon that official and upon the public generally who might, and who did, make and keep deposits in the bank upon the strength of its apparent sound condition. That case is far different from the one we have here. Here the bank, through its receiver, seeks to keep that which it received and to recover back that which it gave. It does not appear that either the bank or its depositors were in the least prejudiced by the transaction. On the contrary it does appear that both were benefited for the bank had the money, where before it had only the certificates. Unquestionably, the bank might have sold the certificates even at a discount; it might have pledged these same certificates for a loan in the identical amount of this particular deposit. In other words, it might lawfully have done the same things that were done; that is, exchange the certificates for the money, except that in case of sale it would have given no evidence of indebtedness, and in case of loan a note instead of a certificate of deposit. I am not questioning, however, the distinction between a loan and a deposit that is elaborated in Judge Johnson's opinion; nor the existence of charter power to pledge securities in the former transaction and its absence in the latter. But the effect of pledging these assets for deposit could not tend to deceive the bank examiner, because the certificates were transferred to the possession of Divide county. There is no statute requiring banks to report the amount of assets pledged for loans, and the examiner can determine the amount pledged for deposits as readily as he can the amount pledged for loans. It is simply a matter of examination in both cases. There was no intention on the part of Divide county to deceive any examining officer or to induce the public to believe that the bank was sound when it was not, or that its assets were different from what they in fact were. Had the county, after receiving the certificates, turned them back to the bank with the idea that they should remain among its apparent assets for the purpose of deceiving the examiner, the principle in the Vallely case might be applicable, waiving the question of how far the county might be bound by any such fraudulent acts on the part of its officers. But that is not the case here.

The county of Divide has the certificates. They are payable to the holders. The county received them in good faith, though under a contract not sanctioned by the law. The maker of the certificates cannot challenge the right of the holder to collect them. The defendant Baird cannot do so, if my conclusions as above set out are correct, since he repudiated the contract and refused to return that which the bank received for them. Therefore, the judgment of the trial court, though apparently it affords affirmative relief by way of foreclosure, was in effect right and should be affirmed.

On Petition for Rehearing.