In Re Cashmere State Bank

These cases, consolidated, present two questions for our determination: (1) May the state supervisor of banking, as liquidator of an insolvent bank, make a loan from the Reconstruction Finance Corporation, pledging as security for such loan the assets of the insolvent bank, and use the proceeds of the loan to pay the claims of preferred creditors and declare a first dividend to depositors and general creditors of the insolvent bank? (2) Has the court the power to approve the making of such loan? The two questions are closely related, and will be considered together in our discussion.

The facts presented by the record and essential to our understanding of the cases are these: On January 30, 1932, C.S. Moody, as supervisor of banking for the state of Washington, made an examination of the condition of the Cashmere State Bank, Cashmere, Washington, determined that it was in an unsafe and unsound condition to do business, and declared it insolvent. On the same day, pursuant to Rem. Comp. Stat., § 3266, and by virtue of his office, he closed the institution, took possession of all the affairs and assets of the bank for the purpose of liquidation, and has ever since continued in possession thereof.

On January 21, 1932, the Congress of the United States enacted a law known as the "Reconstruction Finance Corporation Act," § 5 of which reads, in part, as follows:

"To aid in financing agriculture, commerce, and industry, including facilitating the exportation of agricultural and other products the corporation is authorized and empowered to make loans, upon such terms and conditions not inconsistent with this chapter as it may determine, to any bank . . . organized under the laws of any State or the United States, including loans secured by the assets of any bank that is closed, or in process of liquidation to aid in the reorganization or liquidation of such banks, upon application of the receiver or liquidating agent of such bank and any receiver of any national bank is hereby authorized to contract for such loans and to pledge any assets of the bank for securing the same: Provided, That not more than $200,000,000 shall be used for the relief of banks that are closed or in process of liquidation." Sec. 605, U.S. Code (Ch. 14, Reconstruction Finance Corporation Act), Title 15.

On March 22, 1932, the state supervisor of banking, in charge of the liquidation of the Cashmere State Bank, filed a petition in the superior court of Chelan county, Washington, wherein the bank is situated, requesting authority to borrow $100,000 from the Reconstruction Finance Corporation and to pledge the assets of the bank as collateral security, in order to enable the state supervisor to pay preferred claims and declare and pay a dividend to general creditors and depositors. On the same day, the court made an order fixing April 4, 1932, as the day of hearing on the petition, and directing the state supervisor to publish notice of such hearing in a newspaper of general circulation in Chelan county and to mail a copy thereof to each creditor, depositor and stockholder. On April 4, 1932, after a hearing on the petition, it appearing that the required notice had been duly given, the court entered an order granting the prayer of the petitioner. From that order, S.M. Sim, a depositor, and W.D. Stewart, a stockholder, respectively, of the Cashmere State Bank, have appealed to this court.

On April 8, 1932, S.M. Sim and W.D. Stewart, depositor and stockholder, respectively, of said bank, made application to this court for a writ of certiorari. The writ having issued, the record upon which the lower court authorized the state supervisor of banking to borrow the money as requested in said petition is before us for review. The appeal and the proceedings for review have been consolidated by stipulation, and are now before us for consideration and decision.

The facts upon which the application of the state supervisor of banking to borrow money is predicated are these: The Cashmere State Bank has among its assets $100,000 in properties which are of a character either not readily convertible into cash or which consist of securities which in the present abnormally depressed condition of the market it would be flagrantly wasteful, and would involve a sacrifice, to sell at this time. The insolvent bank is the only banking institution in the city of Cashmere and its vicinity. Its closing had an injurious and profoundly depressing effect upon the merchants, farmers, and orchardists of Cashmere and the surrounding county; it deprived them of the facilities for obtaining credit for seed, the planting of crops, and the spraying and pruning of orchards, and seriously affected their ability to conduct the various agricultural and industrial pursuits prevalent in that community.

[1] At the very outset of our discussion, it must be conceded that neither statute nor judicial decision expressly confer authority upon the state supervisor of banking to borrow money and pledge the assets of the insolvent bank in his custody to pay dividends. It must also be conceded that equity receivers do not, by virtue of their mere appointment as such, possess such powers.

The state supervisor of banking, however, is an executive officer of the state. As such, he acts in a governmental capacity for the public interest.

"The superintendent of banks, in taking charge of the affairs of an insolvent bank for liquidation, is the agent of the State. He acts for and in behalf of the commonwealth. His possession is that of the State, who is his principal." Bennett v. Green,156 Ga. 572, 119 S.E. 620.

While banks are not public corporations, they are quasi-public institutions. 1 Michie on Banks and Banking, chap. 1, § 2, p. 6, and cases cited thereunder. Descriptive of the functions of banks, the supreme court of Kentucky, in Cartmell v. CommercialBank Trust Co., 153 Ky. 798, 156 S.W. 1048, said:

"Banks are to the commercial world what arteries are to the human system. Through them passes the vitalizing life-giving medium of exchange, and, upon their healthy condition, commercial activity and prosperity in the main, depend. It is a matter of common knowledge that payment, in ninety-five per cent of all business transactions, is made, not in cash but by means of checks or drafts. Banks thus become, in a sense, public institutions."

The supreme court of Florida, in Bryan v. Bullock, 84 Fla. 179, 93 So. 182, said:

"The business of banking is an occupation which bears such an intimate relation to the affairs of man that the proper supervision and control of its affairs and methods of transacting business, the discharge of its functions and obligations, is of great importance, to the end that the peace of the community, the welfare of the people, the orderly functioning of industrial activities and the preservation of faith and confidence in commercial transactions be secured and maintained. A banking company's relation to the community is so intimate and its service of such far reaching and comprehensive scope that it has become a quasi public function and almost, if not quite, classed as a public utility."

By the state banking act, the examiner (whose duties are now performed by the state supervisor of banking), is directed as follows:

"Upon taking possession of any bank or trust company, the examiner shall proceed to collect the assets thereof and to preserve, administer and liquidate the business and assets of such corporation." Rem. Comp. Stat., § 3269.

It is true that the state banking act in another portion of the section just quoted, and also in Rem. Comp. Stat., §§ 3273 and 3277, provides for the doing of certain acts by the supervisor with the approval of the court. These include the sale and compromise of bad or doubtful debts, the sale of real and personal property, and the payment of dividends out of the ultimate funds remaining in his hands after the payment of expenses. It is argued that these provisions are restrictive, and by their enumeration exclude all others not specifically designated.

Bearing in mind that the state supervisor of banking is an executive officer of the state, that his duties are of a public nature, and that, in the discharge of them, he acts in the public interest, we are induced to place such construction upon the statute as will enable him to administer speedily, adequately and comprehensively the trust imposed upon him.

In legislating for the performance of a public duty by a state officer, it must be recognized that statutes can not provide for every minute detail of operation. Specific situations can not always be expressly provided for, nor anticipated with exactitude. The most that can be expected of this character of legislation is a declaration, in general terms, of the purpose for which the office is created and the officer appointed. Capacity coextensive with the nature of the office and the object to be accomplished must be inferred, and the necessary power to function therein implied.

"The administration of government often requires, in a large degree, the exercise of discretion and judgment." Sheeley v.People, 54 Colo. 136, 129 P. 201.

"The duties of an office include all those that fairly lie within its scope; not merely those which are necessarily involved in the accomplishment of the main purpose of the office, but those also which, although incidental and collateral, naturally and properly serve to promote and benefit the performance of the principal duties. Constitutions and statutes seldom define with precision the scope of any office." Moore v. Nation,80 Kan. 672, 103 P. 107, 23 L.R.A. (N.S.) 1115.

Our own court, in the case of State ex rel. Hartley v.Clausen, 150 Wn. 20, 272 P. 22, said on page 24:

"It is a well-recognized rule of law that, if a board is charged with a specific duty and the means by which the duty is to be accomplished are not specified or provided for, the board so charged has an implied power to use such means as are reasonably necessary to the successful performance of the required duty. In State ex rel. State Board of Medical Examinersv. Clausen, 84 Wn. 279, 146 P. 630, . . ."

In State ex rel. Railroad Commission v. Great NorthernRailway Company, 68 Wn. 257, 123 P. 8, this court said at page 262:

"The legislature, acting within its constitutional powers, has, by statute, created the railroad commission and entrusted to its jurisdiction the broad and complex field covered by the duties of common carriers in their relation to the public as such. A jurisdiction so vast is of necessity covered in general terms. The dominant purpose of the act is remedial. There is, therefore, conferred by necessary implication every power proper and necessary to the exercise of the powers and duties expressly given and imposed."

By the banking act, the examiner (supervisor) is required to collect, preserve, administer and liquidate the assets of the bank. The activities indicated by these words present a natural and orderly sequence, and look to the assembling and management of the assets and their distribution among those to whom they properly belong. The ultimate purpose is to conserve the assets, not only for the sake of their existence, but particularly for their ultimate disposition. Whatever, therefore, may be reasonably necessary in order to enable the state supervisor of banking to properly function and finally to effect as great and speedy a return as possible to those entitled thereto, may be said to be included within the preservation and administration of the bank's assets.

What is necessary to preserve and administer such assets, must necessarily be a matter for the state supervisor to determine in the first instance, subject, however, to the approval of the court. Whether the particular purpose will effect, or contribute to, the preservation, and ultimately the proper administration and liquidation, of the assets, will, of course, depend upon the particular facts and circumstances. The power to borrow must necessarily always be exercised with great caution, but this statement carries with it the corollary that, after such caution has been exercised and the circumstances by necessity demand such a course of procedure, the power to execute it exists.

In this case, the assets of the bank are now admittedly "frozen." Neither preferred creditors nor general creditors can presently hope to realize anything out of them. It is impossible to dispose of the assets now, or, if it be possible, the consequences at any rate would be disastrous. To hold them in their present form, offers no prospect to either class of creditors or to the stockholders. To accept the beneficent and generous aid proffered by the Reconstruction Finance Corporation, would, at least, immediately realize liquid assets to be paid to preferred creditors and even in part to the general creditors, with no serious, if any, loss or prejudice to the stockholders. So far as the stockholders are concerned, it is merely the substitution of one preferred creditor in the place of another.

If the loan is perfected, the money, borrowed at a low rate of interest, goes immediately to the creditors. It is not used in the management or operation of a going business, with the attendant risk of loss, but is used in reducing existing liabilities. With the wisdom of the plan, inaugurated to meet a recognized emergency, we are not concerned, nor have we heard it in any manner criticized. Indeed, we are impelled to believe that it is the best that sagacious minds, well versed in financial experience, could, under the existing circumstances, devise.

It is argued, however, that a state bank receivership is purely statutory; that, by the banking statute, Rem. Comp. Stat., § 3276, the legislature divested the courts of their chancery prerogatives of appointing receivers of state banks and controlling them as officers of the court; and further, that the courts have no power, either to confer additional authority upon the statutory receiver or to approve any action which he may propose to take, unless that power is specifically reserved in the courts, or given to them, by the statute.

That the state supervisor of banking is, technically, a statutory receiver, may be admitted. But we do not accede to the proposition that the courts have been shorn of their chancery prerogatives of appointing receivers or of directing and controlling them as officers of the court. Even if the legislature had intended to effect that result, it was, in our opinion, powerless to accomplish it. At the common law, courts of equity had jurisdiction of such cases. That jurisdiction was retained in them by the provisions of our state constitution, Art. IV, § 6, which reads in part as follows:

"The superior court shall have original jurisdiction in all cases in equity . . .; of proceedings in insolvency; . . . and for such special cases and proceedings as are not otherwise provided for. The superior court shall also have original jurisdiction in all cases and of all proceedings in which jurisdiction shall not have been by law vested in some other court; . . ."

The administrative method provided for in the state banking act does not constitute a "special case or proceeding" as contemplated in the words quoted from the constitution.

If, then, the courts were vested with jurisdiction by virtue of the constitutional mandate, the legislature had no right or authority to deprive them of it. The provisions of the banking act are not comparable to the workmen's compensation act, which created a wholly new field of action or subject of contest and established a quasi-judicial body for its administration. The banking act merely seeks to provide a new, or rather an additional, and no doubt more flexible and expeditious, method of administering certain complex situations. Assuming that it is advisable in all cases that the method prescribed by the legislature should be followed, nevertheless, in our opinion, it is not an exclusive method in the sense of ousting the courts of their jurisdiction, because the legislature can not take away from the courts powers which they constitutionally possess.

This court has heretofore at least once expressed the view that the procedure prescribed by the statute is not exclusive. InState ex rel. Coulee State Bank v. Farnsworth, 125 Wn. 264,215 P. 355, the court, after referring to the sections of the statute which we have already quoted and indicated, said on pages 266, 267:

"As we read the act, it does not provide that the power of the banking department, as outlined in these sections describing the procedure where the bank remains in the hands of the department for liquidation, is exclusive. The purpose of the act was as far as possible to provide for the satisfaction of all claims of depositors and creditors and to save as much as possible for ultimate return to the stockholders. If all these interested depositors, creditors and stockholders have all their claims satisfied, the purpose sought by the act has been accomplished, and when they present themselves to the banking department and say that they have now been satisfied, and the department's expenses in the administration of the estate have been provided for, there would seem to be no reason in law or in common sense why the banking department should not then release to the directors the assets remaining in its hands."

In State ex rel. Dunbar v. Superior Court, 161 Wn. 550,297 P. 774, this court said at page 554:

"Since time immemorial, courts of equity, under the common law, have had exclusive jurisdiction of causes seeking the appointment of receivers, and any statute designed to oust the courts of their jurisdiction would be in derogation of the common law and therefore to be strictly construed."

While a statute may change the common law, it may not nullify the constitution.

Whatever attempt the legislature may have made to wholly oust the courts of their jurisdiction to appoint receivers of state banks and subsequently control them, we think that all that it could, or did, do in that respect, was to provide an additional method of appointing such receivers, without trenching upon the courts' inherent authority in the premises. A reading of the entire banking act convinces us that the legislature did not even attempt to exclude the courts from the supervision of such banks. We think that the least that can be said is that the supervision of such banks is vested by law jointly in the courts and the state supervisor of banking; that, while the supervisor has been entrusted with all preliminary, routine matters, and all such matters as an equity receiver ordinarily disposes of without an order of the court, yet in all matters of vital concern the court still retains full jurisdiction. The assets of the bank are incustodia legis. Hanson v. Sogn, 50 S.D. 44, 208 N.W. 228; Breese v.Bramwell, 110 Ore. 105, 223 P. 239; Van Meter v. State,132 Okla. 230, 270 P. 41; Mothersead v. Harris, 148 Okla. 285,298 P. 602; Frederick v. McRae, 157 Minn. 366, 196 N.W. 270.

When the legislature passed the banking act it certainly did not envisage the exigency that now exists, and there was, therefore, no occasion to specifically provide for it. But taking the language of the statute as it stands, we think it sufficiently broad to authorize the supervisor to negotiate the loan under consideration, provided that it is approved by the court after a proper notice and hearing thereon, as appears to have been done in this case. We think, moreover, that the court, by virtue of its equity jurisdiction, had the power to consider and approve the proposed acts of the supervisor.

The relief sought under the writ will be denied, and the decree of the lower court will, on the pending appeal, be confirmed.

It is so ordered.

HOLCOMB and HERMAN, JJ., concur.

TOLMAN, C.J., and BEALS, J., concur in the result.