Fry v. Equitable Trust Co. , 264 Mich. 165 ( 1933 )

The question is whether the common-law prerogative of the crown to preference and priority of payment in case of the insolvency of a depositary of public funds has become vested in the sovereign State of Michigan.

Upon separation of the colonies from Great Britain, the Continental Congress declared:

"That, as free and independent States, they have full power to levy war, conclude peace, contract alliances, establish commerce, and to do all other acts and things which independent States may of right do." (1 Comp. Laws 1929, p. 11.)

Article 2 of the articles of confederation and perpetual union between the several States provides:

"Each State retains its sovereignty, freedom, and independence and every power, jurisdiction, and right which is not by this confederation expressly delegated to the United States in Congress assembled." (USCA, pt. 1, p. 10.)

By the ordinance of 1787 the supreme court of the Northwest Territory was given common-law jurisdiction. The common law was adopted by the legislative department of the Northwest Territory and it continued in full force and effect in Indiana territory when Michigan was a part thereof. It was not abrogated by the act of the governor and judges of Michigan of September 16, 1810, 1 Terr. Laws, pps. 210, 900; and is now in full force in Michigan, and has been since this territory came under jurisdiction of the government of the United States.Stout v. Keyes, 2 Doug. 184 (43 Am. Dec. 465); Lorman v.Benson, 8 Mich. 18 (77 Am. Dec. 435); In re Lamphere, 61 Mich. 105.

Section 3, art. 4, of the Constitution of the United States, provides for the admission of new States into the Union. The ordinance of 1787 provided for the admission of new States "on an equal footing with the original States in all respects whatsoever." (1 Comp. Laws 1929, p. 99.)

The act of Congress of June 15, 1836 (5 U.S. Stat. at L. 49), provided:

"That the State of Michigan shall be and is hereby declared to be one of the United States of America and is hereby admitted into the Union upon an equal footing with the original States, in all respects whatever." (1 Comp. Laws 1929, p. 104.)

Commissioner of Banking v. Chelsea Savings Bank, 161 Mich. 691, is based upon the erroneous and untenable theory that prerogative rights are arbitrary, not sovereign; capricious, not reasonable; exercised at the whim of an individual, not by fixed rule of law. The most casual examination of the Commentaries of Blackstone, on the Prerogative of the Crown, commended by Holdsworth in his History of English Law, shows the thing discussed is the orderly classified limitations upon exercise by the King of England of sovereign prerogative power.

In the United States each State has all of the powers of sovereignty inherent in the British crown except those delegated to the government of the United States, and the sovereign prerogative here means the inherent right of the people to exercise those powers not specified either in the Constitution of the United States or reposed in the legislature of the State, but inherent in the people of the State, and to be exercised by the executive officers of the State.

It is argued that because the Federal government does not exercise a prerogative right to preference and priority in the assets of defunct depositaries, independent of statute, it does not have the sovereign prerogative right to claim such preference. The government of the United States is one of limited, defined, delegated powers. All powers not delegated by the people to the government of the United States are retained by the States and by the people. This is a cogent reason why, independent of Federal statutes, the government of the United States may not exercise a sovereign prerogative right to preference and priority in the payment of claims against insolvent depositaries and the several States may exercise such sovereign right and prerogative. In fact, in Commissioner of Banking v. ChelseaSavings Bank, supra, it is said:

"We do not doubt that the State may provide by legislation for a preference of payment of demands due to the State. The legislatures of some of the States and the congress of the United States have, to some extent, given a preference to demands due to the government. The right to do this is inherent in the State. It is exercised in this State, in a limited way in the collection of the revenues. It has at all times been, as it now is, within the power of the legislature to make such provisions for State priority as seemed to be expedient."

The Constitution of 1850 was framed and adopted by men who had witnessed the growth, development, and results of the "wild-cat" banking system, built up in Michigan under the general banking law of 1837 (Act No. 47, Laws of 1837); the inflation of State bank currency; the operation of the bank guaranty plan; the collapse and closing of the banks in the State; the reduction in value of the currency of such banks, finally wiped entirely out by the decision of the court inGreen v. Graves, 1 Doug. 351. Many members of the Constitutional Convention of 1850 were opposed to banks. It was provided no banking law should be adopted by the State unless it was first submitted to and ratified by the people, who could thus exercise directly their sovereign prerogative power, and then such bank was to be subject to the constitutional provision and restriction that, "in case of the insolvency of any bank or banking association the bill-holders thereof shall be entitled to preference in payment over all other creditors of such bank or association." Article 15, § 5, Const. 1850.

This clause was not aimed to suspend, surrender, or destroy the prerogative power of the people in whom the ultimate sovereignty is reposed. It was adopted in the belief it would stabilize the money of State banks, which constituted the principal circulating medium in use at the time, and, though the bank of issue closed, would be some guaranty against the utter worthlessness of the bank's non-interest bearing notes which circulated as money. So in case of the collapse of a bank if the State exercised its sovereign prerogative power and demanded preference and priority in payment, such prerogative would operate upon the money of the bank, the money which its assets might bring, the money of other banks in its possession, and if the prerogative was exercised, it would be exercised against money which by the Constitution constituted a preferred claim against the assets of the banks. It aimed to make the money of the State banks, in which the people and the State were interested, good, and cannot be construed as in any way affecting the exercise of the prerogative right of the State to assert preference and priority in payment. It is said that because the statutes of this State have never declared the State entitled to preference and priority of payment in case of insolvency, such right does not exist. This is substantially the reasoning of Commissioner of Banking v. Chelsea Savings Bank, supra, and it is directly contrary to the established principles of law governing the sovereign prerogative.

"The prerogative is the name for the remaining portion of the crown's original authority, and is therefore the name for the discretionary power left at any moment in the hands of the crown, whether such power be, in fact, exercised by the king himself or by his ministers. Every act which the executive government can lawfully do without the authority of an act of parliament is done by virtue of this prerogative." Dicey, Const. p. 369.

Because the State has not, for nearly a century, asserted this power, it is argued it does not exist. For nearly a century treason against the State has been punishable by death, but, because no one has been hanged for treason against the State, may it be argued the offense no longer exists?

The sovereign prerogative power exists. It is conceded it is inherent in the people — and the people organized constitute the State. It is and always has been executive in its nature, existing independent of statute, not existing or vanishing at the whim or caprice of enactments by the legislature, as suggested in Commissioner of Banking v. Chelsea Savings Bank,supra. It is a power ever present in the State, over which the legislature has no control, existing independent of statute, executive in character, and may be asserted and exercised by the executive officers of the State, on behalf of the State, when the welfare of the State demands, in their judgment, its exercise. Being a power inherent in the State, it has never been parted with by the State.

The legislature may not, under our Constitution, encroach upon the exercise of executive powers and functions by the governor and other executive officers provided for in the Constitution whose duty it is to see that the laws are faithfully executed, to do which, revenue must at all times be available. The State is entitled to exercise its inherent sovereign prerogative through its executive officers, to demand preference and priority of payment of public funds deposited in insolvent depositories.

The State, as against every other people, State, or nation, owns and controls all of the real estate and personal property within its territorial confines. Under its sovereign power and prerogative it is or may be necessary for the effective functioning of the State that by the exercise of that power it claim preference and priority of payment in the distribution of the assets of insolvent depositaries. When money is deposited in a bank by the State, such bank, created by the State, takes with knowledge it belongs to the State, and while the relation of debtor and creditor ordinarily exists between a bank and its depositors, yet when a bank accepts a deposit with knowledge such deposit consists of trust funds — State funds belonging to the people — neither the bank nor the people have a right to complain if the State claims and exercises its sovereign prerogative to preference and priority in payment.

The system of government now prevailing in the United States is based upon the theory that all sovereign power resides in the people; the State has all the powers of the government of England save as restricted by the State and Federal Constitutions. Certain limited powers have been delegated by the people — the source of sovereignty — to the government of the United States. All other powers are reserved by the Constitution of the United States to the States and to the people. The Constitution of this State defines and limits the powers which may ordinarily be exercised by the several departments of government, but back of these lies the sovereign power of the people which makes and unmakes constitutions, the inherent right of self-preservation. This sovereign prerogative power gives the right to demand that which belongs to it, which has been paid to the State by the people of the State. Such money originated with the people, belongs to the people, and may be recovered by the people, in the exercise of their sovereign prerogative power, regardless of whether or not the people's public agents — the legislature of the State — has said they may do so or not.

Money belonging to the State belongs in fact to the people. Money contributed by taxation ultimately reaches the treasury of the State. The people to whom it belongs have no personal control over where it shall be deposited. This is governed by the discretion of public officials in pursuance of law. The private depositor controls his own money. He may deposit it or not deposit it as he pleases. He may pass upon the desirability of depositaries and direct where his money shall go. The sovereign prerogative power in England is exercised by the executive head of the government. In this country it has for its source the sovereignty of the people. There is no reason why it should not be exercised by the executive department of government. Its exercise works no injustice. If the money is recovered from a defunct depositary it is disbursed for the benefit of the people to whom it belongs.

The writ of mandamus should issue as prayed.

McDONALD, C.J., concurred with POTTER, J.