Cameron's Account , 287 Pa. 560 ( 1926 )

Does a state law, giving preference to the claims of depositors of an insolvent state bank or trust company over that of the receiver of a national bank for the par value of the stock held by the insolvent state institution, as provided by act of Congress, constitute an interference with the laws of Congress enacted to carry into effect the powers vested in the general government? Appellant contends that section 1, of the Act of May 23, 1913, P. L. 354, quoted in the majority opinion, conflicts with section 23, of the Federal Reserve Act (U.S. Comp. St. 1916, section 9689).

Congress has the power under the Constitution to create and regulate banks, and, when that power has been exercised, the "States have no power, by taxation or otherwise, to retard, impede, burden, or, in any manner, control the operation of constitutional laws enacted by Congress to carry into execution powers vested in the general government": McCullough v. Maryland, 4 Wheat. 316, 436. THe same doctrine was reaffirmed in Weston v. The City of Charleston, 2 Pet. 449, where it is stated that any sensible influence on the power has a tendency to defeat its free exercise. The extent of that influence if exercised by a state, no matter how small or inconsiderable it may be, is a burden on the operation of the government. It may be carried to such an extent as to arrest the national power entirely. In taxing federal banks, it was said that, if the power to tax was admitted for the slightest purpose, it would be an invitation to exercise the power to destroy: McCullough v. Maryland, supra.

National banks, although their shares of stock may be private property, are instrumentalities of the general government in the conduct of its affairs: Christopher v. Norvell,201 U.S. 216, 225. The statutory liability of the holders of national bank stock was created by Congress for the protection of creditors, to strengthen the bank in the confidence of the public. National banks are established for the purpose of creating a currency and a market for loans: Michie on Banks, vol. 3, page 1778. It is that institution the government protects directly, though indirectly this protection may be of value to the shareholder and to the depositor; their rights, however, in this respect, are unimportant, in dealing with the real purpose of the legislation, which was to protect the national bank system.

Having these thoughts in mind, let us examine the majority opinion which holds that the estate has done no "act that impairs the efficiency of the bank to discharge the duties for which it was created": First National Bank v. California,262 U.S. 366, 369. The trust company owns 93 per cent of the stock of the national bank. As the trust company is insolvent, the receiver will get nothing. It is true that the duties of the Carnegie National Bank, and of any other such bank which invokes the double liability provision, may be at an end, as far as that particular bank is concerned, if the law is valid, so that the state law does not interfere with the efficient discharge of these duties. We overlook the real purpose of the double liability law; it is to protect the national bank system by not permitting such burdens to be placed on it, or laws which can make such contingency possible.

The direct obligation of the trust company, as a shareholder in the national bank, is to the receiver. In First National Bank v. California, supra, Mr. Justice McREYNOLDS said (p. 370): "The success of almost all commercial banks depends upon their ability to obtain loans from depositors." One of the strongest assets to secure depositors and carry on, possessed by national banks, is the feature of a stockholder's double liability. If the state may take away that security or diminish its effectiveness, the act is a direct interference with the whole national bank system. Other states may pass similar legislation, or on subjects akin to it.

We cannot view the question from the standpoint of what Congress has not done to further protect national banks, by forbidding the states to make it impossible for the federal authorities to enforce the law. Section 23 of the act of Congress did create a double liability to be paid by the stockholders where its capital was impaired. Must Congress announce in express language that no state shall interfere with this exercise of authority by exempting such shareholders from liability? In First National Bank v. California, supra, where a state law provided for the escheat of bank deposits unclaimed for twenty years, the court held the act unconstitutional as applied to national banks, and said (p. 270): "If California may thus interfere, other states may do likewise; and, instead of twenty years, varying limitations may be prescribed — three years, perhaps, or five, or ten, or fifteen. We cannot conclude that Congress intended to permit such results. They seem incompatible with the purpose to establish a system of governmental agencies specifically empowered and expected freely to accept deposits from customers irrespective of domicile with the commonly consequent duties and liabilities." Congress has spoken; the question is not what it has left undone, but what a state has done to prevent the effective operation of its laws within a legitimate field of legislation. Congress by this section did not attempt to direct the order of distribution of the assets of a state institution, but it plainly said the liability of stockholders in national banks must not be interfered with.

It is no answer to say that section 23 would give the receiver of a national bank, in right of his depositors, a preference over other creditors or general creditors. If that be true, Congress did not create the situation. The State knew of the federal law when its statute was enacted, the operation of which destroys the strength and security of national banks. Depositors of the state institution gain at the expense of those of the national one, even though the latter may be the federal government, through postal or savings deposits, or other deposits of government funds.

The majority opinion states that depositors in the nature of things are in a preferential class like landlords, employees or mechanics, on the theory that their loans made possible the assets; and failure of deposits would cause banking institutions to perish from dry rot. This same argument could be used in almost every business depending ordinarily on borrowed capital. While it is true that, under the common law, preferences have been allowed, these are the exceptions to the general rule that all creditors should share equally in their debtor's estate. Still priorities cannot be created that violate the Constitution. Since interference with institutions created by Congress is such a violation, the preference given to depositors of insolvent banking institutions is unconstitutional as applied to national banks.

The act is invalid on other constitutional grounds. It is readily conceded that states have exclusive jurisdiction and sovereignty over persons and property within their borders (Pennoyer v. Neff, 95 U.S. 714, 722, 724, where the duty of the State to protect its citizens was stressed); but it is equally clear that under section 1 of Amendment XIV of the federal Constitution, the State is under duty to accord the same privileges or protection to creditors who are citizens of other states and to creditors in the State who are of equal claim or class: Blake v. McClung, 172 U.S. 239, 248. There the assets of a corporation were in course of administration by the courts of the State. It was held that creditors who were citizens of other states or the United States were entitled, under the Constitution, to stand on the same plane with creditors of like class who are citizens of such states. This receiver represents depositors of a national bank who were entitled to be treated on an equal basis with depositors of the state bank.

Let us see whether the state act violates the Fourteenth Amendment. No state shall "deny to any person within its jurisdiction the equal protection of the laws." The First National Bank of Carnegie is a person within the meaning of the due process and equal protection clause of that amendment: G. C. Sante Fe R. R. Co. v. Ellis, 165 U.S. 150; Finance Corporation v. Paramount Auto Exchange, 262 U.S. 544. A state has no more power to deny equal protection of the law to a corporation than to individual citizens. The Carnegie National Bank was a person doing business in Pennsylvania and may claim the benefit of the equal protection clause of the Constitution.

A state may classify its creditors but it must be within constitutional limitations, and the classification will not always be sustained even though all within the class are treated alike. The selection must not be an arbitrary one but one based on reasonable distinction. The Act of May 13, 1912, P. L. 354, provides that, in the liquidation of trust companies, distribution shall be made (in priority to all other claims) to depositors of such trust companies, certificate and check holders. The act treats all depositors alike whether they live in or out of Pennsylvania. Is there any sound, reasonable basis for this classification? The selected class are a part of the trust company's general creditors. Those who hold the bank's notes or who deposit bonds or other securities for sale, where the money has been received and intermingled in the general fund, are not included. Other illustrations might be given, but the most striking is that the creditor, receiver of a national bank, here excluded stands in the same position as the class of creditors the state act prefers. There is no reason inherent in the transaction on which the claims of these general creditors so preferred rests, — that, through fiduciary or other confidential relation, it distinguishes such creditors from others, or that would seem to give them a right or place superior to other creditors of equal grade. If we were to say that persons who lend money to banks stand in a class by themselves, while persons who lend money to other corporations or individuals, some of which perform services similar to banks, are excluded, we set up no reasonable standard to determine the classification. If a state may prefer depositors from the list of general creditors, why may it not prefer, as creditors, persons who lend money to any debtor? No one would contend for a moment that the state can be empowered to carve out of general creditors a group representing a particular nationality, religion or race, to give them preference, and there is just as much justification for such a classification as the one now being considered. People lend money to banks as they do to individuals or others, that it may yield them a revenue. The demand in each case is the same, property to back the loan and individual honesty. When the money is deposited under other circumstances, it is usually to enable one to more expeditiously carry on his business, or it assumes a trust relation. The classification here made is an arbitrary one, not based on any reasonable distinction.

It was held in Cotting v. Goddard, 183 U.S. 79, that a classification could not be made on the basis of the amount of business individuals did. In Connolly v. Union Sewer Pipe Co.,184 U.S. 450, a law forbade competition except as to agriculture and raisers of live stock, and the court held that it denied equal protection to the corporations that were not excepted. In Kentucky Co. v. Paramount Co., 262 U.S. 544, a state was prevented from imposing onerous requirements on foreign corporations seeking to recover their property by actions at law in the courts of the state. To the same effect is Gulf, Colorado Sante Fe Ry. v. Ellis, supra. Attention is also called to what was said in Truax v. Corrigan,257 U.S. 337, 338.

The majority opinion characterizes the ultimate consequence of the discrimination under the Act of 1913 as "fortuitous" or a "chance circumstance." It is, if anything, an admission of the act's possibilities, how, by insidious beginnings, the whole national bank structure may be wrecked. But the condition which results from the direct operation of these acts is the impairment of the capital of a national bank, solvent or insolvent, injuring not only its efficiency, but also its life.

Counsel for appellees urges that the Act of May 23, 1913, supra, having been adopted by the federal courts, must be considered as written into the laws of the United States. This contention is based on a federal statute (Act of June 1, 1878, c. 285, s. 1540, U.S. Comp. Stat. 1916, s. 1540) providing that the district courts of the United States may, by general rule, adopt state laws in relation to remedies by execution or otherwise. Such a rule was adopted by the district court and was in effect January 1, 1913. But does this dispose of the receiver's claim to share equally with the depositors? The act of Congress and the rule of court both relate to state laws as to remedies. It is true that the Pennsylvania Banking Act of 1923, P. L. 809, under which the receiver filed his claim, directs that distribution shall be made in accordance with the priorities fixed by law, but the question of priorities is not one of remedy, but of substantive law. Certainly Congress never intended to constitute each district court a subordinate legislature, and to delegate to those bodies power to adopt the substantive law of the states in which they were situated. Where a state law is inconsistent with an act of Congress, it cannot be adopted by rule of court: Bronson v. Kinzie, 1 Howard 311, 314; M'Cracken v. Hayward, 2 Howard 607, 615; United States v. Halstead, 10 Wheat. 51. The state law here conflicts, as we have seen, with a later federal act, and the latter supersedes it. Upon these considerations, the decision of the Superior Court in Jones' Est., 84 Pa. Super. 170, cited by appellees, would seem to be questionable, although other considerations may have turned the issue. Fink v. O'Neill, 106 U.S. 272, is clearly distinguishable. The state law there involved had a direct relation to executions.

For the reasons here given, I would reverse the judgment in this case.