JAMES B. BUTTON, Superintendent of Banks for the State of Arizona, in Charge of the Liquidation of the YUMA VALLEY BANK, a Corporation, Appellant,
E. F. SANGUINETTI and BERT CAUDRY, Appellees
APPEAL from a judgment of the Superior Court of the County of Yuma. Joseph S. Jenckes, Judge. Judgment Affirmed.
Mr. R. N. Campbell and Mr. H. F. Colman, for Appellant.
Mr. William H. Westover, Messrs. Chalmers, Fennemore & Nairn and Mr. Henry W. Allen, for Appellees.
[40 Ariz. 330] ROSS, J.
This is an action in replevin brought by the state superintendent of banks as receiver of the Yuma Valley Bank to recover from the defendants the possession of $178,834.03 worth of commercial paper and contracts claimed to be part of the assets, or bills receivable, of the said bank, unlawfully withheld by defendants from plaintiff. The answer was a general denial. The case was tried to the court without a jury, and resulted in a judgment in favor of defendants. Plaintiff has appealed.
The salient facts may be stated to be as follows: Prior to May 20, 1929, there was a bank in Yuma known as the Yuma National Bank. The officers and stockholders of this bank theretofore caused to be organized the Yuma Valley Bank, a state bank, for the purpose of taking over all of the assets of the Yuma National Bank and assuming all of its liabilities. This transaction was consummated on the 20th of May. The first board of directors of the new institution were the following: A. W. Crawford, John S. Cook, W. D. Fisk, Bert Caudry, C. H. Robertson, E. F. Sanguinetti, James L. Edwards, P. E. Blalack, and Leroy A. Wright. The day before the Yuma [40 Ariz. 331] Valley Bank opened its doors for business, to wit, May 19th, six of the nine directors and many other interested parties, were, from about 10 to 12 A.M., in the bank building, visiting and consulting concerning the new setup. Word was dropped from somewhere by someone that, unless the bank's cash reserve was increased so as to make a better showing, the deal would or might not go through. The committee in charge of making up a financial statement of the bank thought that it should start with a larger cash balance on hand than the figures showed by $150,000. The method proposed to raise this sum was that the members of the board of directors of the Yuma Valley Bank borrow the sum on their note from the Citizens' National Trust & Savings Bank of Los Angeles. Two of the officers of the Los Angeles bank were present looking after their bank's interests as a creditor of the Yuma National Bank, and the matter of the loan of $150,000 to the directors on their note was approved by these officers of the Los Angeles bank. Those who signed the note were Sanguinetti, Caudry, Crawford, Fish and Cook. Sanguinetti did not to sign it, but did so with the understanding and assurance of his codirectors or some of them who were present that, when the money was deposited in the Yuma Valley Bank, the latter would issue to him and his cosigners of the note a demand certificate of deposit and collateral it with bills receivable of the face value of twenty-five per cent. above the deposit, with the agreement that, if any of such bills receivable were paid or renewed, substitutions
would be made. Plaintiff was present in his capacity of superintendent of banks for the state, and gave his approval of the arrangement before Sanguinetti would sign the note.The $150,000 was turned over to the bank and commingled with its general assets. The bank issued to Sanguinetti, Caudry, Crawford, Cook and Fisk a [40 Ariz. 332] certificate of deposit which they in turn assigned to the Los Angeles bank as collateral to their note.
When the plaintiff took the bank over as insolvent, it owed Sanguinetti and the others named the sum of $150,000. It had during the interim paid the interest on the note to the Citizens' National Trust & Savings Bank. The collateral which defendants claim had been promised them was not delivered until on or about April 29, 1930. On February 3, 1930, at a meeting of the board of directors of the Yuma Valley Bank, at which Fisk, Caudry, Ingraham (who had taken Blalack's place), Larkin and Cook were present, Crawford, Sanguinetti, Wright and Edwards absent, a resolution was passed directing the officers of the bank to deliver to Sanguinetti, Crawford, Fisk, Caudry and Cook "promissory notes and/or other assets of the bank in amounts or sums representing such certificate of deposit plus twenty-five per cent. as allowed by law, for the purpose of securing such deposit or any like deposit," in accordance with "the understanding (of May 19, 1929) that assets of the bank shall be available as collateral when it becomes necessary to repay the loan" as represented by the certificate of deposit. Of those present at this meeting only Ingraham and Larkin voted for the resolution, Fisk, Caudry and Cook not voting. In pursuance of this resolution, the officers of the bank selected the paper pledged, or to be pledged, as collateral to the certificate of deposit, and it is this paper that the plaintiff, superintendent of banks and ex-officio receiver of the Yuma Valley Bank, is seeking to recover.
Present and participating in the arrangement whereby the $150,000 was to be raised to augment the bank's cash on hand when it opened for business were the president, two of the vice-presidents, the cashier, and the executive vice-president, the latter being the manager of the business and exercising the [40 Ariz. 333] duties generally pertaining to the cashier. These officers and the majority of the directors, not in regular meeting but by verbal conferences, agreed to the arrangement and that the certificate of deposit was to be collateraled with the assets of the bank.
The question is, Did the bank, or those representing it, have the power under the circumstances to pledge its bills receivable as collateral to the $150,000? In order to answer that question correctly, it is necessary to ascertain whether Sanguinetti and the others were depositors of the bank or lenders to the bank. If the former, we are satisfied under authority and reason the bank was without power, either express or implied, to make the pledge. But, if the transaction was in fact a loan to the bank by Sanguinetti and others, then the pledge was made with authority.
Our statutes require banks to give security for deposits of public money and make it the duty of officers who have the custody of public moneys to exact such security of public depositories (sections 2632-2645, Revised Code of 1928), but are silent as to private deposits. The Yuma Valley Bank was a commercial bank, which, under the statute (section 209, Revised Code of 1928), "means any bank authorized by law to receive deposits of money, deal in commercial paper, or to make loans thereon, to lend money on real or personal property, to discount bills, notes, or other commercial paper, and to buy and sell securities, gold and silver bullion or foreign currency or bills of exchange. . . ."
This language does not expressly nor impliedly authorize a bank to give security to depositors of private moneys, and the best reasoned cases hold that such power is not incidental nor essential to good banking practices. One of the latest cases discussing the point is Smith v. Baltimore & Ohio R. Co., (D.C.) 48 F.2d 861. In this case the court court takes up and analyzes both th state and federal [40 Ariz. 334] cases bearing on the question, and reaches the conclusion that the power to give security for general deposits "is not necessary to carry on the business of banking; it is not safe, and, therefore, it should not be implied."
In Farmers' & Merchants' State Bank v. Consolidated School District,174 Minn. 286, 65 A.L.R. 1407, 1410, 219 N.W. 163, it is said public policy forbids a commercial bank from securing general deposits by pledges of its assets because "it is in derogation of that fair and equal treatment of all depositors, which is fundamental in the ethics of banking. A conclusive test is that no bank can make a practice of securing deposits by pledging assets and live. A few such transactions made known to its clientele would put any bank out of business. The practice would properly be taken to show that the institution was intrinsically so little deserving of deposits that resort to the too attractive lure of collateral was compelled by adverse circumstances. No bank could long survive such an expose. The very offer of collateral for his deposit would send any discreet and informed depositor elsewhere. So, if the practice of securing deposits by pledge of assets is resorted to at all, it must be done secretly. ...