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any such bond, and that you would be acting well within your rights if you reject personal bonds of bank officers and bank employes where the sureties thereon are officers and directors of the bank. Respectfully yours, (Signed) GRANT FELLOWS, Attorney General.
DISCRETIONARY AUTHORITY VESTED IN COMMISSIONER IN CAPITAL STOCK IMPAIRMENT
Hon. E. H. Doyle, Commissioner of Banking, Capitol, Lansing:
October 2, 1913.
Dear Sir-I have your communication of September 11th, which reads as follows: "We respectfully request your opinion as to whether or not, in case of an impairment of capital stock, the Department could permit a state bank to accept, in lieu of cash, stockholders' notes pro rata to make good the deficiency of capital stock in said bank on account of bad or doubtful assets, required by the Department to be eliminated?"
In reply thereto, would say the matter of making good a deficiency as a result of the impairment of capital stock in a bank seems to be governed by section 42 of the Banking Law, being compilers' section 52 of the pamphlet of laws relating to banking, revision of 1911. This section provides in part that:
"Whenever it shall appear from the report of any bank, or the Commissioner shall have reason to believe that the capital stock of any bank is impaired or reduced below the amount required by law, it shall be the duty of the Commissioner, and he shall have the power to examine the said bank and ascertain the facts, and in case he finds such impairment or reduction of capital, he shall require such bank to make good the deficiency so appearing within sixty days after the date of such requisition."
The same section makes it the duty of the directors of the bank upon such requisition to levy the necessary assessment and prescribe the method for the sale of the stock in case the assessment is not paid.
It will be observed from the foregoing quotation that there is a mandatory requirement that the Commissioner of Banking shall require the bank to make good the deficiency. I am unable to find any provision which is controlling in the particular manner in which the deficiency shall be made good. In the absence of a statutory requirement prescribing whether the impairment may be remedied either by the payment of cash, note or collateral security, it is somewhat difficult to outline a hard and fast rule, to be generally and universally applicable, unless the particular bank, the character of the impairment and the ability of the stockholders, thereof to pay, is taken into consideration. The statutory provision which makes it the duty of the Commissioner of Banking to require the bank to make good the deficiency so appearing vests in him a large discretionary authority. It is his duty to see that the deficiency is made good. He must be satisfied, any action or approval of the board of directors to the contrary nothwithstanding. Cash or its equivalent should be required. A stockholders' note would not necessarily in every instance be a compliance with the law, while in a particular case you might be warranted in approving a note, with or without collateral security in determining whether there has been a compliance with the law and your requisition.
It is therefore my opinion that it is for the Commissioner of Banking to determine whether his requisition requiring a bank to make good the deficiency so appearing is obeyed; that there may be a compliance with the law without the payment of cash; that cash or its equivalent should be required and that in determining whether there has been a compliance with the law a note, or a note accompanied by collateral security may in the discretionary authority of the Banking Commissioner be approved in determining whether there has been a compliance with your requisition.
Very respectfully yours,
LOANS TO MUNICIPAL CORPORATIONS LIMITED TO TWENTY PER CENT OF CAPITAL AND SURPLUS. (40)
Hon. E. H. Doyle, Commissioner of Banking, Capitol, Lansing:
November 24, 1913.
Dear Sir-I have your communication of November 19th, directing attention to Sections 27 and 52 of the Banking Law. Your letter reads, in part as follows:
"The latter provides that a loan to any person, firm or corporation shall not exceed twenty per cent of capital and surplus; and then only upon the two-thirds authorization of the board of directors. Under said section we desire to be informed whether or not a municipal corporation can borrow on its note, signed by proper officials, an amount in excess of twenty per cent of capital and surplus. It is maintained upon the part of some banks that the limitation in said section does not apply to loans to municipal corporations; that such loans are in the nature of a public debt, as mentioned in subdivision (b), section 27 of the law, and thereby are subject to such limitations."
In reply thereto would say it is believed that the banks referred to in your letter are placing an erroneous construction upon the statute. Section 52 provides in part:
The total liabilities to any bank of any person or of any company, corporation or firm for moneys advanced, including the liabilities of the company or firm, the liabilities of the several members thereof except special partners, shall at no time exceed one-tenth part of the amount of the capital and surplus of such bank, etc."
The same section authorizes a loan of not to exceed twenty per cent capital and surplus upon the authorization of two-thirds of the board of directors.
Section 37 refers to entirely different matter. This section prescribes a direction concerning deposits or investments, while Section 52 prescribes a limitation on loans which
Wedemeyer v. Hindelang, 161 Mich. 600 (603).
In the absence of express authority authorizing a greater loan to a municipal corporation than to any other person, firm or corporation, no good reason suggests itself to me requiring the application of a different rule. Instances might arise when it might be hazardous to a bank to overstep this limit in making loans to a municipal corporation as to any other corporation.
It is my opinion that a municipal corporation is bound by the strict terms of section 52, and that the bank has no authority to loan money to a municipal corporation on a note signed by the proper officials in an amount in excess of twenty per cent of the capital and surplus. Respectfully yours, (Signed) GRANT FELLOWS, Attorney General.
RENEWALS WITH PROPER SIGNATURES TO BE PROCURED.
Hon. E. H. Doyle, Commissioner of Banking, Capitol, Lansing:
March 14, 1914.
Dear Sir-You have recently forwarded to this Department a letter from Charles D. Thompson of Bad Axe, Michigan, asking my opinion upon the inquiry therein made. This letter reads in part as follows:
"To avoid the objectionable practice of country banks in extending their power from time to time because of the inability to get all signers to join in new notes, it has been suggested to me that a note for the original loan with the guarantors signing under a guaranty clause of for value received, I hereby guarantee the payment of the within note at maturity, or at any time thereafter, including any renewal of same, waiving a demand, notice of non-payment and protest' could safely and properly be handled by permitting the maker to execute a new note and retaining the old note with the endorsement under the above guaranty.
This would give the banker new paper and avoid the question of extension, yet would not inconvenience his customer."
You desire to know whether there are any objections to the method outlined in the above communication.
In reply thereto would say that the principal idea contained in the suggestion seems to be that such a contract would lessen the work of the bank in procuring renewals of unpaid notes by having the renewals signed only by the parties primarily liable. It is entirely possible that such a contract would be binding upon the makers were the matter tested in court, but it occurs to me that it would establish a bad practice for banks. As a matter of practice I do not think customers of banks should be encouraged in the idea that the status of their paper is more a matter for the banks to look out for than the borrowers themselves. It is unquestionably the duty of borrowers to see that their paper is renewed as often as necessary. Regardless of the exact legal question involved I am impressed that you should not countenance the suggestion made by Mr. Thompson.
Deputy Attorney General.
I return herewith Mr. Thompson's letter.
PURCHASE PRICE OF LEASES MAY BE CARRIED AS BANKING HOUSE.
Lansing, March 17, 1914.
Hon. E. H. Doyle, Banking Commissioner, Capitol, Lansing: Dear Sir-Your communication of recent date, relative to long term leases by banks for banking houses, received and contents noted. In your first communication you state the following:
As you are probably well aware, in the large cities in Michigan state banks are estab lishing a number of branches or agencies, and in some instances procure banking office and real estate under the long time lease, in some instances for 99 years, carrying purchase price of the lease in banking house account.
In view of the fact we are advised that certain banks may erect expensive buildings on leased grounds with the expectation of carrying same in their banking house account, we respectfully ask your opinion as to whether or not the Department has the right, under the law and all the circumstances, to permit banking house and land so held where the fee of the property is not in the bank."
The particular question is presented as to whether a certain lease entered into by the Bank, a copy of which you have procured and forwarded to me, is valid so far as the bank is concerned; and also whether buildings erected upon the ground so leased by the bank should be carried as "banking house."
I have examined this lease, which was originally made between the
party of the second part. I assume that the lessee's rights have been assigned to the bank. Under the terms of this lease, which runs for 99 years, the lessee is required to pay $20,000.00 a year ground rent for the first ten years, and $25,000.00 a year thereafter. The lessee also agrees to construct on part of the ground a building of not less value than $50,000.00. Permission is also given in the lease by which the lessee may construct a building of not less than $100,000.00, to take the place of any buildings now or hereafter constructed. The lease contains the usual provisions for forfeiture and security for performance and provides in case of forfeiture before the end of the term also upon the termination of the lease by expiration of time, all buildings erected by the lessee shall become the property of the lessor. During the term, however, the lessee is given the right to sublet, make improvements, assign or sell his interest in the lease, or use it as security for loans, etc. The intent of the instrument apparently is that the lessee shall exercise all the rights of ownership in the building or buildings incident to ordinary ownership with the exception that the lessor has the right of entry for inspection or exhibition, and with the further reservation that the lessee may not
The first question presented by your inquiry is as to whether under the Michigan Banking Laws it is within the power of a State Bank to enter into such a lease.
On this proposition I think we are agreed that State Banks may under Section 6100 of the Compiled Laws of 1897 enter into a lease of the nature indicated. This section provides, in part, as follows:
"A bank may purchase, hold and convey real estate for the following purposes, but no other: First. such as shall be necessary for the convenient transaction of its business. including with its banking offices other apartments to rent as a source of income, but which shall not exceed 50% of its paid in capital *
The National Banking Act (Revised Statutes, Section 5137) contains a very similar provision, namely:
"A National Banking Association may purchase, hold and convey real estate for the following purposes and for no others: First, such as shall be necessary for its immediate accommodation in the transaction of its business.
Under this provision of the National Banking Law, the Supreme Court of the United States I think See Brown v. Schleier, 194 U. S., 18, affirming held in several instances that National Banks possessed the power to purchase and hold long term leases, provided such leases are bona fide. the decision of the Circuit Court of Appeals in the same case, reported 118 Fed. 981. this decision is conclusive upon the proposition, and that therefore it is intra vires of our State banks to enter into such a lease in preference to obtaining the fee.
Your second inquiry is as to whether under such a lease the investment of the lessee bank should be carried under the head "Banking House."
Upon this proposition so far as I have been able to find the authorities do not throw any light. If the bank had obtained the fee in the land upon which the building is erected it would be carried in its accounts as "Banking House." Having less than a fee, and an interest which might be forfeited through non-performance on the part of the bank, and the terms and it has the of the lease itself imposing a continuous liability upon the lessee bank, there is some question as to whether this lease is an asset or a liability. It is a liability to the extent that the bank must pay its rent whether it obtains any income from the building or not. further liability that it must erect a building worth not less than $50,000.00 upon the land. and it must at all times after the erection of such building maintain the new building and older buildings at a value of not less than $100,000.00. Undoubtedly if the plans of the bank do not miscarry the lease will be a valuable asset.
Independent of such consideration, however, and which are largely speculative, the fact I do not see how such an investment The remains that the bank has invested, or will invest, a specified amount of money in the erection of a building or buildings for its own use as a bank. can be treated differently from the investment in a fee, both being for the same purpose. I understand that National Banks owning their The only difference would be as to actual value. banking houses under similar leases are permitted to carry the same in "Banking House" account. I am therefore of the opinion that the same rule should apply to State Banks. amount which should be carried as "Banking House" account should not exceed the actual value of the buildings erected by the bank under the lease, and should not include the annual rental paid for the ground or buildings erected by the landlord.
Hon. E. H. Doyle, State Banking Commissioner, Capitol:
Lansing. June 5, 1914.
Bank. This proposition is as follows: Dear Sir-Your communication of the 1st inst. received, in which you request my opinion on a proposition submitted to you by the Bank has outgrown its present quarters and it is absolutely necessary "The that we obtain a larger site or go to practically the same expense of rebuilding on the present site. and then not have a desirable building on account of the narrow lot which we now occupy. it being only 21 feet.
to his two daughters, a Mrs. At the There is a building adjacent to our present location of 28 feet, the title of which stands as follows: The property was willed by a Mr. who have the use thereof for their natural lives. is a maiden lady 60 years Miss and a Miss She death of either one, the title is to go to her heirs. the other tenant, is married and is now of the age of 56 years. old. Mrs. should survive her. has three children, who will be the remaindermen of her interest in the property and undoubtedly the remaindermen of the maiden lady, unless Mrs. "These life tenants are willing to sell to the bank, but the remaindermen do not wish to sell, claiming the money is well invested and that they would rather the investment would stand until the death of the life tenants.
"The question arises as to whether the bank would have the right to take over the parties' interests by all of them joining in a lease, coupled with an option to purchase on the death of the life tenants, so that they could go on and erect a bank building, and pay the life tenants rental during their lives, and at the end of the lease period, or at the death of the life tenants, have the option to purchase become operative and they convey their interests in fee to the present bank or its successor."
In reply thereto would say that this proposition is similar to that involved in my opinion given you March 17th, 1914. relative to banks buildings on leased property. In this particular case the lease and option wouid necessarily have to include both the life tenants and all the possible remaindermen.
TREASURER OF MUNICIPALITY
NOT TO DEPOSIT FUNDS
IN BANK WHERE HE IS STOCKHOLDER
Hon. Edward H. Doyle, Commissioner of Banking, Capitol:
Dear Sir-Your oral communication on the following proposition has been considered. You hand in a communication from Mr. Leon J. Navarre, of Essexville, Michigan, as follows:
"The writer, who is a stockholder and director in the State Savings Bank of Essexville, has been elected treasurer of the village of Essexville.
"An opinion has been handed me this morning which concerns the deposit of money which I may handle as such treasurer. The opinion is from the law firm of Coumans & Gaffney, of Bay City, and is enclosed herewith for your inspection.
The writer talked over phone this morning to Mr. Manning, who stated that if the village designated this bank as a depository everything would be all right.
"I do not wish to do anything contrary to the rules of the department and wish you would write me in this regard, so that your decision may be submitted at the directors' meeting and settle any question with regard to your office."
Accompanying this was also an opinion given by Messrs. Coumans & Gaffney, of Bay City, bearing upon the proposition, the conclusion of which is as follows:
"Therefore, we conclude that by the provisions of Section 892, 893 and 895, the treasurer of any municipality is forbidden to deposit moneys in any bank in which he is a stockholder or otherwise."
The references are to Howell's Michigan Statutes (new).
In reply thereto would say that it has heretofore been the position of this department that the treasurers of the various municipalities can not deposit the funds which they hold as uch treasurers in banks in which they are interested as stockholders, directors or officers This, however, is modified by the provisions of Acts 99 and 305, Public Acts of 1909. Act 99 applies to counties, and 305 applies to townships. Both of these Acts provide for the deposit of public funds in banks to be designated by Boards of Supervisors, County Auditors and Township Boards, as the case may be. Under either Act the treasurer is relieved from his responsibility in case of the failure of the banks in which the deposits are made where the depositories are designated in accordance with the terms of the Acts. I think it would also follow that where the Board of Supervisors or the Township Board, as the case may be, has undertaken to designate a depository for the funds, the treasurer would not be violating any law following the directions of those having the right to designate such depositories. This however, is by virtue of express statutes. As to such officials as do not come within the terms of the above Acts, I think the old rule would fully apply. The general school law also contains a provision by which the electors of a primary school district may designate the depository of the school district funds. Where this is done, I am of the opinion that it would relieve the treasurer of any liability for depositing funds in a bank in which he might be interested in the same way as in the case of Counties or Townships. In the absence of express statute I think the opinion given by Coumans & Gaffney is correct. Respectfully yours,
SIGNER ON FACE OF NOTE CONSIDERED MAKER UNLESS OTHERWISE DESIGNATED.
Hon. E. H. Doyle. State Banking Commissioner, Capitol:
April 29, 1914.
Dear Sir-Replying to your oral request for an opinion as to the liability of the signers of a promissory note for the following form: "$100.00. Michigan, Jan'y 1, 1914.
Sixty days after date I promise to pay to the order of THE FIRST STATE BANK OF. MICHIGAN, One Hundred Dollars at its office, value received, with interest at 7 per cent annum after due, waiving notice of demand, dishonor and protest. Due.
I wish to advise you as follows:
It will be noted that the instrument is signed by two parties on its face, neither party having been required to sign on the back. What you desire to know in particular is as to the liability of William Jones, the second signer, who claims to have signed the note as an accommodation party and not as a beneficiary.
In reply thereto, I call your attention to the following provisions of Act 265 of the Public Acts of 1905:
"Section 2. The person primarily liable on an instrument is the person who by the terms of the instrument is absolutely required to pay the same. All other parties are sec ondarily liable."
"Section 26. Every negotiable instrument is deemed prima facie to have been issued for a valuable consideration: and every person whose signature appears thereon to have become a party thereto for value."
"Section 31. ACCOMMODATION PARTY, Liability of--An accommodation party is one who has signed the instrument as maker, drawer, acceptor, or endorser, without receiving value therefor, and for the purpose of lending his name to some other person. Such person is liable on the instrument to a holder for value, notwithstanding such holder at the time of taking the instrument knew him to be only an accommodation party."
"Section 65. When Person deemed endorser--A person placing his signature upon an instrument otherwise than as maker, drawer, or acceptor, is deemed to be an endorser unless he clearly indicates by appropriate words his intention to be bound in some other capacity." In view of the above provisions and the numerous authorities, there can be no doubt that in an instrument executed in the above form William Jones would be prima facie deemed to be maker of the note, there being nothing on the face of the instrument to show that he signed the same in any other capacity.
STATE BANKS NOT TO PLEDGE ASSETS IN LIEU OF BOND TO SECURE COUNTY FUNDS.
Hon. Albert E. Manning, Deputy Banking Commissioner, Capitol:
April 29, 1914.
Dear Sir I have your communication of the 28th inst. requesting my opinion as to whether or not a state bank can pledge its bonds with the County Treasurer in order to secure or guarantee county deposits. You have also forwarded to me the communication from the Bank, in which the question is raised.
In reply thereto would say the only direct authority for the deposit of county bonds with banks is found in Act 99 of the Public Acts of 1909. Before the passage of this Act, and even now in the absence of affirmative action by the Board of Supervisors, or Board of County Auditors, the County Treasurer was held absolutely responsible for all county funds. There was no direct authority for his depositing the county moneys with banks or other depositories unless as in some cases by local legislation. Under the provisions of Act 99 of the Public Acts of 1909, above referred to, the Board of Supervisors may designate a depository for county funds under certain conditions. Your attention is called particularly to Section 3 of this Act, which provides as follows:
"Before any deposit shall be made with any bank or banks as aforesaid, such bank or banks shall execute and deliver to the Board of Supervisors or the Board of County Auditors, as the case may be, a good and sufficient bond in an amount at least equal to the maximum amount to be deposited in such bank, and with such sureties as shall be approved by such board and the Prosecuting Attorney of the county. Said bonds shall be made to the county and shall be conditioned for the safe keeping and repayment of such moneys or any part thereof on demand and the payment of said interest, and shall contain such other conditions as may be required by the Board of Supervisors or the Board of County Auditors, not inconsistent with the provisions of this Act."
The condition prescribed in Section 3 is, in my opinion, an absolute one and for which there would be no authority to make a substitution. The depositing of collateral securities would not, in my opinion, fulfill the conditions prescribed in the Act.
I am assuming for the purpose of this opinion that the Board of Supervisors or the Board of County Auditors of Wayne has undertaken to designate the depositories for their county funds either under the provisions of the above Act or some other similar law. Respectfully yours.
CERTAIN MUNICIPAL PUBLIC UTILITY BONDS NOT LEGAL SAVINGS INVESTMENTS.
October 26, 1914.
Hon. E. H. Doyle, State Banking Commissioner, Capitol:
Dear Sir-You have referred to me a communication from a public committee in the City of Ypsilanti, requesting an opinion as to whether a proposed issue of utility bonds would come within the class of investments permitted to be made by savings banks organized under the Michigan Banking Law. The City of Ypsilanti has recently authorized the purchase of the Ypsilanti gas plant and has authorized an issue of one hundred thirty thousand dollars of mortgage bonds to pay for this plant, the bonds not being a liability upon the general credit of the city but being secured solely by a trust mortgage covering the property and revenues of the gas plant, including a twenty-year franchise in case of foreclosure.
Section 27 of the State Banking Law prescribes the class of investments which may be made by savings banks of the savings money on deposit. There are several classes which are described in sub-sections (a) to (i) of this section. There are two classes of public bonds: (a) Bonds of the United States, of any State or Territory of the United States; (b) The public debt or bonds of any city, county, township, village, or school district of any State or Territory in the United States, which shall have been authorized by the legislature of such State or Territory.
The action of the City of Ypsilanti in purchasing the gas plant from a private corporation was evidently based upon the permission given in Section 4 of Act 279 of the Public Acts of 1909, as amended by Act 5 of the Public Acts of 1913. This section provides in part as follows:
"Each city may in its charter provide:
(b) For borrowing money on the credit of the city in a sum not to exceed eight per centum of the assessed value of all real and personal property in the city **** when a city is authorized to acquire or operate any public utility, it may for the purpose of acquiring the same borrow money on the credit of the city in a sum not to exceed two per centum of the assessed value of all the real and personal property of the city, and the city may also, for the purpose of acquiring such public utility, issue mortgage bonds therefor beyond the general limit of bonded indebtedness prescribed by law: Provided. That such mortgage bonds issued beyond the general limits of bonded indebtedness prescribed by law shall not impose any liability upon such city, but shall be secured only upon the property and revenues of such public utility, including a franchise stating the terms upon which in case of foreclosure, the purchaser may operate the same * ** And provided further. That the charter shall provide for the creation of a sinking fund by setting aside such percentage of the gross or net earnings of the public utility as may be deemed sufficient for the payment of the mortgage bonds at maturity."
The question arising from your inquiry is, whether bonds of the class described and issued by the City of Ypsilanti come within the provisions of sub-section B of Section 27 of the banking Law above quoted.
Section 27 of the banking law was last amended by Act 44 of the Public Acts of 1913 and was therefore re-enacted in its present form subsequent to the passage of Section 4 of the City Home Rule Law and under the ordinary rules of statutory construction must therefore be deemed to have been enacted in view of the provisions of the City Home Rule Law. The precise question under consideration involves the definition of the term "in the public debt or bonds of any city." The banking law does not attempt to define this term any more than is implied in the language used, and so far as I have been able to discover, the Supreme Court of this State has never been called upon to pass upon the question. It is also one