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The purpose of the provisions of Section 27 is to throw proper safeguards around the investment of savings deposits and like other similar provisions of our banking law, and the banking laws of other states and of the United States, must be strictly construed to give it its intended effect.
In order that savings banks may invest in such debts or bonds, they must correspond to all the requirements of the statute, that is, they must be public debts or bonds and must pertain to the city, county, township, village or school district as the case may be and must have been authorized by the Legislature. So far as the particular bonds under consideration are concerned, I have no hesitation in saying that they are, strictly speaking, public bonds, and may be assumed to have been authorized by the Legislature of this State. at least for the purposes of this opinion. Whether or not they are the bonds of the City of Ypsilanti is, however, another question. It is true these bonds are authorized by the City of Ypsilanti and they are to be paid and redeemed by funds belonging to the City of Ypsilanti. They are not, however, secured by the faith and credit of the city as a whole. It is a general rule of law that where special funds are created for the payment of a particular class of claims, those funds cannot be used for any other purpose. People vs. Bay City, 36 Mich. 186; Claims payable out of a special fund are usually not payable out of any other fund, and hence the municipality is not liable outside of such fund. Brooks vs. San Luis Obispo, 109 Cal. 50; Directors Chicago Public Library vs. Arnold, 60 Ill. App. 328; Wiek vs. Wausan, 143 Wis. 645; Rhode Island M. & T. Company vs. Spokane, 19 Wash. 616; Loudenslager vs. Atlantic City, 80 N. J. L. 658. This being the law independent of statute. we may consider our own statute as not only laying down a rule already adopted but as absolutely controlling of the proposition. These bonds are not, therefore, chargeable against the City of Ypsilanti as a whole.
Again, it will be noted that Section 4 of the City Home Rule Act makes a distinction between bonds issued on the faith and credit of a city, and bonds secured by a publicly owned utility and this distinction is not, as I understand it. disturbed by the decision rendered by our Supreme Court in Attorney General vs. Lindsay, 20 D. L. N. 1167, where this provision was under discussion and interpreted. It therefore follows the public debt and bonds of a city are subject to a very pronounced classification to the extent that one class is designated as the debt of a city and the other class is recognized as of an opposite description, although still a public debt.
I have been unable to find any decision which is exactly in point. In this connection. however, the case of Smith vs. Smith, 30 Ky. 238. is of interest. In that case a suit was brought in chancery for settlement between a guardian and his wards, the question presented being whether the guardian should be held responsible for a sum of money received by him for the wards and by him invested in the purchase of shares in the Bank of Kentucky, which stock had become greatly depreciated. Under a rule that such moneys could only be invested in public funds, and holding the guardian liable in case of loss where other investments were made, it was held by the Court as follows:
"We are of the opinion that the defendant (guardian) should be charged with the full amount of the fund invested by him in bank stock, whether his liability be tested by common or statutory law. We cannot consider stock in the bank of Kentucky as 'public funds,' or in other words government stock, depending for its credit and security on the faith, solvency and stability of the Government."
The Bank of Kentucky was, however, a Government bank (Briscoe vs. The Bank of The Commonwealth of Kentucky, 11 Pet. 257), but inasmuch the faith and credit of the State of Kentucky was not pledged as security for the bank stock, the stock was not considered "public funds."
So in the present case I am impressed that while the proposed bond issue is to meet a public expenditure, and is authorized by the City of Ypsilanti, the bonds are not "bonds of the City of Ypsilanti" within the meaning of the banking law. The object of Section 27 of the banking law is to provide the highest kind of security, but the City of Ypsilanti has not provided the highest kind of security. On the contrary it has expressly refused to pledge its faith and credit as a city to meet the bond issue and has pledged only a particular property belonging to the city. I am therefore of the opinion that these bonds do not meet the requirements of the section of the banking law above quoted.
EXECUTOR OF AN ESTATE CANNOT BE DIRECTOR OF STATE BANKS IN THAT REPRESENTATIVE
Hon. E. H. Doyle, Commissioner of State Banking Department. Capitol:
January 4, 1915.
Dear Sir-Your communication of the 31st ult. received as follows: "An executor of an estate desires to become director in a state bank where the deceased held a large block of the stock. the executor as director wishing to hold stock of the bank in his representative capacity rather than as an individual.
The Department has always taken the position that a director. to meet the provisions of Section 12 of the law. must own the stock individually. We would appreciate your opinion in the matter, and citing the following authorities handed us by the executor in support of his contention that he could qualify in his representative capacity as a director.
21 E. G. L. 838.
15 L. R. A. 665.
2 Cook Cors. 623, page 1889.
4 N. Y. Sup. 174.
101 Ky. 570.
42 Conn. 560.
Will you kindly let us hear from you in re. the above at your earliest opportunity?"
In reply thereto would say that the qualifications of directors are fixed by Section 12 of the General Banking Laws of the State. Among others, the following qualification is prescribed, "Every director must own and hold in his own name not less than ten shares of the
I have carefully examined the citations you have referred to and am of the opinion that the rules there laid down, while applicable to general corporations, are not controlling as to banks organized under the Michigan Bank Act, where personal responsibility, based upon beneficial ownership of stock, is plainly contemplated as a qualification for directorship. This position has heretofore been assumed by this Department and I see no reason for not adhering to the same. I am clearly of the opinion that an executor of an estate, whose only interest in a bank results from such office, would not be qualified to be a director of a State Bank. Respectfully yours, GRANT FELLOWS, Attorney General.
BANKS CANNOT LEGALLY SELL STEAMSHIP TICKETS.
Hon. Frank W. Merrick, Commissioner of Banking Department, Capitol:
April 12, 1915.
Dear Sir-I have your communication of the 7th inst. as follows: "We are in receipt of several letters from a state bank desiring to be informed whether or not it can legally transact the business of selling steamship tickets.
This bank is located in a community thickly populated by foreigners, and could transact more or less business in the direction of acting as agent for the various ocean steamship companies."
In reply thereto would say that the general powers of banks incorporated under the Michigan Bank Act are prescribed in Section 4. Attention is particularly directed to the
seventh subdivision of this section, reading as follows:
To exercise by its board of directors or duly authorized officers or agents, subject to law, all such power as shall be necessary to carry on the business of banking by discounting and negotiating promissory notes, drafts, bills of exchange, and other evidences of debts, by receiving deposits, by buying and selling exchange coin and bullion, and by loaning money on personal and real security as provided hereinafter."
These are the usual powers granted to banks in carrying on a banking business. It is a general rule, laid down by all authorities, that the charter of a bank determines the limit of its powers, and that it can exercise no powers excepting those expressly conferred by statute, or necessarily implied and incidental to general banking powers. Michie, Section 87, page 647. I am of the opinion therefore that the business of selling steamship tickets by a bank in this state would be ultra vires and therefore unauthorized. Respectfully yours,
(Signed) GRANT FELLOWS, Attorney General.
STOCKHOLDERS MUST BE PRESENT OR REPRESENTED BY PROXY AT ANNUAL MEETING.
Hon. Frank W. Merrick, State Banking Commissioner, Capitol:
April 21, 1915.
Dear Sir-Your communication of the 13th inst. received, enclosing a form of notice of a meeting of stockholders of a State Bank which contains also a form of ballot, upon which stockholders may express their preference as to the directors to be chosen at such meeting. This form of ballot is as follows:
"Below you will find a list of the stockholders eligible to Directorship :
The present directors are
If you cannot be present please make a cross opposite the names of any five that you would like to have act as Directors for the ensuing year and send or bring to this Bank on or before the above mentioned date, January You are entitled to vote
You desire to know whether or not such a ballot would be legal.
In reply thereto would say that it does not appear from your letter or from the notice that the so-called ballot is used for any other purpose than obtaining an expression of opinion from stockholders who cannot attend the annual meeting. If this ballot is used for no
other purpose, I cannot see how any possible harm or wrong could result from its use.
On the other hand if this ballot is used for the purpose of actually electing directors, and as marked by an absent stockholder is cast in the ballot box of the meeting along with the ballots of stockholders who are present, I am clearly of the opinion that such ballot is invalid. I know of no principle of corporation law which would permit the election of directors in any other manner than at a meeting lawfully called and duly assembled. Cook on Corporations, 7th Edition, Sections 588, 595, 596, 604, 605 and 610. It is possible that under a proper charter provision and by-laws enacted under the authority thereof, or by statutory provisions, such a method of electing directors could be legalized, but I am of the opinion that under our present banking law a stockholder must be either personally present or present by proxy before his ballot can be cast in the election of directors. Respectfully yours,
(Signed) GRANT FELLOWS,
STATE BANK CANNOT BECOME SURETY OF PUBLIC OFFICER.
Hon. Frank W. Merrick, Commissioner of Banking, Lansing, Michigan:
April 27, 1915.
Dear Sir-Your communication of the 22nd instant received as follows: "Recently the directors of a state bank passed a resolution authorizing the bank to assume all liabilities of certain directors who were sureties on bonds of city treasurer. Can a state bank assume any such liability by vote of directors or by unanimous vote of stockholders? We will appreciate your opinion in this regard."
In reply thereto will say that banks are authorized to give bonds to secure city moneys deposited with them in certain cases, as for instance, under Section 3033 of the Compiled Laws of 1897, as amended by Act 156 of the Public Acts of 1901, and under the provisions of some of the Home Rule charters and legislative charters. This, however, must not be confused with the bond given by the city treasurer when he qualifies for his office.
I do not know of any statute authorizing a bank organized under the Michigan Banking Law to become surety upon the bond of any public officer. In the absence of an express statute upon the subject, I am clearly of the opinion that a state bank cannot lend its credit in this way or enter upon any such obligation, either with or without consideration. A bank can lend its credit and assume the obligations of third parties only in cases where the bank is directly interested and in the ordinary course of banking.
Michie on Banks and Banking, page 681.
Thomas v. City National Bank, 24 L. R. A. 263 (Neb.).
Mine Supply Co. v. Stock Growers Bank, 173 Federal 859.
If the bank cannot become the direct surety upon a city treasurer's bond, it cannot assume the liabilities of directors who have become sureties. Neither the directors nor the stockholders have the power to bind the bank for this purpose and I am, therefore, of the opinion that your question should be answered in the negative. Respectfully yours,
GENERAL BANKING LAW NOT AFFECTED BY ACT TO MAKE UNIFORM LAW OF TRANSFER OF STOCK.
Lansing, June 4, 1915.
Hon. Albert E. Manning, Deputy Banking Commissioner, Lansing, Michigan:
Dear Sir-Your letter of the first instant received, containing the following inquiry: "I call your attention to Act 106, Public Acts of 1913, and would appreciate your opinion as to whether or not this in any way supersedes the provisions of the banking law with reference to the statutory lien upon bank stock as provided in Section 9. We have recently had several inquiries as to whether or not said Act No. 106 related to the stock of state banks, and will appreciate your opinion in regard thereto."
In reply would say that the Act to which you refer is entitled "An Act to make uniform the law of transfer of shares of stock in corporations." The evident purposes of this Act as expressed in its title and in the various provisions made with respect to the methods of transferring stock, is to adopt a uniform set of rules, most of which are already recognized as settled corporation law.
With regard to the question as to whether this Act is applicable to shares of stock in banks. I am inclined to the opinion that insofar as bank shares may be treated as transferable personal property, the Act would apply to them as well as to the shares of other corporations. Insofar, however, as this may be in conflict with express provisions of the general banking law of the State as to the methods of transferring bank shares and the lien on the same created by any provision of the banking act, quite a different question is presented.
Banks, as corporations, are controlled and regulated by the general banking law of this State. To that extent they are separate and distinct corporations. Section 9 of Article 12 of the Constitution provides:
"No general law providing-for the incorporation of trust companies or corporations for banking purposes, or regulating the business therof, shall be adopted, amended or pealed except by a vote of two-thirds of the members elected to each house of the legislature..
As partially insuring the strict observance of this Constitutional provision, the legislature has adopted rules as follows:
Rule No. 27. "The question on the final passage of all bills, which by the constitution, require the assent of two-thirds of the senators-elect, shall be taken by yeas and nays, and entered on the journal, and unless two-thirds of all the members-elect vote in the aflirmative, the bill shall be declared lost. And, whenever such bill shall receive such assent of two-thirds as aforesaid, the fact thereof shall be certified upon said bill."
House Rule No. 64. "No bill appropriating the public money or property for local or private purposes, or providing for the incorporation of trust companies, or corporations for banking purposes, or regulating the business thereof, or amending or repealing any law providing for such incorporation or regulation shall be passed unless two-thirds of the members elected to the House shall have voted in favor of the passage thereof."
The legislative history of Act 106 of the Public Acts of 1913 is contained on page 96 of the "Index and History," of Senate Bills, this Act being Senate Bill No. 28. The bill was introduced January 13, 1913, by Senator Smith, and was on the same day referred to the Committee on Banks and Corporations. It was passed on third reading in the Senate March 18th, 1913, and the journal entry is as follows:
"Senate Bill No. 28 (file No. 30), entitled 'A bill to make uniform the law of transfer of shares of stock in corporations;' was read a third time and passed, a majority of the Senators
Names of Senators (26)
The title of the Bill was agreed to."
Names of Senators (2)
I refer to the legislative history as merely showing that the bill was not evidently regarded in the Senate, where it was introduced, as an amendment to the banking laws, inasmuch as the Senate rules applicable to such bills were not observed in the passage of this measure. Of course, it is not a direct amendment to any law and only repeals or amends other laws by implication. Repeals by implication are not favored, and I do not think the provisions of this Act were intended to repeal or modify the express provisions of the general banking law. In view of these facts and principles, I have no hesitation in advising you that no provision of the general banking law is affected by the Act under consideration.
VENDOR'S LIEN NOTES NOT PERMISSIBLE AS SAVINGS INVESTMENTS.
Lansing, July 6, 1915. (53) Honorable Frank W. Merrick, Commissioner of the Banking Department, Lansing, Michigan: Dear Sir-I have before me your communication of the 30th ult., in which you request The quesmy views as to the construction to be placed upon certain provisions found in Section 27 of As I understand the situation, a certain savings bank in this state the general banking law. desires to invest a certain amount of its deposits in so-called "vendor's lien notes" executed in the State of Texas, and by the terms of which a lien is created upon real estate. tion presented is as to whether or not such investment may be made under the law.
Insofar as it is material to the determination of this question,, the section of the statute above referred to provides :
"A savings bank shall keep on hand at least fifteen per cent of its total deposits, one-third of which reserve shall be in lawful money in its own vaults, and the balance on deposit payable on demand, with banks, national or state, in cities approved by the Commissioners as reserve cities, or invested in United States bonds; three-fifths of the remainder of the savings deposits shall be invested by the board of directors as follows:
(h) Said banks may loan the same upon negotiable paper, or other evidences of indebtedness secured by any of the above mentioned classes of security; or
(i) Upon notes or bonds secured by mortgage lien upon unencumbered real estate worth at least double the amount loaned
It appears from the as used. The answer to the question upon which you have requested my views must depend upon One-third of the purSaid notes were the construction to be given to the expression "mortgage lien" correspondence submitted with your inquiry that the land upon which the lien stated in the notes exists has been sold at prices ranging from $25 to $35 per acre. chase price has been paid in cash and the remainder in the notes referred to. issued in series, the obligations in each series maturing at different times, varying from one to four years. The deed of the property refers expressly to the vendor's lien created by virtue This deed has, it is stated, been recorded. of the clause in the notes. The requirement Although it is not expressly so stated, I infer that the investment is sought to be made out of the 51% of deposits that may be loaned upon negotiable paper or other evidences of indebtedness secured by mortgage lien upon unencumbered real property. that such property be unencumbered necessarily implies that there shall be no other lien thereon prior to, or equal in rank to, the mortgage by which the obligations taken by the bank If, therefore, a savings bank were to be permitted under any circumstances to Otherwise, if a number of such are secured. invest moneys, out of the fund in question in vendor's lien notes, all of such notes outstanding against a particular description must necessarily be taken. notes were owned by others, the objection would be encountered that the property was not unencumbered because there would exist thereon a lien equal in rank to that held by the savings bank.
This brings us to a Quite possibly, however, in the case to which you refer, it is desired to buy all of such outstanding notes so that the objection above suggested would be avoided. consideration of the principal point at issue; that is, whether or not the lien created by these notes can be said to be a "mortgage lien" within the meaning of the Michigan statute here involved. The so-called "vendor's lien" is expressly recognized by statute in the State of The decisions of the court at Texas. The provisions with reference thereto are analogous in many respects to the enactments of the legislature affecting mortgages upon real property. last resort of Texas, construing these legislative enactments and involving the nature and necessary incidents pertaining to the vendor's lien, proceed upon the theory that such lien is analogous to the lien that exists by virtue of a mortgage or deed of trust. It is significant to note, however, that the statute does not treat the vendor's lien in connection with mortgage liens, nor does it declare that such liens shall be regarded as identical and subject in all respects to the same considerations. Likewise, the decisions of the courts, while recognizing the analogy do not go to the extent of declaring that for all practical purposes, the vendor's lien and the mortgage lien are identical. The comparatively recent case of Busch v. Broun, 152 S. W. 683, may be cited as suggesting the attitude of the Supreme Court of Texas. It was there held that an assignment of a vendor's lien note should be registered upon the ground that under the terms of the statute and prior decisions of the court, an assignment of a mortgage must be recorded, in order to protect the rights of the assignee as against third parties and It is obvious from the reading of this opinion of that the assignment of a vendor's lien note was subject to similar consideration because such note conveyed "the same character of lien." the court that in the use of the words quoted it was meant to imply that the note like the It was not indicated that in the opinion of the mortgage created a lien upon the land within the meaning of the laws relating to registration of instruments affecting the title to land. court the same lien was created by the notes as is created by a mortgage.
It is also of interest to note in this connection that the statutes of the State of Texas relating to certain mutual insurance companies permit the investment of the funds of such companies, in national, state, county and city bonds, and also in first mortgages upon real
estate, subject to the restriction that the amount secured by such mortgages should not exceed 50% of the value of the land. Permission is not given to such companies to invest in vendor's lien notes. Had it been the intention to grant such permission, it may. I believe, be assumed that the terms of the statute would have been so expressed. This inference would seem to be fully warranted because of the various statutory provisions by which mortgages and vendor's lien notes are recognized as separate and distinct undertakings, although anal ogous in many respects, and of the same character in that each creates a lien on real property.
As I view the matter the reasons that may have prompted the legislature of Texas in not including vendor's lien notes in the list of securities in which mutual insurance companies might invest are not difficult to ascertain. As suggested by the correspondence submitted by you, many such notes may be issued, each imposing a lien upon the same property. If, as is usually the case, these notes are held by different parties, it follows necessarily that no one of such holders has what may be termed a prior lien. Rather, all of such liens are of equal rank. It should be noted also in this connection that each of such notes imposes a lien, while in the event that a mortgage is executed, securing an indebtedness, there is, of course, but the one lien, even though such indebtedness may be evidenced by a number of notes, bonds, or other obligations. It was unquestionably the view of the Texas legislature that first mortgages were preferable to vendor's lien notes. Undoubtedly reasons of public policy were deemed to exist that warranted the apparent discrimination.
I am impressed that similar reasons of public policy obtain in the construction of the provision of the Michigan statute that is here involved. A reading of Section 27 is sufficient to indicate conclusively that the legislature deemed it wise to carefully safeguard the investment of the funds of savings banks. I challenge your attention specifically to subdivisions (e), (f). and (g) thereof. It was clearly intended that every precaution should be observed in order to prevent even a possibility of loss. Undoubtedly the history of banking, as conducted prior to the passage of supervisory and regulatory statutes, explains in large measure the extreme care with which this act was drawn. In permitting investments in notes or bonds secured by mortgage, it was provided, in accordance with the general spirit of this act, not only that the real estate must be unencumbered, but that it must be worth at least double the amount loaned, it occurs to me that this last provision might operate to prevent investments in the specific notes referred to in your communication, for it appears that such notes were given for two-thirds of the purchase price of the land. Assuming that such price may be taken to indicate the actual value of the land, it is patent that the liens created by such notes exceed In the aggregate one-half the value of the property, If, therefore, all of the notes outstanding against any particular description were acquired by the bank to which you refer, there might still be involved the question as to whether or not such investment is in contravention of this clause. However, I regard this feature as of minor importance unless it is sought to purchase notes secured by a trust mortgage, to which more specific reference will hereafter be made.
The significant feature of the clause to which attention has been directed lies in the fact that the legislature has seen fit to refer only to mortgage liens rather than to liens generally that may cover real property. Had it been the intention to include liens other than those existing by virtue of a mortgage, within the purview of the act, it is, I believe, fair to assume that this particular clause would have been enacted accordingly. I am strongly impressed that the intention of the legislature cannot be carried out unless the restrictions imposed are carefully observed in accordance with the letter of the law. Precisely the same reasons of public policy that prompted the inclusion of these provisions in Section 27 require that in construing the same, there shall be no exception permitted and no practice allowed that will open the door to a modication of the requirements deemed to be necessary to safeguard the rights and interests of the depositors in savings banks. In accordance with these suggestions. I am constrained to the opinion that the savings bank to which you refer may not properly invest in vendor's lien notes covering property in the State of Texas on the theory that the lien created by such notes is a "mortgage lien" within the meaning of Section 27 of the general banking law. This, I believe, covers your first question.
With reference to your second inquiry as to whether or not a loan secured by trust deed on realty in the State of Texas may be made the subject of an investment made by a savings bank out of its deposits, it would seem that no feasible objection may be made thereto. This so-called "deed of trust" a copy of which is submitted, is to all intents and purposes a mortgage and in consequence the lien created thereby many fairly be said to be "mortgage lien." In making investment in obligations secured by such lien, it must be borne in mind that the aggregate of such obligation may not exceed one-half the value of the property and that such lien must be prior in character to all other liens outstanding. The fact that it is deemed necessary to execute this instrument in certain cases may in itself be taken as an indication that the so-called vendor's lien notes are not as ample security as is the lien created by a mortgage or deed of trust. In case of any default under the latter, the trustee is, of course. charged with the duty of protecting the rights of all the holders of the obligations that are secured by such lien. As stated, there seems to be no objection to an investment in obligations secured in this manner providing of course, the necessary restrictions and limitations imposed by the statute are observed.
STOCK IN BUILDING COMPANY CANNOT BE CARRIED AS BANKING HOUSE UNDER SECTION 11.
Dear Sir-Your communication of the 28th inst. received as follows: "I desire to call your attention to Section 11 of the banking law, which provides that a bank may purchase and hold real estate such as shall be necessary for the convenient transaction of its business, including with its banking office other apartments to rent as a source of