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income, but which shall not exceed fifty per cent of its paid in capital. Under this provision of said Section I desire to inquire whether or not in your opinion it would be legal for a state bank to carry as an asset stock of a Building Company up to fifty per cent of capital? The Building Company is one organized for the purpose of erecting a bank and office building for the state bank, which bank heretofore held a ninety-nine year lease of the property. The capital stock of the Building Company is $250,000, all held by the directors of the bank, and the Building Company will also have a bond issue of $250,000, retirable at the end of twentyseven years from the income of the building.
Trusting that this will have your early attention
It is my understanding from your inquiry that this particular bank contemplates carrying the stock in the Building Company as an asset under its banking house account.
The authority of a state bank to invest in real estate is limited by the provisions of Section 11 of the General Banking Law to which you refer. Unquestionably this section contemplates direct ownership either by way of a fee or, as we have heretofore held, a long term lease. See Attorney General's Report for nineteen-fourteen at page 578. I do not think that the provisions of this section can be further extended by construction.
Moreover the authorities are uniform in holding that unless expressly authorized by statute, State and National banks cannot hold stock in other corporations and where they are authorized to hold such stock they can only do so in the manner and for the purposes prescribed. Upon this proposition you are respectfully referred to Attorney General's Report for nineteenfourteen at page 434.
Further discussion of this matter I think is unnecessary, and your inquiry is therefore answered in the negative. Respectfully yours, (Signed) GRANT FELLOWS, Attorney General.
THE WORD "CAPITAL" CONSTRUED TO MEAN CAPITAL STOCK.
December 28, 1915.
Hon. Frank W. Merrick, Banking Commissioner, Lansing, Michigan:
Dear Sir--Answering your communication of recent date as follows: "Section 11 of the banking law limits the investment by a state bank in real estate for banking purposes to 'fifty per cent of its paid in capital. The question is asked whether the phrase paid in capital' means capital stock' or does it mean the entire assets of a bank, viz: money paid in for stock, surplus, undivided profits, or other property in the bank. We will appreciate an opinion from your Department on this question."
In reply thereto would say that the provision of section 11 of the State Banking law to which you refer reads in part as follows:
"The bank may purchase, hold and convey real estate for the following purposes, but
First, 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 income but which shall not exceed fifty per cent of its paid in capital...
The meaning of the phrase "paid in capital" as it appears in this section is doubtless made clear by reference to the provisions of section 5 of the same act in which it is provided:
"At least fifty per cent of the capital stock of every bank shall be paid in before it shall be authorized to commence business, and the remainder of the capital of such bank shall be paid in monthly installments of at least ten per cent on the whole of the capital, payable at the end of each succeeding month...
Other provisions of the banking law clearly distinguish between paid in capital and other assets of the bank, such as surplus, undivided profits, etc. This, as I take it, is the view held by Michie in that part of his work devoted to à discussion of capital stock and dividends from which I wish to quote as follows:
"Section 36. Amount of Capital and Shares. The capital of a bank is not an ideal, fictitious, arbitrary sum of money set down in the articles of association, but is composed of substantial property and is that which gives value and solidity to the stock of the institution. It is the foundation of its credit in the business community. Capital used in the business of banking is none the less so because it is borrowed. The mere fact that the money permanently invested in the business is borrowed does not alter its character as capital but à temporary loan obtained to meet an emergency is not capital.
The capital stock of a bank is the whole undivided fund paid in by the stockholders, the legal right to which is vested in the corporation to be used in trust for the benefit of the members. If a large surplus be accumulated and laid up that does not become a part of it. (Citing Fireington v. Tenn., 95 U. S. 679.)
"Capital" and "capital stock" of a bank, while sometimes used interchangeably. are not one and the same thing. "Capital" includes the entire assets of the bank, whether represented by money paid in for stock, surplus, undivided profits, or other property of the bank; while capital stock represents only the total amount derived from the issuance of the shares of stock. (West v. Newport News, 104 Va. 21; Michie Banks and Banking, pages 75 and 76.) The term "paid in capital" as used in section 11, therefore, must be taken to refer only to money paid in for stock, which amount is fixed by statute as distinguished from reserve capital, undivided profits, etc., which are more or less under the control of the directors of the bank and may vary with the fortunes of the business. Respectfully yours, (Signed) GRANT FELLOWS, Attorney General.
BUILDING AND LOAN ASSOCIATION MAY NOT ADVERTISE FOR DEPOSITS; BANKS ARE PREFERRED CREDITORS OF SUCH ASSOCIATIONS.
Hon. Frank W. Merrick, State Banking Commissioner, Lansing, Michigan:
January 17, 1916.
"I am enclosing herewith letter from one of our State banks, as well as advertisements attached, upon the subject matter mentioned in the letter. Will you kindly advise us as to whether or not a building and loan association can legally advertise for deposits; and also advise us, whether or not in the event of an individual or bank loaning a building and loan association money, would the person or bank become a preferred creditor as against the stockholders of the building and loan association."
In reply thereto would say that domestic building and loan associations are governed by the provisions of Act 50 of the Public Acts of 1887, as amended by Act 17 of the Public Acts of 1901. The purpose of such associations is stated in section 1 of the above act as follows: "Any number of persons desiring to organize a building and loan association for the purpose of building and improving homesteads, removing incumbrances therefrom, and loaning money to the members thereof, may, by complying with all the provisions of this act and entering into articles of association, become a corporate body.
Section 5 provides in part as follows:
"The authorized capital stock of such association shall be divided into shares having a par value of not less than twenty-five dollars, nor more than two hundred dollars each, payable in periodical installments, called dues, not exceeding two dollars per month on each share: Provided, That the by-laws may provide for the advance payment of installment dues and for which there may be issued an advance payment certificate. The shares may be issued in series, or at any time as the by-laws shall determine, and subscriptions therefor shall be made payable to the association."
Under the provisions of sections five and six of the act most building and loan associations in this State make provision for investment in their capital stock on the installment plan. This, however, must be distinguished from receiving deposits as banks do business.
I have examined the advertisement to which you refer and do not think it is open to the objection that the building and loan association in question is holding itself out to be a bank. I am of the opinion that were they doing so it would constitute a misuse of their charter. With reference to the second question which you ask as to whether a bank loaning money to a building and loan association would be preferred in case of insolvency over stockholders in the association, I am of the opinion that the same rule would apply as in ordinary corporations. The members of a building and loan association are mutually liable for its obligations and the funds of the association and its assets in case insolvency results, may be used for the payment of debts. In this connection I call your attention to Thornton and Blackledge on building and loan associations, Sections 376 and 377. Respectfully yours, (Signed) GRANT FELLOWs,
April 10, 1916.
Hon. Frank W. Merrick, State Banking Commissioner, Lansing:
Dear Sir-We have had under consideration for some time the proposition submitted to your Department by one of the State Banks in Detroit relative to the proposed building of a banking house where the cost of the land and the building will be approximately two million dollars, which amount equals the capital of the bank. Inasmuch as section 11 of the general banking law only permits 50% of the capital to be invested in a banking house, this bank has submitted several propositions for your approval. These propositions are as follows:
(1) A state bank with $2,000,000 paid in capital desires to invest $1,000,000 in a bank ing office and office building as a source of income, as follows: To obtain a site and erect an 18 story banking and office building at a total cost of not exceeding $2,000,000 using therefor one-half of its paid in capital, viz: $1,000,000 and issuing building bonds for the remaining $1,000,000, the principal and interest of which bonds shall be payable solely from the net Income of the property, and which bonds shall be, according to their terms, solely payable from such net income as may be derived and not a claim or debt against the bank. not a claim against any of its property nor assets nor against the building, but merely against the net income until the principal and interest of the bonds are paid. Is this permissible?
Instead of the insuance of the bonds by the bank, may an independent corporation or an individual or individuals procure title to the site, erect the building, sell it absolutely to the bank for $1,000,000, reserving the title to the net income until the amount received from such net income shall reimburse it or him or them for the balance of the cost plus 5% per annum until paid?
(3) May an independent corporation, individual or individuals owning building and site worth $2,000,000 sell to the bank an undivided one-half interest therein for $1,000,000, they holding as tenants in common, and then lease the remaining undivided one-half interest therein to the bank for a rental equal to the net income of the whole building, with the proviso that when the bank has paid from such net rental an amount sufficient to cover the value of the undivided one-half interest plus 5% interest, the whole title thereto shall vest in the bank? (4) If an independent corporation, individual or individuals procured the site and erected the building at a cost of $2,000,000, and gave a trust mortgage on the property to secure the payment of $1,000,000 construction bonds at a rate of $100,000 a year inclusive of interest, could a state bank of $2,000,000 paid in capital buy the property for banking offices and apartments as a source of income for $1,000,000, subject to such trust mortgage, on the express stipulation, however, that the bank does not assume and agree to pay the mortgage or bonds secured thereby, but that, so far as the bank is concerned, the holders must look to the property for liquidation, and payment?
(5) Can a state bank invest one-half of its paid in capital in a building and site as co tenant in common with another corporation, individual or individuals, and later by an increase of its capital paid in, buy out its co-tenant?
Proposition No. 1, I think, should be answered in the negative. Under this proposition the net income from rentals, etc., would be used in discharging the principal and interest on the bonds. Such rentals are assets of the bank and the bank would, therefor, use its assets in paying off the mortgage bonds, thus increasing its investment in the banking house. The proposition is clearly an evasion of the restrictions imposed by section 11 and should not be
Proposition No. 2. This is subject to the same objections as the first proposition and should likewise be disapproved. This proposition is subject to the criticism that the bank has already Proposition No. 3. invested up to its limit in the banking house and then proceeds to lease the other undivided half interest from the other tenant in common for an amount equal to half the value of the building. This proposition is so clearly an evasion of the law that it should be given no further consideration. I do not see how a distinction can be made between the bank being Proposition No. 4. liable for a debt and property of the bank being liable. In any event failure to meet the terms of the mortgage lien would involve the assets of the bank, especially since the bank would propose to invest one million dollars of its capital in the real estate. This proposition is an evasion of section 11 and possibly of section 45, which provides that a bank cannot pledge its assets as collateral security so as to give a preference to the creditor.
Proposition No. 5.
This proposition is goverened by a separate opinion this day rendered to you and in short may be answered as follows: that there is nothing in the banking law to prohibit a State bank from being a tenant in common with another corporation or individual provided that it does not involve as a necessary consequence a partnership agreement. My fear would be that a partnership agreement would be necessary, and that would be especially true where the parties as tenants in common contemplate from the beginning that one of the parties should purchase the others interest and that in the meantime one of the parties would be acting as a trustee or agent for all in the collection of rents, payment of taxes, insurance, etc. I would suggest, as I did in my other opinion, that any contract made between the tenants in common under this proposition should be submitted to the banking department before taking Respectfully yours, effect. (Signed) GRANT FELLOWS,
April 10, 1916.
Hon. Albert E. Manning, Deputy State Banking Commissioner, Lansing, Mich. : Dear Sir-Your communication of the 13th ult. received as follows: "I am directed by the Commissioner to ask for an opinion from your department on the following questions: First. As to whether or not a State bank can own and carry as Banking House an undi vided half interest in same when the total cost of the Banking House exceeds fifty per cent of capital, the other undivided interest being owned by a Building Company consisting of bank directors.
Second. We will also appreciate your opinion as to whether or not a State bank can carry as Banking House a building with the title to upper story or stories in other corporations, fraternal or otherwise."
In reply thereto would say that the answer to your communication has been delayed because of the suggestion that the banks which are interested in this question proposed to submit a brief. Since that suggestion was made the interested parties have for some reason concluded not to submit a brief and you now desire a reply.
Answering your first question, would say that the right of a bank to purchase, hold and convey real estate is governed by Section XI of the General Banking Law, which 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 office other departments to rent as a source of income, but which shall not exceed fifty per cent of its paid in capital;
We have held that This section does not attempt to define the character of the title to the real estate which a bank may purchase; nor does it prescribe any limitations except such as may be inferred from the words themselves "purchase, hold and convey real estate. under this provision a bank may obtain less than a fee, as for instance a ninety-nine year
Section 8825 of the Compiled Laws of 1897 provides as follows:
"Estates in respect to the number and connection of their owners are divided into estates in severalty in joint tenancy, and in common the nature and properties of which, respectively, shall continue to be such as are now established by law, except as far as the same may be modified by the provisions of this chapter."
Section 8826 provides:
"All grants and devices of lands, made to two or more persons, except as provided in the following section, shall be construed to create estates in common, and not in joint tenancy, unless expressly declared to be in joint tenancy.'
But it can take (10 Cyc., page 1132). It has been held that a corporation can not take an estate in joint tenancy, either jointly with another corporation or with a natural person. It is a and hold as a tenant in common with another corporation or with a natural person. DeWitt vs. San Francisco, 2 Cal. 289; Estell vs. Southern University. 12 Lea Tenn. 476: Haven vs. Mehlgarten. 19 Ill. 91; Hacket vs. Railway Company, 12 Ore. 131; 10 Cyc. 1132. not enter into partnership agreements, and this rule general rule that corporations can would prohibit a corporation from holding lands in partnership or under partnership agreements; but the rule as to partnerships would not prevent a corporation from holding an estate in common with another corporation or with a private person.
Answering your first question, therefore, I would say that a bank might hold title in common with another corporation or private individual, to real estate to be used as a bankThis I think would not prevent ing house, provided there does not follow as a matter of necessity the entering into a partnership agreement relative to the use of the property.
the tenants in common from agreeing by contract as to which portion of the proposed property should be used by either party, but would prohibit any agreement by which the one In this connection I would suggest that tenant in common should permit the other tenant in common to bind the entire property for obligations of a single tenant in common.
any agreements made between the tenants in common as to the use of the property should
be submitted to the Banking Commissioner so as to avoid ultra vires acts on the part of the bank.
Answering your second question your attention is called to an opinion rendered by me to Mr. Leland F. Bean on pages 427 and 428 of the Attorney General's Report for 1915, in which the question was raised as to whether a township could own the fee in a second story of a building. In that opinion I said:
"It does not occur to me that the township could own the second story of a building in fee. Such an attempted purchase of a building or a portion thereof apart from the realty would in all probability be construed as a severance in legal effect, and an estate in fee can exist only in land, and applies to buildings or other structures only insofar as the same are regarded as attached to and part of the land. It would be impossible for the land to be held in fee by one person and a building on such land to be held in fee by another." I am clearly of the opinion that the title to upper stories of a building can not be held in fee by any person other than the owner of the land upon which the building stands. Respectfully yours. (Signed) GRANT FELLOWS, Attorney General.
July 18, 1916.
Hon. Frank W. Merrick, Commissioner of Banking Department, Lansing, Michigan: Dear Sir-You have recently submitted to me copy of a tentative agreement entered into by a State bank with certain persons mentioned therein and have asked that I give you my views upon the matter. Insofar as the bank is concerned, the essential parts of the agree ment provide for the conveyance to a corporation to be hereafter formed of certain real estate for a stipulated consideration; for the leasing to the bank for a period of ninety-nine years of land on which is to be erected a building designed for hotel and bank purposes: for the purchase of a certain portion of said building; and for the leasing of all of said building thus purchased that is not used for banking purposes. Without reference to the practical operation of this contract as written, or to its enforcibility, it does not occur to me that a State bank, if it performs the various acts contemplated, will thereby infringe any provision of the banking law or any other statute of the state. Undoubtedly it has the power as a corporation to sell its property, to lease property and to purchase property. It does not appear that authority of any other or different nature is involved. I do not understand that my opinion is requested except as to the legality of these various acts. assuming that each and all of them may and will be performed in accordance with the written instrument. This opinion is limited accordingly and has, of course, no reference whatever to incidental propositions of business policy which may arise in case the proposed action is taken. I am returning herewith the copy of the contract and the correspondence submtted therewith. Very respectfully, (Signed) GRANT FELLOWS.
JOINT TENANCY NOT CREATED BY JOINT DEPOSIT.
Hon. Matthew Bush, Judge of Probate, Corunna, Michigan:
December 30, 1916.
Dear Sir-I am in receipt of your communication of the 22d inst., wherein you request an opinion from this Department as to the construction to be placed upon the term "joint tenants" as used in section 3 of Act 248 of the Public Acts of 1909. The section to which you refer reads as follows:
"When a deposit shall be made in any bank or trust company by any person in the name of such depositor or any other person, and in form to be paid to either or the survivor of them, such deposits thereupon and any additions thereto, made by either of such persons, upon the making thereof, shall become the property of such persons as joint tenants, and the same together with all interest thereon, shall be held for the exclusive use of the persons s named and may be paid to either during the lifetime of both, or to the survivor after the death of one of them, and such payment and the receipt of acquittance of the same to whom such payment is made shall be a valid and sufficient release and discharge to said bank for all payments made on account of such deposits prior to the receipt by said bank of notice in writing not to pay such deposits in accordance with the terms thereof."
Prior to the enactment of this statute it had been the holding of the Supreme Court that an estate in joint tenancy could not be created in personal property. See
Waite vs. Bovee, 35 Mich. 425;
State Bank of Croswell vs. Johnson, 151 Mich. 538;
I am impressed that it was not the intention of the legislature in enacting this statute to create an estate in joint tenancy as it was known to the common law in bank deposits made in accordance with the provisions with the same, but that the object of this statute is to protect the bank in case payment of the money is made to the survivor before the bank has received notice of the death of one of the parties. The language of the statute would seem to indicate that this was the intention of the legislature and I am, therefore, of the opinion that section 3 of the act does not create a joint tenancy in personal property as the term "joint tenancy" was known to the common law.
BANK LOANS TO BUILDING AND LOAN ASSOCIATIONS ARE LEGAL.
Hon. Frank W. Merrick, Commissioner Banking Department, Lansing, Mich. :
March 19, 1917.
Dear Sir-Your communication of the 14th instant received requesting my opinion upon the following proposition:
"Investigation develops the fact that numerous banks under the supervision of this Department are from time to time advancing funds to certain building and loan associations in the State. The question has arisen whether building and loan associations, as organized under the Michigan statute, are given the right to borrow funds for loan purposes in this way; and as a consequence whether the loans held by banks are legal investments or not."
In reply thereto would say that under date of July 31, 1901, Honorable Horace M. Oren. then attorney general, advised the secretary of state that building and loan associations have a right to borrow money to carry out the purposes of such organizations, in the absence of statutory prohibition, or by-laws of such associations prohibiting it; and have implied power to secure the payment of such loans by assignment of mortgages, bonds, etc. See Attorney General's Report for 1902, page 59.
I do not find that this question has since been passed upon by this department, and I therefore assume that the opinion of Mr. Oren has been followed in this respect. If a building and loan association has the authority to borrow and pledge its securities it consequently follows that a bank would have the same right to loan its money to a building and loan association as to any other borrower.
Respectfully yours, (Signed) ALEX J. GROESBECK, Attorney General.
BANK MAY NOT LEGALLY CLOSE ON ANY DAYS OTHER THAN THOSE PRESCRIBED BY LAW.
Hon. Frank W. Merrick, Lansing, Michigan:
June 11, 1917.
Dear Sir-Your communication of the 19th ult. received as follows: "We have been requested by a State bank to submit to you the proposition of whether a State bank may legally close its bank on an afternoon other than Saturday during the summer months. As you no doubt are aware Saturday afternoon is a busy time in the smaller towns, and for that reason banks dislike to close.
"Will you kindly give this matter your early attention?"
In reply thereto, would say that there does not appear to be any authority in the banking act under which State banks may close through banking hours on any days except those prescribed.
Very respectfully. (Signed) A. B. DOUGHERTY, Deputy Attorney General,
BANK DISCOUNTING ITS NEGOTIABLE NOTES FOR PURPOSE OF RELOANING, NOT ACTING IN GOOD FAITH.
Hon. Frank W. Merrick, State Banking Commissioner, Lansing, Michigan:
February 19, 1918.
Dear Sir-I have before me your communication of the 8th inst. with reference to the authority of a bank organized under the banking laws of this state to rediscount its negotiable notes for the purpose of securing funds to reloan.
Section 32 of the Michigan Banking statute provides in part as follows."Provided further that any bank may borrow money for temporary purposes, and may pledge assets of the bank not exceeding fifty per cent in excess of the amount borrowed as collateral security therefor: Provided further, That whenever it shall appear that a bank is borrowing habitually for the purpose of reloaning, the commissioner of the banking depart ment may require such bank to pay off such borrowed money. Nothing herein contained shall prevent any bank from rediscounting in good faith and endorsing any of its negotiable
You will note that this section prevents a bank from borrowing habitually for the purpose of reloaning. This section provides further that nothing therein contained should prevent any bank from rediscounting in good faith and endorsing any of its negotiable notes.
It is my opinion that it was not the intention of the legislature in providing that a bank might rediscount in good faith its negotiable notes to authorize the said bank to rediscount its negotiable notes for the purpose of securing funds to reloan.
This section permits a bank to rediscount its negotiable notes if done in good faith, and should a bank rediscount such paper merely for the purpose of securing funds to reloan, I do not think it can be said that said bank is acting in good faith.
Trusting this will serve to furnish you with the desired information, I am,
TRUST COMPANIES CANNOT LAWFULLY PURCHASE SHARES OF THEIR OWN CAPITAL STOCK.
April 9, 1919.
Hon. Frank W. Merrick, State Banking Commissioner, Lansing, Michigan: