OPINIONS OF THE ATTORNEY GENERAL. EXCESSIVE LOANS. On account of the importance of the subject of excessive loans I deem it advisable to again publish the construction of section 52 of the Banking Law in this regard as submitted to this department by the Attorney General in the year, 1903: Lansing, Mich., May 23, 1903. Hon. George W. Moore, Commissioner of Banking, Lansing, Michigan: Dear Sir-I am in receipt of your communication of the 19th inst. referring to the General Banking Law of this State, and requesting my opinion upon the following questions: "First, How much money may the directors of a bank loan to any person, or company, or corporation, or firm, by a two-thirds vote of its board of directors? Second, How much money may any bank loan on any one line of commercial paper? Third, May a bank increase the first named line by the bond or personal endorsement of the officers or directors of a firm, company or corporation, or by the assignment of value as collateral?" In considering these questions I desire to call your attention to section 6141 of the Compiled Laws, being section 52 of the General Banking Law of this State, which provides in part as follows: "The total liabilities to any bank of any person or of any company, corporation or firm for moneys advanced, including in the liabilities of the company or firm the liability 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; but the discount of bills of exchange drawn in good faith against actually existing values and the discount of commercial or business paper actually owned by the person negotiating the same shall not be considered as money borrowed: Provided, however, That the foregoing limitations shall not apply to loans on real estate or other collateral securities authorized by this act: Provided, however, That by a two-thirds vote of the directors the liabilities of any bank of any person, or company, or corporation, or firm may be increased to a sum not exceeding one-fifth of the capital and surplus of the bank." It is evident that this limitation was borrowed from the National Banking Law, section 5200 of the Revised Statutes of the United States, providing as follows: "The total liabilities to any association, or any person, or of any company, corporation, or firm for money borrowed, including in the liabilities of the company or firm, the liabilities of the several members thereof, shall at no time exceed one-tenth part of the C amount of the capital stock of such association actually paid in; but the discount of bills of exchange drawn in good faith against actually existing values, and the discount of commercial or business paper actually owned by the person negotiating the same, shall not be considered as money borrowed." This provision, as found in our General Banking Law and also in the National Banking Law, has never been construed by the courts in so far as it relates to the particular question submitted by you. The Supreme Court of Pennsylvania, in the case of O'Hare v. Second National Bank of Titusville, 77 Pa. St., 102, referring to this provision in its application to National banks, makes use of the following language: "Evidently the limitation of the indebtedness to the one-tenth in the 29th section, was intended as a general rule for conducting the business of the bank; a rule laid down from experience to regulate its loans for its own best interest and those of stockholders and creditors, not a rule to regulate its customers. It was, as remarked in Fowler v. Scully, a regulation to prevent these associations from splitting on the rock which has ruined so many banks, to-wit, that of leading too much of their capital to one person or firm. The intention being to protect the association and its stockholders and creditors from unwise banking, we cannot suppose it was meant to injure them by forbidding recovery of the injudicious loans." In Vol. 29 of the Amer. & Eng. Ency. of Laws, 2nd ed. p. 382, we find the following with respect to the limitation found in the National Banking Law: "The object of this provision of the statute was to guard National banks from the hazard of speculative loans, but it contemplated and permitted to an unlimited amount the discount of paper used and required in facilitating the transfer of property and money in the transaction of the legitimate business of the country." Citing Oswego Second National Bank v. Burt, 93 N. Y. 244. It was evidently the intent of the legislature, in enacting the provision above referred to, as found in the banking law of this State, to guard the banks organized thereunder from the hazard of speculative loans, and to prevent such banks from advancing or loaning too much of their money to any one person, firm or corporation, and in construing the statute with respect to the exception, it is necessary to keep constantly in mind the purpose of the limitation, and not to construe the provision relating to the exceptions therefrom in such a way as to destroy the force and effect of the limitation itself. The exceptions to which I refer relate to the discount of bills of exchange drawn in good faith against actually existing values, and the discount of commercial or business paper actually owned by the person negotiating the same, and which, in my opinion, should be strictly construed and should be held to apply to no transaction that did not clearly and fully come within the provisions of the statute in this particular. Black on Interpretation of Laws, 275. I find that the questions which you submit for my consideration are quite fully considered in Pratt's Digest, pages 93-94-95, in their application to national banks, but I am unable to concur in some of the conclusions reached which do not seem to be based upon judicial decisions, and which, in my opinion, tend to defeat the very purpose of the limita spect to statutory or constitutional inhibitions, that you cannot do indirectly that which you are prohibited from doing directly. In their application to commercial paper, the terms "loans" and "discounts" are synonymous. Amer. & Eng. Ency. of Law, Vol. 21, 2nd ed. 381. The question who is borrower is not always to be determined from the position of the parties as they appear on the paper. The borrower may be the maker or the endorser. Pratt's Digest, 94. Our statute provides that in the discount of commercial or business paper actually owned by the person negotiating the same, it shall not be considered as money borrowed. The application of this provision, in my opinion, relates exclusively to the person negotiating the paper. The statute contemplates that he alone shall be considered as not receiving a loan from the bank. With respect to the maker of such paper who is primarily liable, if such maker has received credit at the bank to the full limit imposed by law, the bank should not be permitted to discount such paper, as in that event the liability of the maker would exceed the liability permitted by the General Banking Law, and if such a transaction should be permitted, it would indirectly defeat the very purpose for which this limitation was imposed. In determining the questions submitted by you, I realize that there may be some doubt as to the proper construction of these provisions in the absence of any judicial determination as to their proper meaning. In view of the fact that the several banks of this State organized under the General Banking Law, are subject to State supervision, not only for the protection of the banks themselves, but for the protection of the persons doing business with such banks, the laws relating thereto should be constructed in such a manner as to afford such protection in every possible way, until such time as the courts may determine otherwise. In answer to your first question, I would therefore say that, in my opinion, the amount which the directors of a bank would be authorized to loan to any person, or company, or corporation, or firm, by a twothirds vote of its board of directors, would not exceed one-fifth of the capital and surplus of the bank, and it would be immaterial whether such loan was secured or unsecured, excepting, of course, loans on real estate or other collateral securities authorized by the General Banking Law. In answer to your second question, I would say that the same rule would apply to any one line of commercial paper that would apply to any one person, company, firm or corporation. In answer to your third question I would say that, in my opinion, it is immaterial whether such loan is secured by the bond or personal endorsement of the officers or directors of the firm, company or corporation, or by the assignment of value as collateral, except where such loan is made upon real estate or other collateral securities recognized by the General Banking Law. In this connection I call your attention to the rule laid down in the Amer. & Eng. Ency. of Law, Vol. 21, 2nd ed., page 382, to the effect that "Drafts may be bona fide bills of exchange drawn upon actual existing values within the meaning of the statute, though not accompanied by specific bills of lading in each case. It is sufficient if they are drawn against property previously consigned and existing either in its original form or in the shape of proceeds of sales |