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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 sev eral 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 may be made.

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,

STATE BANKS HAVE NO AUTHORITY TO INVEST IN CAPITAL STOCK OF FEDERAL RESERVE BANKS.

January 6, 1914.

Honorable Edward H. Doyle, Banking Commissioner, Lansing, Michigan :

Dear Sir-I have your communication of the 29th ult., as follows: "We respectfully request your opinion as to whether or not a state bank in Michigan can invest in the capital stock of regional banks as provided for in what is known as the new currency law. We would refer you respectfully to Compiler's Sections 6113, 6115 and 6116.” In reply thereto, I wish to advise as follows:

The title to the Federal Reserve Act, recently passed by Congress, indicates its general scope and purpose, and reads as follows:

"An Act to provide for the establishment of Federal Reserve Banks, to furnish an elastic currency, to afford means of re-discounting commercial paper, to establish a more effective supervision of banking in the United States, and for other purposes."

The Act has undoubtedly been passed by Congress with a view to correcting certain conditions in currency distribution and in the national banking business within the United States. It has for its main features the following: (First) The creation of Federal Reserve Districts; (Second) the creation of Federal Reserve banks; (Third) The creation of a Federal Reserve Board; (Fourth) The creation of a Federal Advisory Counsel; (Fifth) the authorization of additional currency; (Sixth) Certain amendments and changes in the National Bank Law: (Seventh) Indirectly bringing state banks under the control of the Comptroller of the Treas

In carrying out the general scheme of the Act what are known as "Federal Reserve Banks" are authorized. These banks are to be located in Federal Reserve districts and will number not less than eight and no more than twelve, or one for each district created. The Federal Reserve Banks, will not be ordinary banks of deposit, but will be what might be termed "Bankers' banks." These banks will be corporations having a general scheme of organization similar to other banking corporations and having all the ordinary powers of corporations, with such limitations and restrictions on their powers and purposes as will bring them within the intent of the law. The capital stock for instance may only be held by (First) National Banks; (Second) State Banks; (Third) Trust Companies; (Fourth) Individuals; (Fifth) The United States. The last two can only hold stock on the failure of the first three classes of stockholders to take up the necessary stock subscription of the four million dollars as a minimum. The feature of this law which we have under consideration is that, applying to State Banks. The question involved is whether State Banks of the State of Michigan may become "member banks" in a Federal Reserve Bank. The Act permits State Banks to become members, giving them all the rights and powers of stockholders to the same extent as is given to National Banks.

The particular features of this Act which must be considered in determining the inquiry are as follows:

1st. Section 2 of the Act provides in part as follows: "The share-holders of every Reserve Bank shall be held individually responsible, equally and ratably, and not one for another, for all contracts, debts and engagements of such bank to the extent of the amount of their subscription to such stock at the par value thereof in addition to the amount subscribed, whether such subscriptions have been paid up in whole or in part, under the provisions of this Act." 2nd. Section 5 provides in part as follows: "A bank applying for stock in a Federal Reserve Bank at any time after the organization thereof must subscribe for an amount of the capital stock of the Federal Reserve Bank equal to six per centum of the paid up capital stock and surplus of said applicant bank, paying therefor its par value, plus one-half of one per centum a month from the period of the last dividend."

3rd. Under the provisions of Sections 9 and 21 State banks which become member banks, will be practically under the jurisdiction of the Comptroller of the Treasury, the same as National Banks.

4th. Section 19 requires member banks to maintain a portion of their reserve with the Federal Reserve Bank.

The three main questions are presented: (First) Whether under the banking law of Michigan a State Bank may subscribe to the capital of, and become stockholders in a Federal Reserve Bank. (Second) Whether under the provisions of the Michigan banking law a State Bank may loan its credit to or assume the obligations, in whole or in part, of a Federal Reserve Bank; (Third) Whether the permission given by the Federal Reserve Act for State Banks to become stockholders in a Federal Reserve Bank, and to take advantage of other provisions of this Act which are inconsistent with the provisions of the state banking law, is all that is necessary, and whether it would be hense unnecessary for the state to pass an enabling statute.

1st.

Whether under the banking law of Michigan, a State Bank may subscribe to the capital of, and become stockholders in another banking corporation.

The powers of State Banks organized under the banking law of the State of Michigan are limited. In general, it may be said that they have only such powers as are expressly granted by the State Banking Act, and such other powers as are given them ex necessitate rei in order that their express powers may be fully carried out and enjoyed. This has been the policy in Michigan as expressed by the courts and the Banking Department on advice of the various Attorney Generals. To illustrate, we call attention to the following opinions heretofore given by this Department:

Attorney General's Report for 1912, page 158
Attorney General's Report for 1911, page 332.
Attorney General's Report for 1909, page 178
Attorney General's Report for 1908, page 217

See also the following Supreme Court decisions of this State:

Lafferty vs. Peoples Savings Bank, 76 Mich. 65.

This is also the general rule in other jurisdictions:

Bolles Modern Law of Banking, Sec. 19 et seq. p. 17, 18-27.

McGee on Banks and Banking, Chap. XIII.

See note p. 777, U. S. Supreme Court Report, 94 to 97.

There is no express prohibition contained in the Michigan banking law against one State Bank holding stock in another bank or in another corporation. But on the other hand, the use of the bank's corporate funds and of its deposits, both savings and commercial, is set forth by express enumeration, and this enumeration does not contain any reference to investment of capital or other funds in other corporations, whether banking or otherwise. In this respect the banking laws of Michigan are similar to the National Banking Act before the enactment of the Federal Reserve Act.

By the great weight of authority the proposition is sustained that a bank corporation, in the absence of express permission by statute, cannot invest its funds in the stock of another bank or other corporations.

Bolles Modern Law of Banking, page 205.

Michie, "Banks and Banking," page 660.

Metropolitan Trust Co. v. McKinnon, 172 Fed. 846.

First National Bank v. Converse, 200 U. S. 425.

McKim v. Glenn, 66 Md. 479.

Concord v, Hawkins, 174 U. S. 364.

California Bank v. Kennedy, 167 U. S. 362.

Tilingast v. Carr, 82 Fed. 288.

The reasoning upon which this holding is founded is well set forth in the case of First National Bank v. Converse, supra, page 438 of the opinion, which was delivered by Mr. Justice White:

"Now, the limitations upon the powers of National Banks were clearly pointed out in California Nat. Bank v. Kennedy, 167 U. S. 362, 42 L. ed. 198 17 Sup. Ct. Rep. 831, where it was said, (p. 366, L. ed. P. 200, Sup. Ct. Rep. p. 833);

'It is settled that the United States statutes relative to national banks constitute the measure of the authority of such corporations, and that they cannot rightfully exercise any powers except those expressly granted or which are incidental to carrying on the business for which they are established. Logan County Nat. Bank v. Townsend, 139, U. S. 67, 73, 35 L. ed. 107, 110, 11 Sup. Ct. Rep. 496. No express power to acquire the stock of another corporation is conferred upon a national bank, but it has been held that, as incidental to the power to loan money on personal security, a bank may, in the usual course of doing such business, accept stock of another corporation as collateral, and by the enforcements of its rights as pledgee it may become the owner of the collateral, and be subject to liability as other stockholders. Germania Nat. Bank v. Case, 99 U. S. 628, 25 L. ed. 448. So, also, national bank may be conceded to possess the incidental power of accepting in good faith, stock of another corporation as security for a previous indebtedness. It is clear, however, that a national bank does not possess the power to deal in stocks. The prohibition is implied from the failure to grant the power. First National Bank v. National Exch. Bank, 92 U. S. 128, 23, L. ed. 681."

This reasoning applies as well to State Banks as to National Banks, as will be seen by a review of the authorities in the cases above cited.

It may be argued, however, that the Federal Reserve Banks do not come within that class of corporations in which National and State Banks are prohibited from holding stock, and that the Federal Reserve Banks are not private corporations; but on the other hand, are public corporations. From my reading of the Federal Reserve Act, and the provisions relating to Federal Reserve Banks, I am of the opinion that the banks so created and authorized under this Act differ only from ordinary National and State Banks in the limitations upon the powers and scope of their business. It is true they have, as distinguished from the National Banks, probably a closer relation to the government than National Banks; but outside of the higher degree of Federal control and responsibility to the government and other restrictions in their powers, these banks have all the incidents of the ordinary bank as to primary organization, control and use of corporate funds, distribution of profits and liability of stockholders. In these respects the Federal Reserve Banks are very similar to National Banks, and National Banks are held to be private corporations, although governmental

2nd.

Bolles Modern Law of Banking, p. 3

Branch v. United States, 12 U. S. Court of Claims, 281 to 286.

Whether under the provisions of the Michigan Banking Law a State Bank may loan its credit, or assume the obligations in whole or in part of another banking coropration. This question is involved in the first question, inasmuch as under the Federal Reserve Act, State Banks would have no relations with Federal Reserve Banks, unless they should be stock" holders. The Federal Reserve Act expressly defines the liability of stockholders in Federal Reserve Banks. It is my opinion that State Banks under the Michigan Banking Law cannot be permitted to thus assume the liabilities of another bank, nor can they therefore assume the liabilities of a Federal Reserve Bank by becoming stockholders, nor loan their credit in this manner to one of these.

3rd.

Michie, "Banks and Banking," Sec. 99, p. 681, and many cases there cited.
Bolles, "Modern Law of Banking," p. 205.

The last proposition is as to whether the permission given by the Federal Reserve Act for State Banks to become stockholders in a Federal Reserve Bank and to take advantage of other provisions of this Act which are inconsistent with the provisions of the State Banking Law, is all that is necessary and whether it would hence be unnecessary for the State to pass an enabling statute.

The general proposition that the states are subject to the supreme law of the land, namely, the Constitution of the United States, treaties and acts of Congress made pursuant to the Constitution, I believe has no proper application to the question under consideration. regulation of banking is an exercise of the police powers of states.

McGee on Banks and Banking, pages 1 and 2.

Assaria State Bank v. Dolley, 219 U. S. 127.

Noble State Bank v. Haskell, 219 U. S. p. 113 of U. S. Reports.
Engel vs. O'Malley, 219 U. S. and page 128 of Reports.

The

The police power of the states, being expressly reserved to the states by the Federal Constitution, is not subordinate to the Federal Constitution, and hence is not subordinate to Acts of Congress.

License Tax Cases, 5, Wall. 462.

Slaughter House Cases, 16 Wall. U. S. 36.
Bartemeyer v. Iowa, 18 Wall. 129.

Cooley's Const. Lim. 5 ed., page 708.

See also cases cited in Assaria State Bank v. Dolley, in the note on page 127 of the United States Supreme Court reports.

I would have had no doubt on this proposition were it not for the ruling of the United States Supreme Court in Casey v. Galli, 94 U. S., page 673. That case arose under Section 23 of the National Banking Law, which permits a State Bank to be converted into a National Bank. It was there held that the consent of the State was not necessary in such conversion. In the opinion it was said:

"The second plea is clearly bad. No authority from the state was necessary to enable the bank so to change its organization. The option to do that was given by the 44th Section of the Bank Act of Congress (13 Stat. L. 112). The power there conferred was ample, and its validity cannot be doubted. The Act is silent as to any assets or permission by the state. was as competent for Congress to authorize the transmutation as to create such institutions originally."

It

The two propositions, however, it seems to me are clearly distinguishable. The right of the state to create and regulate corporations does not extend to the right to prohibit such corporations from voluntary dissolution. A state banking corporation may dissolve itself and ceas to exist, and beyond the right of the state to compel a bank to properly liquidate, it cannot concern itself in the determination of the incorporators and stockholders of the bank to cease to exist. Hence, a state bank, without the consent of the state, may cease to exist and the incorporators and stockholders may by proper action convert the bank into a National Bank. But it is necessary that a State Bank in order to be converted into a National Bank should have the consent and permission of the United States. This, it seems to me, is

However, the right of a state to control its corporations (and this includes banking corporations), and to say what they may do and may not do, is absolutely conceded by the decisions of the United States Supreme Court, supra. The State of Michigan has seen fit to limit its banks in the use of their corporate funds and this limitation cannot be enlarged by the laws of the United States. The Federal Reserve Act as to State Banks, is purely permissive. It has left the way open for State Banks to enter into the system, but no attempt is therein made to supersede the laws of any state as to the banking business.

In conclusion, I am of the opinion that banks organized under the laws of this state have no authority to accept the provisions of the Federal Reserve Act.

Respectfully yours,
(Signed) GRANT FELLOWS,

Attorney General,

RENEWALS WITH PROPER SIGNATURES TO BE PROCURED.

March 14, 1914.

Hon. E. H. Doyle, Commissioner of Banking, Capitol, Lansing:

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 paper 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 nonpayment 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.

I return herewith Mr. Thompson's letter.

Respectfully yours,

A. B. DOUGHERTY, Deputy Attorney General.

PURCHASE PRICE OF LEASES MAY BE CARRIED AS BANKING HOUSE.

Hon. E. H. Doyle, Banking Commissioner, Capitol, Lansing :

Lansing, March 17, 1914.

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 establishing a number of branches or agencies, and in some instances procure banking office and real estate under a long time lease, in some instances for 99 years, carrying purchase price of the lease in banking house account.

In view of the fact that we are advised that certain banks may erect expensive buildings

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