Fry v. Equitable Trust Co.

249 N.W. 619, 264 Mich. 165, 90 A.L.R. 175, 1933 Mich. LEXIS 969

• Court: Michigan Supreme Court
• Decided: June 13, 1933
• Docket: Calendar 37,319
• Status: Published

Opinions

Fead, J.

This is mandamus to require repayment in full, as a preferred claim, of a deposit of State moneys.

The Equitable Trust Company is in a condition of suspended animation, pending reorganization or receivership, in charge of conservators appointed by the banking commissioner, with the consent of the governor, under Act No. 32, Pub. Acts 1933. The conservators have refused the demand of the governor, State treasurer, and attorney general, made in behalf of the State, for immediate payment of a deposit of $10,000 of State moneys, made by tbe State treasurer and secured by a corporate surety depository bond, approved as provided in 1 Comp. Laws 1929, § 348.

Tbe State claims preference over all other depositors and creditors of tbe trust company on tbe ground that sucb preference is a sovereign prerogative inhering in tbe crown at common law and attaching to the State on its adoption of tbe common law.

Tbe courts are in hopeless conflict on the existence of tbe prerogative in tbe respective States, its force in tbe law, its waiver, loss, and susceptibility to subrogation. But tbe weight of authority sustains tbe prerogative in States which have adopted tbe common law. Tbe literature on the subject may be found in United States Fidelity & Guaranty Co. v. Bramwell (1923), 108 Ore. 261 (217 Pac. 332, 32 A. L. R. 829); People v. Farmers’ State Bank (1929), 335 Ill. 617 (167 N. E. 804, 65 A. L. R. 1327); In re South Philadelphia State Bank’s Insolvency (1929), 295 Pa. 433 (145 Atl. 520, 83 A. L. R. 1123); Shaw v. United States Fidelity & Guaranty Co. (1932) (Tex. Com. App.), 48 S. W. [2d] 974 (83 A. L. R. 1113.); 65 A. L. R. 1331; 51 A. L. R. 1355, and tbe authorities cited therein.

This is a test case. Counsel ably have presented a number of interesting questions, sucb as the effect of depository laws, deposit at interest, appointment of a receiver, and general statutes on insolvency on waiver or loss of the prerogative. These questions need not be discussed. It is agreed that tbe banking laws are applicable, and, in our opinion, they are determinative.

Tbe judicial history of tbe prerogative in this State is brief. In Commissioner of Banking v. Chel sea Savings Bank (1910), 161 Mich. 691, the prerogative was claimed by the surety on a depository bond which sought subrogation to the State’s preference. The prerogative was denied by the attorney general in his brief and doubted by the court in this language:

“The form of our government, the undoubted power of the legislature in this behalf, furnish reasons for saying that in adopting the applicable rules of the common law as a part of the law of the State, the people did not adopt and thereby assert an arbitrary, prerogative right to priority of payment of its debts, which was recognized by the common law. In any event, the State has never asserted, and does not now assert, such a right.”

The prerogative also darted in and out of Reichert v. United Savings Bank (1931), 255 Mich. 685 (82 A. L. R. 33), without alighting. So far as can be ascertained, this is the first time it has been claimed by the State. In Board of Chosen Freeholders of Middlesex County v. State Bank (1878), 29 N. J. Eq. 268, (1878), 30 N. J. Eq. 311, the court thought that nonuser for 100 years was sufficient to negative the prerogative. At least, such nonuser would cast doubt upon the present existence of the prerogative while the unfavorable consideration it had- from the attorney general and this court on its former presentation and the injury it would work to general bank depositors forbid the rejection of fair evidence of its abrogation or waiver.

If the prerogative inheres in this State, it is by virtue of the adoption of the common law in our Constitution. In the Constitution of 1835 the common law was not adopted in express terms. The schedule, § 2, read:

“All laws now in force in the territory of Michigan, which are not repugnant to this Constitution, shall remain in force until they expire by their own limitations, or be altered or repealed by the legislature. ’ ’

By construction, the court held “all laws” to include the common law. Stout v. Keyes, 2 Doug. 184, 188, 189 (43 Am. Dec. 465).

In the Constitutions of 1850 and 1908, schedule, § 1, read:

“The common law and the statute laws now in force, not repugnant to this Constitution, shall remain,” etc.

We will assume that the prerogative inhered in the State at one time. Has it been abrogated or waived?

The Constitution of 1850, art. 15, § 5, provided:

“In case of the insolvency of any bank or banking association, the bill-holders thereof shall be entitled to preference in payment over all other creditors of such bank or association.”

The provision was the mandate of the people in the exercise of the highest attribute of sovereignty under our form of government, the adoption of a Constitution. It was a limitation of power and bound all departments, executive, legislative, and judicial, to conserve the expressly declared preference. The constitutional preference was repugnant to the sovereign prerogative. No exception was made in favor of the State. The prerogative was not preserved, either in whole, as superior or equal to, or in part, in subordination of, the expressed preference. The prerogative, therefore, was abrogated as to banks and banking associations and could have no future force without constitutional or statutory re-enactment.

Preference to the State is. inadmissible on another principle. Since 1850 banking has been treated in this State as a thing apart. Because of the evils which had developed from the general banking act of 1837 (see Green v. Graves, 1 Doug. 351), the Constitution of 1850, art. 15, § 2, provided that no general banking law should take effect until approved by the people at a general election. The Constitution of 1908, art. 12, § 9, requires that banking legislation have the votes of two-thirds of the members-elect to each house of the legislature.

Under these provisions, three general banking acts have been adopted. Two, Act No. 135, Laws of 1857 (1 Comp. Laws 1871, §2182 et seq.), and Act No. 205, Pub. Acts 1887 (3 How. St. § 3208a et seq.), were approved by the people, and Act No. 66, Pub. Acts 1929 (3 Comp. Laws 1929, § 11898 et seq.), was enacted by the legislature. Amendments have been made from time to time, as lately as the legislative sessions of 1931, 1932 (1st ex. sess.), and 1933.

The banking act of 1857 was rather sketchy but the acts of 1887 and 1929 were complete and comprehensive codes, fully governing the business of banking. The latter has been so declared by this court. Stewart v. Algonac Savings Bank, 263 Mich. 272. It is a recognized rule that general laws do not apply to such codes. Leach v. Exchange State Bank (1925), 200 Iowa, 185 (203 N. W. 31). In Cook County National Bank v. United States (1882), 107 U. S. 445 (2 Sup. Ct. 561), the court held that a general statute giving the United States preference as a creditor does not apply to the national banking act:

“The provisions of that law and of the national banking law being, as applied to demands against national banks, inconsistent and repugnant, the former law must yield to the latter, and is, to the extent of the repugnancy, superseded by it. The doctrine as to repugnant provisions of different laws is well settled, and has often been stated in decisions of this court. A- law embracing an entire subject, dealing with it in all its phases, may thus withdraw the subject from the operation of a general law as effectually as though, as to such subject, the general law were in terms repealed. The question is one respecting the intention of the legislature. And although as a general rule the United States are not bound by the provisions of a law in which they are not expressly mentioned, yet if a particular statute is clearly designed to prescribe the only rules which should govern the subject to which it relates, it will repeal any former one as to that subject.”

In point is Commonwealth v. Commissioner of Banks (1922), 240 Mass. 244 (133 N. E. 625), in which the State made claim of preference under the common-law sovereign prerogative, and it was denied, among other grounds, because—

“It is a general principle that, when legislation covers the entire field, previous provisions of either the common or statutory law in conflict therewith become no longer operative.”

In its reply brief, the State contends that a law permitting deposit of State moneys without preference would be invalid, as a loan of State credit in violation of the Constitution, art. 10, § 12 (White v. Pioneer Bank & Trust Co., 50 Idaho, 589 [298 Pac. 933], followed in Lawson v. Charter, 112 W. Va. 108 [163 S. E. 813]), and, as an express law could not defeat the preference, it could not be waived by the legislature.

This contention, if sound, would not revive the prerogative abrogated by the Constitution of 1850. At most, it might nullify the effect of the general banking laws to waive it.

"We cannot follow the reasoning of the cited cases. Preference as a creditor has nothing to do with the power to loan State credit. The credit cannot be loaned under any conditions or upon any security. Nor, if illegally loaned by means of a deposit, would a preference as a creditor be created thereby. Preference and the doctrine of following trust funds must not be confused. Aside from the fact that our Constitution, art. 10, § 15, recognizes the legitimacy of the deposit of State moneys in banks, we do not think a deposit kept in the ordinary course of business can be considered a loan of State credit within the constitutional inhibition.

Denial of the sovereign prerogative of preference, clearly demanded on legal grounds, does not thwart the will of the people, violate the intention of the legislature, nor work injustice.

The preference to bill-holders in the Constitution of 1850 was not a casual piece of legislation. It, with other provisions, was a considered attempt by the people to maintain the integrity of State bank currency after their experience with “wild cat money, ’ ’ and was a pledge to the world that the bill-holders should have first claim on the assets of the bank. And the failure of the State to reserve a preference in cases of banks was in accord with its already declared policy as to insolvent corporations and individuals. R. S. 1846, chaps. 118, 144; Comp. Laws 1871, p. 1852, § 6607, p. 2002, § 7265.

The act of 1887 provided for distribution of assets of an insolvent bank by means of “ratable dividends” on all claims proved (3 How. Stat. § 3208f6). By Act No. 194, Pub. Acts 1893, it was enacted that savings assets should be segregated and held for the payment of savings depositors. The same provisions have been incorporated unchanged in the revised and codified banking act of 1929 (3 Comp. Laws 1929, §§ 11928, 11962) and constitute the present law, except as to certain preferences (not including general State deposits) declared by Act No. 32, Pub. Acts 1933, an emergency measure, expiring by limitation on June 1, 1935. If the latter act is of any effect at bar, it emphasizes the view that the legislature intended that the State have no preference.

The provisions for “ratable dividends” in the Act of 1887 followed so closely the language of the national banking act of 1864, 13 U. S. Stat. at L., p. 115 (12 USCA, § 194), that it evidently was modeled thereon. The adoption and retention of such basis of distribution were for the purpose of putting State banks on a parity with national banks, in order that banking in the State should be uniform and depositors have equal rights. It is significant of the intention of the legislature and people in 1887 that it already had been decided that the Federal government has no preference as a creditor in national banks (Cook County National Bank v. United States [1882], supra), and of the legislature of 1929, that it also had been held that no preference in national banks can arise out of the State law. Davis v. Elmira Savings Bank (1896), 161 U. S. 275 (16 Sup. Ct. 502).

It seems clear that the people and legislature intended to provide and continue distribution of assets of State banks without governmental preference, in harmony with the rule governing national banks. The law requiring security for State deposits and the general State policy on preferences afforded justification for such intention,

The resurrection of the sovereign prerogative of preference at this time, after almost a century of coma, from which it has been aroused only once before, and then to encounter the disfavor of the executive law officer of the State and the court, could not be otherwise than unfair to the people of the State, who, for 46 years, have been depositing moneys in State banks in a justified belief that, in case of the insolvency of a bank, the distribution of assets would be made in accordance with the written law enacted by them and re-enacted by their representatives. Since 1855 the State has had the advantage of separate “good and ample security” for its deposits. 1 Comp. Laws 1929, § 348. If a State preference were imposed on the assets of a bank, the sureties on the State depository bonds or the security deposited would profit at the expense of the depositors. If prevailing business conditions imperil the State’s security, common fairness requires that the loss to the whole people (the State) be borne by the whole people rather than it be shifted to a small part of the people (the other depositors). And, in any event, the State retains the advantage over others of double assurance against loss by way of participation ratably with other depositors in the assets of the bank and such recovery as its separate bond or security may avail.

On both strict legal principles and equitable considerations, we must hold that the State has no sovereign prerogative of preference as a creditor of banks over other depositors and creditors.

Writ of mandamus denied.

Clark, Sharpe, North, Wiest, and Butzel, JJ,, concurred with Fead, J.