Meserole Securities Co. v. Cosman

Finch, J. From a judgment dismissing the complaint on the merits the plaintiff appeals. The action is against the defendants as indorsers of two promissory notes in the sum of $4,400 each, which notes the plaintiff purchased before maturity by paying to the defendant corporation the sum of $4,000 for each note. The only issue presented upon the trial was the validity of the defense that the notes were void in the hands of the plaintiff because the discounting of the notes by plaintiff, a non-banking corporation, constituted a violation of the General Corporation Law and of the Banking Law of this State. This involves a construction of section 22 of the General Corporation Law and of section 140 of the Banking Law. — 22 — Section 22 of the General Corporation Law (as amd. by Laws of 19]], chap. 771),* in so far as material, provides: “ § 22. Prohibition of banking powers. No corporation, domestic or foreign, other than a corporation formed under or subject to the banking laws of this State or of the United States, except as permitted by such laws, shall by any implication or construction be deemed to possess the power of carrying on the business of discounting bills, notes or other evidences of debt, of receiving deposits, of buying and selling bills of exchange, or of issuing bills, notes or other evidences of debt for circulation as money, or of engaging in any other form of banking; * * *.” Section 140 of the Banking Law reads as follows: “ § 140. Prohibitions against encroachments upon certain powers of banks. No person unauthorized by law shall subscribe to or become a member of, or be in any way interested in any association, institution or company formed or to be formed for the purpose of issuing notes or other evidences of debt to be loaned or put in circulation as money; nor shall any such persons subscribe to or become in any way interested in any bank or fund created or to be created for the like purposes or either of them. No corporation, domestic or foreign, other than a National bank or a Federal reserve bank, unless expressly authorized by the laws of this State, shall employ any part of its property, or be in any way interested in any fund which shall be employed for the purpose of receiving deposits, making discounts, or issuing notes or other evidences of debt to be loaned or put into circulation as money. All notes and other securities for the payment of any money or the delivery of any property, made or given to any such association, institution or company, or made or given to secure the payment of any money loaned or discounted by any corporation or its officers, contrary to the provisions of this section shall be void. “No person, association of persons or corporation, unless expressly authorized by law, shall keep any office for the purpose of issuing any evidences of debt, to be loaned or put in circulation as money; nor shall they issue any bills or promissory notes or other evidences of debt for the purpose of loaning them or putting them in circulation as money, unless thereto specially authorized by law. “ Every person, and every corporation, director, agent, officer or member thereof, who shall violate any provision of this section, directly or indirectly or assent to such violation, shall forfeit one thousand dollars to the People of the State.” — 23 — It is apparent that the two sections above quoted are complementary and intended to accomplish a common purpose; section 22 of the General Corporation Law, as is expressly stated by its caption, is intended to prevent the exercise of banking powers by corporations not formed under or subject to the banking laws. With this end in mind, the restriction against the discounting of bills, notes or other evidences of debt applies only when such discounting is a part of the business of banking. This is made particularly evident by the last sentence of the section above quoted, namely, “ or of engaging in any other form of banking,” thus showing that all the transactions enumerated in the section were only prohibited as a part of the business of banking. The mere purchase or discounting of one promissory note or of hundreds of promissory notes is not of itself banking. So, also, in section 140 of the Banking Law above quoted, the purpose sought to be accomplished was to prevent the exercise of banldng powers by mere business corporations. The very title of the section expressly defines its scope, viz., “ Prohibitions against encroachments upon certain powers of banks.” An analysis of the section confirms the title. The first complete sentence places a limited restraint upon individual affiliation with associations or companies, namely, only with respect to a certain class of associations or companies, being those formed for the purpose of issuing notes or other evidences of debt to be loaned or put into circulation as money. The second sentence restricts corporations from unauthorized participation in the business of banking. In this sentence are found for the first time the expressions “ receiving deposits ” and “ making discounts.” Whether the phrase “ making discounts ” should be taken out of its context and read as if standing alone or should be construed in harmony with the purpose of the section as indicated by its caption, “ Prohibitions against encroachments upon certain powers of banks,” presents in the last analysis the real question in the case at bar. To such a query there is only one answer, namely, the application of a fundamental rule of statutory construction known under the maxim noscitur a sociis. In other words, “ making discounts ” must be held prohibited only in connection with the exercise of the business of banking. This is confirmed by the association with the phrase “ receiving deposits.” Prom the earliest times one dominant idea has been to picture banking as keeping a regular office for receiving deposits and discounts, which were later to be checked out by the customer. By chapter 236 of the Laws of 1818, which was legislation somewhat aldn to that now in force, we find banking defined: “ to keep any office of deposit for the purpose of discounting promissory notes.” — 24 — In the early case of People v. Brewster (4 Wend. 498) the action was for a penalty for an alleged violation of the act prohibiting the carrying on of a banking business by individuals and incorporated companies unless specially authorized by law. There was no evidence that the defendant there received deposits of money, and the court in holding that the plaintiff was properly nonsuited said that the evil to be suppressed was “ the keeping of an office of deposit for the purpose of carrying on any ldnd of banking business.” The allegation in the defendants’ answer here is not that the plaintiff kept a regular office for deposits and there is no evidence to that effect and hence the case last cited is exactly in point. We thus find that the word “ discount ” is used to denote two ideas, one, the making of a loan by a bank upon the note of its customer, the interest being taken in advance and the remainder credited to the deposit account of the customer; the other to denote a straight out purchase. (3 Words & Phrases [1st ed.], 2090.) It is the former use of the word, however, which is employed in the statutes under consideration wherein it is coupled with the receiving of deposits. In addition, the nature of the prohibition in the statutes under consideration precludes a construction which would afford to individuals a right denied to corporations. The third complete sentence of the 1st paragraph of section 140 declares void only those notes given in violation of the foregoing provisions of thep aragraph. In view, therefore, of the announced purpose of the section, as declared by its title and as appears by its context, the only reasonable intendment applies the prohibition to the mating of discounts coupled with the banting business of receiving deposits and of “ issuing notes or other evidences of debt to be loaned or put in circulation as money.” This construction of the section is confirmed by an examination of the history of the act, which shows that it originated out of a desire on the part of the Legislature to curb the inflation of paper currency then prevalent. (Birdseye’s Gumming & Gilbert’s Consol. Laws [1st ed. 1909], 297, note; Paine on New York Banking Laws [7th ed. 1914], 212.) That section 140 of the Banking Law and section 22 of the General Corporation Law prohibit only the discounting of promissory notes by a corporation as a part of a banting business is likewise sustained by the authorities. Judge Comstock, in construing these so-called restraining acts, in Curtis v. Leavitt (15 N. Y. 9, 68) said: “ The statute of 1829 against unauthorized banting (1 R. S. 712), known as the restraining act, declares (§6) that ' no person, association or body corporate, except such bodies corporate as are expressly authorized by law, shall keep any office for the purpose of receiving deposits or discounting notes or bills, or issuing any evidences of debt, to be loaned — 25 — or put in circulation as money, nor shall they issue any bills or promissory notes or other evidence of debt as private bankers, for the purpose of loaning them or putting them in circulation as money, unless thereto specially authorized by law.’ Some of the other sections in the same act' are intended to promote the same policy, but they need not be referred to. It cannot fail to be noticed that this statute does not forbid either natural or artificial persons from entering into written engagements of any description, provided they are not issued to be loaned or put in circulation as money. Indeed, the inference is almost irresistible that corporations, whether banking or not, as well as individuals, might, at least in the opinion of the Legislature, create evidences of debt which do not fall within the particular class condemned * * *.” Not by strained inference should it be held that the Legislature has prohibited corporations from engaging in the common business transaction of purchasing notes. There is a vital distinction between a purchase or discount of commercial paper by a corporation and the discounting of the same by a banking institution, crediting the proceeds and paying them out upon order. As already noted, it is against the latter transaction only that the prohibition applies. In New York State Loan & Trust Co. v. Helmer (77 N. Y. 64, 68) Judge Miller said: “Upon the facts alleged, the question to be determined is whether the plaintiff possesses authority, under its charter, to discount notes, the same as any other banldng institution, credit the proceeds, and pay out the same upon the checks of one of the parties; and not whether the plaintiff can lawfully buy and receive promissory notes and advance moneys upon the same. There is a plain distinction between the two cases; and having that distinction in view, it is quite apparent that the plaintiff exceeded its powers in discounting the notes in question, and violated the provisions of its charter and the laws of this State passed to restrain illegal banking * * It is submitted that the case of Pratt v. Short (79 N. Y. 437), relied upon by the respondents, is not contrary to the conclusion here reached. There the plaintiffs, assignees in bankruptcy, claimed for a savings bank the right under its charter to conduct a banking business. Its charter expressly limited its investments, and investment in commercial paper was prohibited. The court said: “It appears from the evidence in the case that the corporation in question, at, and prior to the time of the discount of the note set out in the complaint, used its funds derived from deposits and otherwise, in discounting commercial paper, and exercised the usual and ordinary powers of a bank of discount.” In the case at bar the discounting of the promissory notes was an ordinary purchase; no banking — 26 — powers were involved or claimed and hence no statutory prohibition applied. It follows that the judgment should be reversed and a new trial granted, with costs to the appellant to abide the event. Dowling, P. J., and McAvoy, J., concur; Martin and O’Malley, JJ., dissent. Footnotes [*] See Gen. Corp. Law, § 18, as amd. by Laws of 1929, chap. 650, effective October 1, 1929. See, also, Laws of 1929, chap. 650, §§ 2, 3.— [Rep.