Gold-Stabeck Loan & Credit Co. v. Security State Bank

GATES, J. Plaintiff wrote defendant bank asking- if the-latter could use some money for eight or nine months at 7 per cent, interest, and, if so, offering to remit the proceeds on receipt of a certificate of deposit of the latter, indorsed by two of its most financially responsible directors. Some correspondence passed between them with relation to the matter, and on April 2, 1913, defendant bank sent plaintiff its certificate of deposit for $2,500, payable to plaintiff, indorsed by two of its directors. Although [241] defendant bank foaidi followed1 strictly the instruction® of plaintiff, the latter returned said' certificate of deposit and1 wrote the following letter, containing a thinly disguised plan for violating the law and hoodwinking the public examiner: “We are herewith returning tire certificate to' you for the following reasons: Your state 'bank examiner informs us that be considers' that a deposit of this nature with South Dakota ■banks as bills -payable, so far as your South Dakota banks are concerned. We do not care to violate the laws as laid' down by him but would be glad to- take 3rour certificate under these condition's, you have your Mr. A. W. Morse deposit the money, then have him and A. Hi. Morse indorse it on the back, as you did this one. We would then *purchase the certificate from you at the same rate we quoted1 you.” Upon- receipt of this letter defendant bank on April 7, 1913, issued to A. W. Morse, its ¡president, a time certificate of deposit, payable December 7, 1913, in the sum- of $2,300. Nio- money was deposited by 'him therefor. Said certificate was indorsed by A. W. Morse and A. H. Morse, -and 'sent to plaintiff. Plaintiff remitted to, and the defendant -bank received therefor, the sum of $2,383.33. Defendant bank became insolvent, and went into the hands of the defendant bank examiner. Action was instituted' to recover said sum of $2,500, with interest from December 8, 1913. The complaint stated1 two cause© of action — one upon the contract; the other for money 'bald and received. Th-e answer of defendants, in effect, alleged that the transaction was a loan, and that the certificate of -deposit was therefore unlawful. Trial was had to the court, which fo-und that the defendant 'bank received' said $2,383.33, and that plaintiff -did not know that defendant’s president had) not deposited the sum. of $2,500 at the time of issuing the certificate of deposit. The oo-u.rt decided that plaintiff was entitled to judgment in the sum -of $2,383.33, with interest at 7 per. cent. .from-.April 7, 1913, and to have its- claim- f-or -that amount established as a valid, claim -against the assets of the bank in tlh-a hand's of -the public ex-amin-er ratably with other claims against said- /bank. Prom the .judgment, the defendants have -appealed. [242] It is the claim of appellants that under the provisions of section 33 of article 2, c. 222, of the Laws of 1909 the transaction was a clear violation of law, and therefore that plaintiff cannot recover. That section reads as follows1: “Assets Not to be Pledged — Cannot Borrow on Certificate.— No bank, banker dr 'bank officer shall -give preference 'to any depositor or creditor by pledging tire assets of the hank as collateral security: Provided, that any bank may borrow money for temiporary purposes, and may pledge assets oí 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 public examiner 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 .paper to- an -amount equal to -one-half of its capital. It shall be unlawful for any bank to issue its certificate of -deposit for the purpose oif borrowing money. In all -cases where money is borrowed a bank shall is'su-e its- ‘-bills- -payable’ and shall show the true amount -o-f borrowed money in all- published statements under ‘bills payable.’ Neither shall any bank make partial payments upon certificates -of deposit. In no case shall an overdraft of more than sixty days standing -be -allowed as an asset of the bank.” It will be observed that said section specifically authorizes a hank to -borrow' money. The violation of law consists, not in borrowing money, 'but in issuing its -certificate of deposit as an evidence o-f such loan. The certificate o-f deposit was therefore unlawful; but the loan was not unlawful. Even though, tire -evidence of this transaction, to-wi't the certificate o-f deposit, is unlawful, the fact remains that defendant bank received from plaintiff the sum of $2,383.33, which it had' the right to borrow. The ban of the 'statute therefore -did not go -to the essence of the transaction, and,- the defendant bank having -received th-e said sum -o-f money, there is n-o- reason why the plaintiff’s claim, based upon the actual amount l-oaned, should not be paid ratably with the other general creditors of th-e -bank. The trial court rightfully decided that plaintiff was entitled to such recovery. If the statute 'had prohibited a state bank from -borrowing money, or -if in this cas-e the money had never been received by th-e defendant [243] bank, then entirely different question® would have been presented tor consideration. The judgment appealed- from is affirmed.