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Opinion of the Court.
gested, the 1930 amendment was passed merely in order to settle doubts as to the power of a national bank to pledge its assets to secure deposits, the amendment would naturally have been made not to $ 45, but to $ 8 which contains the grant of “incidental” powers.
The Railway urges also that since the relation of the bank to its depositors is that of debtor to creditor, and since a national bank may borrow money, Aldrich v. Chemical National Bank, 176 U.S. 618; Auten v. U.S. National Bank, 174 U.S. 125, and pledge its assets therefor, Wyman v. Wallace, 201 U.S. 230, it may likewise pledge assets to secure a private deposit. The fallacy of this contention has been many times exposed.14 The difference between deposits and loans is fundamental and far-reaching. The amount of the deposits is commonly accepted as a measure of the bank's success; an increase of deposits as evidence of increased prosperity. The depositor does not think of himself as lending money to the bank. The modern deposit grew out of the older form of deposit in which the fund was held separate and intact, and the sole purpose of the deposit was safe-keeping. Safe-keeping is still a very important function of deposit banking; and from the point of view of most depositors the chief one.16 Borrowing by a bank (as distinguished from a re-discount) is commonly regarded as evidence of weak
" Farmers & Merchants Bank v. Consolidated School District, 174 Minn. 286, 291; 219 N.W. 163; State Bank of Commerce v. Stone, 261 N.Y. 175; 184 N.E. 750; Divide County v. Baird, 55 N.D. 45, 52; 212 N.W. 236; Commercial Banking & Trust Co. v. Citizens Trust & Guaranty Co., 153 Ky. 566, 574; 156 S.W. 160; 27 Col. L. Rev. 88; 79 U. of Penn. L. Rev. 608, 614.
Though large deposits frequently represent loans by the bank to the depositor, this is less likely to be true of small accounts. Out of 30,556,105 accounts reported by 5,500 licensed member banks of the Federal Reserve System, 29,482,384 were under $2,500 and the average size of these accounts was $189. Federal Reserve Bulletin, July 1933, p. 454. [See order, post, p. 649.]
Often the loan is made in the hope of averting insolvency. Loans made by one bank to another commonly involve a pledge of assets, since only upon such a condition is the transaction possible. Wyman v. Wallace, supra.
Second. The receiver is not estopped to deny the validity of the pledge. The Railway's argument is that the bank could not set up the defence of ultra vires since it had the benefit of the transaction; and that the receiver, as its representative, can have no greater right. Neither branch of the argument is well founded. The bank itself could have set aside this transaction. It is the settled doctrine of this Court that no rights arise on an ultra vires contract, even though the contract has been performed; and that this conclusion cannot be circumvented by erecting an estoppel which would prevent challenging the legality of a power exercised. California Bank v. Kennedy, 167 U.S. 362; McCormick v. Market Bank, 165 U.S. 538; Central Transportation Co. v. Pullman Co., 139 U.S. 24.17 But even if the bank would have been estopped from asserting lack of power, its receiver would be free to challenge the validity of the pledge. The unau
14 The Comptroller of the Currency has insisted on the distinction between deposits and borrowings and has stated that to list borrowings as deposits-e.g., as certificates of deposit—is a grave misrepresentation of the condition of the bank. Annual Report 1890, p. 13; 1892, p. 39.
“ The fact that more than one-half of the national banks reporting were not borrowing from any source is additional evidence of the stability of the national banking system.” Annual Report of Comptroller of the Currency (1922), p. 26.
See also Pearce v. Madison & I. R. Co., 21 How. 441; Thomas v. Railroad Co., 101 U.S. 71; Pennsylvania R. Co. v. St. Louis, A. & T. H. R. Co., 118 U.S. 290; Oregon Ry. & N. Co. v. Oregonian Ry.
Opinion of the Court.
thorized pledge reduced the assets available to the general creditors. It is the duty of the receiver of an insolvent corporation to take steps to set aside transactions which fraudulently or illegally reduce the assets available for the general creditors, even though the corporation itself was not in a position to do so.
Third. The receiver may assert the invalidity of the pledge without making restitution by paying the pledgee's claim in full. The Railway's argument to the contrary is that when as a result of an ultra vires contract one of the parties is enriched at the expense of the other, the law creates an obligation to repay ex aequo et bono to the extent of the enrichment. The argument if applicable would not help the Railway. Such claim under the doctrine of unjust enrichment is assimilated to an obligation of contract; and does not, in the absence of an identifiable res 19 and a constructive trust based on special circum
Co., 130 U.S. 1; Concord First Nat. Bank v. Hawkins, 174 U.S. 364; De La Vergne Co. v. German Savings Inst., 175 U.S. 40.
And on the matter of estoppel in pledge cases, see authorities cited in note 14. Also Smith v. Baltimore & Ohio R. CO., 48 F. (2d) 861, 869; affirmed 56 F. (2d) 799; contra: State Bank of Commerce v. Stone, 261 N.Y. 175; 184 N.E. 750. Also compare West Penn Chemical & Mfg. Co. v. Prentice, 236 Fed. 891.
King v. Pomeroy, 121 Fed. 287; Hamor v. Taylor-Rice Engineering Co., 84 Fed. 392, 399; In re O’Gara & Maguire, Inc., 259 Fed. 935, 936; In re K-T Sandwich Shoppe, 34 F. (20) 962, 963; Shooter's Island Shipyard Co. v. Standard Shipbuilding Corp., 293 Fed. 706.
19 The claimant has the burden of identifying the property in its original or altered form. Schuyler v. Littlefield, 232 U.S. 707. It is not enough to show that at the time of receipt the general assets of the insolvent were increased or that debts were discharged. Wuerpel v. Commercial Germania Bank, 238 Fed. 269, 272–3; Knauth v. Knight, 255 Fed. 677; State Bank of Winfield v. Alva Security Bank, 232 Fed. 847; In re See, 209 Fed. 172; In re Dorr, 196 Fed. 292; City
Argument for Petitioner.
stances of misconduct, confer a preference over other creditors. The pledge here challenged having failed because illegal, the Railway is entitled only to a dividend as a general creditor.20 Its right thereto is conceded.
CITY OF MARION v. SNEEDEN, RECEIVER, ET AL.
CERTIORARI TO THE CIRCUIT COURT OF APPEALS FOR THE
No. 400. Argued December 7, 8, 1933.—Decided February 5, 1934.
1. Under the national banking laws, a national bank has no power to
pledge its assets to secure a deposit of public money of a State, or of a subdivision of a State, unless it is located in a State in which
state banks are so authorized. Act of June 25, 1930. P. 268. 2. The State of Illinois has not conferred upon its banks the power to
pledge assets to secure deposits of political subdivisions of the State.
P. 269. 3. Where a national bank, before becoming insolvent, made an ultra
vires pledge of bonds to secure a deposit, its receiver was entitled to recover them unconditionally, for the benefit of the general creditors of the bank. Texas & Pacific Ry. Co. v. Pottorff, ante,
p. 245. P. 272 . 64 F. (20) 721, affirmed. .
CERTIORARI, 290 U.S. 617, to review a decree which reversed a decree of the District Court, 58 F. (2d) 341, dismissing a bill brought by the receiver of an insolvent national bank to obtain possession of bonds which the bank had pledged as collateral security for a deposit of public moneys by a city.
Messrs. Richard Mayer and Henry F. Drièmeyer, with whom Messrs. Carl Meyer, David F. Rosenthal, C. E.
Bank v. Blackmore, 75 Fed. 771; compare St. Louis & S. F. R. Co. v.
* Compare Blakey v. Brinson, 286 U.S. 254; Handelsman v. Chicago Fuel Co., 6 F. (2d) 163.
Argument for Petitioner.
Pope, and R. T. Cook were on the brief, for petitioner. Mr. William Cattron Rigby also participated in the oral argument in behalf of petitioner.
Solvent national banks have always had the power to pledge assets as security for deposits of public funds. Act of June 3, 1864, c. 106, 13 Stat. 99, 101; Rev. Stats., § 5136; 12 U.S.C., § 24; Smith v. Lansing, 22 N.Y. 520; United States v. Robertson, 5 Pet. 641; Planters Bank v. Sharp, 6 How. 300; $ 45, Act of June 3, 1864, supra; Rev. Stats., § 5153; National Bank v. Graham, 100 U.S. 699.
The power is likewise necessarily implied from the provision in the National Bank Act forbidding transfers of assets by an insolvent bank with a view to a preference of one creditor to another. $ 52.
Congress further recognized the power, as incidental to the right to receive deposits, in statutes requiring custodians of public funds to obtain collateral security from the state or national banks in which such funds are deposited. See Rev. Stats., $ 5234, as amended by 12 U.S.C., $ 192; Federal Reserve Act, $ 9, as amended by 45 Stat. 492; 12 U.S.C., § 332; 39 U.S.C., $ 759; 25 U.S.C., $$ 156, 162; 31 U.S.C., § 771. In each of these Congress has assumed that not only national banks, but state banks as well, have general power to pledge their assets as security for deposits of public money and that the exercise of such power is merely an ordinary incident of the business of banks of deposit. See opinion by Sparks, J., in the court below in this case.
The Comptroller of the Currency has consistently taken the position that national banks have the right to secure deposits of public money. Pottorff v. Road District, 62 F. (2d) 498; Smith v. Baltimore & Ohio R. Co., 48 F. (20) 861, aff’d, 56 F. (20) 799.
The question of the power of banks to secure deposits has arisen in the following cases: Mothersead v. U.S.