Orphans' Court of Philadelphia County

In re National Bank of Germantown and the Southwark National Bank. Practice, O. C.-National banks acting as sureties and fiduciaries—Approval under Rule 21, refused.

National banks which, under the amendment to the Federal Reserve Act of Sept. 26, 1918 (Barnes's Federal Code Supplement, 1921, p. 395), have been granted a special permit to act as sureties, trustees, executors, administrators or guardians, will not be approved by the Orphans' Court under Rule XXI, as amended Jan. 12, 1921, because of the conflict between the Federal act and the laws of this Commonwealth.

Petition for approval under Rule 21 of the Philadelphia Orphans'
O. C. Phila. Co., Jan. T., 1921, No. 359; April T., 1921,

No. 44.

Jere J. Crowley, for the National Bank of Germantown, and William S. Furst, for the Southwark National Bank, applicants for approval.

Bevan A. Pennypacker and Philippus W. Miller, contra.

Bernard J. Myers, Deputy Attorney-General, for Commissioner of Banking.

August 1, 1921. Opinion by HENDERSON, J.

The National Bank of Germantown and the Southwark National Bank have petitioned for approval under our Rule XXI, as amended Jan. 12, 1921, relating to trust and surety companies. These applications are opposed by our Examiners of Trust and Surety Companies and by the Commissioner of Banking of this Commonwealth, who appeared by the Attorney-General.

Both of these national banks have acquired fiduciary and surety functions by complying with the Acts of Congress. The question is, therefore, raised as to whether this court should approve them for appointment in fiduciary capacities and accept them as surety. We should approve them unless the Federal acts are in contravention of the law and established practice of this Commonwealth.

The amendment of the Federal Reserve Act, dated Sept. 26, 1918, § 2 (k), provides (Barnes's Federal Code Supplement, 1921, page 395): "To grant by special permit to national banks applying therefor, when not in contravention of state or local law, the right to act as trustee, executor or administrator, registrar of stocks and bonds, guardian of estates, assignee, receiver, committee of estates of lunatics, or in any other fiduciary capacity in which state banks, trust companies, or other corporations which come into competition with national banks are permitted to act under the laws of the state in which the national bank is located. . . ."

The control of fiduciaries and sureties is peculiarly the subject of state regulation. In a final analysis, the approval of a surety or appointment of a fiduciary is not a question of administration, but a question of the exercise of a reasonable judicial discretion. See the brilliant opinion of Judge Penrose in American Banking and Trust Co., 4 Dist. R. 757. In First National Bank v. Union Trust Co., 244 U. S. 416VOL. XXXVII, No. 95

In re National Bank of Germantown and the Southwark National Bank. 426, Mr. Chief Justice White, in construing this act, said: "Of course, as the general subject of regulating the character of business just referred to is peculiarly within state administrative control, state regulations for the conduct of such business, if not discriminatory or so unreasonable as to justify the conclusion that they necessarily would so operate, would be controlling upon banks chartered by Congress when they came in virtue of authority conferred upon them by Congress to exert such particular powers."

This Act of Congress was passed to aid national banks to compete with state banks "whose business," to quote the language of Chief Justice White in the case last cited (page 426), "in a greater or less degree rivals that of national banks, thus engendering from the state law itself an implication of authority in Congress to do, as to national banks, that which the state law has done as to other corporations.”

Thus we see that the right of Congress to enact this legislation is derived from the necessity of aiding national banks to maintain their supremacy and to "rival" similar state corporations.

Service and honor are the key-notes to this branch of the law in England. In Lewis on Trusts (12th ed.), 780, we find it said: "It is an established rule in general that a trustee (and all fiduciaries are included) shall have no allowance for his trouble and loss of time."

In Pennsylvania, to service and honor we have added compensation to fiduciaries. In Heager's Estate, 15 S. & R. 65, our Supreme Court said: "He who takes upon him a trust, takes it for the benefit of him for whom he is intrusted, but not to take any advantage for himself."

In Harrison's Estate, 217 Pa. 207-210, our Supreme Court, speaking by Mr. Justice Mestrezat, said: "It should be understood by trust companies as well as individuals that the position of a trustee is not to be sought or granted for the purpose of profit. Fair compensation . . . is all that a trustee has a right to demand, and all that any court should award."

Under the Federal statute, service, honor and fair compensation are subordinated to the idea of profits. A chancellor should hold his nose at the mere suggestion that trust estates may be used for the benefit of the trustee. If the commissions allowed fiduciaries are such that Federal banks, without them, suffer in the race with our oldfashioned trust companies, an inquiry may be pertinent as to whether the scale of commissions should not be revised downward, and thus mitigate the injury to trust estates which probably will result from this scramble for the business.

The first reason urged in support of the contention that the Federal statute is in contravention of the law of the State involves this very problem of making a profit from trust estates. The amendment to section (k) of Sept. 26, 1918, provides: "Funds deposited or held in trust by any bank awaiting investment shall be carried in a separate account, and shall not be used by the bank in the conduct of its business unless it shall first set aside in the trust department United States bonds or other securities approved by the Federal Reserve Board. . . ."

Our Act of May 9, 1889, § 5, P. L. 159, requires trust companies

In re National Bank of Germantown and the Southwark National Bank. to keep trust funds separate and apart from their assets. Under this provision our State Banking Department has required all trust funds to be deposited in a separate banking institution.

When our State Commissioner of Banking demanded that our Act of May 9, 1889, be respected, the Governor of the Federal Reserve Board at Washington wrote to our State Commissioner, confessing his inability to require conformity with our statute, and said:

This provision specifically authorizes national banks exercising fiduciary powers to deposit in the commercial department trust funds held awaiting investment, provided that the bank first set aside in the trust department either United States bonds or other approved securities. The Federal Reserve Board is of the opinion that it is without authority, in the face of this express provision of law, to impose upon national banks a different requirement as to how the banks must deal with trust funds held awaiting investment.

"The Federal Reserve Board is, of course, aware of the advantages of having the requirements of state and Federal law generally uniform. It has always held, however, that its power to regulate is limited by the terms of the Federal Reserve Act. In this particular instance the board does not believe that the difference between the requirement of the state law and the requirement of section 2 (k) of the Federal Reserve Act, as amended, is of such importance as a practical matter. . . .'

No one familiar with our law could say that it is of no practical importance whether or not a corporate trustee is permitted to mingle trust assets with its own and use them for its private corporate profit. The principle that trustees are forbidden to make a profit out of trust funds is elementary and the very heart of the law relating to fiduciaries. Once the heart is corrupted in this respect, who could stop the spread of the corruption?

If the Federal provision is to prevail, every fiduciary will have two masters to serve the trust estate and the corporation; sound public policy requires that they should not be put into any such position.

When our Banking Commissioner learned that he could expect no cooperation from the Governor of the Federal Reserve System, he was advised by the Attorney-General to enjoin any bank refusing observance of the Act of May 9, 1889, P. L. 159. See opinion of Hon. Bernard J. Myers, Deputy Attorney-General, 30 Dist. R. 63.

It is true our Rule XXI requires all trust companies to file a stipulation agreeing to observe this practice, but have we the power to make and enforce such a rule in opposition to the plain language of the Federal statute? Shall we not occupy stronger ground by declaring this provision in contravention with the State law?

The second point of alleged conflict of the Federal with the state law is in section 2 of the amendment to section 11 (k) above referred to, which provides: "National banks, exercising any or all of the powers enumerated in this sub-section shall segregate all assets held in any fiduciary capacity from the general assets of the bank, and shall keep a separate set of books and records showing in proper detail all trans

In re National Bank of Germantown and the Southwark National Bank.

actions engaged in under authority of this sub-section. Such books and records shall be open to inspection by the state authorities to the same extent as the books and records of corporations organized under state law which exercises fiduciary powers, but nothing in this act shall be construed as authorizing the state authorities to examine the books, records and assets of the national bank which are not held in trust under the authority of this sub-section."

The Act of the Legislature of Pennsylvania of May 21, 1919, P. L. 209, relating to the organization of the Banking Department of the State, provides in section 14 (a) for the examination of every State bank, trust company and private banker at least twice in each year, and provides, further, that whenever the Commissioner of Banking shall deem it necessary or proper, "he shall assign a qualified examiner or examiners to make any such examination or investigation, which examiner or examiners shall have power to make a thorough examination into all the business and affairs of the corporation or person in all departments, and of all property, assets and resources wherever situated, and, in so doing, to examine, under oath or otherwise, any of the officers, agents or employee of a corporation or unincorporated association, any member, agent or employee of a partnership, any individual or private banker, any agent or employee of an individual or private banker, or any corporation or person in possession of any assets of the corporation or person under examination. The examiner or examiners shall make a full and detailed report of the condition of the corporation or person under examination, or such special report as may be directed by the commissioner."

Here we have an undoubted conflict of laws. Shall we say that the national bank should be permitted to stipulate that its banking department should be as freely examined as such department of a trust company? Can a national bank so stipulate in the teeth of the Federal provision? Probably no question would arise while everything went well with the bank, and then, if the sky thickened, the door of inquiry could be closed with no way to open it.

Another, and the most serious, question of conflict arises in the case of insolvency or suspension of a national bank. Section 5234 of the Revised Statutes provides:

"That on becoming satisfied that a national bank has refused to pay its circulating notes and is in default, the Comptroller of the Currency may forthwith appoint a receiver.

"Such receiver, under the direction of the Comptroller, shall take possession of the books, records and assets of every description of such association, collect all debts, dues and claims belonging to it, and, upon the order of a court of record of competent jurisdiction, may sell or compound all bad or doubtful debts, and, on a like order, may sell all the real and personal property of such association, on such terms as the court shall direct."

Section 1 of the Act of June 30, 1876, ch. 156, 19 Stat. at L. 63, also provides: "That whenever any national banking association shall be dissolved, or whenever any creditor of such an association shall have

In re National Bank of Germantown and the Southwark National Bank.

obtained a judgment against it, which has remained unpaid for thirty days, and the Comptroller is satisfied of the insolvency of the association, he may, after due examination into its affairs, appoint a receiver, who shall proceed to close up such association."

It may not be gainsaid that such receiver would be under the control of the Federal authorities rather than our courts, and the administration of trust assets would pass under Federal control, and meanwhile our courts would be powerless. The regular administration of estates held in trust by the bank might be seriously interfered with, and they might be subjected to delay and expense attendant upon such receivership proceedings and administration, here and in Washington, if the Comptroller so decides.

Counsel for the Southwark Bank suggests that there will be harmony between the State and Federal authorities in receivership proceedings, and legislation from time to time will cure differences. Harmony there would be, but at the expense and annoyance of those interested in trust estates. If legislation is to cure differences, let us first have the cure, and not suffer ourselves, inter alia, to have the strange principle forced upon us by the Federal Reserve Act compelling us to permit the use of trust funds for the private profit of trustees.

In view of the foregoing points of conflict between the Federal laws and those of this Commonwealth, we have reached the conclusion that the application of these and other national banks to be approved under Rule XXI should be refused. Accordingly the petitions are dismissed.

Court of Common Pleas of Lancaster County

Reuben Benedict v. Township of Fulton, Cyrus Eckman, Chester E. Wiley and D. I. Glacken, Supervisors (No. 2).

Trial-Practice-Refusal to read points.

A new trial will not be granted because the court refused to read the defendant's points to the jury and specifically answer them though requested to do so, where the matter embraced in the points was covered in the charge in almost the same language.

Rules for a new trial and for judgment for defendant n. o. v.
Chas. E. Workman and John E. Malone, for rules.

K. L. Shirk and John E. Coyle, contra.

July 2, 1921. Opinion by HASSLER, J.

This is an action to recover damages caused by the negligence of the defendant township in not maintaining guard-rails at a bridge. The verdict was in favor of the plaintiff for $70.00. The defendant has filed twenty-one reasons for a new trial, four of them are general and are without merit, as the verdict is not against the law and the evidence nor the charge of the Court. Nearly all of the remaining reasons question the correctness of our statement of the testimony to the jury. We have carefully examined the testimony, and are entirely satisfied that what we said to the jury was in exact accordance with it.