Central Law Journal.

ST. LOUIS, MO., NOVEMBER 10, 1916.

THE RIGHT OF CONGRESS TO AUTHORIZE A NATIONAL BANK TO ACT AS TRUS TEE, EXECUTOR, ADMINISTRATOR OR REGISTRAR OF STOCKS AND BONDS.

Section 11 of the Federal Reserve Act

provides that the Federal Reserve Board shall be authorized and empowered "(k) 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, administrator or registrar of stocks and bonds under such rules and regulations as the said board may prescribe." The Supreme Court of Michigan has held that Congress exceeded constitutional limitations in granting such powers to national banks and that this provision of the Federal Reserve Act is void. Fellows v. First Nat. Bank of Bay City, 159 N. W.

335.

The majority opinion cites McCulloch v. Maryland, 4 Wheat. 316; Osborn v. Bank of United States, 9 Wheat. 738, and Farmers' and Mechanics' Nat. Bank v. Dearing, 91 U. S. 738, and quotes especially from the Ogden case in support of its conclusion.

The McCulloch case speaks of a bank being "a convenient, a useful and essential instrument in the prosecution of its fiscal operations," and this seems to imply that it should be vested with all the powers, such at least as ordinarily belong to a bank, to become a self-supporting agency.

The Ogden case says: "It has never been supposed that Congress could create such a corporation. *** Why is it that Congress can incorporate or create a bank? This question was answered in the case of McCulloch v. State of Maryland. It is an instrument which is 'necessary and proper' for carrying on the fiscal operations of government. Can this instrument, on any rational calculation, effect its object, unless it be endowed with that faculty of lending and

dealing in money which is conferred by its charter? If it can, if it be as competent to the purposes of government without as with this faculty, there will be much difficulty in sustaining that essential part of the charter. If it cannot, then this faculty is necessary to the legitimate operations of government and was constitutionally and rightfully ingrafted on the institution."

The Michigan court says: "In the reasoning of the judges, in the opinions to which I have referred, I find, I think, a conclusive argument supporting the proposition that Congress has exceeded its constitutional powers in granting to banks the right to act as trustees, executors and administrators. If for mere profit it can clothe this agency with the powers enumerated, it can give it the rights of a trading corporation, or a transportation company, or both. There is, as Judge Marshall points out, a natural connection between the business of banking and the carrying on of federal fiscal operations. There is none apparently between such operations and. the business of settling estates or acting as trustee of bondholders. This being so, there is in the legislation a direct invasion. of the sovereignty of the state, which controls not only the devolution of estates of deceased persons and the conducting of private business within the state, but as well the creation of corporations and the qualifications and duties of such as may engage in the business of acting as trustees, executors and administrators."

The only thing said in the Dearing case is to refer to the McCulloch case on the question of the constitutionality of the national bank act of 1864 and to say that banks are instruments designed to be used to aid the government in an important branch of the public service and in this service they are not subject to the provisions of the usury law of the state, the bank act having covered that ground. We see, then, by this case that Congress may interfere with state law generally governing transactions therein.

But is it true, as matter of law, that Congress has not this power, if, in its judgment, the authorizing of banks to become trustees, executors, etc., would contribute to enlarging the safety of these governmental financial agencies, or generally make them more efficient? If it can disregard a state usury law, because it likes another law on this subject better, because it tends to promote the success of its own institutions, is not that the test for almost any power it attempts to confer on the institutions themselves?

If such is the test, it seems to us idle to talk about devolution of estates being interfered with. Title by devolution is but a statutory right, just as the law of usury is a statutory right. If the latter must yield to federal exigency, why not the former?

But the Reserve Act does not propose to interfere with the former. The Michigan court is treating an academic question. It is saying that Congress cannot create an agency, whose stability as such may be assisted and it become more useful as a support of the government, and this, too, when the state may have declared that the offices therein enumerated do pertain to banking operations.

Suppose there were no state statute authorizing banks to become trustees, executors, etc., might not this be taken as indicating a policy that no bank might become such? Of course, it would follow that in this state the Federal Reserve Board could not vest any such power in a national bank. But, if a state statute said banks could act as such officers, there would be legislative. declaration that for banks to become such officers pertained to the banking business, and it was beneficial to themselves and for the general welfare of the people at large, that on proper occasion they be called in to act as such officers. It might be deemed useful that national banks should have powers commensurate with those of state banks.

Furthermore, it is apparent that the holding of these offices contributes to deposits in banks and encouragement of deposits is

a direct way of assisting banks as financial institutions. The government certainly has the power, and has exercised it, to prescribe in reference to all creditors of national banks. It has done this to give their institutions the requisite character for the successful prosecution of their business It is a mere description of a creditor that he is a trustee, executor or administrator. May the government invite all classes of depositors but these, and, especially, when the state encourages them?

It is to be said that the majority in the Michigan court does not state that any state law interferes, while one judge reaching the conclusion that the national bank could not act in a fiduciary capacity, proceeded upon the theory that the safeguards provided by state law excluded a national bank. It was stated that these safeguards "would be wholly lost if national banks within the state were permitted to exercise the functions enumerated under Section 11 (k)." If this had been the ruling of the court, we imagine, the federal Supreme Court would defer to the state's construction of its own statutes.

NOTES OF IMPORTANT DECISIONS.

REMOVAL MISFEASANCE OF SERVANT MAKING CONTROVERSY NON-SEPARABLE. -In Southern Ry. Co. v. Sewell, 90 S. E. 94, decided by Georgia Court of Appeals, it is held that where a conductor sees a passenger in a perilous situation in time to prevent a resulting injury and fails to use ordinary care for his safety, there is such relationship between the two as makes his failure an act of misfeasance, and not non-feasance, and he and his master are both subject to suit and the controversy is non-separable under federal removal statute. The distinction thus drawn between acts of misfeasance and nonfeasance is shown as follows: "The railway conductor in the case under consideration was under a duty solely to his master until he actually took charge of one of the railway trains of the master and thereby began to operate it for the master; but thereafter he owed a duty to the general public as well as to other employes and passengers on

the train. * ** While running the train the conductor was in the performance of a duty which exacted from him a due regard for the rights and safety of the public, and it cannot be said that he would incur no personal or individual liability, if on account of his failure to perform his duty towards the general public, injury resulted to one of that public, even though the injured person was at fault."

It is said: "The agent's liability in such cases is not based upon the ground of his agency, but upon the ground that he is a wrongdoer and as such he is responsible for any injury he may cause." But this would not involve his principal, or, at least, not necessarily so, unless by reason of the agency there arises a relationship of duty to another. Does the public character of his employment, that is employment by a master conducting business of a public character, do this. It is true, as often held, that willful acts done by the agent in such agency as spoken of, makes principal and agent joint tortfeasors, but it would seem that this case extends this principle, when it embraces non-action, even though failure to act may be willful or amounting to gross negligence. It would seem that the court relies on the individual duty the employe owes to passengers as being in charge of an employer owing a public duty and this employment infects, so to speak, the relations of its employes. It is not clear the court would have held as it did but for this consideration.

CONDITIONAL SALE-LIEN ON AFTERACQUIRED PROPERTY NOT VALID AGAINST, THOUGH UNRECORDED.-U. S. Fidelity & Guaranty Co. v. Parsons, 235 Fed. 114, decided by Eighth Circuit Court of Appeals, holds that, though an unrecorded conditional sales contract is not valid as to good faith purchasers and incumbrances for value, it is good against a lien holder who has taken possession of after-acquired property, the subject of sale being such property.

The court said: "This case is controlled by Holt v. Henley, 232 U. S. 637. That suit involved a contest between a vendor under a conditional sale and a mortgagee under a mortgage which was executed and recorded previous to the sale, so the cases are parallel. * * * Defendant attempts to distinguish this case upon the ground that there was no taking possession of the property in that case by the mortgagee before the conditional sale was filed. The fallacy of that argument arises out of the fact that the mortgagee in the case of Holt v. Henley filed his mortgage and that

under all the decisions was tantamount to taking possession."

We doubt very greatly whether filing is equivalent to taking possession. Where defective instruments are filed the taking of possession by one will cut out the other. It cures defects.

But it is stated that the Supreme Court also "held that the mortgagee was not a good faith incumbrancer for value of this after-acquired property and sustained the claim of the vendor under the conditional sale contract. The present case cannot be distinguished from that decision in any material feature. The surety company has no standing in equity. It parted with no value."

This part of the ruling appears to be stronger than the prior part and if the principle could go over a filing, carrying constructive notice, it also could go over the taking of possession by one not a present incumbrancer for valuable consideration then parted with.

THE FEDERAL FARM LOAN ACT.I. CONSTITUTIONALITY.*

The debate in the United States Senate, during the current session of Congress, on the Federal Farm Loan bill, more commonly known as the Rural Credits bill, presented anew the ever recurring and always interesting question of the limit of the power of the national government as against the reserved rights of the states. A brief recital of its salient features will suffice to expose that part of the controversy attending its passage most likely to excite the interest of lawyers.

*This very thorough discussion of the purposes and constitutionality of the Federal Farm Loan Act, by the learned Senator from Montana, will be read with interest by every lawyer. It was originally delivered in the form of an address before the meeting of the Ohio Bar Association, on July 6, 1916, and here presented in article form with the express consent of Senator Walsh, given to the editor at the last meeting of the American Bar Association. The argument naturally divides itself into two parts. First, the constitutionality of the underlying idea involved in the creation of a land bank. Secondly, the validity of the tax exemption provision, which is the most doubtful feature of the Act. Part II will therefore deal with the tax exemption clause and will be published in next week's issue.

Il'hat the Act Provides.-The act contemplates the establishment of twelve federal land banks, each operating within a defined district, the whole country being comprised within the twelve districts. These bands must have a capital stock of not less than $750,000, open to private subscription for thirty days, when any portion up to the minimum capitalization not subscribed for must be taken by the Secretary of the Treasury and paid for out of the public purse. Subsidiary to these banks, the organization of local national farm loan associations is provided for. Ten or more prospective borrowers, prepared respectively to offer satisfactory land mortgage security for the loans which they individually contemplate making, may organize such an association. Each incorporator or member subsequently admitted is required to subscribe for stock in the association to the amount of five per cent of the sum he intends to borrow. Being organized, the association may apply to the federal land bank for a loan for any member to be used by him,

(a) To provide for the purchase of land for agricultural uses.

(b) To provide for the purchase of equipment, fertilizers and live stock necessary for the proper and reasonable operation of the mortgaged farm; the term "equipment" to be defined by the Federal Farm Loan Board.

(c) To provide buildings and for the improvement of farm lands; the term "improvement" to be defined by the Federal Farm Loan Board.

(d) To liquidate indebtedness of the owner of the land mortgaged, existing at the time of the organization of the first national farm loan association established in or for the county in which the land mortgaged is situated, or indebtedness incurred for purposes mentioned in this section.

If the application is approved, the loan, not greater in amount than 50 per cent of the appraised value of the land offered as security is made. The mortgages are all

drawn on the amortization plan, maturing in not less than five nor more than forty years. The local association is required with each application for a loan to subscribe for stock in the federal land bank to an amount equal to five per cent of the loan, and to endorse the mortgages which it transfers to the land bank, thereby becoming liable for the payment of the same. The stock, both of the local associations and of the land banks, carries a double liability.

The Federal Land Bank, upon approval by the Federal Farm Loan Board, consisting of the Secretary of the Treasury and four other members appointed by the PresiIdent, to which is entrusted the supervision of the entire system, may issue its bonds, pledging as security for the same the mortgages which it acquires from the local associations. The bonds are sold in the open market to replenish the available capital of the bank as it is from time to time applied to meet the demands for loans. The rate at which these bonds are floated governs the interest charges exacted of borrowers, for the rate at which they are required to pay cannot exceed one per cent above that borne by the last issue of bonds sold by the land bank, and in no case can it be more than six per cent. It is expected by the friends of the measure that the bonds can be marketed at par, though they bear no higher rate than four per cent, particularly in view of the tax exemption accorded by the act, a feature so important in the discussion to follow that it is here set out in full. It is as follows:

"Section 26. That every federal land bank and every national farm loan association, including the capital and reserve or surplus therein and the income derived therefrom, shall be exempt from federal, state, municipal, and local taxation, except taxes upon real estate held, purchased, or taken by said bank or association under the provisions of section eleven and section thirteen of this act. First mortgages executed to federal land banks, or to joint stock land banks, and farm loan bonds issued under the provision of this act, shall

be deemed and held to be instrumentalities of the Government of the United States, and as such they and the income derived therefrom shall be exempt from federal, state, municipal, and local taxation.

"Nothing herein shall prevent the shares. in any joint stock land bank from being included in the valuation of the personal property of the owner or holder of such shares, in assessing taxes imposed upon by authority of the state within which the bank is located; but such assessment and taxation shall be in manner and subject to the conditions and limitations in section fifty-two hundred and nineteen of the Revised Statutes with reference to the shares of national banking associations.

"Nothing herein shall be construed to exempt the real property of federal and joint

stock land banks and national farm loan associations from either state, county, or municipal taxes, to the same extent, according to its value, as other real property is taxed."

It was advanced, rather than maintained, that the measure, as a whole, was not warranted by the Constitution, while the provisions purporting to grant exemption from taxation by the states was assailed as beyond the power of Congress. As the two propositions are intimately related and the conclusion to be arrived at upon the second depends to no small degree upon the considerations determinative of the first, it may well engage some brief attention.

Is the Act Sound Constitutionally?-The bill looks to the launching of a second national bank system. The one with which the public has grown familiar, originating with the acts of 1863 and 1864, and perfected by the federal reserve law of 1914, has been justified, as is well known, by the decisions upholding the creation by the national government of the old United. States Bank. Heretofore, congressional legislation, authorizing the establishment of banks, has had its origin in periods of stress and was induced to a greater or lesser degree by the financial necessities of the government. It bore quite directly in each instance upon the immediate fiscal requirements of the government itself, quite apart from the demands or the conveniences of

business generally. The system with which we are familiar had its birth during the dark days of the Civil War, when the ingenuity of Congress was taxed to devise means to meet the extraordinary expenditures it entailed.

The national government is at present happily abundantly able to meet its current obligations or may, by additional taxes, not at all oppressive, provide the necessary means. It has no occasion to resort to the establishment of a new system of banks in consequence of any embarrassment with respect to its revenues. It is quite obvious from the bill itself, as well as from the pre

vailing conditions of which notice may be taken, that the primary consideration upon which Congress acted was not to create a needed instrumentality to meet the necessities of the government as such, but to afford facilities to citizens engaged in the basic industry of agriculture to secure credit with which successfully to carry on their operations so essential to the general welfare, and to which the value of their property ought to entitle them.

The national banking system now in vogue did not meet this need. Until the federal reserve act changed the law, the banks organized under it were prohibited from making loans upon real estate. They have the right now to do so to a very limited extent, and for comparatively short periods. Their assets are, ideally, fluid in character, speedily, if not readily, convertible into cash. Their loans are, accordingly, made for relatively short periods. Real estate loans are made almost of necessity for periods of considerable duration. The perfected system with which we are familiar meets the needs of the merchant, the manufacturer and of commerce generally. It is well nigh useless to the farmer. It is to meet his wants that the new system of national banks is to be inaugurated, the advantages accruing to the government being in every just sense, if the motives of Congress are to be looked to, incidental.

It is, however, of no great consequence that the law may have been induced by a