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; COPY ITo. 174 X-6198 Hennepin County Midland national Bank & Trust Company of Minneapolis, 3naorsed Respondent 26578 Dibell, J -vs- Filed Hovenber 30th, 1928 G-race Kaercher Davis, Clerk F i r s t State Bank of Sioux F a l l s , F. R. Smith, Superintendent of Banks of the State of South Dakota and ?/. S. Ward, Examinerin-charge of the F i r s t State Bank of Sioux F a l l s , Appellants SYLLABUS 1. A contract of pledge of c o l l a t e r a l s e c u r i t i e s to secure any indebtedness or obligation owing "by defendant "bank to the p l a i n t i f f "bank made and to "be performed in Minnesota i s a Minnesota contract and i s not u l t r a v i r e s though forbidden by a s t a t u t e of South Dakota. 2. The p l a i n t i f f received checks and d r a f t s from i t s customers and c r e d i t e d t h e i r accounts with the understanding that they should not draw against them u n t i l they were paid, and if not paid that the p l a i n t i f f bank might charge against the c r e d i t s given. the defendant baifk f o r c o l l e c t i o n . a d r a f t t h e r e f o r to the p l a i n t i f f The p l a i n t i f f sent them to The defendant c o l l e c t e d them and sent drawn upon the p l a i n t i f f . funds with the p l a i n t i f f , and immediately suspended. honored. I t had no The d r a f t s were dis- The bank charged against i t s depositors the uncollected items. Held that i t was e n t i t l e d to foreclose the c o l l a t e r a l under the pledge contract and apply on the amounts collected by the defendant and not pa id. Order affirmed, t: BS COPY o p n X-6198 i o ii Action by the p l a i n t i f f to foreclose c o l l a t e r a l deposited with i t "by the defendant F i r s t State Bank of Sioux F a l l s , South Dakota, as security f o r obligations which i t owed or might owe. There were findings f o r the p l a i n t i f f and defendants appeal from the order denying t h e i r motion f o r a new t r i a l . The defendant F i r s t State Bank i s organized under the laws of South Dakota. The defendant Smith is superintendent of banks of that s t a t e , and the defendant Ward i s the examiner in charge of the defendant bank which became insolvent and suspended on October 27, 1925. The p l a i n t i f f was the correspondent bank in Minneapolis of the F i r s t State Bank. I t did a considerable amount of business with i t , loaned i t money, and rediscounted i t s paper. The F i r s t State Bank deposited with i t c o l l a t e r a l to secure such obligations as existed or might a r i s e . The pledge agreement was dated May 25, 1925, and i n p a r t provided as follows: "Know a l l Men By These Presents, That the undersigned ( F i r s t State Bank of Sioux F a l l s ) , in consideration of Financial accomodations given or to be given or continued to the undersigned by the Midland National Bank of Minneapolis, Minnesota, hereby agree with the said Bank that whenever the undersigned s h a l l become or remain d i r e c t l y or contingently indebted to the said Bank f o r money l e n t or ' f o r money paid for the use or account of the undersigned or f o r any overd r a f t or upon any endorsement, d r a f t , guarantee or in any other manner whatsoever or upon any other claim, the said Bank shall then and t h e r e a f t e r have the following r i g h t s , in addition to those credited by the circumstances from which such indebtedness may a r i s e , against the undersigned, or h i s or t h e i r executors, administrators or assigns, namely: "1. All s e c u r i t i e s deposited by the undersigned with said Bank, as c o l l a t e r a l to any such loan or indebtedness of the undersigned to said Bank, s h a l l also be held by said Bank as s e c u r i t y f o r any other l i a b i l i t y of the undersigned to said Bank, whether then e x i s t i n g or t h e r e a f t e r contracted; and said hank s h a l l also have a l i e n upon any balance of the deposit account of the undersigned with said bank e x i s t i n g from time to time, and upon a l l property of -2- ; X-6198 of the undersigned of every description l e f t with said Bank f o r safekeeping or otherwise, or coming to the hands of said Bank i n any way as security for any l i a b i l i t y of the undersigned to said Bank now' e x i s t i n g or h e r e a f t e r contracted." On October 22, 1925, October 23, 1925, and October 24, 1925, the p l a i n t i f f forwarded to the defendant tank f o r coll e c t i o n and remittance checks and d r a f t s drawn on various "banks in Sioux F a l l s , t o t a l i n g $19,843.59, which i t had received from various customers. All of them were collected by the Sioux F a l l s Bank except one item of $3. The defendant bank, through i t s d r a f t s i n payment upon the p l a i n t i f f and i n i t s favor, covered the amount collected, $19,840.59. The Sioux F a l l s bank f a i l e d on October 27, 1925, before the d r a f t s reached the p l a i n t i f f . I t had no funds with the p l a i n t i f f , payment was refused, and the d r a f t s were dishonored. Checks were deposited with the p l a i n t i f f bank with the understanding that they would be credited to the various accounts of t h e i r customers, but that they should not have the r i g h t to withdraw them u n t i l paid and, i f not collected, that the p l a i n t i f f might charge them against the depositors. When the d r a f t s on the South Dakota bank were dishonored the p l a i n t i f f charged against i t s customers the amounts of the checks and d r a f t s which they had deposited, except one item of a few hundred dollars which a depositor had been permitted to withdraw. The p l a i n t i f f collected and applied p a r t of the c o l l a t e r a l and now asks f o r a foreclosure and sale of that remaining. It is the contention of the defendants: (1) That the pledge agreement was u l t r a v i r e s and void. (2) That, if not void, the p l a i n t i f f , having charged -3- % 5 . , against / i t s various customers the amounts which i t had credited then ' X-6198 1 8 6 as i t had the r i g h t "by contract to do cannot recover of the defendant hank and therefore cannot foreclose the c o l l a t e r a l . 1. The s t a t u t e of South Dakota, Rev. Code 1913,^.3948, reads: "Ho tank shall give preference to any depositor or creditor "by pledging the a s s e t s of the "bank as c o l l a t e r a l s e c u r i t y ; * * * provided f u r t h e r t h a t any hank may "borrow money f o r temporary purposes, and may pledge as c o l l a t e r a l security t h e r e f o r the a s s e t s of such hank i n an amount not exceeding f i f t y per cent in excess of the paidup c a p i t a l and surplus of said bank." The contract of pledge was not in a proper sense an u l t r a vires contract. I t was a forbidden one* The s t a t u t e was enacted i n furtherance of what was deemed b e t t e r banking. I t p r o h i b i t e d and made criminal the a c t a g a i n s t which i t was directed. Dakota contract i t would be i n v a l i d t h e r e . If i t were a South This i s the e f f e c t of Smith v. Continental State Bank, 11 Fed. (2 ed.) 907, where Judge Sanborn held that a pledge contract made in South Dakota securing a Minnesota bank whose r e p r e s e n t a t i v e came to South Dakota and made h i s contract of pledge was i n v a l i d . The contract before us was made in Minnesota and was to be p e r - formed i n Minnesota and i s a Minnesota c o n t r a c t . not a t a l l l i k e that before us i n Farmers e t c . 174 Minn. 286. 2. The s i t u a t i o n presented i s Consolidated School D i s t r i c t , There the bank's a s s e t s were pledged to secure deposits, The contention that the p l a i n t i f f , having charged back the c r e d i t s against i t s customers, cannot apply the c o l l a t e r a l i n discharge of the o b l i g a t i o n a r i s i n g from the d e f a u l t of the Bioux F a l l s Bank, i s without m e r i t . Immediately upon the f a i l u r e of the Sioux F a l l s bank to pay, the p l a i n t i f f had a cause of a c t i o n against i t for the amount which i t had collected and did not pay. I t had the legal t i t l e , so to speak, to the d i s - honored d r a f t s drawn by the Sioux F a l l s "bank. Whatever r i g h t i t had arose X-6198 upon the f a i l u r e of the bank to remit what i t received and i t s r i g h t was p r o t e c t e d "by the security of the pledge agreement. There i s no reason why the Sioux F a l l s hank or i t s c r e d i t o r s should have the $19,000 which came from i t s c o l l e c t i o n s f o r the p l a i n t i f f when the pledge agreement secured i t s payment to the p l a i n t i f f , and the p l a i n t i f f "be compelled to seek a remedy by p a r t i c i p a t i n g in the insolvent estate of the bank. It was r i g h t that the c o l l a t e r a l held under the pledge agreemtnt should r e spond to the payment of the moneys c o l l e c t e d . The charging off of the c r e d i t s was a matter between the p l a i n t i f f bank and i t s customers. Neither the South Dakota bank nor i t s c r e d i t o r s nor those representing them in t h i s a c t i o n should gain by i t . There i s being kept from the South Dakota bank only the amount by which i t s a s s e t s were enhanced through the collections made immediately p r i o r to i t s suspension. cited. We have examined a l l the cases Brusegaard v. He land, 72 Minn. 283 and In r e S t a t e Bank, 56 Minn. 119 are much r e l i e d upon. We f i n d i n them nothing c o n t r o l l i n g i n favor of the defendants; nor do we i n E i f e l v* Veigel, 169 Minn, 281. Whatever the r i g h t s between the depositors and the p l a i n t i f f may be, or would be i f the p l a i n t i f f had not charged back the c r e d i t s , the r i g h t of the p l a i n t i f f to f o r e c l o s e the c o l l a t e r a l and apply on the unpaid collections is elear. Order a f f i r m e d . Holt, J . did not s i t .