
    Common Pleas Court of Montgomery County.
    State of Ohio ex rel Ira J. Fulton v. Fred S. Wolf, Sheriff, et al.
    Decided July 7, 1933.
    
      John W. Bricker, att’y. gen’l., Estabrook, Finn & McKee, for plaintiff.
    
      Calvin Crawford, prosecuting attorney and E. F. Duncan, ass’t. prosecuting attorney, for defendants.
   Snediker, J.

These cases are in injunction. In each the plaintiff prays that an order issue restraining the defendant until further order of the court from selling, transferring, or disposing of certain bonds pledged to the defendant, or any of the coupons thereto attached, or pledging or hypothecating them; and that upon final decree the defendant may be ordered to surrender and return to the plaintiff said bonds together with all uncashed coupons; and, further, that the defendant may be ordered to pay over to the plaintiff the proceeds of the interest coupons or the proceeds of such bonds as the defendant may have cashed, insofar as such proceeds have not been distributed by the defendant upon the order of any court of competent jurisdiction; and for such other and further relief as the case may require.

In case No. 74182 it appears that at the time the Union Trust Company was taken over by the superintendent of banks for liquidation the defendant sheriff of this county had on general deposit in that bank the sum of $50,681.96, which was the proceeds of moneys collected and received by the defendant from sheriff’s sales and otherwise, all held subject to the order of the court for distribution to litigants or in such' manner as the court might direct; that in order to secure this deposit The Union Trust Company on or about January 6, 1931 pledged to the defendant $50,000.00 worth of City of Dayton Water Works Extension Improvement Bonds.

In case No. 74207 it appears that on October 31, 1931, the date on which the superintendent of banks took over the Union Trust Company for liquidation, the defendant clerk of Montgomery county, Ohio had on deposit the sum of $17,590.74, which was made up of court costs collected and received by the clerk, held by him subject to court order for distribution in such manner as the court may direct; that in order to secure this deposit the Union Trust Company on or about July 18, 1297 pledged $20,202.34 of city of Canton Street Improvement Bonds.

In both instances the bonds pledged were assets of The Union Trust Company.

The claim of the. defendant in each case is that the funds which were deposited with the Union Trust Company were public moneys as defined by Section 286, General Code, and that the same were deposited with the bank pursuant to a specific verbal agreement made between the defendant and an officer of the bank that the deposits were not to (and they did not in fact) draw any interest; that both parties to the agreement knew and understood that the funds were public moneys and that the bank considered the receipt of the deposits under said terms to be an advantage to the bank, and both parties knew and believed that it would also be an advantage to the defendant, and further believed that the agreement and its execution were completely, legal and also necessary as a practical business arrangement on the part of the defendant. Both defendants claim that the receiving of collateral from a depository was a practice of long standing not only in this community but over the state. The defendant in each case contends that the bank, having these deposits under its control without any interest charges, reaped a substantial profit therefrom and that now to require the defendant to surrender this collateral and allow the bank to retain the benefits and profits of the deposits would be grossly unfair and contrary to good conscience.

Since the filing of these actions both defendants surrendered one half of the collateral held by them and there was paid to each a fifty'per cent dividend upon their deposits at the time of the closing of the bank, it being stipulated that such surrender of such collateral barred the defendant from any title or interest in the collateral surrendered, and that determination by the court as to whether the balance of defendants’ claims constitute a preferred claim, or, if not, whether the defendant is required to surrender and disgorge the balance of the collateral held by him, or the extent to which the manner in which the provability, allowance, and payment of the claim of defendant is affected by the fact that defendant still holds collateral to secure his said claim shall be made as though defendant had never held collateral other than that now retained by him after surrender of the collateral above described.

The evidence disclosed in both cases that the deposit was secured by the bank upon solicitation of the defendants by one or more of its officers and that the collateral described in the petitions was given and held by the defendants for the purpose stated at a time when it does not appear that the bank was insolvent.

In the sheriff’s case the evidence discloses that the fund on deposit was derived from collections on executions, sales of property; and part of the amount, in each case, of the sale of real estate was distributable to taxes, and, in all cases, to pay costs. Part of the fund would, on the order of the court, be distributed to individual litigants. In the clerk’s case that the funds were accumulated in his hands for the payment of costs, judgments, settlements each month with the county and with the state, such settlements covering, among other things, fishing licenses, hunting licenses, automobile registrations, and so forth. The clerk testified that he paid fees into the county in the last couple of years in round numbers of $50,000.00. Each of these officers made his deposits in his official name; and the bank in each case knew that it was a deposit of public funds and that that was the reason security was demanded by these officers and delivered to them as collateral to secure the deposit. Neither deposit drew interest.

Both the sheriff and clerk of a county occupy offices which are an agency for the state, and in the pursuance of the duties of this agency both are public officers.

Public money as defined by the General Code of Ohio includes “all money received or collected under color of office, whether in accordance with or under authority of any law, ordinance, or order, or otherwise; and all public officers shall be liable therefor.”

There are certain sections of the General Code which require and permit some of the public officers of the state to accept security for their bank deposits. The sheriff and clerk of the county are not included among these officers. But while the law of Ohio does not specifically give a bank the power to deliver such security to these officers, no inhibition is found in the Code with respect thereto, and each banking corporation is generally given the power by Section 710-47, General Code, “to do all needful acts to carry into effect the objects for which it was created.”

There is a conflict of authorities in this country as to the legality of a bank securing deposits with collateral which are a part of its assets. In a case decided December 19, 1932 the Court of Appeals of Lucas county quoted with approval the language of the Supreme Court of Nebraska:

“There is a conflict of authority on the question of the power of a bank to pledge its assets to secure general depositors. The weight of authority, however, supports the doctrine that a bank may make such a pledge as security for a deposit of public funds.”

The court also said:

“In view of the fact that the Ohio Legislature has required security in case of deposit of state funds, county funds, municipal funds and various other funds in a bank, by giving bond to secure the same or by pledging securities owned by the bank, it is manifest that in the deposit of funds of this character the public policy of the state is rather to require such security than to permit of an unsecured deposit.”

A leading case is that of Cameron, Appellant, v. Christy, 286 Pa. St. Rep. 405, where the 4th syllabus reads:

“The pledging of assets to secure deposits made by a solvent bank is not an unlawful preference.”

In the body of the opinion the court say:

“There is no force in the argument that the effect of upholding defendant’s claim to the bonds is to illegally prefer one creditor over another. The transaction was entered into in good faith long before any question of insolvency arose. The property was transferred to secure the obligation when created. In absence of express limitation, the corporation would have the same right as an individual to prefer one creditor over another or to secure one while leaving others unsecured: Dana v. Bank of United States, 5 W. & S. 223; Ahl v. Rhoads et al, 84 Pa. 319.

“Furthermore, the corporation secured the benefits derived from the deposit and cannot now escape its burdens by setting up a plea that it acted beyond the scope of its powers. The rule of law is the same with corporations as with individuals.’ Neither can retain the profits of a transaction, or anything of value received from the other party thereto, and set up ultra vires as a defense to the enforcement of the contract. To do so would be unconscionable, and is therefore impossible in a court of equity. He who seeks equity must do equity.' The cases are legion, and from many courts, in which this sound rule of equity and common honesty has been enforced.”

In the case of Richards v. Osceola Bank, et al., 79 Iowa Reports, the Supreme Court of Iowa said:

“It cannot be doubted that, in the absence of any statutory prohibition, the county treasurer was authorized to demand and recover from the bank the money due the county. Surely, if he had such authority, he could accept security from the bank for its indebtedness. It would be strange, indeed, if any law existed prohibiting the county treasurer, the financial officer of the county charged with the duty of collecting the debt owed by the bank, from accepting security where, in his judgment, it is demanded. It would be an absurd rule forbidding the county treasurer, in the discharge of his duty, to do an act for the protection of the county when his judgment, as a faithful officer, directed it. The statute providing for security by bond to be given by a bank before deposits of county money are made therein does not forbid the county treasurer to take other security if, in his judgment, it is demanded. Other creditors of the bank cannot complain, for the notes were taken in the exercise of the undoubted right of a creditor, in the exercise of diligence, to secure his claim by taking collateral security of this character.”

In the case of The First American Bank & Trust Co. v. Town of Palm Beach, found in the 96 Florida Reports at page 247, the first syllabus is as follows:

“The authority of a state banking institution to guarantee deposits by pledging collateral security is controlled in many states by statute. In others it is controlled by court decisions based upon what the courts conceived to be a proper public policy. In others, as in this state, the question of such authority may be said to be controlled by a legislatively established public policy.”

Here we may interpolate that it has been the policy of the legislature of Ohio — as we think it ought to be — to require security for a deposit of public funds; and the fact that they have not yet made any special provision for the protection of such funds in the hands of a sheriff or of a clerk ought not to be conclusively taken against the right to require and receive such collateral if it is otherwise right to do so.

Looking to the opinion in the Palm Beach case, we find the court quoting in support of its views from a Mississippi case:

“The right of a bank to pledge property to secure loans or deposits was sustained in Ahl v. Rhoads, 84 Pa. 319, and has also been upheld in other jurisdictions; Richards v. Osceola Bank, 79 la. 707; McFerson v. National Surety Co., 72 Colo. 482; Ward v. Johnson, 95 Ill. 215; Morse on Banks and Banking, Sec. 63. In McFerson v. National Surety Co., swpra, the court said (page 483) :
“There is no question that a bank, in order to secure deposits may give security for them. The giving of the indemnifying bonds was within the authority of the banks, and was a matter of ordinary business. The banks owned the securities pledged to the surety company and had full right so to pledge them. It is further undoubted that when collateral has been pledged as security the pledger has no right to such collateral until the purpose of the pledge has been fulfilled. It is unnecessary to cite authorities to these points.
“There is authority to the contrary, holding that a bank is not authorized to pledge its assets as collateral security for funds deposited with it by certain of its customers, the theory being that to permit such act would be to confer power on officers of the bank to give a preference to favored customers. (Commercial Bank & Trust Co. v. Citizens Trust & Guaranty Co., 153 Ky. 566). This decision was based mainly on the construction of the banking laws of that state, it being held that since no express power to pledge assets was given in the provisions of the act relating to deposits, no such power would be implied. The court in this last named case also recognized an exception where the law required security before a deposit could be made, as in the case of public funds, in which case it would necessarily have the right to furnish the required security.
“It has been contended that to hold that the pledging of securities to protect deposits in state banks would be unfair to other depositors who are unsecured because the financial reports of banks shows as a part of the assets securities which are pledged to protect deposits without indication that such securities are so pledged. If this contention is true, it may be easily obviated by the state comptroller requiring financial statements and reports of state banks to show what amount of the assets of the bank is pledged as security for deposits.”

In the Bassfield case, 148 Mississippi 109, the court said:

“That a bank has the power to pledge its liquid, assets to secure one of its depositors is sustained by the cases of Wylie v. Bank, 63 S. C. 406, 41 S. E. 504; Ward v. Johnson, 95 Ill. 215; Richards v. Osceola Bank, 79 Iowa, 707, 45 N. W. 294; Ahl T. Rhoads, 84 Pa. 319; Weddington v. Jones, 41 Tex. Civ. App. 463, 91 S. W. 818; State of Nebraska v. First National Bank of Orleans (C. C.), 88 F. 947; McFerson, National Bank Commissioner, v. National Surety Co., 72 Colo. 482, 212 p. 489; and Cameron v. Christy, 286 Pa. 405,133 A. 551. The views as expressed by the text writers and the rule as announced by them is also contrary to that laid down in the Kentucky case. The principle here involved is tersely stated by Morse as follows:
“ ‘A bank may receive special, specific and general deposits and give security for them.’ Morse on Banks and Banking, vol. 1, section 63, p. 122.”

In Page Trust Co., et al, Receivers, v. T. M. Rose et al, 192 N. C. 673, the Supreme Court of North Carolina held that:

“The relation between a bank and its depositor is that of creditor and debtor, and the former may make an assignment of its notes and other assets to secure the deposit in good faith, and in the due course of its business.”

In the case of McFerson, Bank Commissioner, v. National Surety Co., et al, 72 Colo. 482, the Supreme Court approved this syllabus:

“1. A bank, in order to secure deposits, may give an indemnifying bond to secure the depositor against loss.
“2. When collaterals have been pledged as security, the pledgor has no right to their possession until the pledge has been fulfilled.”

In delivering the opinion of the court Chief Justice Teller said:

“The right of the treasurer to deposit the money in the banks is not involved, and that right is of course undoubted. There is no question that a bank, in order to secure deposits, may give security for them. The giving of the indemnifying bonds was within the authority of the banks, and was a matter of ordinary business. The banks owned the securities pledged to the surety company, and had full right so to pledge them. It is further undoubted that when collateral has been pledged as security the pledgor has no right to such collateral until the purpose of the pledge has been fulfilled. It is unnecessary to cite authorities on these points.
“There being no fraud charged, and no violation of law in the transaction having been shown, the rights of the bank commissioner are no greater than were the rights of the respective banks. If they could not recover the security, neither can he. The transaction appears to have been one in the ordinary course of business, proper in every respect, and the surety company having, as the record shows, paid the full amount of its liability under the bond, is entitled to retain the collateral to the extent necessary to repay it. There is no principle of law or equity under which the plaintiff is entitled to recover.”

And in Ainsworth, Receiver, appellant, v. Kruger, respondent, 80 Montana 468, the first syllabus, which is supported by the opinion, is to the effect that:

“In the absence of a statute prohibiting it, a state bank may pledge its securities to indemnify a surety who signs a bond in its behalf in order that the bank may obtain deposits of public funds.”

The brief of counsel for the plaintiff presents the case of Sneeden, as receiver of The City National Bank of Herron, Ill., appellant, v. The City of Marion et al (U. S. Circuit) Court of Appeals, 7th Circuit, decided on April 25, 1933, in which the court was divided as to the question which we are now deciding. After reading this case we feel justified in adopting the dissenting opinion of Judge Alschuler, which contains excerpts from the opinion of the Supreme Court of Indiana in the case of Schornick v. Butler (March 28, 1933), among which are the following:

“We find no constitutional or statutory enactments, no practices of officials, or judicial decisions, in this state indicating that the pledging of collateral to secure deposits is against public policy. There is nothing inherently wrong or immoral in such transaction. The only decision of this court upon the subject that we have found upholding such an agreement denies such a policy.
“Respecting the equities of such a situation, and as bearing on the proposition that such pledges are ultra vires the bank and against public policy, the opinion states:
“ ‘The bank parted with an interest in the securities equal to the deposit subject to the condition that, to the extent to which it repaid the cash, it would reclaim the securities. It amounts to no more than a sale of securities at their actual value for cash. The general creditors of the bank lost nothing by the transaction, and, if they are affected at all, they are benefited since the bank is more liquid by reason of having the cash rather than the securities. The appellees gained nothing. The public deposit or its proceeds was used, or will be used, for the payment of general creditors of the bank. No more than an equal amount of the pledged notes will be withheld. The action sounds in equity. The general creditors of the bank or the appellant, their representative, cannot be heard to say that the pledging of the securities was illegal while they retained the benefits of the transaction. Melaren v. Hunker et al, 299 Pac. 1075. It would be unconscionable to permit the general creditors to profit where they had no loss, at the expense of the appellees, who have profited nothing and have done no wrong. It must not be permitted unless there is some insuperable rule of law which requires it.’
“Our banking law gives banks ‘all the powers incident and proper, or which may be necessary and usual in carrying on the business of banking.’ The right of a bank to borrow money and pledge its assets for the payment thereof is beyond serious question. It is urged, however, that a deposit is not a loan and that banks have no power to pledge their assets to secure deposits. There is no reason for the distinction. In either case the relation of debtor and creditor is created. It has been expressly held by this court that an agreement to assign collateral as security for a certificate of deposit will be enforced, and in answer to the contention that the transaction constituted an ordinary deposit and not a loan, the court said:
“As to how it should be regarded in this respect, whether as a loan or a deposit, is not material under the facts in this case, for if it be considered as an ordinary deposit its effect would be to create the relation of debtor and creditor between appellee and appellant’s bank. Harris et al v. Randolph County Bank, 157 Ind. 120.
“The legislature recognized the right of a bank to pledge collateral to secure the payment of ordinary deposits when it enacted the depository law. An examination of the title and body of that Act clearly discloses that it was not intended to affect the powers of banks. It merely fixed the terms and conditions upon which public officers may make deposits in banks.”

The sheriff and clerk of our court, as public officers, are public trustees.. It was a very great man who once said, “A public office is a public trust.” And it has been held by the Supreme Court of Ohio in the case of Smith et al, trustees v. Fuller et al, assignees, 86 O. S. 57, that:

“A general deposit by a trustee of the trust funds in a bank is in legal effect a loan to the bank.”

The same view with relation to a bank deposit was taken by Justice McKenna in the case of Auten v. U. S. National Bank of Neto York, 174 U. S., page 125. He says:

“A banker, Maclead says, is a trader who buys money, or money and debts, by creating other debts, which he does with his credit — exchanging for a debt payable in the future one payable ón demand. This, he says, is the essential definition of banking. ‘The first business of a banker is not to lend money to others but to collect money from others.’ And Gilbart defines a banker to be ‘a dealer in capital, or more properly a dealer in money. He is an intermediate party between the borrower and the lender. He borrows from one party and lends to another party.’ Gilbart, Banking, vol. 1, p. 2.”

Morris, in his work on Banks and Banking, in a note to the text says:

“A deposit as a matter of law is simply a loan by the customer to the bank of his money on the promise of the bank to repay, and the bank has the corporate power to borrow money and pledge its own securities as colloateral for the loan.”

It must not be forgotten that it is the first duty of a public officer to protect and to conserve any public moneys coming into his hands. Whatever of the funds in the hands of the clerk or the sheriff is distributable to private individuals is, while held by him, under the control of the court and until an entry of distribution is signed and filed, consistent with law, all such moneys may, without a violation of terms, be designated public.

We are of the opinion that it was not only the right but the duty of these officers to demand the security which was given them to secure their deposits, and that it was within the powers of the bank to meet that requirement by giving the bonds which it did to the clerk and sheriff of this county. The decisions which we have reviewed herein are consistent with law, common sense, and equity, and do not lay down a rule which is a violation of any public or private right.

The prayer of the petitions is therefore denied..  