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£ 6

FEDERAL RESERVE BOARD

WASHINGTON

X-369I

Apri l 1 0 , I923.

SUBJECT: Exercise

of

Fiduciary Powers

b y

National Banks

i n

Pennsylvania.

Dear

S i r ;

There i s enclosed herewith f o r your information

a copy of a decision handed down April 9 by t h e Supreme

Court of Pennsylvania upholding t h e r i g h t of National Banks

i n Pennsylvania t o ex er ci se fi du ci ar y powers under perm its

granted by t he Federal Reserve Board.

Yours very truly,

Wm. W. Hoxton,

Secretary-.

T o Governors of a l l Federal Reserve Banks,

7/17/2019 frsbog_mim_v18_0264.pdf


C O P Y

X-369Ia

IN THE SUPREME COURT OF PENNSYLVANIA

EASTERN DISTRICT

I n t h e matter of t he Pe t i t io n

of

N os. 273 and. 2 j 4 January Term,

1923

EDNA FBI SB IE TURNER, Deceased

Appeal from t h e d ec i s io n of

t h e

Superior Court

of

Pennsylvania,

reversing Decree of the Orphans'

Court of Philadelphia County.

Appeals

of

Commonwealth

of

Pennsylvania

OPINION

FRAZER',

J -

These

tw o

appeals involve

t h e

same qu es ti on , namely, whether

a n a t -

ional hank h a s t h e r i g h t to ac t a s a fiduciary under t h e laws of th e Common-

wealth of Pen nsyl vani a; they were argued to ge th er and w i l l be decided in a

single opinion.

Turner, a fund was awarded t o minor chi ldr en, bene fic iari es under t h e wi l l of

decedent . The court appointed Th e Rittenhouse Trust Company, of t h e City of

Philadelphia, guardian of t h e i r e s t a t e and b efo re t h e account was ca l l ed f o r

audit that company

was

converted into

a

national bank

an d

consolidated with

t h e

Corn Exchange Na ti on al Bank, wi th power gr an te d

b y t h e

Federal Reserve

Board

t o

t r a n s a c t

a

f id u c ia ry b u s in ess .

The

l a t t e r a pp li e d

f o r a n d

secured

a c e r t i f i c a t e f r o m t h e St at e Banking Department au th or iz in g i t t o do

f i d u c i a r y ' s b u s i n e s s i n Pennsylvania and presen ted a pe ti t i on asking that

funds belonging t o t h e minors b e paid t o i t - This t h e court refused to do

u n t i l th e bank secured th e approval of the Orphans' Court of Phi ladelph ia

County, under Rule

21 of

that cour t re la t ing

t o

approval

of

f i d u c i a r i e s .

A c-

cord ing ly , a p e t i t i o n was presen ted f o r that purpose se t t ing fo r th t h e fact

I n

s e t t l i n g

t h e

account

of

executors

of t he

E s ta te

o f

Edna Frisbie

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- 2 - X-369I ^

of

p e t i t i o n e r s i n c o r p or a t i on u nde r

t h e

National banking laws

a n d i t s s u b -

sequent consol ida t ion wi th

The

Ritten house Nation al Bank, fo rmer ly

The

Rittehhou.se Tfust Company, stating i t was au thor ized b y th e Federal Reserve

Board

t o

t r a n s a c t

a

f i du c i ar y bus iness

and had

complied with

th e law of

Pennsylvania governing

t h e

t r a n s a c t i o n

of

such business;

h a d

conformed

t o

t h e Acts o f m y 9 t h , 1 8 8 9 , 1 ^ 9 , an d May 2 0 , 1 9 2 1 , P . L* 9 9 1 , agree ing

t o b e s ub j e c t t o s upe r v i s i on and examination b y th e Banking Department of

Pennsylvania i n t h e same manner a s corpora t ions of Pennsylvania ; an d s t i p u -

la ted , pur suant t o requirements o f t h e before mentioned rule of cour t , tha t

s e c u r i t i e s an d other proper ty rece ived b y t j ie corpora t ion both in a

f i duc i a r y c a pa c i t y a n d from t h e person o r persons f o r whom i t i s sure ty ,

s h a l l

n o t b e

taken

o u t o f t h e

j u r i s d i c t i o n

of the

c ou r t

an d

s h a l l

b e

kept

s e pa r a t e

and

apart from

a l l

moneys , secur i t ies

a n d

prope r ty

o f t h e

said bank,

so

t h a t

th e

same

c a n , a t a l l

t imes ,

b e

e a s i l y i d e n t i f i e d

a s

be longing

to t h e

e s t a t e o f t h e person f o r whose account th e same h a s been rece ived , and tha t

t r us t funds rece ived b y said bank, whether a s f i d u c i a r y or f o r t h e person o r

pe rsons f o r whom i t i s s u r e t y s ha l l be depos i t ed i n a sepa ra te account i n

another bank or trust company of good s tand ing. This ap pl ic a t io n w as re fused

b y th e Orphans

1

Court, whereupon t h e bank f i l ed a p e t i t i o n , a s guardian of

t h e minors , asking tha t , notwiths tanding t h e r e f u s a l t o approve i t s a p p l i -

c a t i on to ac t a s f i d u c i a r y , t h e funds i n ques t ion be awarded to i t a s

guardian* This p e t i t i on was a lso dismissed and an appeal taken to t h e Superior

Court which reversed t h e court below and from that decree we have t h a present

appea l s -

The Act of Congress, approved December <£3, 1913> (38 S t a t - 2 ^ 1 ) >

gave t h e Fede ral Reserve Board power, in te r a l i a , t o grant b y spec ia l permit

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f r ^

- 3 - • x-36gia

r

' '

jfo National Banks applying therefor, whan n o t i n contravent ion of S ta te o r

l o c a l l a w , t h e r i g h t t o a c t a s t rus tee , execu tor , admin is t ra to r o r r e g i s t r a r

of stocks and bonds under such rules and r e g u la t io n s a s t h e said Board may

p r e s c r i b e .

I t was

th u s l e f t

t o t h e

courts

to

ascer ta in whe ther ,

in any

given

case , t h e exerc ise of the powers granted would be in con t raven t ion of State o r

l o c a l l a w . D i f f i c u l t i e s a ro se i n t h e cons t ruc t ion o f t h e A c t , r e s u l t i n g i n

i t s

amendment

in 1918 (Ac t

September

26, 1918, 40

Stat»

867) by

permi t t ing

National Banks t o a c t a s execu tor , admin is t ra to r , t rus tee , guard ian , e t c . , i n

a l l cases where State banks, trust companies o r other corporations which come

into competition with National Banks a r e permit ted t o a c t under t h e laws of

th e S ta t e i n which t h e National Bank i s lo c a t e d , and also providing that

whenever t h e laws of such State authorize or permit th e exerc ise of any or

a l l o f t h e foregoing powers by State banks, trust companies o r other corpora-

tions vtiiich compete with National Banks, t h e gran t ing to and exerc ise of

such powers by National Banks shall n o t b e deemed to be in con t raven t ion of

Sta te o r loca l la w wi th in t h e meaning of t h i s A c t . The Statute contained a

fu rt he r pro vis ion th at banks ex er ci si ng fi du ci ar y powers should segr egate

a l l assets held i n a n y f iduciary capaci ty f rom t h e general assets of the bank

and shall keep a separa te s e t o f books an d records showing i n proper deta i l

a l l

transactions engaged

i n

under authori ty

of

th is sec t ion

. . . . b u t

nothing

i n

t h i s

A ct

sh a l l

be

construed

a s

a u th o r i z in g

t h e

S ta t e a u th o r i t i e s

t o

examine

t h e books, records and accounts of the National Bank which a r e n o t he ld i n

t rus t under au thor i ty of th i s su b - se c t io n . I t als o req uir ed th at funds d e -

p o s i t e d

or

held

i n

t r u s t

by the

bank awa iti ng investment sh al l

b e

c a r r i e d

i n

a separate account and sh a l l no t be used by the bank i n t h e conduct o f i t s

bus iness , un less

i t

s h a l l f i r s t

s e t

aside

i n i t s

trust department, United

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rrg

- U - X-3691 . a

States bonds o r other securit ies approved, b y t h e Federal Reserve Board.

11

Numerous other administrative provisions

a r e

found

i n t h e

Federal

A c t

that

need n o t b e r e f e r r e d t o here .

Th e

conten t ion

of t he

Commonwealth

i s

t h a t ,

to

permit

a

Federal bank

t o ac t i n a

f iduc i a ry capac i ty

i n

th i s S ta te , under

th e

s ta tu tory provis ions

r e f e r r e d

t o ,

would amount

t o a

v i o l a t i o n

of our

laws.

The A ct of May 2 1 , 1919>

P. L . 209

provides , in t e r a l ia , tha t

t h e

Banking Department s h a l l have su pe r-

v i s i o n

o f a l l

corpora t ions

o r

persons receiving money

on

depos i t

f o r

safe

keep ing , incl udi ng banks inc orp ora ted under

t h e

laws

of t he

United States ,

which shall , pursuant

t o

Federal

l aw or

r egu la t i ons ,

b e

permi t ted

t o a c t i n

any

f iduc i a ry capac i ty

and

makes

a l l

such corpo rat io ns sub jec t

t o

inspect ion

an d

examination

b y t h e

Banking Commissioner.

By Ac t of May 2 0 , 1 92 1, P*

991» i t was provided that no person should have t h e r i g h t t o appo in t , in a

f i duc i a ry capac i ty , an y corporation other than a corporat ion organized and

doing business under t h e laws of Pennsylvania and sub jec t t o t h e supervis ion

and

examination

of t he

Banking Department

of t he

S t a t e ,

or a

corporat ion

organized under t h e laws of t he United States a n d doing business i n Pennsylvania

by r e s o l u t i o n o f i t s Board of Directors agreeing t o place i tself under and

sub jec t t o t h e supe rv i s ion and examination of t he State Banking Department

11

i n

t h e same manner and to the same extent a s corporat ions organized an d ex i s t i ng

under th e laws of t h i s S t a t e .

A comparison of t he foregoing Federal an d State acts shows t h e main

of d i f f e r e n c e a r e tha t t h e Federal s ta tute a l lows inspect ion of the

books and records of only that part of t he a s s e t s of National Banks a s a r e

rece ived i n a f iduc i a ry capac i ty an d requires them to segregate a l l asse t s

he ld

i n a

f iduc ia ry capac i ty

an d

p ro hi b it s commingling them wi th ot he r as se ts

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r 5 - X 369I a

f 9

i n i t s bus iness , un less i t s h a l l f i r s t s e t as ide i n t h e trust department

United States bonds o r other securities approved b y t h e Federal Reserve Board,

while

on

the-other hand,

th e

State acts authorize supervis ion

b y t h e

Banking

Department

o f a l l

a s s e t s

of the

corpora t ion

a n d

f o r b i d s u b s t i t u t i o n

of

s e c u r i t i e s

f o r t h e

funds

b u t

requ i re

t h e

companies,

i n a l l

c a se s ,

t o

keep

tr us t funds separ ate f rom th ei r o ther assets and to ind ica te a l l investments

made a s f i d u c i a r i e s , so th a t th e t r u s t t o which t h e investment belongs shall

be

clearly known.

I t i s

argued th is d ifference

in the two

prov is ions

p r o -

duces a conf l ic t , making t h e Federal Reserve Ac t in d i r e c t v i o l a t i o n of State

l aw by permit t ing uninvested funds to be mingled with t h e genera l asse ts and

removing such funds from t h e inspec t ion and superv is ion of S ta t e a u th o r i t i e s .

The Corn Exchange National Bank h a s complied with every provision of the

Sta te ru les , regu la t ions

and

laws,

b y

consenting

to the

examination

o f a l l

i t s

a s s e t s

by the

State Bank Examiners

an d

agree ing

t o

keep t r us t secu r i t i e s

on

depos i t

i n a

se pa ra te bank. This vol unt ar y compliance wi th St at e r u l es

would, i n i t s e l f , seem t o render unnecessary a fu r th e r d i s c u s s io n of the

que sti ons ra is ed . Appellant contends, however, th at t h e National Bank cannot,

va l id ly , agree

to be

bound

by

S ta te

law or by

loca l ru le

of

court , which

i s

con t ra ry o r incons is ten t wi th t h e Federal law and tha t , consequen t ly , the

que sti on s t i l l remains whether i t w as n o t beyond t h e power of the bank t o

agree

to

comply with

t h e

State regulations where they

a r e i n

c o n f l i c t w i th

Federa l p rac t ice .

H ie answer t o th is con ten t ion i s th a t i n so fa r a s t h e S ta t e l a w i s

incons is ten t wi th

t h e

Federal

a c t , th e

former must yield

to the

la t te r , even

though t h e r e s u l t may be t o place upon Federal Banks a b e n e f i t o r burden no t

rece ived o r assumed b y t h e State banks and trust companies.

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4 *

f:' C V'

- 6 - X-3691a

The de f i n i t i on g i ve n i n t h e Federa l a c t a s t o what c ons t i t u t e s a

v i o l a t i o n

of the

S t a t e

l a w

takes

no

cognizance

o f t h e

f a c t t ha t c e r t a i n

a d -

m i n i s t r a t i v e d e t a i l s in t h e r e g u l a t i o n s of Fed eral Banks were d i f f e r e n t from

those gove rning S ta te in s t i t u t io ns * The ex i s tence of t h es e d i f f e r e n c e s , h o w-

e ve r , i s

n

° t s u f f i c i e n t t o depr ive a National Bank of t he enjoyment o f i t s

powers under t h e Federal law* The es tab l i shment o f t h e Federal Reserve Bank

•.was

a

mat te r wi thin

t h e

scope

of

Federal power

and a

Sta te cannot ,

in any wa y ,

i n t e r f e r e w i t h

t h e

powers

of

such banks, except in so fa r

a s

Congress

h a s

pe rmi t t ed i t t o d o so - When t h e Federa l a c t w a s passed Congress h a d knowledge

o f t h e fac t tha t var ious Sta tes h a d adopted d i f fe r e n t laws a n d systems governing

persons

o r

corpora t ions ac t ing

i n a

f id uc ia ry cap ac i ty . Raving th is knowledge ,

they gave to t h e Federal Reserve Board power t o p r e s c r i be r e gu l a t i ons f o r t h e

government of Fede ral Banks. Regu latio ns thus es ta bl is he d a r e paramount t o

Sta te ru le s

and the

latter must yield whenever

a

c o n f l i c t a r i s e s -

I t was

with

knowledge of t h i s s i t u a t i o n an d th e e xi s t i ng di f f e r en ce be tween ru le s governing

S t a t e and Federal Banks that Congress undertook t o d e f i n e , by the Act o f 191S,

what would b e cons trued i n cont ravent ion of State law* I t w i l l b e observed

th e d e f i n i t i o n r e f e r s t o powers only an d n o t t h e rules governing th e exe rc i se

of

such powers•

I t i s t h e

r i g j h t i t s e l f ,

n o t t h e

rules governing

t h e

exe rc i se

o f t h e r i g h t , to which re ference i s made» Concede th e e x i s t e nc e of the r igh t

i n t h e State banks and trust companies and we have th e same right bestowed upon

National Banks* Had Congress intended th e l a t t e r to be governed b y State laws

i n t h e

e xe r c i s e

of the

r ig ht given, sure ly expres s ion

of

t ha t in te nt io n would

b e found i n t h e s t a t u t e . I n t h e absence of such u t t e rance , we must assume

Congress was s a t i s f i e d w i t h t h e ru le s a l r eady pre sc r ibed b y t h e Federal Reserve

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#»

i

f'-r £• JL

- 7 -

X-3691&

Board., I f these rules happen to conf l ict wi th State regulat ions o n t h e

s ub j ec t ,

t h e

la t t e r mus t y ie ld

to the f

orrrer because th e ' r i g h t be in g conceded

t h e

power

t o

r egu l a t e

t h e

exerc i se

of the

right would follow

a s a

necessary-

inc ident

• We

believe this view

i s

ful ly suppor ted

b y t h e .

opinion

i n

Fi r s t

National Dank

v .

Union Trust Company,

244 U . S* 4 l6 , and

cases therein ci ted.

The decree o f t h e Superior Court i s affirmed*

Apri l 9* 1923.

frsbog_mim_v18_0264.pdf

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t i n g i t

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p e t i t i o n of

u n t i

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c e r t i f i c

c t i o n

guardian of t h e i