Story Case

Having agreed to make a loan of $1,000 to Cornelius Wright, the Bedford State Bank took his note for that amount, payable in ninety days, and gave him credit on his account for the same sum. Before Wright had drawn any checks upon his account, the bank was put into bankruptcy. Wright sought to have the whole transaction undone, the book credit cancelled, and his note surrendered to him. The other creditors, however, insisted that Wright had become a depositor of the $1,000, a pro rata portion of which he can claim with the other depositors and creditors; but that he must pay the note in full. They selected one of their number, Stanley Fowler, trustee, and he brought suit against Wright upon the note. Is he entitled to recover?

Ruling Court Case. Savings Institution Vs. Oulton, Volume 17 Wallace

United States Reports, Page 109.

The German Savings and Loan Society was a savings institution organized under the laws of California, with a capital stock of $100,000. The institution received deposits, lent the money so deposited, and repaid it, together with the dividends arising from the interest on loans, to the depositors. When a deposit was made, a pass book was given to the depositor, and an entry of deposit was made in it and in the books of the institution. A depositor could not make checks or draw drafts upon the institution; he was obliged to go in person and present his pass book, or send his representative with the pass book and an order on his bank to pay such substitute.

At this time there was a law which declared that every "company, having a place of business where credits were opened by deposits - of money or currency subject to be paid - upon draft, check, or order - shall be regarded as a bank." In the same law it was provided that a tax of one twenty-fourth of one per cent should be levied and collected each month upon the average amount of money deposited by any bank. By virtue of this act, taxes to the amount of $2,697.84 were assessed against the savings institution, which it paid under protest, and to recover which this action was brought. It was contended by the savings institution that it was not a bank, and that, therefore, not liable for the taxes in question.

Decision: Banks exercise various functions. One of the primary, and certainly the oldest, function of a bank is to receive deposits. Here, the savings institution did receive deposits. In exercising this function, it was acting as a bank in the meaning of the statute, even though it restricted the method of withdrawing such deposits.

Mr. Justice Clifford delivered this opinion; "Banks in a commercial sense, are of three kinds, to wit: (1) of deposits, (2) of discount, (3) of circulation. Strictly speaking, the term "bank" implies a place for the deposit of money, as that is the most obvious purpose of such an institution. Originally, the business of banking consisted only in receiving deposits, such as bullion, plate, and the like, for safe-keeping, until the depositor should choose to draw it out for use; but the business, in the progress of events, was extended, and bankers assumed to discount bills and notes, and to loan money upon mortgages, pawn, or other security, and at a still later period, to issue notes of their own, intended as a circulating currency and a medium of exchange instead of gold and silver. Modern bankers frequently exercise any two or even three of those functions, but it is still true that an institution prohibited from exercising more than one of those functions is a bank in the strictest commercial sense, and is equally subject to taxation as if authorized to make discounts and issue circulation as well as receive deposits." Judgment was held that the taxes were lawfully collected and could not be recovered by the German Savings and Loan Society.

Ruling Law. Story Case Answer

One of the most common functions of a bank is to receive money for safe-keeping, or receive it and pay it out at the order of the person delivering it to the bank. Such a transaction is known as a " deposit." It now often represents credit extended to the customer by the bank. This may be a plain loan, as the price of securities purchased by the bank, or commercial paper discounted, or as a credit for checks and bank drafts deposited for collection. These transactions usually occur without any handling of money.

In the Story Case, the credit entered in favor of Wright became a debt due him by the bank, which he could collect by drawing checks which the bank would pay. This did not mean that the bank held $1,000 of his money, which the other creditors could not touch. His note had passed to the bank and become one of its assets, independently of the deposit liability. Like all the other assets, it is available to all the creditors equally. Wright cannot cancel it in settlement of his claim, but must pay it to Fowler for the benefit of all the creditors equally, and will receive his pro rata share of the assets when distributed. This may be much less than $1,000. Judgment should be given for Fowler.