74-8

74-8

December 12, 1975

Re: ________ (Proposed)

Dear Mr. ________:

We regret the delay in making a formal response regarding the proposal to establish ________ (“________”).

As we understand the proposal, ________ and ________, acting through a jointly owned corporation, would incorporate and organize ________ as a trust company under the laws of the State of California. ________ would perform stock transfer and related services, including such functions as transfer agent, fiscal agent, stock and bond registrar, shareholder servicing agent, securities clearance, custodian for mutual funds and for securities portfolios of customers, and record-keeping functions. Also, ________ would receive funds from corporations to distribute as dividend and interest payments and funds from shareholders of corporations for investment pursuant to periodic investment and dividend re-investment plans: ________ would use such funds for its own account pending such distribution or investment, thus capturing the “float”.

As we have previously advised you, we are inclined to favor the establishment of a corporation to perform services of the type proposed for ________. However, we have tentatively concluded that receiving funds for distribution as dividend and interest payments and using such funds for one’s own purposes pending distribution, as proposed in the case of ________, constitute the business of accepting deposits, and only a commercial bank, not a trust company, may engage in such business. The reasons for our tentative conclusion are set forth in this letter. If you wish, you may present additional points and authorities on the matter, and we will consider them before making a final decision. In the alternative, you may file an application for authority to establish a commercial bank to perform the functions originally proposed for ________. If such an application is filed and if it is approved, the approval will be subject to conditions which will, among other things, restrict the scope of business to be conducted by the commercial bank in accordance with the proposal. We have not yet determined whether we would require that the commercial bank be insured by the Federal Deposit Insurance Corporation.

The principal question presented may be stated as follows: Do the proposed activities of ________ in receiving funds for the purpose of making dividend and interest payments and investing such funds for its own account pending the making of such payments comprise the “soliciting, receiving, or accepting of money or its equivalent on deposit as a regular business”, within the meaning of Financial Code Section 102. As you yourself have observed, if this question is answered in the affirmative, ________, as an independent trust company without authorization to transact commercial banking business, would be precluded from performing the proposed activities. As indicated above, we have tentatively decided to answer the question in the affirmative. We can best explain the reasons for our tentative decision by means of reviewing the arguments that you present in your Memorandum in Support of the Trust Company Application of Proposed ________.

Your first argument, briefly stated, is as follows: The term “deposit” as used in Financial Code Section 102, means only a general deposit and not also a special deposit. But what ________ proposes to do constitutes receiving special deposits, not general deposits. Therefore ________ should not be deemed to be engaged in the commercial banking business.

For the sake of discussion, let us assume for the moment that the term “deposit”, as used in Financial Code Section 102, does not include a special deposit. Subject to the same qualification, let us also assume that funds received for the purpose of making dividend or interest payments are special deposits, at least so long as the person receiving such funds is not to use such funds for his own purposes. We then reach the issue whether funds received for the purpose of making dividend or interest payments subject to an understanding that the person receiving such funds is to be free to use such funds for his own purposes pending the making of such payments, are special or general deposits. The decision of the Supreme Court in Bank of America Assn. v. California Bank, 218 Cal. 261 (1933), compels us to answer that funds received subject to such a understanding are general deposits.

In the California Bank case, certain shippers made a deposit with California Bank for the purpose of securing credit granted to them by another bank. When California Bank failed, the shippers alleged that their deposit was a special deposit and asserted a preferred claim against the Liquidator of California Bank. The Court held that the shippers’ deposit was a special deposit and that the shippers, as special depositors, were entitled to a preference to the extent that California Bank’s cash had not been reduced below the amount of the special deposit.

The Court in its opinion delineated the distinction between general and special deposits, as follows:

“In the case of a general deposit in a bank the relationship of the bank and depositor is that of debtor and creditor, and the funds deposited become a part of the general assets of the bank, which it may use in making loans and investments and otherwise conducting a general banking business. When the nature of the transaction is such that it must be said that the depositor does not intend that such use shall be made of … at all times to keep on hand cash in a sum equal to said constitutes a fund which the bank is not authorized to use in its general banking operations.” 218 Cal. at 273-274.

(Emphasis added.)

Continuing, the Court as if for emphasis, reiterated:

“Where money is delivered to a bank /for a special purpose /, the deposit is held to be a deposit for a special purpose, and the bank has no right to use the amount thereof in its general business.” 218 Cal. at 274. (Emphasis added.)

Finally, in explaining the expansion of the concept of special deposit, the Court pointed out:

“We are aware of expressions in certain cases, includes decisions of this state / Citations / to the effect that a special deposit of money is in the nature of a bailment in which the identical money deposit is to be returned in specie. A special deposit of this type may be provided for, but the law recognizes a large class of deposits which, if not ‘special’ within this definition, nevertheless are deposits made for a special purpose, which precludes use of the funds by the depository ….” 218 Cal at 274-275. (Emphasis added.)

Other authorities are in agreement with the holding of the Supreme Court and the California Bank case. Thus, in Bank of America v. Board of Supervisors, 93 Cal.App.2d 75 (1949), the Court of Appeal declared:

“Money deposited with a bank for a particular purpose but, with the depositor’s consent, commingled with other funds is a general deposit.” 93 Cal.App.2d at 79-80.

Also, in the Restatement of Trusts (Second), it is stated:

“If money is deposited in a bank for special purpose, the bank is not a trustee or bailee of the money unless it is the clear understanding of the parties that the money deposited is not to be used by the bank for its own purposes.” Restatement of Trusts (Second), Section 12, Comment Z.

It is clear, then, that it is an essential characteristics of a special deposit that the person receiving the funds is not to use such funds for his own purposes. But it is an essential element of the proposal that ________ be free to invest for its own account funds received for the purpose of making dividend and interest payments. It must be concluded, therefore, that funds received by ________ would be general deposits, not special deposits.

It might be noted that for our standpoint it seems that in your argument you would have us view the funds received by ________ for the purpose of making dividend and interest payments as special deposits for the purpose of avoiding Financial Code Section 102 and, at the same time, you would have us classify the funds as general deposits for the purpose of allowing to invest the funds for its own account. In effect, you ask for the benefits of both worlds with the burdens of neither. We cannot grant such a request.

In the interests of making a complete analysis of the issues, let us reconsider briefly the propositions that we assumed above for the purposes of discussion. The first proposition was that the term “deposit”, as used in Financial Code Section 102, does not include a special deposit. Your argument in favor of this proposition is based upon Opinion No. 60-105, dated October 17, 1960, 36 Ops.Atty.Gen. 194 (1960).

At issue in the Opinion was a pre-paid freight transportation plan. Under the plan a shipper would obtain stamps or metered tapes from a certain corporation. The shipper would weigh his shipment, prepare a shipping document, and affix the proper amount of stamps or tapes to it. The carrier would redeem the stamps or tapes with the issuing corporation. The Attorney General was asked whether the corporation would be engaged in the business of receiving money on deposit. He concluded that it would not.

The first reason that the Attorney General gave for his conclusion was that the corporation would merely sell stamps and metered tapes to the shippers. As a second reason for the conclusion, the Attorney General stated:

“The receipt of something on deposit denotes that the person / sic / who places it on deposit will receive it back at a future time. Black, Law Dictionary (4th ed. 1951).”

36 Ops.Atty.Gen. at 197.

This, of course, is the statement to which you refer in your argument. We have reviewed the authority that the Attorney General cited for his statement, and we find nothing therein to support his statement. Furthermore, the statement appears to be clearly erroneous, for it is not typical of all deposits that the person who places funds on deposit will receive them back at some future time. On the contrary, in the case of a demand deposit, it is typical that the person who places funds on deposit will, by means of drawing checks, order the depositary to pay the funds to third persons.

Under the circumstances, while we have no quarrel with Attorney General’s conclusion or with the first reason for his conclusion, we must respectfully question the second reason for his conclusion, and we are not ready to accept the Opinion as precedent for the proposition that the term “deposit”, as used in Financial Code Section 102, does not include a special deposit.

The second proposition that we assumed above was that funds received for the purpose of making dividend or interest payments are special deposits, at least so long as the person receiving such funds is not to use such funds for his own purposes. It is true that, as the Supreme Court observed in the California Bank case, the concept of special deposit has been expanded beyond a mere bailment where the identical money is to be returned in specie and now includes a larger class of deposits made for special purposes. The Court in the California Bank case listed some examples of special deposits (218 Cal. At 274); other examples were cited by the Court of Appeal in Engleman v. Bank of America, 98 Cal.App.2d 327, 331 (1950). To the best of our knowledge, however, no California appellate court has held that a deposit of funds for the purpose of making dividend or interest payments constitutes a special deposit. Moreover, the weight of authority elsewhere appears to be to the contrary. (See 5 Scott, The Law of Trusts, Section 530.1 pp. 3686-3687.) For these reasons, we are not prepared to conclude at this time that funds received for the purpose of making dividend and interest payments comprise special deposits.

Your second argument on the principal question presented is that the proposed activities of ________ in receiving funds for the purpose of making dividend and interest payments and investing such funds for its own account pending the making of such payments do not constitute a “regular business”, within the meaning of Financial Code Section 102. More specifically, you contend that these activities would be only peripheral to the primary activity of ________, which would be to provide recordkeeping and related services for corporations and shareholders, and in support of your contention you cite Rosenbloom v. Angim, 135 F.2d 512 (9th Cir. 1942). In the Rosenbloom case it was held that, for estate tax purposes, the receipt by an import-export firm of deposits for a single person is not carrying on a commercial banking business. In the case at hand, however, ________ proposes to provide its dividend and interest payment services to a number of corporations. Therefore, the Rosenbloom case is distinguishable on the facts, and we do not consider it applicable here.

A case more in point is MacLaren v. State, 124 N.W. 667 (Sup.Ct.Wisc. 1910). In the MacLaren case, a department store accepted funds from customers under an arrangement whereby the customers were permitted either to apply the funds against purchases from the department store or to withdraw the funds. The court, construing a statue which was very similar to Financial Code Section 102, held that the department store was engaged in soliciting, receiving, and accepting money on deposit as a regular business. There is no indication in the MacLaren case that the accepting of deposits had become the primary activity of the department store, superseding its retail merchandising operation. It appears, therefore, that the fact that the receiving of funds for the purpose of making dividend and interest payments would not be the primary activity of ________ is no basis for concluding that such activity would not be a “regular business” of ________, within the meaning of Section 102.

In interpreting the meaning of the term “regular business”, as used in Financial Code Section 102, it is instructive to consider the definitions of the words of the term in their general sense; for, except where clearly otherwise intended or indicated, words in a statue should be given their ordinary meaning and construed sensibly in accordance with their commonly understood meaning. County of Los Angeles v. Frisbie, 19 Cal.2d 634, 642 (1942).

The word “business” is defined as meaning:

“that which occupies the time, attention, or labor of men for the purposes of profit or improvement.” Matter of Application of Smith, 33 Cal.App. 161, 163 (1917).

As the Supreme Court has observed:

“The word ‘business’ embraces everything about which one can be employed….” Burks v. Poppy Construction Co.,

57 Cal.2d 463, 468 (1962)

The word “regular” is defined as meaning:

“steady or uniform in course, practice, or occurrence: not subject to unexplained or irrational variation: steadily pursued….” Webster’s Third New International Dictionary (1961).

The words “regular” and “business”, taken together, then, may be defined as meaning anything done for profit on a continuous or systematic basis. (Compare the term “engaging in business”; see City of Los Angeles v. Cohen, 124 Cal.App.2d 225, 228 (1954).) Certainly, the proposed activities of _________ in receiving funds for the purpose of making dividend and interest payments and investing such funds for its own account pending the making of such payments would constitute a “regular business”, as thus defined; for ________ would be receiving and investing funds on a continuous and systematic basis and would be doing so for profit.

In your Memorandum, you point out that the Comptroller of the Currency has chartered national banks to perform services of the type that would perform and, similarly, that the Superintendent of Banks of the State of New York has chartered trust companies to perform services of the type that would perform. You also call attention to the fact that the Board of Governors of the Federal Reserve System has provided in Regulation Y that trust company subsidiaries of bank holding companies may engage in certain deposit-taking activities. 12 C.F.R. Section 225.4(a)(4). We are fully prepared to give due weight to such regulatory actions in determining that the organization and licensing of a company to perform the services which would perform would be in the public interest. However, none of the regulatory actions that you cite is helpful in resolving the principal question under consideration here. National banks are authorized by Federal law to accept deposits. 12 U.S.C. Section 24. Trust companies organized under the laws of the State of New York are authorized by New York law to accept deposits. New York Banking Law Section 96. Therefore, in chartering institutions to perform services of the type that would perform, neither the Comptroller of the Currency nor the Superintendent of Banks of the State of New York has had the occasion to decide the principal question presented here. Section 225.4(a(940 of Regulation Y represents a determination by the Board that, for the purposes of the Federal Banking Holding Company Act, as amended, the activities specified are a proper incident to banking or managing or controlling banks; the provision is not binding for purposes of interpreting the Financial Code of this State.

In your Memorandum you suggest that, since ________ would be licensed to engage in trust business, it would not be prohibited by Financial Code Section 3390 from receiving deposits. We do not agree.

The term “banking business” is not defined in the Banking Law (Division 1(commencing with Section 99) of the Financial Code). However, since the term “bank” is defined in Financial Code Sections 102 and 109 as including both commercial banks and trust companies, it follows that the term “banking business” includes both commercial banking business and trust business. Just as the term “bank” is used at some places in the Banking Law to mean only a commercial bank (for example, Financial Code Sections 117 and 380) and at other places to include both commercial banks and trust companies (for example, Financial Code Section 102 and 258), so also the term “banking business” is used at some places to mean only commercial banking business (for example, Financial Code Section 200 and 369) and at other places to include both commercial banking business and trust business (for example, Financial Code Section 502 (c) and 661). Within the context of Section 3390, we believe that the term “banking business” should be understood to mean either commercial banking business or trust business, depending upon whether the specific activity is within the scope of commercial banking business or trust business. Accordingly, since the activity of receiving deposits is within the scope of commercial banking business, the term “banking business” should, in reference to the activity of receiving deposits, be read to mean commercial banking business. Consequently, no person other than a person licensed to engage in commercial banking business may receive deposits. Any other interpretation of Section 3390 would lead to the patently unreasonable conclusion that a corporation which is licensed to engage either in commercial banking business or in trust business would not only be authorized to transact such business but would also be exempted from the statutory prohibition against engaging in the other business.

Before closing, we should note two additional points. First, in your Memorandum you observe that funds received by ________ from shareholders of corporations for investment pursuant to periodic investment and dividend re-investment plans would not be subject to Financial Code Section 102 but rather would fall with the exemption allowed in Section 102 for “money or its equivalent… left with an agent pending investment in … securities for or on account of his principal.” We concur with you on this point.

Second, in your memorandum you set forth arguments on the question of whether it is within the corporate powers of a trust company to engage in the business of receiving funds from corporations to distribute as dividend and interest payments and funds from shareholders of corporations for investment pursuant to periodic investment and dividend re-investment plans. Since we have tentatively concluded that no person may engage in such activities without a commercial banking license, it is not necessary for us to decide the question of corporate powers, and we express no opinion on it at this time.

As emphasized above, our conclusion that ________ , as a trust company and without a license to engage in commercial banking business, would be prohibited from receiving funds for distribution as dividend and interest payments and investing such funds for its own account pending such distribution, is tentative only, and we will defer making a final decision in order to give you an opportunity to present additional points and authorities on the matter. Instead of presenting additional points and authorities, you may, if you wish, file an application for authority to establish a commercial bank to perform the functions originally proposed for.

We look forward to hearing from you.

Very truly yours,

DONALD E. PEARSON
Superintendent of Banks

By

JAMES F. CARRIG
Counsel

JFC:olj

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Last updated: Jun 28, 2019 @ 11:12 am