The opinion of the court was delivered by: MCGOHEY
These actions, brought under the deposit insurance laws of the United States, involve common questions of law and fact and were consolidated for trial. They seek judgments: 1. declaring that certain funds received and held by each defendant constitute deposits as that term has been defined by statute and regulations made pursuant thereto; 2. directing that each defendant file amended certified statements which shall include the balances of such funds in the 'assessment base' for each semi-annual period up to date, beginning with the period for which the certified statements were due on July 15, 1945; 3. for the amount of deposit insurance assessments found to be due from each defendant upon on such amended certified statements, plus interest and costs.
Federal Deposit Insurance Corporation, hereafter called FDIC, is a governmental corporation created by the Banking Act of 1933 which inaugurated, on an experimental basis, the Federal Government's first venture in the insurance of bank deposits.
The defendants, hereafter called respectively Guaranty and Irving, are banking corporations chartered and operating under the laws of New York. Since January 1, 1934, each has been an 'insured bank' and a member of the Federal Reserve System. The Court has jurisdiction of the parties and subject matter. The actions which were tried to the Court alone arise out of the following circumstances.
The Banking Act of 1933 did not define 'deposit.' It authorized FDIC to raise capital through the sale of its stock to member banks of the Federal Reserve System, which were required to purchase it in amount based on their respective totals of 'deposit liabilities as computed in accordance with regulations prescribed by the Federal Reserve Board.' It further provided that on and after July 1, 1934, no state bank, trust company or mutual savings bank could become a member of the Federal Reserve System until it became a stockholder of FDIC; and no national bank could secure authorization from the Comptroller of the Currency to commence business until it became a member of the Federal Reserve System and a stockholder of FDIC. There was then in effect a Federal Reserve Board ruling promulgated in 1922
'* * * that all funds received by a bank in the course of its commercial business must be treated either as deposits against which reserves must be carried, or as trust funds, subject to the ordinary restrictions and safeguards imposed upon the custody and use of trust funds, (and) that whether a certain deposit falls in one category or the other must depend in each case upon the particular terms and conditions under which it was made.'
After more than a year's study of the experiment in practical operation and after extensive Congressional hearings, the permanent system of federal deposit insurance was established by The Banking Act of 1935.
In that Act Congress defined 'deposit' and required each insured bank to file with FDIC semi-annually a certified statement of its total liability for deposits as so defined and to pay to FDIC an assessment computed at the annual rate of one-twelfth of 1% of the certified total which is called 'the assessment base.' The definition of 'deposit' was as follows:
'The term 'deposit' means the unpaid balance of money or its equivalent received by a bank in the usual course of business and for which it has given or is obligated to give credit to a commercial, checking, savings, time or thrift account, or which is evidenced by its certificate of deposit, and trust funds held by such bank whether retained or deposited in any department of such bank or deposited in another bank, together with such other obligations of a bank as the board of directors shall find and shall prescribe by its regulations to be deposit liabilities by general usage: * * *'
Regulation I, promulgated by FDIC,
'the term deposit shall include the following obligations:
'(a) Outstanding drafts, cashier's checks, and other officer's checks. Outstanding drafts*, cashier's checks, and other officer's checks issued under any of the following circumstances:
'(1) For money or its equivalent received by the issuing bank; or
'(2) For a charge against a deposit account in the issuing bank; or
'(3) In settlement of checks, drafts, or other instruments forwarded to the issuing bank for collection.
'(b) Certified checks. Checks drawn against a deposit account and certified by the drawee bank.
'(c) Traveler's checks and letters of credit. Outstanding traveler's checks or letters of credit on which the bank is primarily liable issued under either of the following circumstances:
'(1) For money or its equivalent received by the issuing bank; or
(2) For a charge against a deposit account in the issuing bank; or
'(d) Money or its equivalent. Under paragraphs (2) and(c) of this section, drafts, cashier's checks, and other officer's checks, traveler's checks and letters of credit must be regarded as issued for the equivalent of money when issued in exchange for checks or drafts or for promissory notes upon which the person procuring any of the enumerated instruments is primarily or secondarily liable.'
'*Drafts drawn on foreign correspondents or foreign branches and payable only in foreign countries are not included in the term 'deposit'.'
In 1946 FDIC commenced its first audits of insured banks. By the end of 1949, several hundred of the larger insured banks in the country had been examined. The audits showed that while many of the banks which had accounts containing funds of the kind here in dispute had, in their certified statements to FDIC since 1935, included the balances of those accounts in their assessment bases and had paid the required assessments thereon, about 85 of the largest banks, including the defendants had not. Early in 1950, FDIC made demand on all insured banks which had such accounts but had not so certified and paid, to file amended certified statements which would include such balances in their assessment bases and to pay the proper assessments thereon. Every bank on which this demand was made complied, except Guaranty and Irving.
In September, 1950, after extended hearings by respective committees of the Senate and the House, The Federal Deposit Insurance Act became law.
It will hereafter be referred to as the 1950 Act. In it Congress retained all of the 1935 Act's definitions, including the definition of 'deposit' and added the following: 'The term 'trust funds' means funds held by an insured bank in a fiduciary capacity and includes, without being limited to, funds held as trustee, executor, administrator, guardian or agent.'
Several amendments were made to the section of the 1935 Act relating to assessments, but only one is important here. It provides
that in computing its total liability for 'deposits' an insured bank 'may exclude from its assessment base * * * cash funds which are received and held solely for the purpose of securing a liability to the bank but not in an amount in excess of such liability, and which are not subject to withdrawal by the obligor and are carried in a special non-interest-bearing account designated to properly show their purpose.' The 1950 Act also prohibited suits for recovery of assessments claimed to be due and unpaid 'for any year prior to 1945.'
After passage of the 1950 Act, FDIC revised Regulation I by substituting for the above quoted subdivision (d), the following:
'(d) Special purpose funds. Money received or held by the bank, or the credit given therefor to an account including a special or memorandum account, which money or credit is held for a special or specific purpose, regardless of whether the relationship thereby created is that of debtor-creditor, fiduciary, or any other relationship. 2
'2. Special purpose funds, defined in Sec. 326.1(d), include, among others and without limitation to those mentioned here, escrow funds, funds held as collateral security for an obligation due the bank or others, withheld taxes, funds held for distribution or for purchases of securities or currency, or funds held by the bank to meet its acceptances or letters of credit. The Corporation has consistently interpreted the term 'deposit', as defined in the Federal Deposit Insurance Act since 1935, to include special purpose funds as defined in Sec. 326.1(d). These special purpose funds are also deposits by general usage. This clarification is made with the realization that some or all of the funds defined as special purpose funds in Sec. 326.1(d) may be within the term 'deposit' as defined in the Federal Deposit Insurance Act since 1935.'
The several types of funds sued on are itemized in Paragraph IX of each complaint. At the trial items 1, 5, 6, 10 (in part), 11, 12 and 14 of Paragraph IX of the complaint against Irving were characterized by its counsel as 'very small and inconsequential' and he made 'an unconditional withdrawal' of Irving's 'contest' as to those items. He added 'we are not contesting (them) but we are not admitting liability.' Guaranty contested all of the items set out in the complaint against it.
There remain in dispute funds found in fourteen types of accounts which will hereafter be described and designated A through N. Accounts A through D and G, J and K are carried by both defendants. Account L is carried by Guaranty only. Accounts E, F, H, I, M and N are carried by Irving only.
The funds in each of the fourteen accounts are received by the banks in the regular course of business. They are commingled with and invested in the same way as all other bank funds including those conceded to be deposits within the statutory definition. As will later appear, accounts A through F, H and I which are called 'cash collateral accounts,' and account G which is called 'anticipated acceptances account,' are carried as 'special non-interest-bearing account(s) designated to properly show their purpose.' Absent a customer's default in his obligation to the bank, the funds in the cash collateral accounts, except account A, are not subject to appropriation by the bank and are withdrawable by the customer when his obligation to the bank has been discharged without recourse to his cash collateral. However, as long as the customer's obligation to the bank remains undischarged, they may not be withdrawn except to a limited extent from account B. The funds in account A, which is called 'cash collateral for commercial letters of credit,' are used by the banks to pay drafts presented by the beneficiaries. The funds in account G are used by the banks to pay drafts presented by holders of the banks' acceptances. After all such payments have been made, any balance then remaining in accounts A and G may be withdrawn by the customer. Customers are kept informed as to the status of the accounts carried in their names, either by statements showing monthly transactions and balances or by separate written advices as to each transaction as it is recorded in the account.
The balances in all the accounts, except account G, are included in the total of deposits shown in reports, later published, which under substantially identical regulations promulgated by the Federal Reserve Bank and the New York State Banking Department, the defendants are required to file with those agencies. They are also included in the total of deposits shown in 'condensed statements of condition' which the defendants voluntarily publish and circulate to stockholders, customers and the public.
FDIC makes two claims. The first is that the funds in each of the fourteen accounts constitute deposits under the statutory definition and therefore the balances of all the accounts are assessable and should have been included in the assessment bases. The second is that the funds in the cash collateral and anticipated acceptances accounts were not and are not 'received and held solely for the purpose of securing a liability to the bank' and hence, under the 1950 Act, no part of the balances of those accounts may be excluded from the defendants' assessment bases.
The defendants concede they have never included in their assessment bases the balances of accounts A through G except when as sometimes happened in account C, the balance exceeded the customer's 'total liability' to the bank. They concede that such excess 'of course is no longer cash collateral' and assert that though it was retained in the account, it was always included in the certified assessment bases. They assert further that there is never an excess in any of the other cash collateral accounts. As to the concession they make two contentions. The first is that any of the funds in accounts A through G which were not included in the assessment bases did not constitute deposits under the statutory definition and hence were not assessable. The second is that such funds were and are 'received and held solely for the purpose of securing a liability to the bank' and therefore after the passage of the 1950 Act, the exclusion from the assessment base of the balances in accounts A through G was proper.
The defendants also concede that the balances of accounts H through N were never included in the assessment bases prior to January 15, 1951, when the first certified statements due after passage of the 1950 Act were filed. Although on and since that date these balances have been included in the assessment bases, the defendants contend they have done this only because the amounts involved were comparatively small and because they desired 'to be on all fours with FDIC.' They 'did not and do not concede' that the funds in those accounts 'were or are assessable deposits' either 'in fact or in law.'
Obviously, the first issue to be determined is whether any of the funds in dispute constitute deposits within the statutory definition. Then, if the funds in accounts A through G or any of them are held to come within that definition, there will remain the further issue whether the portion of those funds not in excess of customers' liability to the banks was 'received and held solely for the purpose of securing a liability to the bank.
In connection with the second issue it is to be noted that not only Guaranty and Irving but also all other insured banks which carry accounts A through G have, since the passage of the 1950 Act, excluded the ...