Petitioners Brief — Howard National Bank & Trust Co. v. Morgan

BEEN CRON TAR MO PSD BLL A NE, BAT LEE RARE ATS Fl . aC a oe ; “ —ay

SUPREME COURT OF THE UNITED STATES

OCTOBER TERM, 1942

NO.

IN THE MATTER OF THE

ESTATE OF

HARRIS R. WATKINS,

Deceased,

HOWARD NATIONAL BANK

AND TRUST COMPANY, -

Petitioner.

BRIEF IN SUPPORT OF PETITION FOR CERTIORARI

The salient facts and the questions involved in the Petition for

Certiorari to which this brief is addressed have been stated in the

petition. A specification of particular rulings of the Vermont

Supreme Court and particular facts in the light of which they

were made should be helpful in considering the questions of law

herein briefed. Such a specification is included as ‘‘I’’ hereof.

I

THE VERMONT SUPREME COURT HELD THAT

THE CONSOLIDATION INVOLVED WAS NOT IN CON-

TRAVENTION OF THE LAW OR PUBLIC POLICY OF

VERMONT, DID NOT REQUIRE SPECIFIC STATUTORY

AUTHORITY FROM THE STATE, WAS VALIDLY

EFFECTED, DID NOT DESTROY THE CORPORATE

IDENTITY OF THE STATE BANK OR TERMINATE ITS

2

EXECUTORSHIP, ALTHOUGH ALL THE ASSETS OF

THE ESTATE WERE IN THE POSSESSION OF AND

WERE MANAGED BY THE CONSOLIDATED BANK.

1. The Vermont Supreme Court said with reference to the

legality of the consolidation, “Specific authorization was not neces-

sary (citing cases). We hold that the consolidation of the City

Trust Company and the Howard National Bank was not in con-

travention of our law, or of our public policy.” (Op. par. 12,

Rec. 54.)

2. The court noted that no question was made but that the

steps prescribed by law were taken and certificate of approval issued

by the Comptroller; it declared the objection as to contravening

state law unfounded (Op. par. 12, Rec. 54) and throughout treated

the consolidation as valid.

3. The consolidation did not destroy the corporate identity of

the state bank or terminate its executorship. This destruction

and termination was held to have been effected by taxation and

control exercised by the state after consolidation. (Op. par. 14,

Rec. 55, par. 20, Rec. 58, par. 24, Rec. 60.) The Court said:

_..."No statute of this state declared the charter of the

trust company void upon the event of consolidation.” (Op.

par. 14, Rec. 55.)

_... “City Trust Company, not having paid its annual

license tax ceased to exist as a corporation upon April | of

that year (1932). Its authority as executor was thereupon

extinguished” .... (Op. par. 20, Rec. 58.)

_..."The Court might, after the dissolution of City Trust

Company’s charter, have appointed the petitionee adminis-

trator with the will annexed”... . (Op. par. 24, Rec. 60.)

4. The Vermont Supreme Court recognized that at the time

of consolidation the consolidated national bank took possession of

the assets of the estate and managed the affairs previously con

ducted by City Trust Company. (*Op. par. 10, Rec. 53.) The

Court said:

* From F. 7 Rec. 26 and F. 17 Rec. 28.

—

3

“On or about the date of the consolidation the petitionee

took possession and control of the assets of the estate and

proceeded to act as executor, although it did not apply for

appointment as administrator or furnish a bond and it has

never received an appointment as administrator from the

Probate Court. On July 31, 1931, it was appointed trustee

of the trust fund established by the will, but the fund has

never been decreed to it as such trustee. After March 12,

1931, the directors of the City Trust Company never took

action as a board and the affairs previously conducted by

that company were directed and controlled by the directors

and officers of the petitionee.”’

5. In Vermont the office of executor is held by virtue of the

testator’s selection and not as the result of judicial appointment.

(Op. par. 10, Rec. 56.) The Court said:

“In our law an executor is a person, or corporation em-

powered to discharge the duties of a fiduciary, appointed as

such by the testator in his will. The Probate Court has

no power of choice, for the office is held by virtue of the

testator’s selection.”

II

THE VERMONT SUPREME COURT ASSERTS THAT,

BECAUSE OF LACK OF AFFIRMATIVE CONSENT BY

THE STATE OF VERMONT, THE CONSOLIDATION

DID NOT OPERATE UPON THE RIGHT OF CITY

TRUST COMPANY “TO BE A CORPORATION”; AND

THAT THEREBY THE CONSTITUENT CORPORATION

REMAINED SUBJECT TO STATE CONTROL, TAXA-

TION AND DESTRUCTION. THIS IS A QUESTION OF

FEDERAL POWER AND LAW.

In its opinion (Pars. 19-20, Recs. 57-58) the Vermont

Supreme Court said:

“As we have seen, the petitionee asserts that since the date

of the consolidation the State of Vermont has been with-

out power to regulate, control or terminate its corporate

existence. We do not adopt this view. The ‘franchise’

— HOSSAIN MaRS RAT

4

of the state bank, the transfer of which is provided for in

the Act of Congress (12 U.S.C. A. § 34a), ‘cannot mean

its right to be a corporation. The right to transfer fran.

chise powers of a corporation organized under the laws oj

one sovereignty to a corporation organized under the laws

of a different sovereignty is extraordinary. It cannot be

implied in the absence of explicit, statutory enactment to

that end.’ (Citing cases discussed below.) At the time

of the consolidation in the present case there was no statute

of this State permitting the transfer of the City Trust Com

pany’s right to bea corporation.’ This right therefore, re

mained subject to our law.”

“It follows that the State of Vermont had the power to

terminate the corporate existence of the City Trust Com-

pany in accordance with G. L. 1046 (now P. L. 1000) pro-

viding that : ‘Every corporation shall . . . . cease to exist a

such corporation on the first day of April in any year dur-

ing which such corporation has not, on or before such date,

filed its annual license tax returns for the fiscal year be

ginning with the first day of the preceding February and

has not on or before the first day of April in such year paid

to the state the annual license tax for such fiscal year’ ...."

Thus, the Vermont court asserts that :

(1) It is not the intent of the federal consolidation statute to |

include the primary corporate franchise.

(2) This result cannot be accomplished by the consolidation

without affirmative permission of the state.

(3) The state retains jurisdiction to regulate, control, tax and

destroy the state corporation.

Each of these assertions raises a federal question, the first a

to the meaning of the federal statute, the second as to the power ol

the federal government and the third as to power of the state te

affect consolidated national banks after consolidation by continued

regulation, control, taxation and destruction of constituent state

banks. On these questions federal law is paramount.

Ex parte Worcester County National Bank, 279 U. S. 34/,

at 359, 49 S. Ct. 368, 73 L. ed. 733.

And see infra V.

_——ae

The Vermont court cites as its authority decisions of courts of

other states and an affirmance by this court of one of those de-

cisions. -\s indicated below that affirmance is no authority for the

rule asserted by the Vermont court; and the decisions relied upon

are not in accord with the law of the United States, as shown

by the discussion below (III, TV and V). This is the more readily

apparent when the authorities relied upon by the Vermont Court

are examined in the light of the law and facts of the instant case,

as shown by the record, including the opinion of the Vermont

Supreme Court. The cases relied upon by the Vermont Court

are Petition of Worcester County National Bank, 263 Mass. 444

(45) 162 N. E. 217, 220"; affirmed 279 U. S. 347, 357,*

Com. to use of Grammes v. Merchants National Bank, 323 Pa.

145, 185 A. 823, 826,* and Com. v. First National Bank and Trust

Company, 303 Pa. 241, 154 A. 379, 382.*

In the Massachusetts case, reviewed by this Court, the holding

of the Massachusetts court was summarized by this court. In

Massachusetts an express statute rendered void the charter of any

tate bank merging into another bank (279 U. S. at 356). After

quoting that statute, this court said of the decision of the Massa-

chusetts Court :

“With this qualificationt the court found the field to be left

open, under Massachusetts law, to the exercise by Congress

of whatever power it possessed over the subject” (of con-

solidation of a state bank with a national bank) (279 U. S.

356)

“It (the Massachusetts court) referred again to the pro-

vision of the state law that upon the consolidation, the

charter of the trust company should be ‘void except for the

purpose of discharging existing obligations and liabilities.’

It held that the word ‘franchises’ directed to be transferred

to the national bank by virtue of section 3 did not mean its

charter of its right to be a corporation, for that would be

in contravention of the law of the Commonwealth :* that it

*Local citations by the Court.

t Italics supplied.

4 SPY AMS IO PLES IS EAE EO BI SOL Ie SG APSE LOLI NE 0 8 ROR

6

was only the national bank that retained its corporate iden-

tity ; that the certificate of the Comptroller did not consti-

tute a charter, but only his approval of the consolidation;

that the Trust Company had gone out of existence* and all

its property had become the property of the consolidated

bank and that the latter was not a newly created organiza-

tion but an enlargement of the continuously existing na-

tional bank. Thus the court found that the identity of the

trust company had not been continued in a national bank,

but had been extinguished”* (279 U.S. 357, 338).

Thus it was the holding of the Massachusetts court, as inter-

preted by this court, that a Massachusetts statute operated as a

qualification of the “open” field for the operation of the federal

statute and the Massachusetts charter could not be transferred

99 66

under the designation of “franchise,” “for that would be in con-

travention of the law of the Commonwealth” of Massachusetts.

But the law of Vermont has no such “qualification” of the

“open” field for the operation of the federal statute. The decision

in the Worcester Bank case is therefore not an authority with re-

spect to consolidation of a Vermont trust company into a national

bank. |

The next case cited by the Vermont court, Commonwealth v.

First National Bank and Trust Company (303 Pa. 241, 154 A.

379), arose in 1931 following the consolidation of a Pennsylvania

trust company with a national bank. The Pennsylvania Commis-

sioner of Banking directed the trust company after the consolida-

tion to petition the Pennsylvania court for a decree of dissolution.

The consolidated bank and trust company entered as respondent

claiming that the effect of the consolidation under the federal

statute “‘was to extinguish the trust company.” Pennsylvania had

no statute in contravention of the consolidation or recognizing the

consolidation as working a dissolution of the state corporation.

It did have a statute providing for dissolution of the corporation

by petition: The Pennsylvania court held that as a result of the

* Italics supplied.

_

7

separate sovereignty of the state and nation “The United States

has no power to create or destroy Pennsylvania corporations.”

The court held that it was not the intent of the federal act to merge

the charter of the trust company with that of the national bank,

relying upon the decision of the Massachusetts court in the

Worcester case, supra, and the affirmance of that decision by this

court and quoting from the summary of the ruling of the Massa-

chusetts court, which appears in the decision of this court. _ It fails,

however, to recognize that the opinion of the Massachusetts court,

so quoted, was based, as above indicated, upon the Massachusetts

statute.

The Pennsylvania court found the case ‘‘analogous to that of a

state bank or trust company organized under state laws converting

itself into a national bank.’’ It said: “Such a conversion of the

state bank does not dissolve the state corporation. It is merely a

change of title and governmental supervision” (154 A. at 381).

In support of the foregoing statements the court quoted from

Michigan Insurance Bank v. Eldred, 143 U. S. 293, and Metro-

politan National Bank v. Claggett, 141 U.S. 520, to the effect that

the result of conversion is that the state bank becomes a national

bank without affecting its identity; it is under a changed juris-

diction, but it remained ‘‘one and the same bank, . . . . doing busi-

ness uninterruptedly."” The Court concluded that

“It would be derogatory to the rights and dignity of this

sovereign state for her courts to hold that an act of the

Congress of the United States, or something done pursuant

thereto could extinguish the life of the Pennsylvania cor-

poration, without Pennsylvania's consent” (154 A. at 382).

The other case relied upon by the Vermont Court, Common-

wealth v. Merchants National Bank, 323 Pa. 145, 185 Atl. 823,

involved an action against a consolidated national bank on account

of the obligation of a constituent state bank. It was claimed by

way of defense that the liability was not assumed and that there

was “no legal consolidation of the two corporations from which

8

liability could be implied.” The court held that under the local

law the state bank might have been converted into a national bank

and then under the federal law, consolidated with another nationai

bank. But the Court felt that in view of Hopkins Federal Sa-

ings and Loan Association v. Cleary, 296 U.S. 315, “342,” 568.

Ct. 235, 80 L. ed. 251, 100 A. L. R. 1403, the decision in Casey v.

Galli, 94 U. S. 673, 24 L. ed. 168, ‘cannot be given the compre-

hensive effect, as limiting the power of the commonwealth’’ claimed

for it; that the Tenth Amendment did not permit federal legisla-

tion to confer authority on the trust company to consolidate its

franchise and property with those of the bank. “What was lack-

ing to make the consolidation de jure was authority from the com-

monwealth pursuant to whose law the trust company existed. The

consolidation described did not, therefore, transfer to the bank

the trust company’s franchise to be a corporation and work its

dissolution.” But the court held that there was a de facto consoli-

dation, carrying with it the obligation to pay the debt in question.

The Pennsylvania court thus holds that, without the express

consent of the state, the national government could not absorb the

corporate franchise of the state corporation, although it took over

its property and obligations (185 A. at 826), and left the state

corporation “in a state of suspended animation” (154 A. 380).

If the Pennsylvania decision in the Merchants National Bank case

makes express consent necessary to de jure consolidation, that re-

quirement is not in accord with the Vermont rule. For the Ver-

mont Supreme Court said as to consolidation in the instant case,

“Specific statutory authorization was not necessary,’ citing Casey

v. Galli, and Petition of Worcester County National Bank, “162

N. E. at page 230.”

Thus the Vermont court declines to follow the above implica-

tions of the holding of the Pennsylvania court in Commonwealth

v. First National Bank. Instead it held that while the federal

government may take over a state corporation without affirmative

———_

9

permission from the state, it may not absorb the corporate fran-

chise unless it has affirmative permission from the state, and that

the state retains power to regulate, control, tax and destroy the

constituent state corporation after consolidation notwithstanding

resultant injury to the consolidated national bank. The error of

this holding is shown below.

Il

THE UNITED STATES HAS THE POWER TO CON-

SOLIDATE A STATE BANK INTO A NATIONAL BANK

WITH TRANSFER OF ALL RIGHTS, AS SPECIFIED IN

THE STATUTE, EXCEPT AS SUCH A CONSOLIDA-

TION IS IN CONTRAVENTION OF STATE LAW. AF-

FIRMATIVE CONSENT IS NOT REQUIRED TO GIVE

FULL EFFECT TO SUCH A CONSOLIDATION.

In the only case in which this court passed upon the question

of state consent, the Massachusetts court had concluded that no

state legislation was necessary to accomplish the consolidation of a

Massachusetts trust company with a national bank under the

authority of the federal statute. This court said that it was in

agreement “with the conclusions of the Supreme Judicial Court in

respect to legality of the consolidation of the trust company and the

national bank.”

Ex parte Worcester County National Bank, 279 U.S. 347,

357, 360.

In accord upon this point :

Adams v, Atlantic National Bank, 115 Fla. 399, 155 S. 648.

First National Bank v. Chapman (1929), 160 Tenn. 72,

22 S. W. (2d) 245.

Central United National Bank v. Abbott, 135 Ohio. St. 37.

Hopkins Federal Savings, etc., Association v. Cleary, 296 U. S.

315,56 S. Ct. 235, 80 L. ed. 251, 100 A. L. R. 1403, is relied upon

in the later Pennsylvania case cited by the Vermont Court. But

RENEE aN GP eee yi SONS EERIE LBP IMLAY SNOT IITA! PME IIL ANE wT ee Ae, Baas

10

that case is no authority for the theory of the necessity of affirma-

tive consent. There this court had under consideration a statute

which omitted the proviso that the conversion shall “not be in con-

travention” of the state law, which since 1913 has been a part of

the bank conversion statute and has been incorporated in other

conversion statutes and in the statute as to consolidation of state

banks into national banks. The court held that the omission indi-

cated the intention of Congress too distinctly to be ignored; and

that “the Home Owners Loan Act, to the extent that it permits

conversion of state associations into federal ones in contravention

of the laws of the place of their creation,* is an unconstitutional

encroachment upon the reserved powers of the state’ (296 U.S.

at 335). The court did not assert the necessity of affirmative con-

sent to conversion; and it recognized the possible distinction be-

tween the powers of Congress in “respect of banks of issue and de-

posit and its power in respect of associations to encourage industry

and thrift.” The concluding paragraph of the opinion discloses

the scope of the decision:

“Confining ourselves now to the precise and narrow ques-

tion presented upon the records here before us, we hold that

the conversion of petitioners from state into federal asso-

ciations is of no effect when voted against the protest of

Wisconsin. Beyond that we do not go... ."” (296 U. S. at

343).

The Pennsylvania court stressed the effect of the decision in

the Savings and Loan Association case upon the decision of this

court in Casey v. Galli, 94 U. S. 673, 24 L. ed. 168. It is true

that the court in the Savings and Loan case concludes that the

Galli case did not decide a question of constitutional power ; but

it points out (296 U. S. at 342-343) that the contravention clause

was later inserted in the statute and this court clearly implied that

this amendment cured the constitutional difficulty.

It is thus apparent that the Savings and Loan case does not sup-

port the theory that affirmative consent of the state is required to

* Italics supplied.

11

effectuate the purpose of Congress in the consolidation statute.

On the contrary, that decision clearly implies that consolidations

are valid if they are not in contravention of the state law.

The decisions of this court thus indicate unmistakably that

silence of the state statutes and policy as to consolidation of state

banks into national banks, is not negation but consent; that the

jederal statute operates according to its terms unless in contraven-

tion of state law.

IV

IT WAS THE EXPRESSED INTENT OF CONGRESS

TO EXERCISE ITS POWER TO VEST IN THE CON-

SOLIDATED BANK EVERY RIGHT OF THE STATE

BANK EXCEPT TO THE EXTENT BARRED BY THE

POSITIVE LAW OF THE STATE.

As appears from the discussion above (“ITT’’), expressed con-

sent of the state is not required to supplement the power of the

national government to absorb a state bank into a national bank.

Silence is consent. When, as in Vermont, there is no law in

contravention, the effect of consolidation is to be determined from

the intent of Congress as manifested by the language of the

statute. That statute gives the sanction of law to the transforma-

tion of the corporate status.

The terms of the federal statute having to do with the vesting

of the franchise and property of the state corporation in the con-

wlidated corporation are of all-inclusive scope. They cover “all*

the rights, franchises and interests” of the state bank in every

species of property and “all* rights of property, franchises and

interests including the right of succession as trustee, executor or

in any other fiduciary capacity.” The untrammeled scope of this

statute has a single limitation—the provision that the consolida-

tion shall not be “in contravention” of the state law.

‘Italics supplied.

12

In the absence of contravening state law, the terms of the

statute make apposite the language used by Mr. Justice Cardozo

at the close of his opinion in Baltimore National Bank v. State Tax

Commission, 297 U. S. 209 at 218.

“Across the petitioner's path there still lies the stumbling

block of that uncompromising ‘all.’ ”’

State courts have passed upon the effects of consolidations

under the federal statute as it was at the time of the consolidation

involved here. They have recognized the persistence of the state

corporate entity within the consolidated national bank.

Central United National Bank v. Abbott (1939, 135 Ohio

St. 37, 18 N. E. (2d) 981, 983.

Guardian Depositors Corp. v. Currie (1940), 292 Mich.

549, 560, 291 N. W. 2, 6.

This court has held that upon conversion of a state bank into

a national bank, the identity of the state bank persists in the na-

tional bank, as one and the same bank ‘“‘under a changed juris-

diction.”

Metropolitan National Bank v. Claggett, 141 U.S. 520, 12

S. Ct. 60, 35 L. ed. 841.

Michigan Insurance Bank v. Eldred, 143 U. S. 293, 125.

Ct. 450, 36 L. ed. 162.

See, also,

Coffee v. The National Bank of the State of Missouri (1870),

46 Mo. 140, 2 Am. Rep. 488.

In re Barriero (1932), 125 Cal. App. 153, 13 P. (2d)

1017.

Thus without any affirmative action of the state, the federal

statute could have authorized a conversion of City Trust Company

into a national bank without disturbing its identity. After this

13

conversion the same identity could have been preserved upon con-

solidation with Howard National Bank.

Cannon v. Dixon (C. C. A. 4, 1940), 115 F. (2d) 913.

It would be strange indeed if it were the intent of Congress

that direct consolidation should be less effective than conversion

followed by consolidation, to preserve a continued corporate iden-

tity within the consolidated national bank.

After the consolidations considered in the above cited Ohio,

Michigan and Circuit Court of Appeals cases had been effected,

and before the times of the decisions, amendment had been inserted

in the federal statute which in terms provided that ‘‘upon such a

consolidation or upon a consolidation of two or more national

banking associations under section 33 of this title, the corporate

existence of each of the constituent banks and national banking as-

sociations participating in such consolidation shall be merged into

and continued in the consolidated national banking association and

the consolidated association shall be deemed to be the same corpora-

ton as each other constituent institution.” And that the con-

solidated corporation ‘‘without any order or other action on the

part of any court or otherwise, shall hold and enjoy the same and

all rights of property, franchises, and interests including appoint-

ments, designations, and nominations and all other rights and in-

terests as trustee, executor, administrator,” etc.

The amendment also contained considerable changes with re-

spect to the rights of stockholders and other matters.

Before this insertion there had been no provision with respect

tothe transfer of fiduciary capacity in the case of the consolidation

of national banks.

The amendment was contained in the Act of June 16, 1933, c.

89, § 24, 48 Stat. 100 and originated in the House Bill. The report

of the House committee as to this change (Report No. 150 May

1933, to accompany House Rule 5661) merely says:

14

“This section also amends such act with respect to the

property rights and the duties and powers of consolidated

national banking institutions.”

Thus with respect to the continuance of the identity of a con-

stituent bank in a consolidated national bank, the act amplifies the

statement but does not appear to have been intended to change

existing law. The amendment in this regard falls within that

class of legislative changes which was referred to by this court

when it said:

“We think it clear that the provision of the later act was

intended to clarify the former rather than to change its im-

port...

Lawrence v. Shaw, 300 U. S. 245, 249, 57 S. Ct. 443, 81

L. ed. 623.

That this was the view of the Circuit Court of Appeals for

the 4th Circuit because it is indicated by its language used after

the amendment, with reference to a consolidation before the amen¢-

ment ;

“ ... the great weight of authority is to the effect that

in a consolidation of two national banks the identity of the

banks is continued in the consolidated bank.

‘The purpose of the federal statute as to consolidation of

national banks is to continue the identity of the old national

bank in the bank into which it is consolidated.’ ”’

Cannon v. Dixon (1940), 115 Fed. (2d) 913.

In the Ohio case above cited in was urged that at the time of

consolidation no statute provided any continuance of the state cor-

porate entity in the consolidated bank and that subsequently the

Ohio Legislature so provided. The Ohio Court said:

“The defendants insist upon implication that the Legisla-

ture thereby manifested the intention to change the existing

law. The difficulty with this contention is that there 's

15

nothing in this language or in the context to so indicate.

Legislatures frequently reduce existing general rules of law

to statutory form.”

Central United National Bank v. Abbott, 135 Ohio (1939),

37, 42,18 N. E. (2d) 981, 983.

The language of the Ohio court is as applicable to the amend-

ment of the national act as it is to the state legislation.

Vv

NO STATE MAY BURDEN OR CONTROL A NA-

TIONAL BANK OR IMPAIR ITS EFFICIENCY TO EXER-

CISE ITS POWERS UNDER THE LAWS OF THE

UNITED STATES.

NO STATE MAY TAX A NATIONAL BANK, DI-

RECTLY OR INDIRECTLY EXCEPT AS CONGRESS

PERMITS.

The immunity of national banks from state control arises

out of the paramount character of the national sovereignty within

its jurisdiction and the immunity from taxation is a part of the

broader immunity. A short extract from the brief filed by this

petitioner in the Vermont Supreme Court, printed as an appendix

hereto, discloses the claim which this petitioner made below in sup-

port of its pleading.

A

A state may not control or share in the control of a national

bank as an instrumentality of the United States.

The Vermont Supreme Court holds that the federal statute

authorizing consolidation of state and national banks may operate

in Vermont and that it is not in contravention of the laws of that

state. But it asserts that notwithstanding the legal consolidation,

the state retains the power to regulate, control, tax and destroy a

state corporation after it has been consolidated into a national bank.

16

It thus asserts that the national government is without power to

protect from state injury, the national instrumentality created, un-

less the state expressly abdicates its power. But this is in sharp

conflict with correct legal principles.

The paramount authority of the United States with refer-

ence to national banks and their immunity from any kind of state

control except to the extent which Congress may authorize, has

been frequently stated by this Court. It is true, of course, that

the activities and transactions of national banks in their daily

course of business are governed to a large extent by state law, but

state laws may not operate when “they expressly conflict with the

laws of the United States or frustrate the purpose for which the

national banks are created, or impair their efficiency to discharge

the duties imposed upon them by the laws of the United States.”

McClellan v. Chipman, 164 U. S. 347, 17 S. Ct. 85.

Davis v. Elmira Savings Bank, 161 U.S. 175, 16 S. Ct.

502, 40 L. ed. 700.

See, also, Smith v. Kansas City T & T Co., 255 U.S. 180,

208, 41 S. Ct. 243, 65 L. ed. 577.

In a case dealing with taxation of national banks under a state

statute claimed to be in violation of their rights under federal law,

this court held that the question was not oné of constitutionality

of the state statute but of its conflict with federal law. It said:

“The declaration of the supremacy clause (Article VI, cl. 2 of the

Constitution ) gives superiority to valid federal acts over conflicting

state statutes.”

Ex parte Bransford, 310 U. S. 354, 358, 359, 60S. Ct. 947,

84 L. ed. 1249.

So in a case dealing with the enforcement of a stock assessment

against a stockholder of the national bank and to collect from him

a note payable to the bank, this court recently said:

“The national Act (12 U. S.C. A. § 21 et seq.) constitutes

‘by itself a complete system for the establishment and

—_

17

government of national banks’ Cook County National Bank

v. United States, 107 U. S. 445, 448, 2S. Ct. 561, 564, 27

L. ed. 537.”

Deitrick v. Greaney, 309 U.S. 190, 194, 60S. Ct. 480.

In a case which involved the status of a state insolvency law

while a national bankruptcy statute was in effect, this court said:

“It is apparent, without comparison in detail of the pro-

visions of the Bankruptcy Act with those of the Arkansas

statute, that intolerable inconsistences and confusion would

result if that insolvency law be given effect while the na-

tional act is in force. Congress did not intend to give in-

solvent debtors seeking discharge, or their creditors seeking

to collect claims, choice between the relief provided by the

Bankruptcy Act and that specified in state insolvency laws.

States may not pass or enforce laws to interfere with or

complement the Bankruptcy Act or to provide additional or

auxiliary regulations.”

International Shoe Co. v. Pinkus, 278 U.S. 261, 265, 49

S. Ct. 108, 73 L. ed. 318.

The supremacy of the national laws with respect to national

banks and the completeness of that system of laws require that

the government of national banks and all of their corporate affairs

shall be free from “intolerable inconsistencies and confusion”

which would result if the state might exert a power to regulate,

control, tax and destroy a corporation which had been consolidated

with a national bank under national law not in contravention of

statelaw. Indeed the unified control is so essential that this court,

in passing upon a state statute with respect to receipt of deposits

while insolvent, said :

“But we are unable to perceive that Congress intended to

leave the field open for the states to attempt to promote

* the welfare and stability of national banks by direct legis-

lation. If they had such power it would have to be exer-

cised and limited by their own discretion, and confusion -

18

would necessarily result from control possessed and exer-

cised by two independent authorities.”

Easton v. lowa, 188 U.S. 220, 232, 23'S. Ct. 288, 47 L. ed.

452.

Petitioner therefore submits that the national power to effectu-

ate complete consolidation when not in contravention of state law,

is not dependent upon the state’s assent and is inconsistent with a

continuance of state control.

B

The states are precluded from burdening a national bank by

direct or indirect taxation, except as Congress permits.

In Owensboro National Bank v. Owensboro, 173 U. 5S. 664.

666, 43 L. ed. 850, 852, 19 S. Ct. 537, this court had under con-

sideration the validity of a franchise tax assessed upon a national

bank. In denying the tax, it applied the rule enunciated by this

court in Davis v. Elmira Savings Bank (supra), and applied to the

Bank of the United States in W’Culloch v. Maryland, + Wheaton,

16, 4 L. ed. 579, and Osborn v. Bank of the United States, 9

Wheaton 738, 6 L. ed. 204. After stating the rule of immunity

from state interference, the court said :

“It follows then necessarily from these conclusions that

these respective states would be wholly without power to

levy any tax, either direct or indirect,* upon the national

banks, their property, assets, or franchises, were it not for

the permissive legislation of Congress.” (173 U.S. 668.)

It was the decision in the Owensboro case, since frequently

quoted, that the federal statute permitting taxation “prescribes

the full measure of the power of the several states to impose taxes

upon national banking associations or their stockholders. Any

assessment not in conformity is unauthorized and invalid.”

First National Bank of Gulfport v. Adams, 258 U. S. 362,

364, 42 S. Ct. 323, 66 L. ed. 661.

* Italics supplied.

—

19

Bank of California vy. Richardson, 248 U.S. 476, 39S. Ct.

165, 63 L. ed. 372.

Maricopa County v. Valley National Bank, No, 449, De-

cided March 1, 1943, 63S. Ct. 587.

In determining whether a national instrumentality is subjected

to an unlawful state tax, the court looks to the incidence of the

burden, not merely to the designation of the taxpayer. “The per-

son liable for the tax, primarily, cannot always be said to be the

real taxpayer. The taxpayer is the person ultimately liable for the

tax itself.”

Colorado National Bank v. Bedford, 310 U.S. 41, 52, 60

S. Ct. 800, 84 L. ed. 1067, citing Stahman v. Vidal, 305

U.S. 61, 59S. Ct. 41, 83 L. ed. 41.

And see Bank of California N. A. v. Richardson, 248 U.S.

476, 485, 39 §. Ct. 165, 63 L. ed. 372.

Federal Land Bank v. Crossland, 261 U.S. 374, 43 S. Ct.

385, 67 L. ed. 703.

Pittman v. Home Owners Loan Corp., 308 U. S. 21, 60

S. Ct. 15, 21, 84 L. ed. 11.

This immunity from tax burden is protected from impairment

of its functions. In the case last named this Court said:

“Congress has not only the power to create a corporation

to facilitate the performance of governmnetal functions,

but has the power to protect the operations thus validly

authorized. ‘A power to create implies a power to pre-

serve.” McCulloch v. Maryland, supra, 4 Wheat. Page

426, 4 L. ed. 579.”

In striking down a sales tax upon purchases by federal land

hanks in furtherance of its lending power this Court recently said :

‘

‘.... when Congress constitutionally creates a corporation

through which the federal government lawfully acts, the

activities of such corporation are governmental.”

Federal Land Bank v. Bismark Lumber Co., 314 U. S. 95,

102, 62 S. Ct. 1, 86 L. ed. 146.

Thus the protection goes to all functions.

20

VI

THE ACTS OF THE STATE OF VERMONT IN Iy.

POSING A LICENSE TAX UPON CITY TRUST Coy.

PANY AFTER ITS CONSOLIDATION AND IN REVOK.

ING ITS CHARTER CONSTITUTED A BURDEN UPON

THE CONSOLIDATED NATIONAL BANK WHICH VIO.

LATED ITS IMMUNITIES AND IMPAIRED ITS EFFIC.

ENCY TO EXERCISE ITS POWERS CONFERRED By

NATIONAL LAW.

The Vermont Supreme Court sanctioned the control of the

state corporation, after consolidation, exercised by the state

through a license tax, nominally upon the constituent state bank

but actually upon the consolidated national bank, and _ through

denial to the national bank, if it failed to.pay that tax, of the right

to continue to enjoy, through the state bank, rights which the

national law conferred upon the national bank.

A

The tax which operated to destroy the constituent state bank

was in effect a tax upon Howard National Bank and Trust Com-

pany.

The consolidated national bank was under the compulsion of

paying the tax, if valid, to protect its powers and rights, whatever

the status of the state corporation,—whether the tax was upon the

right of a constituent part of the consolidated national bank to con-

tinue to preserve its identity within the consolidated bank, or was

a tax upon a franchise not integrated with the consolidated national

bank but held by it as a right in the nature of property.

1. The state corporation had neither the means nor the c-

pacity to pay a separate tax.

As shown above (I, 1) City Trust Company had been validly

consolidated into Howard National Bank and Trust Company.

All of the affairs of the constituent state bank were under the

_—

21

management of the consolidated bank (supra 1, 3). All of its

property, general and special, and all of its rights had passed to

the consolidated bank and all of its business.* Thus, independ-

ently of the consolidated bank, the constituent state bank had no

capital, property or assets, no “business,”’ no stockholders, no

oficers. Whatever affected its finances or its business equally

affected the consolidated bank. None of these foregoing facts

find denial in the opinion of the state court.

2. If the charter rights of the state corporation did not merge

in the consolidated national bank it acquired rights in them. In

effect the two banks became one as contemplated by the federal

statute. A tax on the state franchise was a tax on a franchise

owned by a national bank.

The Vermont Courts said that “there was no statute of this

state permitting the transfer of the City Trust Company's right to

bea corporation. This right, therefore, temains subject to our

law.” (Op. par. 19, Rec. 57.)

The Vermont court does not say, and does not imply, that the

charter franchise remained unaffected by the consolidation.

It cannot have meant that the persons named in the charter or

the former stockholders retained a right to do business as a cor-

poration independently of the consolidated corporation, so that

after the consolidation there were, as before, two banks, each en-

titled to function indepentently of the other.

*The Vermont Court recognized that ‘the consolidation was

not a sale, lease or exchange of assets,” citing ‘Petition of

Worcester County National Bank, 263 Mass. 444, 162 N. E. 217,

219." That case holds that a similar Massachusetts statute did

not apply to a similar consolidation but a statutory provision that

“The charter of a trust company, the business of which shall... .

be consolidated or merged with or absorbed by another bank or

trust company shall be valid... . The Vermont court thus indi-

cates that all the “business” of the constituent bank passed to the

consolidated bank as an incident of consolidation. Certainly such

was the effect of consolidation under the federal statute.

22

It cannot have meant that the stockholders of the state bank

who had taken the steps necessary to merge the business of th

state bank with the national bank, were at liberty to conduct a

banking business as “City Trust Company” by virtue of the charter

which City Trust Company held before the consolidation.

At the least, the acts of the stockholders, taken under th

authority of the national law, operated through the national law to

vest in the consolidated corporation ownership of the proper

rights in the state corporate franchise. This construction is with-

in the express terms of the federal statute. It declares that “a

.... franchises shall be transferred to and vested in such nationa!

banking associations” which shall “hold and enjoy them,’—la»-

guage apposite to ownership of property rights. Under such «

constuction the corporate franchise passes under the control of th

national bank. It becomes a part of the mass of assets whic!

the bank owns and manages. The benefits of that ownership, an¢

the right to them, are the property of the bank. This property i

the corporate franchise created by the state and the benefits thereof,

is held with the same incidents as other property, held by a national

bank.

In such circumstances the two banks would become one, witha

single ownership, a single business and a single management, under

the authority of national law. There would be two charter fran-

chises, but only one bank and that bank a national bank.

A tax upon either charter franchise was a tax upon the national

bank. It was none the less a tax and none the less illegal because

not assessed directly. See, supra, V, B.

If the rights in the state franchise which upon this theory was

held in its entirety by the consolidated national bank had been

divided into shares, and the bank owned a share of the stock repre-

senting the franchise and the other property of the state corpora-

tion, it could not have been taxed on account of that share. Bank

of California v. Richardson, 248 U. S. 476, 39 St. Ct. 165, 63

L. ed. 372. There is an entire absence of reason why the bank

23

should bear the burden of the tax upon the gross franchise when it

could not be taxed with respect to ownership of any part.

B

The destruction of the charter of City Trust Company um-

paired the right of Howard National Bank and Trust Company to

perform its functions and exercise the powers conferred upon it by

national law and deprived it of benefits therefrom.

As indicated above (I, 2) the Vermont Court held that no

vacancy occurred in the office of executor of the Watkins’ will

until City Trust Company ceased to exist. Thus, the Court said:

“Its authority as executor was thereupon extinguished.” (Op.

par. 20, Rec. 58.)

The assets of the estate were in the custody of the consolidated

hank. The consolidated bank had an interest in them as the result

of consolidation. Thus, this Court said in /.x parte Worcester

County National Bank (279 U.S. at 360):

“Because of the interest of the national bank in all of the

assets of the Trust Company, including the estate at bar,

transferred to its custody, the bank would seem to have

a right to make such an application to the probate court

and await action of that court.’ (The application referred

to was for appointment as administrator because the charter

of the state bank which, previous to consolidation had been

administrator, was made void by statute at the time of con-

solidation. )

In the interval of more than a year from the date of consolidation

to the date of revocation of the charter of City Trust Company,

April 1, 1932, the duties of the executor must of necessity have

been performed by the consolidated bank. Otherwise the admin-

istration of the estate would have been completely immobilized dur-

ing this entire period. City Trust Company having been enabled

through the consolidated bank to perform the functions of an

executor, was entitled to payment for that service but City Trust

Company could have no separate treasury because of the effect of

24

the consolidation. The emoluments of the office of executor

would inure to the benefit of the consolidated bank. Thus, the

consolidated bank in the right of its constituent state bank was

performing the duties and entitled to receive the emoluments of the

office of executor.

Whether the state bank entity was merged in the national

association or its franchise held as in the nature of a property right,

in either event the continued existence of City Trust Company per-

mitted the consolidated bank to exercise through the Trust Com-

pany entity, fiduciary powers conferred upon national banks by

national law. Destruction of City Trust Company destroyed the

opportunity to exercise those powers in the instant case, if the

national bank could not itself succeed as executor.

C.

The tax sanctioned by the Vermont court, in effect upon the

consolidated national bank, was illegal as a tax not within the per-

mission of Congress.

1. The State of Vermont, in 1932 and since, has included divi-

dends derived from shares of national banks located within the

state in the taxable income of the owners or holders (Subd. II of

Sec. 3 of Part I, read with Sec. 18 of Part II of No. 17 of the Acts

of 1931). By the provisions of subd. (e) of said subd. I] of

Sec. 3, dividends from domestic corporations taxed on account of

their franchises are exempt from inclusion in individual income for

taxation.

By the terms of the federal statute* the imposition of this

method of taxing national banks or their stock is in lieu of any

other tax except upon real estate.

The tax involved in the instant case is not a tax upon real

estate. It is not a tax such as Congress has authorized, even if it

were the sole tax assessed against the national bank.

*R. S. Sec. 5219 as amended March 4, 1923, c. 267, 42 Stat. 1499 and March

25, 1936, c. 88, 44 Stat. 223, subd. 1 (a) 12 U.S. C. A. Sec. 548, subd. 1 (a).

25

2. The tax here challenged is a corporate license tax of arbi-

trary amount, which may not be imposed with respect to activity

of corporations which are entitled to do business in the State of

Vermont, by virtue of paramount federal law.

In International Text Book Company v. Lynch, 81 Vt. 101,

69 Atl. 541, reversed, 218 U. S. 664, 31S. Ct. 225, 54 L. ed. 1201,

the Vermont Supreme Court and this court had under considera-

tion the license tax statute invoked in this case as the basis of

destruction of the state corporation.

Both the State Supreme Court and this Court recognized that

the tax was imposed upon the right of a foreign corporation to do

business in the state as a corporation. Both recognized that the

tax was invalid if the corporation had a right to do business in

the state without the permission of the state. The question turned

upon whether the business done was iriterstate commerce. This

court held the business to be interstate and the tax invalid upon

the authority of Jnternational Text Book Co. v. Pigg, 217 U.S.

91, 30S. Ct. 481, 54 L. ed. 678.

It is thus the settled law of this court that the State of Vermont

may not impose the tax involved in this case upon a corporation

which functions within the state under sanction of the law or Con-

stitution of the United States.

D

The tax here involved was not within the permission of

Congress and is an unauthorised burden upon the exercics of

rights and privileges conferred by paramount federal law.

In any aspect, the tax sanctioned by the state court is beyond

the power of the state because “the measure adopted is essentially

inimical to national banks, frustrating the purpose of the national

legislation, or impairing their efficiency as federal agencies.”

Clement National Bank v. Vermont, 231 U.S. 120, 135, 34

S. Ct. 31, 58 L. ed. 147.

26

Bank of California v. Richardson, 248 U.S. 476, 483, 39

S.Ct. 165, 63 L. ed. 372.

The fact that the tax is not incurred unless the taxpayer elects

to act to protect itself from other losses or damages makes it no

less burdensome than if unconditionally assessed.

Federal Land Bank vy. Crossland, 261 U.S. 374, 43S. Ct

R. 385.

Pittman v. H. O. L.C., 308 U.S. 21, 60S. Ct. 15, 84 L. ed.

8.

Louisville Gas & Electric Co. v. Coleman, 277 U. S. 32,

48 S. Ct. 423, 72 L. ed. 770.

Vil

THE DETERMINATION BY THE VERMONT COURT

THAT THE CONSOLIDATED BANK DID NOT BECOME

EXECUTOR IN THE RIGHT OF THE CONSTITUENT

STATE BANK WAS AN ERRONEOUS DECISION UPON

A QUESTION RAISED UNDER THE CONSTITUTION

AND LAWS GF’ THE UNITED STATES.

The probate law of Vermont is to be determined by the courts

of that state and that determination is binding on the federal

courts. The application of the national banking laws to the state

probate law, so determined, is a question of federal rather than

state law.

Here the determination of the non-federal question will not

sustain the judgment without the determination of the operation

and effect of the national law. It follows that this court may re

view and redetermine whether the executorship vested in the con-

solidated bank. See

Ex parte Worcester National Bank, supra (279 U. S. 347

at 359, 49 S. Ct. 368, 73 L. ed. 733.

Abie State Bank v. Weaver, 282 U. S. 765, 773, 51 S.C

252, 75 L. ed. 690.

_—

27 .

1. The state court determined that the consolidated bank did

not become the legal executor because it was not named in the will.

The court held that under Vermont law an executor is one

“appointed as such by the testator in his will. The probate court

has no power of choice’’ and there is no right of assignment or

succession. (Op. par. 17, Rec. 50-51.)

The Vermont court points out that by statute there is in

Vermont no right of succession of an executor or administrator

of a deceased executor. No other provision of Vermont law

which varies from generally accepted rules of executorship is sug-

gested, unless it is by the court's denial that a testator who names

acorporation as an executor contemplates and assents to consoli-

dation and merger. Neither proposition is counter to the right of

a corporate executor, continued in life in a consolidation, to con-

tinue to hold the office of executor.

The Vermont Court held that the executorship of City Trust

Company continued after consolidation until that corporation was

dissolved, as discussed above, notwithstanding the facts show that

the consolidated bank had all the assets, that its management was

the management of the state bank and that the constituent state

bank neither did, nor could do, an independent business.

If the executorship of City Trust Company could continue

when all its assets including the assets of the estate were in the

possession of the consolidated bank and it neither had, nor could

have, independent management or an independent business, it is

clear that the executorship could continue if the City Trust Com-

pany’s corporate entity continued within, rather than outside, the

consolidated bank. The denial of the executorship to the consoli-

dated bank is because it was a different corporation than the state

bank which was named as executor. If, however, the Vermont

Court had determined that the whole corporate entity of the state

bank had been taken over and persisted in the consolidated national

bank, it must have reached the conclusion that the consolidated

bank was the corporation named in the will and therefore was the

executor.

—

28

The right of the consolidated bank to executorship is thus

dependent upon the continuance of the corporate entity of the state

bank within the consolidated bank.

2. The intent and the effect of the federal statute as to consoli-

dation was to provide that the state corporate entity shall continue

in the consolidated national bank.

This intent is discussed above under “IV.” As there shown it

was the expressed intent of Congress that “all” franchises of the

state bank should continue in the consolidated national bank to

use the language of the Act “in the same manner and to the same

extent as was held and enjoyed by such State... . bank.” The

persistence of the state entity in the national bank notwithstanding

the change in charter was a concept long before established by

this court in conversion cases (National Bank v. Claggett (1891),

141 U. S. 520, and Michigan Insurance Bank v. Eldred (1892),

143 U. S. 293) and must be deemed to have been within the knowl

edge of Congress. In Ex parte Worcester County National

Bank, supra (279 U. S. 347), effect could not be given to this in-

tention because of the controlling fact that continuance of the state

corporate entity was in contravention of the statute law of the

state. But other courts have held that the state entity continued

in the consolidated national bank as a consequence of consolidation

effected under the statute as it stood when the consolidation here

involved was effected. (C entral United National Bank v. Abbott,

supra, 135 Ohio St. 37; Guardian Depositors Corporation v. Cur-

rie, supra, 292 Mich. 549, 560.) The Circuit Court of Appeals

of the Fourth Circuit has reached a similar conclusion with respect

to the continuance of the consolidating corporations when national

banks consolidate (Cannon v. Dixon, 115 F. (2d) 913).

Petitioner therefore urges that, since the Vermont Court has

determined that consolidation under the federal statute was not in

contravention of Vermont law, that statute operated to continue

the state corporate entity within the consolidated national bank;

29

and that the consolidated national bank was, therefore, the person

named as executor and holding the office of executor.

3. Effect should have been given to the intent of the national

legislation and thereby the executorship recognised as continuing

in the consolidated national bank.

Since, as held by the Vermont Court, City Trust Compamy con-

tinued as executor, and, since, as intended by the national statute,

City Trust Company continued, with identity preserved, in the con-

solidated national bank, the national bank was the executor ‘‘in the

same manner and to the same extent” as its constituent entity City

Trust Company had been. This was the conclusion reached by

the Florida court in

Adams vy. Atlantic National Bank (1934), 115 Fla. 399,

155 S. 648.

It is in harmony, as pointed out by the Florida Court, with the

decision of this court in Ex parte Worcester County National

Bank, supra, and with general principles of law as to consolidation

where the constituent entities are preserved in the consolidated cor-

poration. See Thomas v. National Bank, 187 Wash. 521, 60 P.

(2d) 264.

The result differs from that reached by the Vermont Court,

not because of the determination of Vermont law by that court,

but by reason of the failure of that court to give effect to the lan-

guage and intent of the federal statute under which the consoli-

dation was effected.

Vill

A CORRECT DECISION OF THE INSTANT CASE IS

OF GENERAL IMPORTANCE.

It is apparent that the decision of this case is of great impor-

tance to petitioner because if the decision of the state court is

allowed to stand, petitioner will not only lose the benefits of the

executorship but be subjected to liabilities as an intermeddler,

i

30

which will have arisen because of its reliance upon the effectiveness

of national legislation.

But the effect of the decision of the Vermont Supreme Court

extends to the situation of a large number of consolidated national

hanks in states where the state charter is not destroyed by consoli-

dation.

If states may exact license taxes from a state corporation the

substance of which has passed into a national corporation, the

power may be exercised without substantial restraint. The es-

sential difference between an operating corporation and such a

shell as the Vermont and Pennsylvania Courts recognize, would

furnish a basis of classification permitting onerous burdens upon

the shells without equally burdening other state corporations.

Thus, it would be difficult, if not impossible, to set limits to the

exercise of the power of the states as to such taxation, if not re-

strained by the immunity of national banks.

The injury which a national bank would suffer from the

destruction of the state corporate entity, might compel payment of

large and burdensome exactions as less injurious than loss of the

property and earning power connected with the state bank. Loss

of guaranties and fiduciary rights, suggested by cases hereinbefore

discussed, are by no means the measure of the possible injury from

destruction of the state entity.

A reasonable protection of instrumentalities of the United

States from injury by the states demands the review and reversal

of the decision of the Vermont Court in the instant case.

Respectfully submitted,

JoserH T. STEARNS, Guy M. Pace,

G. J. MurpHY, 172 College Street,

Both 172 College Street, Burlington, Vt.

Burlington, Vt. Joun J. DESCHENEs,

Of Counsel. 158 Bank Street,

Burlington, Vt.

Attorneys for Petitioner.