Yonkers v. Downey

Background

The dispute involves the Receiver of the First National Bank and Trust Company of Yonkers and several depositors who withdrew funds as the bank faltered in March 1933. The depositors had $277,000 on deposit while the bank had pledged $535,000 in bonds to secure those and other deposits. State officials declared bank holidays in early March, a Conservator took control later in March, and a Receiver assumed charge in January 1934. Withdrawals were made between March 9 and March 28, and general creditors later received fifty percent dividends on their claims.

Reasoning

The Court considered whether a national bank may lawfully pledge assets to secure deposits and whether withdrawals made while the bank was insolvent could be kept by depositors. Relying on prior interpretations of the National Banking Act, the Court found that national banks have no inherent power to pledge assets to secure deposits and that such pledges are ultra vires, or beyond the bank’s authority. The trial court had found the pledges unlawful, the bank insolvent by March 6, and the payments to depositors were made with intent to prefer other creditors; the Court accepted those findings and affirmed the judgment for the Receiver.

Real world impact

The decision makes clear that national banks cannot secure deposits by pledging assets and that receivers may reclaim withdrawals made when a bank is insolvent. State rules about when an ultra vires pledge may be set aside do not override the federal rule for national banks, and depositors who took money during insolvency may be required to return it to protect equal treatment of creditors.