FIRST NAT. BANK v. WALKER BANK
Legal provision: 12 U.S.C. 36
Argument of Richard A. Posner
Chief Justice Earl Warren: Number 51, 73 and 88, the First National Bank of Logan versus Walker Bank and Trust Company.
Mr. Posner, you may continue your argument.
Mr. Richard A. Posner: Mr. Chief Justice and may it please the Court.
Yesterday, I urged that Congress and the National Bank Act, Section 36 (c) did not intend to incorporate and make applicable to the national banks all restrictions that a state might impose on branching by state chartered banks.
The Congressional purpose as shown by the history and in the language of the Section 36 (c) was far more limited to protect the policies of those states which feared the consequences of unlimited branch banking and to do so by subjecting the national banks in a state to state law only insofar as the state chooses to limit the scope and extent of branch banking.
If this is a correct analysis then Utah's take over restriction in suit here whereby a state bank may branch anywhere in the state provided only that it does so by taking over by purchase or merger an existing bank is not binding upon the national banks in the state.
Such a restriction does not limit the extent of branch banking in Utah and it does not reflect any policy against unlimited branch banking.
If anything it is designed to accelerate the expansion of large affluent banks throughout the state.
It is true as the Chief Justice observed during the argument yesterday that there is language in the Congressional debates referring to a goal of competitive equality.
That language is indeed the very heart of respondent's case and I should therefore like briefly to summarize the reasons why in our view competitive equality in its literal sense is not the policy of Section 36 (c).
In the first place, the term competitive equality is a rather vague one.
And to be given concrete meaning, it must be viewed in its context in the legislative debates.
The inequality that the opponents of branch banking -- that the opponents of giving branching authority to the national banks feared was that which would result if the national banks enjoyed unlimited statewide branching authority irrespective of limitations of state law.
Now Congress precluded any such drastic inequality by expressly providing in Section 36 (c) as I try to explain in somewhat greater detail yesterday that to the extent a state chooses either to forbid or geographically to circumscribe branch banking within its state, the resulting pattern binds and limits the national banks in the states as well.
This was the equality that Congress sought to create.
There was no purpose of creating a perfect equality and furthermore the goal --
Chief Justice Earl Warren: If I ask -- may I ask what's the specific language in any of the committee documents or debate on the floor bears you out on it?
Mr. Richard A. Posner: Well, we refer to no specific language defining the meaning of the term competitive equality.
We rely upon the tone and the mood of these debates which extended as I mention over ten years in Congress as making clear what it was that Congress had in mind when it adopted certain portions of state law on branching and made it applicable to the national banks.
There is no evidence -- there is no persuasive evidence in the congressional reports that perfect equality between the state and national bank systems of state with respect to branching was intended and furthermore this goal of perfect equality which the respondents placed before this Court is illusory because the national bank system was never meant to be the mirror image of the banking systems in the various states.
The dual banking structure which we have in this country presupposes a great diversity between the two systems in terms of the powers and the supervision and the management of state and national banks.
For example in the Franklin National Bank case in 347 U.S. which we've cited in our brief, New York by statute forbad all commercial banks in the state to advertise for savings account and the court held that limitation inapplicable to the national banks even though the result was to create a certain disparity.
Now, branching is not an exception to this rule of diversity.
Even respondents do not contend that a national bank must apply to Utah's banking commissioner in order to open a new branch in Utah or that the Comptroller of the Currency in passing upon the application of the national bank to branch must use the criteria which guide the state banking commissioner in the performance of his discretionary functions in deciding whether to approve a branch.
Utah's bank commissioner must make a finding that the establishment of a branch would subserve and promote the public convenience and advantage and there is no similar requirement upon the Comptroller --
Justice William J. Brennan: Mr. Posner, I take it the number of the existing banks is a limitation, isn't it, on branching in and of itself under the Utah statute?
That is there may not be more branches than are existing banks because we can't establish a branch without acquiring an existing branch, isn't that so?
Mr. Richard A. Posner: That is correct.
Justice William J. Brennan: Well then why isn't that itself a state policy of limitation on a number of branching?
Mr. Richard A. Posner: That is a -- that is a limitation of sorts but it is not the kind of limitation we think that Congress had in mind in --
Justice William J. Brennan: Well, I gather if -- are they -- there are more familiar limitation as I recall it is that you may not have branches except in a municipality or a countywide limitation or that sort of thing, isn't it?
Mr. Richard A. Posner: Right.
Justice William J. Brennan: Here, this may be a different form because I gather branching may be statewide in Utah under Utah's statute but limited to the number of existing banks at the time that the bank which wants the branch wants to acquire one branch, isn't that right?
Mr. Richard A. Posner: That is -- that is a form of limitation but what Congress -- what many in Congress feared was a state bank -- was a national bank that would spread itself throughout the state by branching, a city bank --
Justice William J. Brennan: Well, (Voice Overlap) Utah limitation though, if you prevail, isn't that precisely that can -- what can happen in Utah?
In other words, -- in other words, national banks may branch by establishing new locations, may they not, if you're right?
Mr. Richard A. Posner: That -- that's true and that we say is proper because Utah has not adopted the kind of restrictive policy on branching to which Congress decided to defer.
It has not said that we believe that unlimited statewide branch banking is an evil that it conduces to these problems of absentee ownership.
It looks with equanimity upon statewide branching.
That being so, we think the national banks may properly branch throughout the state and that the method of branching is not the kind of restriction which Congress has adopted.
Now, it's quite true as you said, that the result will be some disparity in the powers of state and national banks and I point out only that the greatest disparity and one inherent in this dual banking system is that which results from the different attitudes which banking authorities take towards their responsibilities.
Chief Justice Earl Warren: May I ask Mr. Posner, suppose the State of Utah said that in cities of 20,000 like this city was that banks could have one but no more than one branch in such cities, would the national banks and the authorized have as many branches they wanted?
Mr. Richard A. Posner: We would -- we would suggest that this kind of restriction probably does not find the national banks simply --
Chief Justice Earl Warren: Do you suggest -- do you argue that here --
Mr. Richard A. Posner: I suggest --
Chief Justice Earl Warren: -- that is -- the answer is no, that it would not be a restriction?
Mr. Richard A. Posner: I don't press it with great force here because I don't think it is necessary for the Court to decide that question and we recognize that it presents a more difficult problem because after all the restriction you put is one which does limit and confine branch banking in the state.
It is -- it expresses some kind of policy concerned with unlimited branch banking, but where Utah says that we will tolerate unlimited branch banking so long as it is effectuated by means of mergers, that is a -- that reflects a wholly different policy.
Chief Justice Earl Warren: But Utah has the right to determine how many banks shall be in any community, I take it, than it probably has on that through its bank commissioner.
Now, why isn't that just as much the limitation as the Court says only when branch in one community?
What is the fundamental difference there?
Mr. Richard A. Posner: The difference is that if we read the federal statute, it was not designed to place the state and national banks on a plain and complete equality so far as branching is concerned but only to safeguard certain state policies and specifically the policies of those states which fear an unlimited statewide branching pattern whereby a few large city banks may be able to dominate the entire state banking industry.
If Utah have --
Chief Justice Earl Warren: But is there any fundamental difference between those two situations that I put to you?
Mr. Richard A. Posner: Yes, I think so because if a state says that no bank may have more than one branch, it is plainly limiting the extent to which branch banking can take hold in the state but if what the state provides is that you may have as branches as you want, anywhere in the state, so long as you establish the branch by purchasing an existing bank, it is not circumscribing or limiting the branch banking pattern of the state.
It is permitting city -- large city banks like the Walker Bank in Salt Lake City to extend itself through branching, through establishing numerous branches all over the state.
And we feel that once a state makes that determination that its banks shall be permitted to extend themselves by branching throughout the state in any numbers that there are no further restrictions upon the national banks of the state.
Now, it's perfectly true that the result of this is a certain disparity in the powers of the state and national banks of a state.
I suggest only that this disparity is inherent in the system because --
Justice William J. Brennan: May I ask this Mr. Posner.
I was thinking now only about state banks, suppose you have a community, would you have no principal office or a state bank, but you do have branch offices of some state banks.
Mr. Richard A. Posner: Correct.
Justice William J. Brennan: May other state banks go into that community and establish branches although there are no principal offices that they can acquire?
Mr. Richard A. Posner: Yes.
Justice William J. Brennan: They may?
Mr. Richard A. Posner: That is an exception to the Utah statute.
Justice William J. Brennan: Well, that kind allows unlimited branching then does it subject of course to the discussion of the state banking commissioner?
Mr. Richard A. Posner: Correct.
Justice William J. Brennan: -- branching by state banks in any community where there exist only branch banks.
Mr. Richard A. Posner: Correct.
And this is just -- this is but another indication that we do not find in Utah law any kind of policy of restricting branching as such.
There is a policy here of protecting existing banks from too much competition in the form of branching.
That is the real policy and it is not the kind of policy that to which we believe Congress meant to defer.
Justice Tom C. Clark: Oh, I thought you said it was only a (Inaudible) banks in cities?
Mr. Richard A. Posner: Now that Mr. Justice Clark is a second exception in cities of the first class and in unincorporated areas of counties where such cities are located.
Branching may be done by state banks without any limitation.
They need not take over an existing bank.
It so happens that Salt Lake City is at the present time the only first class city.
There, branching is completely unlimited as it is in those cities which have no branch main offices.
Justice Hugo L. Black: And then outside of Salt Lake and the only way they can branch is that -- if it take over an existing bank?
Mr. Richard A. Posner: In any true -- in any city or town where there is at least one main office of a bank.
Even if it's the bank that wants to establish the branch that has the only main office, it is subject to a limitation.
Justice William J. Brennan: Well, then it really comes down to this does it that state banks may branch without restriction sort of the approval of a state commission in all communities of Utah except those where there are principal offices of banks located and in those instances they may branch, say for Salt Lake City wholly by acquisition of the principal office?
Mr. Richard A. Posner: That's -- that applies to all cities and counties except Salt Lake City.
Justice William J. Brennan: That's in Salt Lake City, (Voice Overlap) --
Justice William J. Brennan: Correct.
Justice William J. Brennan: Is that right?
Mr. Richard A. Posner: That's correct.
Justice Hugo L. Black: It looks like that would be a parcel then to protect the smaller community banks on the city?
Mr. Richard A. Posner: I would think so and bearing in mind that this was a depression measure, this Utah law passed in 1933, I suppose the feeling was that if banks were free to establish branches by opening new facilities and putting a new competitive factor into the community that might be too much competition where if it just takes over an existing bank there's no change.
All we say is that this kind of policy was not on the contemplation of Congress when it adopted certain portions of state law and made them applicable to the national banks.
Chief Justice Earl Warren: Mr. Perry.
Argument of Theodore S. Perry
Mr. Theodore S. Perry: Mr. Chief Justice and may it please the Court.
The precise issue in First National Bank versus Walker Bank is whether or not Congress intended that a state could impose restrictions on a national bank branching in its own community by which restrictions would permit all other state banks to branch in that community.
We'd like first to discuss briefly a theory of competitive equality as it applies to the First National Bank.
It disturbs the First National Bank because all we are trying to do is compete equally with Walker Bank.
Automobile banking has come to Logan.
The two largest banks in the State of Utah have branches in Logan, Utah.
Each of the branches have a drive-in office located about a half a block away for automobile customers to drive-in and make deposits.
The customers of the First National Bank also want this convenience.
We looked at the branch banking statute and noted in Subdivision F that any additional office for receiving deposits or paying checks is a branch and so we felt the only proper course would be to apply for a branch.
We looked at the branch banking law, it said two conditions are required.
One, state law must expressly authorize branch banking in that community at that time.
Two, the Comptroller of the Currency must approve.
Informally in 1962, we paid a visit to the state bank commissioner and asked him, are state banks expressly authorized to branch in a city, the second class as the Logan.
His answer was yes.
In fact he said, he had just authorized Provo State Bank to branch in the City of Provo.
It was the only unit bank in Provo and it had established a branch up in the BYU campus.
We next went to the Comptroller of the Currency and he approved our branch.
Now, we opened and six months passed and nobody made any objection to our branch and I suppose that the Provo State Bank case has never arisen, this case would not be before this Court at this time.
Suppose ten years had passed and Walker Bank versus Taylor came up, would the directors of the First National Bank be required to close their branch?
I presume if the Tenth Circuit Court of Appeals of the law, we would.
But suppose the State Supreme Court later reverses itself then what's the responsibility of the directors of the stockholders?
Our picture of another fact situation, suppose this 1956.
At that time, in Logan, the Cache Valley Banking Company was in existence.
Now, suppose the First National Bank wanted to branch by taking over the Cache Valley Banking Company.
I assume under the doctrine of the United States versus Philadelphia National Bank, the Department of Justice would say no because that would remove competition in Logan and yet we have to do that as state law applies and so we're faced with an impossible situation in Utah.
If state law governs, then we can't comply with federal law.
If we comply with federal law, then we violate state law.
And so the effect is, that if the Tenth Circuit Court of Appeals has affirmed national banks cannot branch within the limits of their own hometown which is the intent of the McFadden Act to permit them to branch there if states bank could branch in that city.
Now, we think it's clear that Congress did not intend that all state restrictions should apply.
When Congress passed the McFadden Act, they said number one, you are subject to population restrictions.
In other words, in cities of less than 25,000, a national bank cannot have a branch.
This provision is later removed but it shows the intent of Congress at that time that it was established in the restrictions for the national banks.
It wasn't looking to state law for restrictions.
Congress also said if a national bank establishes one branch it has to have the same capital requirements as if there were two National Banks.
Now, we look in Section 51 and it says you have to have $240,000.00 in capital to establish two National Banks.
So you'd have to have the same amount to establish one branch.
If you turn to Utah law, if you have a capital of $60,000.00 you can establish a branch.
If you go to North Carolina, in the city the size of Oregon, you have to have $300,000.00.
Now, how can you say that the restrictions are identical if the capital requirements are expressly made different in federal law.
And we turn to subdivision law of the statute leading to with outside branches and Congress specifically makes two restrictions of state law applicable to outside branches, branches outside the community.
They say, first, they're subject to location requirements of state law.
They say secondly, they are subject to capital restrictions of state law, that these restrictions are not imposed on branches organized in the hometown of the national bank.
So it seems to be clear that Congress did not intend that all state restrictions to be applicable.
Justice Abe Fortas: Well, the governing provision of the federal law is 36 (c) (1), isn't it --
Mr. Theodore S. Perry: That is correct.
Justice Abe Fortas: -- in your case?
In 36 (c) (1), permits a national bank to establish and operate a new branch within the limits of the city in which it's located.
If such an establishment in operation or at the time expressly authorized to state banks by the law of the state in question, now literally I suppose that the opponents argued that since a state bank could not establish nor operate a branch in Logan then the national -- you as a national bank could not do so.
What you're saying is that we ought to as I believe Mr. Posner did that we ought to read into that certain qualifications and put a gloss on it based on the intent of Congress.
Mr. Theodore S. Perry: All what we're saying is that you should not read into it in addition because Walker Bank, a state bank, has already branched in Logan under state law, so there is expressed authority to branch in Logan.
Justice Abe Fortas: But Walter did it by merger?
Mr. Theodore S. Perry: That is correct but it still has it expressed authority to branch there.
Justice Abe Fortas: But you're not doing this by merger.
You're doing it under -- in circumstances when a state bank could not do so, is that right?
Mr. Theodore S. Perry: That is correct.
If we were in Provo, under the Provo State Bank situation, Walker Bank versus Taylor, State Supreme Court cases cannot branch even though there's no other unit bank in Logan we can take over.
Now, this theory of competitive equalities, it is cited by the respondents and based on about five subsections of the National Banking Act.
I think a careful reading of each one of these subsections would reveal that there is no theory of competitive equality.
First they cite Section 51.
I've already referred to Section 51 and it expressly states that the capital requirements for federal banks are different than state banks.
It establishes the capital requirements for federal banks.
Only in certain isolated instances is there any similarity between state and federal capitalization requirements.
Next they point to Section 92 (a).
It says -- or they claim it says that a national bank can act as a trustee or an executor unless the state bank can also act.
But this Court held back in 1924 in the case of Missouri versus Duncan that under certain situations, a national bank could act as a trustee even though state law expressly forbid a state bank from acting as trustee.
They also point to Section 85 on interest that this Court held a long time ago in Tiffany versus National Bank of Missouri that under certain situations, the interest rates can be different for national banks and state banks and I am sure anyone who has read the newspapers recently knows that the interest rates are established for federal law for banks and not by state law because it's the federal government who is imposing the interest rate we pay on deposits and not state governments.
So I think there is no theory of competitive equality in the National Banking Act.
Congress originally set up the National Banking Act for a system of national banks and this Court has affirmed again and again that under certain instances, the national bank has privileges that a state bank doesn't have.
And certainly an examination of state law we'll show they have a great many privileges that national banks do not have.
Some of their -- ones that bothers most in Utah is the limitation the amount we could loan to any one customer.
Under federal law, we're restricted to 10%.
This means our large customers have to go elsewhere to make a loan.
But under state law they can go up to 15%.
In real estate loans, there are hardly any limitation on what a state bank can do and we're very severely restricted by national banking laws.
There is no competitive equality the National Banking Act and I think the Court should remember that what we're concerned about here is a national bank which is an instrumentality of the Federal Government.
This Court has said, state laws cannot limit the efficiency of a federal instrumentality in national banks.
The effect of the decision of the Tenth -- Court of -- Circuit Court of Appeals is to limit our efficiency in receiving deposits because as I pointed out in the beginning all they want to do is compete with Walker Bank.
We want to have our small business customers, our farmers, our laborers who don't want to get dressed up when they do their banking, come and have a place where they can make deposits.
That's all we're seeking.
We don't want to put Walker Bank out of business is apparently they're attempting to do to us when we all we want to do is compete equally with them.
And we think the Court examines the law carefully that they will find that we have that right of equal competition with them.
Chief Justice Earl Warren: Mr. Wilson.
Argument of John Wilson
Mr. John Wilson: Mr. Chief Justice and may it please the Court.
I appear for the petitioner in the case from the District of Columbia Circuit Court.
This involves a National Bank in Ogden which is on all floors with a problem confronting a national bank in Logan so that I associate myself with the remarks which have been made by my colleagues in arguing third for the petitioners I have no intention to repeat their arguments.
I have sought to make a contribution to this presented -- invitation today by analyzing a little different situation and that is whether the respondents here are contending for absolute equality or not.
In the lower court in our case, my worthy opponent used the phrase “exact equality.”
He has abandoned that phrase as I see -- as I read in the brief in this Court.
Now, I realize of course with respect to administrative functions of the supervisor of banks that he is not arguing that there must be equality there.
But he seems to be arguing for absolute equality and if he can't maintain this position, he must give way in their position that our position is immeasurably improved by that weakness.
This I think is strengthened by my reference to a portion of the Utah branching statute which has not been discussed before Your Honors yesterday or today and which has only marveled gloss over in the briefs of the respondent.
In the branching section not only is it provided that branching shall be only by taking over or merger, but that the bank to be taken over must be in existence for five years.
Now, all my -- all our worthy opponents on the other side are going to maintain that in order to sustain their theory of absolute equality here that that provision too is imposed upon the Federal Government.
Let me tell you why I speak of this.
We know that in times of financial crisis, whether it be in a community or whether it be in a nation that a very important function of the federal Comptroller has been -- in the case of a failing national bank in a community to prevent that bank from closing its doors by having a strong national bank in the community take over the smaller failing bank and thus save a failure in the community.
Now, my time is short and I would close with a question like this.
If the Congress of the United States in adopting the provisions which we discussed here today intend that the Federal Government in its exercise of powers over federal instrumentalities as national banks are, did it intend that there should be a hamstring, let me call it, of the Federal Government so that it could not exercise this very important function of taking over a failing bank if the failing bank in Utah had not been in existence for five years.
I say that these practical considerations are important for a construction of the statute and for an understanding of the legislative intent because otherwise we get into and argument of “it does, it doesn't” and I have sought for something here that illustrates that the national government which can be supreme in this field will be limited and restricted if this five-year limitation is imposed upon the takeover of a bank in Utah and I would expect my opponents to discuss whether they argue here today that the five-year limitation is equally applicable to the Federal Government.
Justice Abe Fortas: Mr. Wilson, if the position for which you and the other counsel who have argued here thus far contend or adopted, would you expect the state to amend the law so far as state banks are concern?
That is to say if in a -- let's -- supposedly expanding community, the national banks were free to establish branches anywhere they wanted to, would you not expect that the state would in order to maintain the competitive position of the state banks proceed to amend the law so that the state banks would have the similar privilege.
Mr. John Wilson: I would expect them to do that and I would see no vice in that happening.
Justice Abe Fortas: So that what would in effect which we really have here is the question as to whether it seems to me is a question as to whether Congress intended that net -- the state policies with respect to branch banking or a national policy with respect to branch banking would provide it.
Mr. John Wilson: Except that the National Government -- the Congress has laid down certain absolute restrictions such as if a state does not branch, the Federal Government may not branch or in Section 2 of 36 (c) that the state may proscribe the location so that these are the -- these are the absolutes in the statute, otherwise, I -- as I say I associate myself with the discussions of my brethren, my colleagues who take the position that once the permission is granted to branch this is the extent of the limitation.
Chief Justice Earl Warren: In other words, Mr. Wilson, if the state permits any kind of branching, then the national banks can do any kind of branching?
Mr. John Wilson: That's correct sir.
That's my position.
And I think that when Your Honor asked the question of Mr. Posner yesterday, was there any legislative -- any evidence of legislative intent to this effect?
When one reads two of 36 (c) and finds the phrase with respect to branching outside of cities, it says, and subject to the limitations as to location.
I think this is as -- this is as eloquent as a phrase could be used by Congress to show a clear intention that when they wanted to make a restriction, they employed the word restriction and in two they made claim that you cannot branch in the outer portions of the state without the state approving the location.
Chief Justice Earl Warren: Mr. Bell.
Argument of James F. Bell
Mr. James F. Bell: Mr. Chief Justice, may it please the Court.
I represent the respondent, the Commercial Security Bank in cases 73 and 88.
This is the so-called Ogden case arising from the District of Columbia.
Mr. Jones, my colleague, is the counsel for the Walker Bank and Trust Company in 51 which arises in the Tenth Circuit of branches in Logan.
The issues in both cases are identical and it is one of statutory construction.
The principal statute is Section 36 (c) (1) of the National Bank Act which permits the Comptroller of the Currency to approve an application of a national bank for an in-town branch if the establishment of such a branch and I now read from the statutory language which we believe is significant, “is expressly authorized to state banks by the law of the state in question.”
Now, the state in question here is Utah and the applicable provision of the Utah Code reads are follows, “no branch bank shall be established in any city or town in which is located a bank or banks, state or national, unless the bank seeking to establish such branch shall take over an existing bank.”
Now, we read the Utah statute as containing two clear cut provisions.
First of all, it contains a flat prohibition against any de novo branches.
Secondly, it contains permission to operate an acquired bank as a branch following an acquisition.
The first of these provisions is the one applicable in this case.
The First Security National Bank has applied to establish a de novo branch in the City of Ogden which is a city with four existing banks.
And we contend that a de novo branch of a national bank is not expressly authorized by a state statute which prohibits de novo branching in any city with operating banks.
This is basically the decision of the Tenth and D.C. Circuits which are here today.
Justice William J. Brennan: May I ask Mr. Bell, if the --
Mr. James F. Bell: Yes sir.
Mr. James F. Bell: Would that be so in a case where the only existing bank was a branch bank of a state bank?
Justice William J. Brennan: Yes sir.
Mr. James F. Bell: The statute only refers to the word bank.
It does not refer to the word branch and therefore you are correct in your understanding that there may be a branch in a city in Utah in which there are only branches.
The purpose of the Utah statute clearly was to protect the small unit --
Justice William J. Brennan: Well, then that situation where there are only branches, I gather that a national bank may establish?
Mr. James F. Bell: Yes sir because a state bank may do so.
Now, the Comptroller would read the Utah statute differently and I think it's very important to see the two-point program that is followed in terms of the way he construes the Utah statute.
The first thing that he does is to translate a statute that says, “No branch may be established where there is an existing bank except as a result of a merger into a provision that says any branch may be established in a city where there is located an existing branch by the method or procedure of take over.”
Then having established the concept of method or procedure by merger or takeover, he argues that method or procedure are not the type of restrictions to be found under congressional history and in any event ought to be read out of the statute because they are contrary to federal anti trust statutes.
The conclusion therefore that he reaches is that under a statute which says that a national bank may only be authorized to establish a branch if expressly authorized to state banks under state law is that a national bank may establish de novo branches in the city of -- in the State of Utah where there are presently located branches even though such branches are specifically prohibited to state banks.
This is a unique construction by the incumbent Comptroller for 36 years following the passage of the McFadden Act of 1927.
There was competitive equality between national and state banks in the matter of branching.
There are now 11 states other than the State of Utah which have almost identical statutes and they include such important states as New York and Massachusetts.
Now, under the Comptroller's construction, state banks in all of these 12 states face one of two alternatives.
They obviously cannot continue to compete under a situation where their national bank competitors have a fundamental right to branch which they do not and therefore they would be force to convert to national banks thus destroying the dual banking system in 12 states in our country containing a substantial part of the assets of all state banks in the country.
Secondly, they could move to the state legislature and have the state legislature change the established branching policy in every one of these 12 states in order to conform to the Comptroller's ruling.
Accordingly, we believe that the importance of this case to the banking industry cannot be overstated.
In our opinion the central and controlling issue in this case, is the question of congressional intent and that is where I intend to spend the bulk of my time.
But before I do so, I would like to make four brief points with regard to the Comptroller's argument particularly as it was set forth in his brief.
First of all, we do not agree with his translating the Utah statute from a restricted branch banking statute with an exception in the case of a branch resulting from merger into an unrestricted statute through a methodology or procedure of merger.
My colleague, Mr. Jones, will address himself to that point and will demonstrate in the -- on the basis of Utah's Supreme Court decisions construing the Utah statute that this is a restricted prohibitive statute.
Secondly, we really have a deep conceptual problem with the relevancy of the whole argument of the Comptroller because as we understand it, his quarrel is with joining a prohibition against de novo branching on the one hand with a permission to operate a branch resulting from a merger on the other hand.
He attacks this take over provision and says that it was unintended by Congress or it is against federal statutes relating to banking competition.
But if this is knocked out, what is left?
A prohibition against de novo branching in Utah and the Comptroller could improve the application anyway.
Second -- thirdly, we have a deep problem with the arguments that he is advancing even in favor of this proposition because as we understand it, he says that a take over provision encourages bank mergers or in -- which is contrary -- which develops banking concentration.
But the Comptroller has completely lost we submit the difference between a de novo branch and a branch resulting from a merger.
A de novo branch is a completely independent transaction that is considered separately under the statutes by the respective banking agencies.
A branch resulting from a merger that is a take over is by definition something that results from another transaction namely the merger itself.
And Congress has provided in the Sherman Act and in the Clayton Act and in the Bank Merger Act for a thorough study of any bank merger and all the evils of banking concentration etcetera that you read in the Comptroller's brief are all taken care of and handled in the consideration of a merger.
So that the question of what happens to a branch following a merger doesn't even arise until a merger has been considered and studied.
And then state policy says in some states, “You may not continue the branch of the -- the office of the acquiring bank as a branch.”
Or other states such as Utah may say that if a merger has been approved and found to be in the public interest we believe that consideration should be given to the continued operation of the offices of the acquired bank as a merger -- as a branch and fourth and finally we submit that the Comptroller's argument is shot through with self-inconsistency.
The whole thrust of his case relates to banking concentration but let's just look at the facts of this case.
The First Security Bank is the largest bank in Utah.
It has 45 branches in 34 cities.
It has 33% of all of the banking offices in Utah.
It has $360 million in assets which is six times that of the Commercial Security Bank.
Now, what is the result of the Comptroller's construction of the statute in this case?
That the largest branch in the State of Utah now has permission to go out to establish de novo branches in 37 other cities in a state where there are presently state banks operating who would be prohibited from establishing de novo branches themselves in order to meet this competition.
What are Utah banks going to do?
They only have three choices.
They may go and try to acquire a branch by a merger but if they do that that is really encouraging mergers and the encouragement of mergers is not from the take over provision but would result directly from the Comptroller's construction of a statute.
What is the second thing they can do?
They can change their law and have statewide branch banking.
That then would give open sesame to the largest bank in the State of Utah to go out and establish branches anywhere.
What is the third thing they can do?
The legislature can change the statute and abolish all branch banking and that ironically is 180 degrees opposite to what the Comptroller is arguing because he believes that branches encourage competition.
Basically, in our opinion, the whole thrust, the entire thrust of the Comptroller's argument in this case is -- it results from the imposition of an economic theory relating to bank mergers onto de novo branches and results in a misconstruction of a statute in the legislative history.
Now, let's go to the legislative history of Section 36 (c) and this whole question of competitive equality.
Chief Justice Earl Warren: May I ask you a question before you get to that Mr. Bell, please?
Mr. James F. Bell: Yes sir.
Chief Justice Earl Warren: Could I understand you to say that for 36 years, the Comptroller has never asserted the position that is being asserted here?
Mr. James F. Bell: You're absolutely correct sir.
This is a unique and brand new construction of a statute.
I think it's also significant to note that throughout this entire 36 years, there were statutes exactly like those in the Utah statute today.
I would --
Justice William J. Brennan: Either at the time you -- and also this federal statute came on the books?
Mr. James F. Bell: Yes sir.
In our briefs we cite a statute that was in existence at the time of the bank -- of the McFadden Act of 1927 and seven statutes that were in effect at the time of the Banking Act of 1933 which reenacted Section 36 (c) (1).
Justice William J. Brennan: They include New York and Massachusetts?
Mr. James F. Bell: I believe --
Justice William J. Brennan: Don't waste --
Mr. James F. Bell: Massachusetts was I -- as I recall one and I think New York was the other, I'm not sure sir.
I would like to cite if I might before I move directly in the Section 36 (c), a brief historic or economic settlement setting for our argument.
Now, we do not quarrel with the point that I believe Mr. Perry raised that national banks are instrumentalities of the Federal Government and subject to the paramount law of the United States.
This issue was decided in the great constitutional debates of the First and Second Banks of the United States and finally by Mr. Chief Justice Marshall in McCullough versus Maryland in 1890 nor do we quarrel with the proposition that Congress could have if it wanted have barred all applicability of state law so that the pivotable issue here is the question of the extent to which Congress intended to permit the applicability of state law and indeed to adopt state law.
Now, as a matter of practical economic fact, this was a question which Congress had to decide because you cannot have 9500 state banks on the one hand and 4500 national banks on the other hand operating together in a competitive atmosphere if one of the other class of these banks hold substantially greater privileges than the other.
Now, we make -- how -- we make no contention of course that the National Bank Act in any way tries to meet all of these but as I'll show you in a moment they do meet the most important ones.
Now, how could Congress have solved this question?
First of all, it could have completely ignored state law and set up national banks regulation entirely for national banks.
In that case, every time a substantial privilege was granted to a national bank by Congress, 50 state legislatures would have to go into session in order to meet that privilege in order to maintain competitive equality.
Or if one of the 50 states came up with a substantial privilege for the banks in its states and Congress to meet that had to change its law then the other 49 states would have to change their law again and so on.
In addition to this practical problem, there was the question of whether bank branching should be regulated in terms of what regional possibilities may be.
In other words there are instances where a national policy really doesn't fit the banking industry.
And I think the best instance of this for example is in branching.
Some states for example Illinois, they are greatly the Chicago banks branching throughout the states which would put the unit banks out of business.
Accordingly in Illinois all branch banking is forbidden.
In a state like Maryland for example, where there is no one city that dominates the whole state, statewide branch banking is permitted so that you have 16 states in the union that prohibit all branching.
Twelve which permits statewide branching and then 22 of them have a middle ground.
They have various county provisions, numbers of banks, distances from banks, Salt Lake City for example in Utah may be unlimited branching but it's restricted in the rest of the state.
Now, the alternative to simply ignoring state law was to adopt what Mr. Justice Brandeis called the policy of equalization.
And in the Lewis and Fidelity case, which we have cited in page 14 and 15 of our briefs, Mr. Justice Brandeis in construing a 1930 amendment to the National Bank Act as to whether or not the security permitted there if a state deposits, was they restricted or a broad security specifically went through several provisions in the National Bank Act where Congress had adopted state law in -- either in its entirety or in other forms as the standard for the regulation of national bank branches.
Now this is exactly the way the law stands today.
Now, nowhere that we've been able to find in the entire history of a National Bank Act has there ever been a more definite and clear cut establishment of the policy of equalization or competitive equality between national and state banks by the adoption of state law as the standard for branches of national banks then in the great banking debates of the McFadden Act of 1927 and the Banking Act of 1933.
And at pages 18 through 32 of our brief we have outlined in great detail the legislative history with specific statements not implications of tone or generalizations but specifically quoted statements throughout this entire legislative history to establish that fact.
Now I won't repeat that legislative history in it's entirely obviously in my argument but I would like to make one or two salient points to demonstrate that error in the Comptroller's argument that Congress in fact intended to adopt competitive inequality in a state with the Utah type statute.
Now, his argument as we understand it runs something like this.
The legislative history revolve exclusively around a debate between the proponents of branch banking seeking to extend this as a useful form of banking and the opponents of branch banking who feared banking concentration.
Then he says that Section 36 (c) represents a compromise involving a concession of proponents to opponents and that a takeover provision would be associated and I quote “in the minds of the opponents” with banking concentration and therefore was not intended as a restriction to be applicable to national banks.
In our view this is an interesting but utterly strange and utterly unsupported conception of the legislative history.
Let's go to the McFadden Act of 1927 which is the act involved here.
That legislation did not turn upon any debate as to whether branch banking would be useful or not useful.
It turned upon one simple fact that prior to 1927 the national banks could branch at all and that by about 1923 there were 20 states that permitted branch banking primarily in cities so that when the Comptroller of the Currency in his 1924 report said this, “The question as to whether national banks may be granted the opportunity to meet the competition of state banks in intra-city banking in my opinion involves the question of the perpetuation of the national banking system.”
This was not a debate on economic merits of branch banking.
It was a debate on competitive equality and the survival of the national banking system.
How did Congress solve that problem?
It permitted the national banks to branch within a city.
It permitted by state law and then it restricted the members of the fed -- state number banks of the federal reserve system to intra-city banking thereby establishing competitive equality on intra-city banking.
And when Mr. McFadden, the author of the Bill and I just want to read two sentences because I think these are significant sentences that demonstrate precisely what Congress had in mind in 1927.
The business of banking is a competitive commercial enterprise like any other business which makes a profit to the rendition of service to the public.
Under our financial system where in each state of the union there are two systems of banking national and state, each in natural competition with the other for business, it is necessary for their mutual existence that their charter powers be substantially equal.
Now and this may answer I believe a point that Mr. Justice Fortas raised early in the argument.
The question of whether it was truly to be a state law that was to control and in our brief in the McFadden Act of 1927, we discussed something called the Hull Amendments.
They were proposed by the House and was rejected by the Senate.
Now, the Hull Amendments -- were -- were a group of amendments that tried to say, there will be competitive equality based on state law as it exists right now.
The obvious reasoning behind this was that this would energize the national banks to try to keep state law from ever being changed to permit branching in states where it was then prohibited because then it be back in a competitive inequality again.
And the Senate Banking and Currency Committee quoted on page 22 says, “Construe this whole thing as to coerce the states to remain silent.
Your committee feels that this is an unprecedented policy for the Federal Government to pursue and constitutes an unwarranted interference with the rights of citizens and these states in their relationships to state legislatures.”
Finally, when the McFadden Act passed, Mr. McFadden himself said that the purpose of this was to establish competitive equality.
Now, where are all these restrictions that we're talking -- that we have heard from the able opposition?
The language is permitted with incidentally the word used in the McFadden Act of 1927 and it was strengthened in the Banking Act of 1933, the word “permitted” was made expressly authorized which even strengthen the point that we're making.
I don't think it's necessary to define exactly what is the limit of the restrictions that were involved here.
There are two that are clearly not included.
One is capital for branches.
Congress has separated that out, has applied state law for outside capital -- state law relating to capital for outside branches but not for inside branches.
The other is this question of need.
Certainly, we never intend any construction of the statute in that effect of which would be to have the Comptroller ask the judgment opinion of the supervisor of banking in any state.
But beyond that when Congress said “expressly authorized” it meant that and if Congress had intended that state statutes which prohibited de novo branching but permitted the retention of branches resulting from a merger meant unrestricted de novo branches for national banks that were prohibited to state banks it could have said so because these statutes were always present.
Now, I could go on in the Banking Act of 1933 to develop the competitive equality point.
Senator Glass proposed a Bill, in that effect which was to abolish competitive equality by giving national banks the right to branch without regard to state law.
The Bratton Amendment which came in and became the law contained this philosophy as expressed by Senator Bratton.
The question of whether branch banking shall be determined is by that state and we are asked to permit national banks in disregard of state laws overwriting the sentiment of a state to engage in branch banking whether it is desired in the state or not.
I would like to close my argument by reference to cases which are set forth in some detail at -- in our brief in which the whole legislative history has been exhaustively considered by a number of courts.
Certainly, it was considered in the Tenth Circuit and in the D.C. Circuit.
It is so been held in the Fifth Circuit and in the Sixth Circuit as well as District Courts in several circuits.
Now all of these cases you will note with the exception of two have arisen since 1960 during the term of the incumbent Comptroller of the Currency.
I have cited and I believe it's fair to state that the existing Comptroller of the Currency is restive with being bound by state laws.
And the 15 or so cases that have arisen in the lower courts I believe reflect that restiveness as indicated in his constructions of Section 36 (c).
And we ask this Court to put an end to that unrest by holding that when Congress enacted 36 (c) it is intended to establish competitive equality not competitive inequality and in our view the Comptroller's construction is inconsistent with this intent upon which depends the entire viability of the dual banking system.
Chief Justice Earl Warren: Mr. Jones.
Argument of Joseph S. Jones
Mr. Joseph S. Jones: Mr. Chief Justice and may it please the Court.
After the action was filed against the First National Bank of Logan but before it was tried, the Supreme Court of the State of Utah decided the case which is exactly in point with this case except the bank involved was the Provo State Bank.
And the Supreme Court of the State of Utah rendered its decision in which it said that the State Bank of Provo could not branch in the City of Provo.
The law of the State of Utah is reflected in the decision in the case of Walker Bank versus Taylor.
And that case says that where the statute does not authorize the establishment of the branch it prohibits the establishment of the branch.
And in that connection I want to call the Court's attention to another section of the Utah statute which is set forth in our brief, which is Section 736.3 Utah Code annotated 1953 which says from and after the effective date of this Act which was 1933, 1953, “no unit bank and no branch bank shall be established or authorized to conduct a banking business except as herein before in Section 736 expressly provided.
Now we go back to Section 36 (c) of the National Banking Act.
Justice William J. Brennan: Excuse me Mr. Jones, are you reading from 736?
Mr. Joseph S. Jones: 736.3.
Justice William J. Brennan: Thank you.
Mr. Joseph S. Jones: The National Banking Association may with the approval of the comptroller of the currency established and operate new branches one within the limits of a city, town or village in which said association is situated.
If such establishment and I am emphasizing the word such.
If such establishment in operation are at the time expressly authorized to state banks by the law of the state in question, the law of the state in question is announced in the decision in the case of Walker Bank versus Taylor which prohibited the State Bank of Provo in the city of the second class and under the same circumstances as here from branching and I simply say that if we apply the language of 76 -- 36 (c) to our situation in Utah that the establishment of the branch by the First National Bank of Logan is not such an establishment as at the time as expressly authorized to state banks by the law of the state in question.
Now, my colleague Mr. Bell has gone through the history of this statute.
I think the issue has been presented to the Court and I don't wish to be repetitious.
If the court would like to ask me any questions I would be glad to answer them.
Chief Justice Earl Warren: Thank you Mr. Jones.
Rebuttal of Richard A. Posner
Mr. Richard A. Posner: Do I have a moment or --?
Chief Justice Earl Warren: Yes, I think you do.
Mr. Richard A. Posner: Fine.
I'd like to make just one comment.
Mr. Bell made reference to the First Security Bank of Utah, the largest bank in the state, a national bank which he said has 45 branches in 34 cities of Utah and of course the Walker Bank has 14 branches throughout the State of Utah and how is such an extensive branching pattern of these major banks consistent with the view that Utah's policy is to restrict and to limit the growth of branch banking.
This is not a state like Illinois which has decided to forbid branching.
It's not a state like Pennsylvania which has decided to confine branch banking within a few communities.
Now, should the Court uphold the Comptroller's position and hold that it is permissible for national banks in the State of Utah to establish de novo branches, it does not follow that Utah will be unable to effectuate a policy of restricting branch banking in the state.
Should it choose as Section 36 (c) expressly contemplates to place any kind of geographical bounds upon branch banking, to confine it to the major cities, to confine it within certain radius of home banking offices, if it wishes to prevent a repetition of this situation whereby the major banks in the states have branched extensively throughout it, it has ample power under the National Bank Act to do so.
And there is absolutely no need to imply in Section 36 (c) an additional power that a state may impose upon the national banks all restrictions or provisions of state law hampering these National Banks in the performance of their important federal functions even though Congress when it limited the powers of National Banks to branch in Section 36 (c) was concerned only so far as the history shows with permitting certain state policies of confined branch banking to be effectuated, policies which so far Utah has not seen fit to apply to its own banks.
Chief Justice Earl Warren: Mr. Posner, would you mind commenting on the statement of Mr. Bell to the effect that no Comptroller of the Currency prior to the present one had so interpreted the Act and that all of these cases that you cite are -- in the last few years, would you mind telling us what your opinion, the administrative interpretation of this Act had been?
Mr. Richard A. Posner: The Comptroller of the Currency under Section 36 (c) has power to approve or disapprove branch banking under no specific criteria.
That is to say if a Comptroller should adopt the attitude that branch banking is a bad thing and should not be allowed, he has a virtually unreviewable discretion to refuse branching authority to national banks.
I can only assume that the predecessors of Mr. Saxon took a conservative view on the propriety or the social benefits of branch banking and we're not -- had no particular concern with encouraging banks to branch but I do not believe that there is any evidence that Comptrollers prior to the present incumbent had in -- had adverted to these provisions of Section 36 (c) and as interpretation of those sections had deliberately ruled that all state provisions of -- are applicable to national banks so far as I know national banks in this era or perhaps because of the restrictive attitude of the Comptrollers had not sought the kind of branching authority which the First National Bank of Logan and other banks encouraged by the present Comptroller have sought.
Justice Hugo L. Black: What do you mean by restrictive policy?
Mr. Richard A. Posner: I mean to say that the Comptroller has a broad discretion quite apart from any specific provision of state law as to whether he shall permit a national bank to establish a branch.
Justice Hugo L. Black: What do you mean by the restrictive policy of past comptrollers as compared with some kind of liberal parties are now, what is the --?
Mr. Richard A. Posner: Well, I can't speak authoritatively of what past comptrollers thought but I do know that the present Comptroller believes that branching should be encouraged as a method of injecting competition into local branching markets.
Justice Hugo L. Black: In other words, the difference is that the old ones either did not believe in or did not bring about or encourage branch banking while the present one does.
Mr. Richard A. Posner: So far as I understand, that is true.
My -- the point I mean to make is, this is not a case where earlier administrators had construed Section 36 (c) as preventing this kind of branching and then Mr. Saxon came along and reversed.
Justice Hugo L. Black: But they didn't ever construe it then if they didn't have it then they didn't encourage it.
Mr. Richard A. Posner: I assume that the issue did not arise under these previous administrations.
Justice Hugo L. Black: The difference is that the old comptrollers did not encouraged branch banking and this one does.
Mr. Richard A. Posner: That is my opinion and this Comptroller has wanted to test the limits of the law in this area.