Request By:
Mr Donald R. Speer
Director, Division of Purchases
Department for Administration
Finance and Administration Cabiney
348 Capitol Annex
Frankfort, Kentucky 40601-3481
Opinion
Opinion By: FREDERIC J. COWAN, ATTORNEY GENERAL; NATHAN GOLDMAN, ASSISTANT ATTORNEY GENERAL
In your letter to the Attorney General you state that the Commonwealth is currently soliciting proposals under KRS 45A.085 for general depository banking services. A question has developed concerning transportation of the Commonwealth's deposits and withdrawal transactions to and from the depository bank. You ask two specific questions.
"(1) May the Commonwealth contract with an armored car or courier service to transport deposits and withdrawal transactions? The following conditions are applicable:
(a) the contract would be between the Commonwealth and the armored car or courier service;
(b) the armored car or courier service would invoice the bank for payments, and the bank would pay for the service from the Commonwealth's interest earnings on it's deposits. "
KRS 355.4-104(e) defines "customer" as "any person having an account with a bank or for whom a bank has agreed to collect items and includes a bank carrying an account with another bank." Therefore, in this instance, the Commonwealth is the customer of a bank. As a customer, the Commonwealth may contract with an armored car, or courier service, to act as its agent in the transportation of deposit and withdrawal transactions. The American Law Institute has defined agency as, "the fiduciary relation which results from the manifestation of consent by one person to another that the other shall act on his behalf and subject to his control, and consent by the other so to act." Restatement (second) of Agency § 1 (1957).
Normally, a deposit is complete when money or negotiable instruments are delivered into the possession of the bank, or its agent, on the bank's premises and during, banking hours. 9 C.J.S. Banks and Banking § 269; Rains v. Lewis, 579 P.2d 980 (Wash. Ct. App. 1978); United States v. Holt, Commissioner of Finance, 131 S.W.2d 59, 61 (Mo. Ct. App. 1939); In re Liquidation of Columbus State Bank, 26 P.2d 643 (Mont. 1933). Therefore, the customer's deposit transactions are not deemed to have been received by a bank until such time as the armored car, or courier service, delivers the deposits into the possession of the bank, or its agent. Also, once the bank delivers withdrawal transactions to the armored car, or courier service, this constitutes delivery to the customer.
It is a well-settled principle of law that the relationship between a bank and its depositor is one of debtor and creditor. Bank of Marin v. England, 385 U.S. 99, 101 (1966); Kentucky Rock Asphalt v. Helburn, 108 F.2d 779, 781 (6th Cir., 1940); Federal Deposit Ins. Corporation v. Wilhoit, 52 F. Sup. 308, 313 (E.D. Ky. 1943); Denny v. Thompson, 236 Ky. 714, 718, 33 S.W.2d 670, 672 (1930). Once a deposit is made, the title to the funds passes to the bank, but the bank has the duty to disperse the funds on deposit as directed by the depositor. This is because the debtor and creditor relationship between a bank and its depositor is governed by contract principles. The contract of a bank with its depositor is to pay the money deposited at its banking house, in such sums, at such times, and to such persons as the depositor may direct. 9 C.J.S. Banks and Banking § 330; Groos National Bank v. Shaw's of San Antonio, Inc., 555 S.W.2d 492, 494 (Tex. Civ. App. 1977); Susen v. Citizens Bank and Trust Co., 444 N.E.2d 701, 704 (Ill. App. Ct. 1982); Mesquite State Bank v. Professional Investment Corp., 488 S.W.2d 73, 75 (Tex. 1972); First National Bank of Bellaire v. Hubbs, 566 S.W.2d 375, 377 (Tex. Civ. App. 1978). KRS 355.4-103(1) sets forth the limits of contractual variation and there must be a meeting of the minds as with general contract law.
Having the bank pay for the armored car, or courier service, out of the interest accrued on the Commonwealth's deposits, is analagous to automated clearinghouse transactions. A customer may use automated clearinghouse transactions to make recurring payments on bills for items such as mortgages, insurance and utilities. With these types of transactions, the customer authorizes the payees to initiate periodic debits to his account at his bank, and he authorizes his bank to allow the payees to draw on that account. In the situation at hand, the armored car or courier service, as payee, would be authorized by the Commonwealth, as the customer, to initiate periodic debits to the Commonwealth's bank account through the use of the invoice sent by the armored car, or courier service, to the bank.
"(2) May a depository bank located in Franklin County send an employee to pick up or deliver deposits and withdrawal transactions from the Treasurer?"
The enumerated powers of banks and the branching law of Kentucky are contained in KRS 287.180 which reads, in part, as follows:
"(1) Banks authorized under the laws of this state may, except as provided in subsection (2) of this section, exercise, only at their principal office, powers necessary to carry on the business of banking by discounting and negotiating notes, drafts, bills of exchange and other evidences of debt, and by purchasing bonds, receiving deposits and allowing interest thereon, buying and selling exchange, coin and bullion and lending money on personal or real security."
"(2) Any corporation presently or hereafter engaged in the business of banking, and meeting the requirements of this subsection, may apply to the commissioner for permission to establish, within the city in which either the principal office or an existing branch office which has been annexed into the city or acquired by merger is located and, subject to the limitation hereinafter imposed, within the county in which its principal office is located a branch at which all of the powers conferred in subsection (1) of this section may be exercised . . . ." (Emphasis added).
The use of agents by state chartered banks to perform ministerial duties has been recognized by the Court of Appeals (now Supreme Court) of Kentucky. In Bruner v. Citizens Bank of Shelbyville, 134 Ky. 283, 120 S.W. 345 (1909), the Court of Appeals was determining whether a state bank had the right to establish and maintain a branch. At that time, there was no provision in the statute for the operation of branches. The court held that branch banks could not be established in the absence of express legislative authority. The court said:
"This construction does not mean that banks may not have agents. There is a wide difference between the appointment of agents to receive and collect money and forward it to the bank or to transact other business necessary or incidental to banking and the right to establish branch banks at which a general banking business is carried on. A bank may have as many duly appointed agents as its needs require, and these agents, among other things, may receive and forward to it at its place of business the money of persons who desire to deposit with it." 134 Ky. at 299, 120 S.W. at 350.
In Marvin v. Kentucky Title Trust Co., 218 Ky. 135, 291 S.W. 17 (1927), the issue was whether a bank's decision to open additional offices, in the same city, for the receipt of deposits and payment of checks was the illegal establishment of a branch bank. The Court of Appeals (now Supreme Court) of Kentucky stated that the issue turned upon the definition of the business of banking. The court rejected the idea that merely receiving deposits was the proper definition. The court adopted the definition that the United States Supreme Court enunciated in Warren v. Shook, 91 U.S. 704, 710 (1875):
"Having a place of business where deposits are received and paid out on checks, and where money is loaned upon security , is the substance of the business of a banker." (Emphasis added) 218 Ky. at 138, 291 S.W. at 18.
The court distinguished receiving deposits and paying out checks from banking business such as "loans, discounts, investments, and other like duties" which requires the exercise of discretion and direct control of the bank's directors and officers. Id . at 18. The court also followed its holding in Bruner :
"That opinion, however, expressly recognizes the right of a bank to 'have as many duly appointed agents as its needs require, and these agents, among other things, may receive and forward to it at its place of business the money of persons who desire to deposit with it.' In principle the same rule would apply to agents who merely receive deposits and pay out checks on demand, duties that are incidental to the business, but which do not require special discretion and business acumen." 218 Ky. at 138, 291 S.W. at 18.
The court held that the bank could establish additional offices in the same city, where deposits could be made and checks cashed, because such transactions were not the "business of banking" within Ky. St. § 579. The court stated:
"The convenience to the general public of such an arrangement is easily perceived. The time consumed by a great number of depositors in making daily trips to and from banks of deposit during banking hours calls for some measure of economy and renders the arrangement suggested very desirable, and as it is clearly incidental to the bank's business and neither violates the statute nor public policy and the judgment of the court limits its application to the matter of receiving deposits and paying checks, no good reason can be perceived for denying the application." 218 Ky. at 138, 291 S.W. at 18.
It may be noted that the statute then in force, Ky. St. § 579, contained the same enumerated powers as KRS 287.180(1). KRS 287.180(1) does contain language which did not exist in Kentucky Statutes § 579; that is, language to the effect that the bank's powers may only be exercised at its principle office or an authorized branch. However, in Bruner , the court stated that the exercise of such powers, in carrying on the business of banking, was limited to one place, there being no statutory provision for the operation of branches at that time.
The Attorney General has relied on Marvin and Bruner in past opinions. In OAG 83-471, the Attorney General differentiated receiving deposits and paying out checks from the making of loans. The Attorney General stated, that for a bank to make loans at loan production offices located outside the bank's home county, approval was required by the Commissioner of Banking for a branch bank. This was based on the fact that the proposed activities were not limited to receiving deposits and paying out checks. A loan production office, in which ministerial rather than discretionary acts occurred, would not constitute a branch bank.
When considering the use of armored cars, or courier services, by national banks rather than by state chartered banks, a different conclusion may be reached. In First National Bank in Plant City, Florida v. Dickinson, 396 U.S. 122, 24 L. Ed. 312, 90 S. Ct. 337 (1969), the United States Supreme Court had to determine if a national bank's use of an armored car messenger service was a violation of a Florida statute which prohibited branch banking. The court decided that an armored car, which was owned and controlled by the bank, constituted a branch of the bank. The bank had a contractual arrangement with its customers whereby the funds carried from the customers, in the armored car, would not be deemed deposited until they arrived at the bank. Despite this arrangement, the Supreme Court determined that when the customer delivers money to the armored car, "the money is given and received for deposit even though the parties have agreed that its technical status as a 'deposit' which may be drawn on is to remain inchoate for the brief period of time it is in transit to the chartered bank premises." Id . at 137. The Supreme Court rejected the contention that state law definitions of branch banking controlled national banks. Although state branching law applies to national banks, 12 U.S.C. § 36(c), the Supreme court said that the definition of Branch banking which controls national bands is found in the National Bank Act, 12 U.S.C. 36(f), and not state law definitions. "To allow the states to define the content of the term 'branch' would make them the sole judges of their own powers." Id. at 133. The National Bank Act defines branches as, "places where deposits are received, or checks paid, or money lent", 12 U.S.C. 36(f). The court focused on the phrasing of the definition in the disjunctive in determining that any one of these three services constituted branch banking. "The term 'branch bank' at the very least includes any place for receiving deposits or paying checks or lending money apart from the chartered premises; it may include more." Id. at 135. Therefore, the use of the armored car messenger service was a violation of the Florida branching statute. This interpretation is broader than that adopted by the Court of Appeals (now Supreme Court) of Kentucky in Marvin , where the focus was on duties which required discretion and control, such as the ability to loan money, in contrast to merely ministerial duties, such as receiving deposits and paying out checks.
In Jackson v. First National Bank of Gainesville, 430 F.2d 1200 (5th Cir. 1970), the court determined that armored cars, or courier services, cannot be operated as branch banks, by national banks, if the state banks are not allowed to engage in branch banking. The court followed Plant City and applied 12 U.S.C. 36(f). It determined that armored cars, or courier services, constituted branch banking. The Bank had transferred operation, and ownership, of its armored car service to a subsidiary corporation after the trial court halted its use of armored cars. This was an attempt to indirectly do what it could not do directly. The court rejected this transfer as a way for the Bank to supply its customers with an armored car service. "The transfer of ownership of the armored trucks from the Bank to a holding company did not affect the continued prohibition on the use of such trucks by the Bank to extend its area of banking operations." Id. at 1201.
CONCLUSION :
The Commonwealth, as a depositor, is a customer of a bank, and as such, is involved in a debtor creditor relationship with that bank. This debtor creditor relationship is inherently contractual in nature and is governed by general contract principles. The contract between a bank, and its customer, may be varied by agreement. Having the armored car service invoice the bank is substantially no different from a customer's use of automated clearinghouse transactions. The Commonwealth may contract with the bank to pay for the armored car, or courier service, out of the interest accrued on its deposits.
The answer to your second question is more difficult. It would appear that, based on the Marvin and Bruner cases, a state chartered bank could use agents to pick up deposits. Marvin and Bruner appear to exclude the mere depositing of money from the meaning of the term "the business of banking" which must be conducted at the principle office or an authorized branch. This differs from the definition of this term for national banks and would appear to place the two kinds of banks at competitive inequalities. Furthermore, the Division of Banking of the Commonwealth has consistently opined that the use of courier services by state banks is strictly prohibited. The holdings and interpretation of statutes by the agency charged with their administration are normally given great weight. Department of Banking and Securities v. Coleman, Ky., 594 S.W.2d 895 (1979).
For these reasons we cannot say categorically that agents may be used to pick up deposits from a customer and to forward to the bank. Such an answer may only come from a court of law. However, based on the Marvin and Bruner cases, the Commonwealth could, in good faith, have such a provision in the RFP.