going limitations shall not apply to loans on real estate or other collateral securities authorized by this act. Provided however, That by a twothirds vote of the directors the liabilities of any bank of any person or company or corporation or firm may be increased to a sum not exceeding one-fifth of the capital and surplus of the bank."

It is evident that this limitation was borrowed from the National Banking Law, section 5200 of the revised statutes of the United States, providing as follows: "The total liabilities to any association, or any person, or of any company, corporation, or firm for money borrowed, including in the liabilities of the company or firm, the liabilities of the several members thereof, shall at no time exceed one-tenth part of the amount of the capital stock of such association actually paid in; but the discount of bills of exchange drawn in good faith against actually existing values, and the discount of commercial or business paper actually owned by the person negotiating the same, shall not be considered as money borrowed."

This provision, as found in our General Banking Law and also in the National Banking Law, has never been construed by the courts in so far as it relates to the particular question submitted by you.

The Supreme Court of Pennsylvania, in the case of O'Hare vs. Second National Bank of Titusville, 77 Pa. St. 102, referring to this provision in its application to National banks makes use of the following language: "Evidently the limitation of the indebtedness to the one-tenth in the 29th section, was intended as a general rule for conducting the business of the bank; a rule laid down from experience to regulate its loans for its own best interest and those of stockholders and creditors, not a rule to regulate its customers. It was, as remarked in Fowler v. Scully, a regulation to prevent these associations from splitting on the rock which has ruined so many banks, to wit, that of lending too much of their capital to one person or firm. The intention being to protect the association and its stockholders and creditors from unwise banking, we cannot suppose it was meant to injure them by forbidding recovery of the injudicious loans."

In Vol. 29 of the Amer. & Eng. Ency. of Law, 2nd ed. p. 382, we find the following with respect to the limitation found in the National Banking Law: "The object of this provision of the statute was to guard National banks from the hazard of speculative loans, but it contemplated and permitted to an unlimited amount the discount of paper used and required in facilitating the transfer of property and money in the transaction of the legitimate business of the country." Citing Oswego Second National Bank v. Burt, 93 N. Y. 244.

It was evidently the intent of the Legislature in enacting the provision above referred to, as found in the banking law of this state, to guard the banks organized thereunder from the hazard of speculative loans, and to prevent such banks from advancing or loaning too much of their money to any one person, firm or corporation, and in construing the statute with respect to the exception, it is necessary to keep constantly in mind the purpose of the limitation, and not to construe the provision relating to the exceptions therefrom in such a way as to destroy the force and effect of the limitation itself. The exceptions to which I refer relate to the discount of bills of exchange drawn in good faith against actually

owned by the person negotiating the same, and which in my opinion should be strictly construed and should be held to apply to no transaction that did not clearly and fully come within the provisions of the statute in this particular. Black on Interpretation of Laws, 275.

I find that the questions which you submit for my consideration are quite fully considered in Pratt's Digest, pages 93-94-95, in their application to National Banks, but I am unable to concur in some of the conclusions reached which do not seem to be based upon judicial decisions, and which, in my opinion, tend to defeat the very purpose of the limita tion. It is an elementary proposition recognized by the courts with respect to statutory or constitutional inhibitions, that you cannot do indirectly that which you are prohibited from doing directly. In their application to commercial paper, the terms "loans" and "discounts" are synonymous. Amer. & Eng. Ency. of Law, Vol. 21, 2nd ed. 381. The question who is borrower is not always to be determined from the position of the parties as they appear on the paper. The borrower may be the maker or the endorser. Pratt's Digest, 94. Our statute provides that in the discount of commercial or business paper actually owned by the person negotiating the same, it shall not be considered as money borrowed. The application of this provision, in my opinion, relates exclusively to the person negotiating the paper. The statute contemplates that he alone shall be considered as not receiving a loan from the bank. With respect to the maker of such paper who is primarily liable, if such maker has received credit at the bank to the full limit imposed by law, the bank should not be permitted to discount such paper, as in that event the liability of the maker would exceed the liability permitted by the general banking law, and if such a transaction should be permitted, it would indirectly defeat the very purpose for which this limitation was imposed.

In determining the questions submitted by you I realize that there may be some doubt as to the proper construction of these provisions in the absence of any judicial determination as to their proper meaning. In view of the fact that the several banks of this state organized under the general banking law, are subject to state supervision, not only for the protection of the banks themselves, but for the protection of the persons doing business with such banks, the laws relating thereto should be construed in such a manner as to afford such protection in every possible way, until such time as the courts may determine otherwise.

In answer to your first question, I would therefore say that in my opinion the amount which the directors of a bank would be authorized to loan to any person, or company, or corporation, or firm, by a two-thirds vote of its board of directors, would not exceed one-fifth of the capital and surplus of the bank, and it would be immaterial whether such loan was secured or unsecured, excepting, of course, loans on real estate or other collateral securities authorized by the general banking law.

In answer to your second question, I would say that the same rule would apply to any one line of commercial paper that would apply to any one person, company, firm or corporation.

In answer to your third question I would say that in my opinion it is immaterial whether such loan is secured by the bond or personal endorsement of the officers or directors of the firm, company or corporation, or by the assignment of value as collateral, except where such loan is made upon real estate or other collateral securities recognized by the general

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banking law. In this connection I call your attention to the rule laid down in the Amer. & Eng. Ency. of Law. Vol. 21, 2nd ed., page 382, to the effect that "Drafts may be bona fide bills of exchange drawn upon actual existing values within the meaning of the statute, though not accompanied by specific bills of lading in each case. It is sufficient if they are drawn against property previously consigned and existing either in its original form or in the shape of proceeds of sales in the hands of the consignees." This rule, of course, applies to the federal statute. The state and federal statute being identical in this particular, unquestionably the same rule would apply to a bank organized under the general banking law of this State.

Respectfully yours,

CHAS. A. BLAIR,
Attorney General.

At the session of the legislature of 1903 an amendment to Section 39 of the banking law was passed making it the duty of the Commissioner of the Banking Department to examine twice in each year all state banks located in the reserve cities of Michigan. The cities thus designated were Detroit. Grand Rapids, Bay City, Saginaw, Kalamazoo, Jackson, Port Huron, Adrian, Benton Harbor, Muskegon, Ann Arbor and Marquette. These cities contain 42 state banks with total footings of $116,629,191.86. The total footings of all state banks in Michigan amount to $179,434,970.33. It will be seen therefore, that under this amendment, the work of the Department has increased fully sixty per cent over the work of former years, and in this connection it should be understood that the legislature imposed this extra work without additional fees from the banks examined. This has necessitated the procuring of extra help in the field, as well as in the office, and I am of the opinion that the good results following the work have far more than compensated for the additional expense incurred. To such an extent is this apparent that I am pleased to recommend to you the examination of all state banks twice each year by this Department, believing that it will materially aid in their betterment.

Bank failures in Michigan, aside from the questions of defalcation and dishonesty have been due to other causes, viz.: First, to the inactivity of the board of directors who, in many cases, have been willing to place all their power in the hands of the cashier, who has practically managed what may be termed a "one man bank." Second, to the practice of making loans largely in excess of the provisions of the General Banking Law.

The Commissioner has spent much time in eliminating the inactivity of directors from Michigan banks and obliging all banks to hold regular monthly meetings of their boards and properly approve all loans of magnitude as required by law. The office of bank director is a most responsible one under Michigan law, and I am glad to report that my request in this regard has been met with favorable replies in all cases where it has been necessary to urge activity.

The question of excessive loans has been given special attention by the Department and good results have been attained.

In addition to the above, due consideration has been given to the question of eliminating slow paper from the assets of state banks with excellent results. The Commissioner has endeavored to have his examiners report the exact condition of all past due paper coming within the limits.

ment has been carefully applied in the direction of seeing that questionable assets have been charged to the profit and loss account.

All details pertaining to banks are now carefully preserved. Ledger accounts with each state bank have been opened, accounts with earnings, dividends, the distribution of profits and other important accounts are now made matters of record in detail, thus affording the Commissioner an accurate and thorough knowledge of the work his Department has in hand.

During the year the Commissioner has visited many of the banks in person, and each bank and trust company has, as a result of the official examination, been given a full and fair criticism of its condition as seen from the standpoint of the Commissioner. In this connection permit me to thank the bankers of Michigan for the courteous treatment the Commissioner has uniformly received at their hands and the very full and hearty manner in which their co-operation has been given.

I am especially anxious at this time to acknowledge the valuable services rendered the Department by Deputy Commissioner Wm. Donovan, and examiners B. C. Jolly, Harmon Wendell, E. E. Ford, W. T. Bradford, Albert E. Manning, F. D. Carleton and Charles M. Turner.

Very respectfully,

M

Moors

Commissioner of the Banking Department.

COMPARATIVE ABSTRACTS (STÁTE BANKS.)

Comparative abstracts, giving the volume of business as shown by the December reports of Michigan State banks for the years 1889, 1890, 1891, 1892, 1893, 1894, 1895, 1896, 1897, 1898, 1899, 1900, 1901, 1902, and 1903, as made to the Commissioner of the Banking Department.