Texas & Pacific Railway Co. v. Pottorff

Under the National Bank Act, national banks could exercise all incidental powers necessary to carry on the business of banking. First National Bank of El Paso (First National) was a national bank operating in Texas. Texas and Pacific Railway Company (the railway) (plaintiff) was a depositor at First National. Essentially, the railway deposited $50,000 into its account at First National, and First National backed the funds with surety bonds. Eventually, First National, with the railway’s consent, canceled the surety bonds and pledged $50,000 in Liberty bonds, which were held in First National’s trust department. In other words, instead of paying premiums on the surety bonds, First National simply pledged some of its own assets as security for the railway’s deposits. A few years later, First National failed and closed. The railway had over $50,000 in its checking account when the bank failed. S. O. Pottorff (defendant) was appointed as First National’s receiver. The railway made a claim for its deposits as a secured creditor. The receiver approved the railway’s claim, but he denied the validity of the bank’s pledge. The receiver considered the railway an unsecured creditor, so the railway did not receive rights to the Liberty bonds and was paid out of the general fund divided among all unsecured creditors. The railway sued the receiver in the district court. The district court held that the pledge was void, and that the Liberty bond assets were to be distributed to the general creditors of First National. The court of appeals affirmed. The railway appealed, arguing that the power to pledge assets to secure a deposit was an incidental power to the business of banking.