BANKS AND BANKING ‑- SAVINGS AND LOAN ASSOCIATIONS ‑- FORMATION OR ACQUISITION OF SUBSIDIARY CORPORATION BY STATE‑CHARTERED SAVINGS AND LOAN ASSOCIATION
(1) A state‑chartered savings and loan association may legally form and manage a subsidiary service corporation only to perform functions which are incidental and either necessary or proper to the association's purposes, assuming further that having those functions performed by a separate corporation is more efficient.
(2) A state‑chartered savings and loan association may, through the process of investment, acquire a controlling interest in an existing corporation by purchasing its capital stock and, thereafter, manage that corporation as its subsidiary.
(3) A subsidiary service corporation formed by a savings and loan association may only do those things which the association itself could do directly; conversely, however, a subsidiary corporation acquired by a savings and loan association as a bona fide investment may do any lawful act related to its own business.
(4) The state supervisor of savings and loan associations is statutorily authorized to establish, by rule, the manner in which such associations report their financial conditions and those of any subsidiary corporations to his office.
(5) The state supervisor of savings and loan associations also has the legal authority, in view of RCW 33.04.020 as amended by § 1, chapter 113, Laws of 1979, to examine into the affairs of any corporation of which the capital stock is controlled by a state‑regulated savings and loan association.
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February 1, 1980
Honorable Sid Toth, Supervisor
Division of Savings and Loan Associations
Department of General Administration
218 General Administration Building
Olympia, Washington 98504 Cite as: AGLO 1980 No. 9
[[Orig. Op. Page 2]]
By letter previously acknowledged, our opinion was requested on several questions relating to the ownership and operation of subsidiary corporations by state‑chartered savings and loan associations. We paraphrase those questions as follows:
(1) May a state‑chartered savings and loan association legally form and manage a subsidiary service corporation?
(2) May a state‑chartered savings and loan association acquire a controlling interest in an existing corporation by purchasing its capital stock and, thereafter, manage such corporation as its subsidiary?
(3) Assuming an affirmative answer to either question (1) or question (2),
(a) May the subsidiary corporation undertake activities which the parent savings and loan association could not, itself, lawfully undertake‑-either because of a lack of statutory authority or a statutory prohibition?
(b) Are the assets and liabilities of a subsidiary service corporation to be included with those of the parent savings and loan association for the purpose of calculating the lending and investment limitations of the parent association?
(c) Does the state supervisor of savings and loan associations have the legal authority to examine into the affairs of the subsidiary corporation or corporations involved?
We answer questions (1), (3)(a) and (3)(c) in the affirmative as qualified in our analysis, question (2) in the affirmative and question (3)(b) in the manner set forth in our analysis.
We begin by noting the unique characteristics of savings and loan associations, as distinguished from other types of corporate or quasi-corporate entities. Such associations are [[Orig. Op. Page 3]] formed under the provisions of Title 33 RCW rather than the General Business Corporation Act, Title 23A RCW, and thus differ in many respects from ordinary business corporations. This distinction was specifically noted by our State Supreme Court in State ex rel. Berger v. Allen, 186 Wash. 403, 58 P.2d 293 (1936), as follows:
"Thus, while under our laws a savings and loan association is a corporation, it has some of the characteristics of a quasi public corporation. Its creation, by-laws, officers, manner of doing business, investments, expenses, reserves and accounting are all more or less subject to statutory, governmental control and supervision. Because of the inherent nature of such a corporation, particularly as to its large membership, which, for the most part, use it as a safe investment medium for their meager savings and for the building of homes to be paid for on a small monthly payment plan extending over a number of years, the legislature has placed upon certain state officers the responsibility of protecting the members in dealing with such an association; . . ."1/ Supra, at pp. 407, 408.
In order to answer your first question we turn, therefore, to the statutory parameters within which a state‑chartered savings and loan association must operate. In RCW 33.12.010 we find the following enumeration of powers possessed by all such associations, subject to certain limitations:
"An association shall have the same capacity to act as possessed by natural persons, but shall have authority to perform only such acts as are necessary or proper to accomplish its purposes and which are not repugnant to law.
"Subject to the restrictions and limitations of this title, every such association shall have authority:
[[Orig. Op. Page 4]]
". . .
"(4) To acquire, hold, sell, dispose of, pledge, mortgage, or encumber property, as its interests and purposes may require;
"(5) To conduct business in this state and elsewhere as may be permitted by law and, to this end, to comply with any law, regulation, or other requirements incident thereto;
". . .
"(23) The powers granted in this section shall not be construed as limiting or enlarging any grant of authority made elsewhere by this title, or as a limitation on the purposes for which an association may be incorporated;
"(24) To exercise, by and through its board of directors and duly authorized officers and agents, all such incidental powers as may be necessary to carry on the business of the association." (Emphasis supplied)
The letter requesting this opinion noted that,
". . . state law is silent on the creation or operation of subsidiary corporations2/
by state‑chartered savings and loan association . . ."
We take this to be a recognition of (a) the absence, in the above‑quoted statute or elsewhere, of specific authority for such action and (b) the absence of any statutory prohibition.
[[Orig. Op. Page 5]]
Under these circumstances the answer to question (1) thus turns on whether such an authorization is nevertheless implicit in the statutory system governing savings and loan associations in this state.
In view of the above‑underlined portion of RCW 33.12.010(24), limiting the exercise of the specific powers granted by that section to those acts which are "necessary or proper" in the accomplishment of the purposes of the association, we must next identify the purposes for which a savings and loan association is formed. Although no specific statement as to those purposes is set forth in the law, we believe the description made by the court in the Allen case,supra, at 407-408, to be quite accurate; i.e.,
". . . a safe investment medium for . . . [the members'] meager savings and for the building of homes to be paid for on a small monthly payment plan extending over a number of years, . . ."3/
Bearing this in mind, it would not be difficult to postulate a number of actions, not specifically authorized by RCW 32.12.010, which might not only be considered "incidental powers" but also either "necessary" or "proper" in terms of the purposes of a savings and loan association.4/ For [[Orig. Op. Page 6]] example, courts in two other jurisdictions have recently held that savings and loan associations may engage in the insurance brokerage business for the purpose of assisting their members in acquiring insurance on properties mortgaged to the association. See,Kerrigan v. Unity Savings Association, 58 Ill.2d 20, 317 N.E.2d 39 (1974) andGoodman v. Perpetual Building Association, D.C., 320 F.Supp. 20 (1970). Likewise, it is entirely conceivable that there may be circumstances under which a savings and loan association would find it more convenient or efficient to have one or more of its functions‑-such as, for example, the collection of delinquent accounts‑-performed for it by a different corporate entity than itself. Indeed, in such circumstances it might be desirable for several associations jointly to form a corporation to perform such functions on behalf of all of them.
On that basis we believe the first question to be qualifiedly answerable in the affirmative.5/ This response assumes that the functions to be performed are incidental and either necessary or proper to the association's purposes. It further assumes that having those functions performed by a separate corporation is more efficient‑-thus resulting in greater return on members' investments. Under those circumstances, it is our opinion that the formation and operation of a subsidiary service corporation would be legally permissible as an incidental power under RCW 33.12.010.
The second question here to be considered also involves the ownership and management of a subsidiary corporation by a state‑chartered savings and loan association. However, in contrast to the first question (under which the subsidiary corporation would be formed by a savings and loan association) this inquiry involves the acquisition of such a corporation through the process of investment;i.e., through the purchase of a controlling amount of stock of an existing corporation by a state‑chartered savings and loan association.
RCW 33.24.010 provides that:
"An association may invest its funds only as provided in this chapter.
". . ."
[[Orig. Op. Page 7]]
A subsequent provision in the chapter (originally enacted in 1969) then grants savings and loan associations specific investment authority, including investments in capital stock,6/ as follows:
"An association may invest in capital stock, capital debentures, and bonds issued by any corporation organized under the laws of the United States or any state, subject to the further limitations and conditions that at the time of such investment the aggregate of the reserves, surplus, undivided profits, and guaranty stock, if any, of the association is at least equal to five percent of the savings of the association and that immediately upon the making of any investment under authority of this paragraph, the aggregate amount of all investments than held by the association under authority of this paragraph does not exceed fifty percent of its guaranty stock, reserves, surplus, and undivided profits." RCW 33.24.280.
The word "invest" has been held to include the purchase of stock for control as well as possible financial gain. See,Securities & Exchange Com'n v. Fifth Ave. Coach Lines, Inc., 289 F.Supp. 3 (Dt. N.Y., 1968). Thus, pursuant to RCW 33.24.280, it is permissible for a savings and loan association by "investing" to become the owner of a controlling interest in an existing corporation. Moreover, for such investments there is no requirement that the business of the "acquired" corporation be related to the purposes of the savings and loan association. The only statutory limitation on such investments is that the maximum amount to be invested in any corporation shall not exceed five percent of the savings and loan's aggregate reserves, surplus, undivided profits, and guaranty stock.
We also note that our legislature, to encourage the preservation of a dual system of state‑ and federally-chartered financial institutions and to maintain a competitive balance between those institutions, has provided as follows in RCW 33.24.190:
[[Orig. Op. Page 8]]
"Notwithstanding any provision of this title, an association may invest its funds in any loan or purchase which is permitted o a federal savings and loan association doing business in this state."
The regulations of the Federal Home Loan Bank Board permit federally-chartered savings and loans to invest in general service corporations. See, CFR 545.9-1(a) and (b). Thus, by virtue of the federal tie‑in set forth in RCW 33.24.190, supra, there is authorization for state‑chartered savings and loans to invest in subsidiary corporations to the extent permitted federally-chartered institutions by the Federal Home Loan Bank Board.
For the foregoing reasons, we therefore answer question (2) in the unqualified affirmative;i.e., state‑chartered savings and loans may, through the process of investment, become the owner of an existing corporation which then may be operated as a subsidiary.7/
The next question here posed, repeated for ease of reference, asks:
Assuming an affirmative answer to either question (1) or question (2), may the subsidiary corporation undertake activities which the parent savings and loan association could not, itself, lawfully undertake‑-either because of a lack of statutory authority or statutory prohibition?
We here begin by noting that within Title 33 RCW there are two distinct types of restrictions placed upon the activities of a state‑chartered savings and loan association. The first type places specific limitations on certain activities [[Orig. Op. Page 9]] which are expressly authorized. See,e.g., RCW 33.24.120, spelling out the conditions under which an association may invest in real estate contracts. The second category of restrictions is expressed as absolute statutory prohibitions. For example, RCW 33.12.020 expressly prohibits a savings and loan association from carrying commercial or checking accounts.
As it relates to the lawful activities of a subsidiary service corporation formed by a savings and loan association, we believe that the answer to your question is inherent in our disposition of question (1). Having there concluded that the parent association's only legal basis for forming a subsidiary service corporation is to perform functions which the association itself could perform directly, it is axiomatic that such a service corporation cannot engage in activities which the parent association could not itself undertake.
The second aspect of question (3)(a) relates to corporations acquired through the investment mechanism discussed in our answer to question (2). Again, the statute permitting such investments (RCW 33.24.280) does not limit those investments to corporations engaged in a business related to the purposes of the acquiring savings and loan association. In view of that general investment authority and in the absence of any specific prohibition, it would appear to us that a subsidiary corporation acquired by investment may perform any lawful act in the conduct of its business.
Accordingly, in summary, our answer to question (3)(a), supra, is as follows: A subsidiaryservice corporation formed by a savings and loan association may do only those things which the association itself could do directly. Conversely, a subsidiary corporation acquired by a savings and loan association as a bona fide investment may do any lawful act related to its own business.8/
[[Orig. Op. Page 10]]
Next, also assuming an affirmative answer to questions (1) and (2), we have been asked:
Are the assets and liabilities of the subsidiary service corporation to be added in with the assets and liabilities of the parent corporation for the purpose of calculating the lending and investment limitations of the parent corporation?
There are a number of statutory provisions under which the authority of a particular savings and loan association to engage in certain activities depends upon the status of its financial condition. However, those statutory provisions are generally silent with respect to the precise manner of computing the particular financial condition. Bearing that in mind, we also note that under RCW 33.04.025 you, as supervisor of savings and loan, are authorized to adopt rules and regulations outlining the manner in which state‑chartered savings and loan associations will report their financial condition to your office.
Thus, while there is no statutorily mandated answer to your question, it is our opinion that you, as the supervisor of savings and loan associations, are authorized to establish by rule the manner in which such associations report both their own financial conditions and those of any subsidiary corporations to your office.
[[Orig. Op. Page 11]]
This final question again assumes an affirmative answer to questions (1) and (2), and asks:
". . . does the state supervisor of the division of savings and loan associations have legal authority to examine into the affairs of the subsidiary corporation or corporations involved?"
This inquiry is now readily answerable in view of the recent legislative enactment of chapter 113, Laws of 1979. As amended by § 1 of that act, RCW 33.04.020 (reciting powers and responsibilities of the supervisor) now includes in subsection 7 the following:
"(7) may visit and examine into the affairs of any corporation of which the capital stock is controlled by an association; may appraise and revalue its investments and securities; and shall have full access to all the books, records, papers, securities, correspondence, bank accounts, and other papers of such corporation for such purposes;"
Thus, as supervisor of savings and loan associations, you now also have the legal authority to examine into the affairs of any corporation of which the capital stock is controlled by a state‑regulated savings and loan association.9/
We trust that the foregoing will be of assistance to you.
Very truly yours,
EDWARD B. MACKIE
Deputy Attorney General
*** FOOTNOTES ***
1/See also, State v. Merrill, 83 Wash. 8, 144 Pac. 925 (1914); andState ex rel. Wicks v. Puget Sound Sav. & Loan, 8 Wn.2d 599, 113 P.2d 70 (1941).
2/A subsidiary corporation is ". . . one in which another corporation owns at least a majority of the shares, and thus has control." Black's Law Dictionary, page 1596 (Fourth Ed., 1951). The Federal Home Loan Bank Board defines "subsidiary" as including ownership or control of voting power of more than 25% of the capital stock. CFR 545.9-1(k)(2).
3/See also, 13 Am.Jur.2d, Building and Loan Associations, § 1.
4/In a recent case involving the analogous powers of a mutual savings bank under the identical language of RCW 32.08.140(1), Banker's Ass'n v. Wash. Mutual Savings Bank, 92 Wn.2d 453, 598 P.2d 719 (1979), the Court said, at pp. 458-9:
". . . An activity necessary to carry on the Bank's business has been defined as one which is 'convenient or useful in connection with performance of the bank's established activities pursuant to its express powers.'
M & M Leasing Corp. v. Seattle‑First Nat'l Bank, 563 F.2d 1377, 1382 (9th Cir. 1977). Likewise it has been defined as such powers as are necessary or usual and convenient for the attainment of purposes of the creation of a bank. Bank of California v. Portland, 157 Ore. 203, 208, 69 P.2d 273, 115 A.L.R. 676 (1937) . . ."
5/See also our response to question (3)(a), pp. 8-9, infra.
6/This authority to invest in capital stock was added by amendment (§ 31, chapter 130, Laws of 1973).
7/Furthermore, the subsidiary corporation does not have to be a "service corporation" unless investment in the same has been made pursuant to the authorization for federally-chartered savings and loans pursuant to CFR 545.9-1(a) and (b), supra.
8/By this response we do not, however, mean to condone the acquisition of what is purely a shell corporation in order for a savings and loan association to engage, through such subsidiary, in activities with respect to which the parent savings and loan association is prohibited or specifically limited. The question there would be whether the acquisition of the subsidiary was truly an "investment" or simply a subterfuge for the savings and loan to engage in activities not otherwise permitted. We would also caution that subsequent manipulation of a subsidiary acquired as an investment could, by intercorporate dealings, be such as to cause a court to disregard the separate corporate entity of the subsidiary and treat its actions as being those of the parent. See,e.g., Soderberg Advertising v. Kent-Moore Corp., 11 Wn.App. 721, 524 P.2d 1355 (1974). The propriety of acquiring and operating a subsidiary corporation engaged in activities prohibited or limited for a parent savings and loan association will thus be dependent upon particular circumstances and relationships between the parent and subsidiary‑-including the extent of the ownership interest, the nature and extent of intercorporate activities and of intercorporate financing, the extent of control over specific activities by the subsidiary and coordination of business activities.
9/Clearly, the ownership of more than 50 percent of the capital stock of the subject corporation would cause that corporation to be "controlled" by the savings and loan association for the purpose of this amendment. But in addition, it is also possible, depending upon all of the facts in a given case, that such control might exist even on the basis of something less than 50 percent plus ownership, coupled with other means of effective control.