BANKS AND BANKING ‑- TRUSTS ‑- MISMANAGEMENT OF TRUST BY MUTUAL SAVINGS BANKS
(1) If a mutual savings bank is acting as a trustee under RCW 32.08.210, and if by reason of its mismanagement of a trust a loss is sustained for which the bank is legally liable, all of the assets of the bank will be available to cover the loss, including the guaranty fund provided for by RCW 32.08.100 and 32.08.110.
(2) In the event such a mutual savings bank becomes insolvent, such parties as may have been injured by reason of the mismanagement of a trust by the bank, for which the bank is legally liable, will not generally have a legal preference of the depositors of the bank with respect to any particular funds or any assets thereof.
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January 21, 1976
Honorable Kenneth O. Eikenberry
State Representative, 36th District
Olympia, Washington 98504 Cite as: AGLO 1976 No. 5
By letters previously acknowledged you have requested an opinion of this office on certain questions which we paraphrase as follows:
(1) If a mutual savings bank is acting as a trustee under RCW 32.08.210, as amended by § 1, chapter 265, Laws of 1975, 1st Ex. Sess. (SSB No. 2469), and if by reason of its mismanagment of the trust a loss is sustained for which the bank is legally liable, to what assets of the bank may the injured parties look in order to recover for that loss?
(2) In the event that such a mutual savings bank becomes insolvent, will the injured parties described in question (1) have a legal preference over the depositors of the bank with respect to any particular funds or other assets of the insolvent bank?
We answer question (1) as explained in our analysis and question (2) in the negative except as qualified therein.
Mutual savings banks in the state of Washington were recently authorized by the legislature (chapter 265, Laws of 1975, 1st Ex. Sess.) to engage fully in the trust business. Prior to this legislation, such banks had only limited trust powers (§ 12, chapter 55, Laws of 1969). Your primary concern, as stated in your letters to us, is the degree of protection afforded the trust customers of a mutual savings bank in the event of loss through mismanagement of any of their trust assets.
In order to answer your questions it is necessary first to examine the financial structure of a mutual savings bank. Such banks have no capital stock. Their initial [[Orig. Op. Page 2]] operating funds come from contributions by the incorporators of the bank to a guaranty fund and an expense fund. At the outset, the guaranty fund must be in the minimum amount of $5,000.1/ The initial contributions to the expense fund and the guaranty fund subsequently may be repaid to the incorporators but only after certain requirements regarding earnings are met.2/
The guaranty fund consists of the initial contributions plus all sums credited to the fund from earnings of the mutual savings bank pursuant to RCW 32.08.120(1). The purpose of this fund, as stated in RCW 32.08.100, is:
". . . for the protection of its [a mutual savings bank's] depositors against loss on its investments, whether arising from depreciation in the market value of its securities or otherwise. . . ."
Subsection 3 of that same statute then provides that the guaranty fund may not be encroached upon in any manner:
". . . except for losses and the repayment of contributions made by incorporators or trustees as hereinafter provided, until such fund together with undivided profits exceeds twenty-five percent of the amount due depositors."
Another statute, RCW 32.08.110 also describes the purpose of the guaranty fund in somewhat different terms, as follows:
"The contributions of the incorporators, or trustees of any such savings bank under the provisions of RCW 32.08.100, and the sums credited thereto from its net earnings under the provisions of RCW 32.08.120, shall constitute a guaranty fund for the security of its depositors, and shall be held to meet any contingency or loss in its business from depreciation of its securities or otherwise, and for no other purpose except as provided in RCW 32.08.130, and RCW 32.12.090(5)."
[[Orig. Op. Page 3]]
In addition to its guaranty fund, a mutual savings bank is empowered to establish other types of reserves for the protection of the bank. See, RCW 32.12.090(1) which permits the trustees of such a bank to
". . . deduct from its net earnings, and carry as reserves for losses, or other contingencies, or as undivided profits, such additional sums as they may deem wise."
On the typical balance sheet of a mutual savings bank the guaranty fund, the undivided profits account, and the reserve for losses account are included in that portion of the balance sheet which, in the case of corporations having capital stock, is ordinarily identified as the owners' equity portion. These funds or accounts are necessary since, as stated earlier, mutual savings banks have no capital stock ‑ and without the equivalent of owners' equity there would not be a cushion to protect either the depositors or other creditors of the bank in the case of financial difficulty or insolvency.
Having outlined the financial structure of a mutual savings bank we turn now to your first question; i.e.,
If a mutual savings bank is acting as a trustee under RCW 32.08.210, as amended by § 1, chapter 265, Laws of 1975, 1st Ex. Sess. (SSB No. 2469), and if by reason of its mismanagment of the trust a loss is sustained for which the bank is legally liable, to what assets of the bank may the injured parties look in order to recover for that loss?
A trustee, whether it be a mutual savings bank, a commercial bank, a trust company, or a private person, is not a guarantor of the assets of the trust ‑ although the trusteee does have a fiduciary responsibility to protect those assets and to carry out the purposes of the trust. Thus, a distinction must first be drawn between a trust loss which results even though the trustee has properly performed his fiduciary responsibilities and a loss which is caused by a breach of the trustee's fiduciary duties. In the first case the loss incurred by a trust will not result in any liability on the part of the trustee and thus there will obviously be no basis for a claim against any of the trustee's assets ‑ including its guaranty fund in the case of a mutual savings bank. This will be true whether the trustee is a mutual savings bank, a commercial bank, a trust company or a private individual.
[[Orig. Op. Page 4]]
Conversely, in those situations in which a mutual savings bank, as a trustee, has been adjudged to be liable to a settlor or beneficiary of the trust because of a breach of its fiduciary responsibilities in the management thereof, the injured settlor or beneficiary will thereby become a judgment creditor of the trustee bank. Generally speaking, there are no limitations as to the kinds of assets of such a bank to which such a creditor may look in order to satisy his judgment.3/ When such a judgment is paid the loss should first be charged against the bank's current income and then if it exceeds such income, to any equity accounts established by the bank in the following order: (1) against reserves for losses; (2) against undivided profits from prior periods; and (3) finally, when all other accounts are exhausted, against the guaranty fund.
While it can be argued that RCW 32.08.100, read alone, precludes the guaranty fund from being charged for such losses, it is our opinion that the later language of RCW 32.08.110 is controlling and permits such charges to be made.
RCW 32.08.100 originated as § 7, chapter 175, Laws of 1915, while RCW 32.08.110 codifies § 21 of that same act. Thus, the latter controls in accordance with the rule that where there are two conflicting sections of a statute the part which is latest in order of position will prevail unless the first part is clearer and more explicit than the later one. Schneider v. Forcier, 67 Wn.2d 161, 406 P.2d 935 (1965). A second rule which supports the same conclusion in this case is that where a statute first expresses a general intent and later an inconsistent particular intent, the particular intent will be taken as an exception to the general intent and both will stand. In re North River Logging Company, 15 Wn.2d 204, 130 P.2d 64 (1942).
RCW 32.08.110 provides that while the purpose of the guaranty fund is for the security of a mutual savings bank's depositors it is to be held to ". . . meet any contingency or loss in its business from depreciation of its [[Orig. Op. Page 5]] securities or otherwise. . ." A judgment obtained by a settlor or beneficiary of a trust which was mismanaged by such a bank would most certainly constitute a "contingency or loss" in the bank's business. Moreover, this interpretation is consistent with the overall purpose of the guaranty fund. The function of that fund is to serve as a cushion which is to be used to absorb losses so that deposits will remain intact. To limit the losses to be charged against the fund to those sustained on investments would serve no other purpose than to mislead those dependent upon the fund as security as to the amount of protection actually being afforded to them.
Based upon this analysis, our answer to your first question is that all of the assets of a mutual savings bank will be available to cover losses to a trust which are caused by its mismanagement by such a bank serving as trustee. In short, the guaranty fund statutes do not, in our opinion, restrict the use for this purpose of any assets of the bank.
We turn now to your second question, which asks:
In the event that such a mutual savings bank becomes insolvent will the injured parties described in question (1) have a legal preference over the depositors of the bank with respect to any particular funds or other assets of the involvent [[insolvent]]bank?
Capital, in the traditional sense, represents ownership in a corporation. The owners of the corporation share in its profits and also, to the extent of their ownership interest, they share in the losses of the corporation. The capital of a corporation is the base upon which the corporation builds and, as such, it is available to the creditors of the corporation to satisfy any of its debts. As we have seen, however, a mutual savings bank has no capital as such and no owners. The depositors in such a bank, rather than assuming an ownership role, are themselves creditors of the bank to the extent of their deposits.4/ Whether other classes of creditors would have priority over those depositors of the bank with respect to any particular funds or other assets is, however, unanswered in this state. There is no Washington case law establishing any priorities as between depositors and other creditors of a mutual savings bank with respect to its assets upon liquidation. Nor is there anything in the [[Orig. Op. Page 6]] liquidation statutes with regard to mutual savings banks5/ which sets forth the priorities of persons entitled to the assets of a mutual savings bank. Therefore, we must turn to the general authorities.
In 9 CJS, Banks and Banking, § 1039, the general rule with respect to mutual savings banks is said to be that:
"In the absence of a statute to the contrary, since a depositor is ordinarily considered as a creditor of a savings bank, supra, § 992, on insolvency of the bank, depositors stand as other creditors, having no greater, but equal rights to be paid ratably out of the insolvent estate. . . ."
Since the Washington statutes on the involuntary liquidation of a mutual savings bank are silent as to any priorities as between depositors or creditors, it thus appears ‑ given this general rule ‑ that an injured trust settlor or beneficiary who has thus become a creditor of a mutual savings bank will ordinarily have merely an equal right to that of the bank's depositors to any of the assets of the bank ‑ including the guaranty fund. At least this will be so unless, in a given case, a mutual savings bank serving as a trustee may have segregated certain securities to cover deposits of trust funds in its own savings accounts under RCW 30.24.030, supra.6/ Thus, subject to that one qualification we believe that your second question, as above paraphrased, must be answered in the negative.
We trust that the foregoing will be of assistance to you.
Very truly yours,
RICHARD A. HEATH
Assistant Attorney General
*** FOOTNOTES ***
3/For a possible exception, see RCW 30.24.030 which provides that a corporation doing a trust business may only invest trust funds in savings accounts with itself to the extent that such deposits are insured by FDIC or, if the amounts so invested exceed FDIC coverage, to the extent that they are secured fully by segregating certain obligations of the United States, a state or political subdivision.
4/See, 9 CJS, § 992.
5/RCW 32.24.050 and chapter 30.44 RCW. RCW 30.44.060 intimates that depositors and other creditors are treated equally upon liquidation except that depositors may file claims after the time limit fixed in the notice to other creditors.
6/See, footnote 3, above.