Story Case

The Colonial Trust & Savings Bank was incorporated to do a general banking, a savings bank, and a trust company business. It offered to pay three per cent upon savings deposits, and secured the great bulk of its deposits in this class. In its general commercial banking departments, it made loans to local merchants at good rates, and also bought securities of the speculative class, upon which it was fortunate enough to make large profits. Its trust business also produced fees and commissions which amounted to a large sum. Its operation was so conspicuously successful that it excited the cupidity of Daniel Richardson, one of its depositors. He brought a suit against the bank, alleging that he had carried a large deposit for all the time that the bank had been in existence, that during that time the bank had paid him only three per cent interest, that by the use of his money and that of the other depositors, the bank had received much more than three per cent interest and had accumulated a large surplus, besides having paid high dividends to its stockholders. He asked that, because of these facts, the court order the bank to pay to him and other depositors who should present their claims, that part of the surplus which would be in the proportion that the deposit bore to the total deposits.

The bank mantained that, as a depositor, Richardson had no interest in the profits or surplus of the bank, but that the stockholders only were entitled thereto. What should the court decide?

Ruling Court Case. Ackenhausen Vs. Peoples Savings Bank, Volume 110 Michigan Reports, Page 175; Volume - American State Reports, Page 338

Ackenhausen came from Germany to Detroit in 1893. On the steamer he made the acquaintance of Lange, and they went to Detroit together. Ackenhausen roomed and boarded with Lange and his family. Ackenhausen had about a thousand dollars in cash which he wished to deposit somewhere for safe keeping. He accepted his friend's suggestion that he place it on deposit with the People's Savings Bank. He signed his name for identification and was given a pass book in which his deposit was entered. This book also contained certain rules and regulations. One provided that the bank would not be liable, in case the book was stolen and the money paid out on a forged signature of the depositor. It was not shown that Ackenhausen's attention was called to this rule. Some months later, while Ackenhausen was away from home, Lange took the book from his friend's room, forged an order, and the bank paid him the full amount deposited.

He, thereupon, sued the Bank for the money. He showed that the bank was incorporated under a law which permitted it to have a capital stock and to retain all profits above a certain amount paid to the depositors by way of interest. This law also provided that all moneys deposited should be returned to the depositor. The bank contended that it was not liable, because it was only a savings bank, and liable only to take due care not to pay out money under such circumstances.

Decision: This rule limiting the liability of the bank did not bind Ackenhausen because it was not shown that he ever assented to it. Nor can the bank escape liability on the ground that it was only a savings institution. It was not a savings institution which acted as a mere agency for the depositors, all the profits of which were divided among the depositors, but it was an institution having a capital stock, the primary purpose of which was to make a profit for its stockholders.

In such a case, its undertaking is that of a debtor, to repay the amounts deposited under all circumstances and at all events.

Mr. Justice Moore said: "Until recently, the primary idea of a savings bank has been that it is an institution in the hands of disinterested persons, the profits of which, after deducting the necessary expenses of conducting the business, inure wholly to the benefit of the depositors, in dividends, or in a reserved surplus for their greater security. They were without capital and managed by trustees. The banks themselves derived no benefit whatever from any deposit or the produce thereof. In this state, savings banks, like the defendant bank, are organized under the general banking law. They are required to have a capital stock and stockholders. The depositors have no share in the profits of the business beyond the interest paid on their deposits; the profits of the business all belong to the stockholders. It may well be argued that if the depositors are to share in the profits of the business when it is profitable, they shall accept its losses without complaining, and not seek to hold the bank liable. On the other hand, if the bank is to take the profits of the business, where is the justice of asking the depositors to take the risks?" Judgment was given for Ackenhausen.

Ruling Law. Story Case Answer

The most common type of savings bank is the capital stock savings bank. This kind of bank is conducted primarily for the benefit of those interested in the bank, and not for the benefit of the depositors, except in an indirect way. Such banks are usually required to have a capital stock for the protection of their depositors. In this case, the bank is liable at all events to repay the deposits made. It cannot excuse itself by reason of the fact that no profits have been made, or that the money deposited has been lost without any fault on its part.

It is apparent that in the modern type of savings bank, the depositor is in no sense an owner of the bank. He is in legal effect only a creditor, that is, he has loaned money to the bank. The shareholders contribute a capital to give the bank a start and to establish its credit; they then make their profits by borrowing from great numbers of people at a low rate and loaning out to others at a higher rate. As a borrower, the bank must repay its loans, regardless of the profits gained from them, and usually stockholders are held liable for stated amounts, if the capital of the bank is not sufficient to repay the depositors. But the bank is also entitled, like any other borrower, to fix the rate of interest upon its loan. When it agrees to pay three per cent upon savings, the fact that it makes seven per cent with the money does not oblige it to pay more to the depositor. It is entitled to the profit as the compensation for its risks. Richardson has no action for a share in the surplus, as this is merely profits which have not yet been divided. Judgment should be given for the bank.