Banks and Banking: Foreign Corporations

Subject:

Banks and Banking: Foreign Corporations

Requested By:

Commissioner of Banks

Question:

May a national or state bank domiciled in a state other than North Carolina, which is acting as a trustee in its home state, purchase income producing real property in North Carolina under a lease-back arrangement?

Conclusion:

Yes, provided it is not part of a continuous scheme of Business dealings in North Carolina.

Introduction

On 28 July 1976 an informal opinion was issued by this Office expressing the view that a national bank, domiciled in another state, could not purchase income producing property in North Carolina as a trustee, under a lease-back arrangement. That conclusion rested upon a prior formal opinion reaching the same result respecting a foreign state bank. Op. N.C. Attorney General 37 Biennial Rep. 20 (1964). The premises were 1) a foreign bank cannot qualify to "do business" in North Carolina and 2) the transaction in question amounted to "doing business".

Serious questions have been raised concerning these two opinions and are the predication for this re-evaluation.

The legal principles which apply to the resolution of the question presented differ for national and state banks. Therefore, each will be discussed separately.

National Banks

Chief Justice John Marshall held, early in the life of the Federal Constitution that states have no power by taxation or otherwise to retard, impede or in any way interfere with the operations of a bank created by act of Congress. M’Culloch v. Maryland, 17 U.S. (4 Wheat) 316 (1819). It was clearly intended by those in federal government, from the inception, that national banks would do business in every state of the Union. See e.g. Alexander J. Dallas, "Proposal for a National Bank", (1811). reprinted in 4 The Annals of America 406 (1968). Justice Marshall found protection for that purpose in a conjunctive reading of the Necessary and Proper Clause, U.S. Const. Article I, § 8 and the Supremecy Clause, U.S. Const. Article 6. M’Culloch v. Maryland, supra.

Our own Supreme Court has fully recognized this limitation on state power. Board of Commissioners v. First Nat’l Bank of Snow Hill, 194 N.C. 475, 140 S.E. 208 (1927). Indeed, the Court has gone so far as to say that a national bank is not a foreign corporation having property or doing business in North Carolina under a license, express or implied, from this State, Leggett

v. Federal Land Bank, 204 N.C. 151, 167 S.E. 557 (1933).

The only qualification is that the dealings and contracts of national banks are governed by general state laws so long as they do not conflict with the laws of the United States, or frustrate the purpose for which the national banks were created or impair their efficiency. Waite v. Dawley, 94 U.S. 527 (1876).

It is also instructive to note that all of the Attorney General’s opinions which considered the issue prior to 1976 expressly excluded out-of-state national banks from the proscription against doing business in North Carolina. Op. N.C. Attorney General, 2 Dec. 1963; Op. N.C. Attorney General, 25 Biennial Rep. 219 (1940).

Foreign State Banks

Foreign state banks may not do business in North Carolina since 1) there is no provision in the banking act, Chapter 53, for the qualification of out-of-state banks and 2) while the Legislature has determined that the banking business needs supervision it gave the Commissioner of Banks no supervisory powers over banks other than those created under North Carolina law. G.S. 53-104. As a matter of policy, then, foreign state banks should not be allowed to do business here. See e.g., Op. N.C. Attorney General., 37 Biennial Rep. 20 (1964); Op. N.C. Attorney General, 26 Biennial Rep. 295 (1941).

There appears to be no constitutional objection to this position. Ashley v. Ryan, 153 U.S. 436 (1894); Bank of Augusta v. Earle, 38 U.S. (13 Pet) 519 (1839).

What is at question here is whether the purchase of income producing property under a lease-back arrangement amounts to "doing business"? Three informal opinions of this Office, although citing no authority, have answered this question in the affirmative. Op. N.C. Attorney General, 4 January 1960; Op. N.C. Attorney General, 17 May 1955; Op. N.C. Attorney General, 29 June 1951. See also Op. N.C. Attorney General, 5 August 1941.

The case law seems contrary to these opinions.

In Baden v. Washington Loan & Trust Co., 133 Md. 602, 105 A. 860 (1919) it was held that a trust company incorporated in another state and administering a trust therein is not "doing business" within another state for the purposes of a corporate qualification statute by making a contract to sell real estate owned by the trust estate in that state. It was reasoned that this was an isolated transaction and merely incidental to the execution of a trust which had its inception and was being principally administered at the domicile of the foreign corporation.

Although the case sub-judice involves a lease, that is a single transaction somewhat akin to a sale of the property for a term of years and more closely approaches an isolated transaction than the idea of "doing business". See, generally, Lambert v. Schell, 235 N.C. 21, 69 S.E.2d 11 (1952); Parris v. Fischer, 219 N.C. 292, 13 S.E.2d 540 (1941), Ruark v. Trust Co., 206 N.C. 564, 174

S.E. 441 (1934); Op. N.C. Attorney General, 3 November 1931.

In Cleveland Trust Co. v. Comm’r of Internal Revenue, 115 F.2d 481 (6th Cir. 1940), it was specifically held that the mere receipt of income from leased property and its distribution to cestuis que trustent amounts to no more than receiving the ordinary fruits that arise from the ownership of property and does not constitute doing business for tax purposes.

Generally, the Courts require a much stronger showing of in-state activities in order to invoke the sanctions of corporate qualification statutes than is required to subject the foreign corporation to local taxation or to state court jurisdiction through service of process. 36 Am. Jur. 2d. Foreign Corporations, § 324 (1968).

An indication of the direction our courts might take is found in Harrison v. Corley, 226 N.C. 184, 37 S.E.2d 489 (1946), where in deciding that a foreign corporation was doing business in North Carolina for jurisdictional purposes the Supreme Court said,

Looking through the form to the substance, it is apparent more than the mere relationship of lessor-lessee was contemplated. 226 N.C. at 188, (Emphasis added).

This opinion does not extend to those situations where the purchase and lease-back transaction is part of a continuous scheme of business transactions in North Carolina or where the corporation was established for the very purpose of engaging in such dealings. See, S. & A. Realty Co. v. Hi burn, 249 So.2d 379 (Miss. 1971); Annot. 59 A.L.R.2d 1131 (1958).

Rufus L. Edmisten Attorney General

Lucien Capone, III Associate Attorney General