December 14, 1994
The Honorable William T. Graham Commissioner of Banks Post Office Box 29512 Raleigh, North Carolina 27626-0512
Re: Advisory Opinion — Collateralization of Deposit Accounts Public Authority, G.S. § 159(b)(7)(10), G.S. §§ 159-30 and 31; Public Agency, G.S. § 117-33
Dear Commissioner Graham:
This will respond to your request for an opinion on the question of whether or not a bank, organized under North Carolina law, may collateralize certain deposits to the extent that the funds on deposit exceed FDIC insurance limits.
You indicate that in the supervision of banks under your jurisdiction, i.e., state banks, you have consistently taken the position that a bank may not pledge its assets to secure deposit accounts except to the extent authorized by statute or regulation. During the course of a recent examination of a state bank your agency criticized the bank’s collateralization of funds on deposit by Star Telephone Membership Corporation ("Star") and Murphy Electric Power Board ("Murphy EPB").
Together with your inquiry, you provided us with copies of informal letter opinions issued by this office on July 18, 1962, concluding that banks could not lawfully collateralize private deposits, and March 21, 1966, advising that a bank could not lawfully collateralize the deposits of Atlantic Telephone Membership Corporation. Additionally, you provided us with the following factual information.
FACTS
A. Star Telephone Membership Corporation
Star is a telephone membership corporation ("TMC") created under Chapter 117, Article 4, of the North Carolina General Statutes, and is subject to supervision by the North Carolina Rural Electrification Authority.
The depository bank takes the position that Star’s deposits may be collateralized for the following reasons. First, N. C. Gen. Stat. § 117-33 provides that "[a] telephone membership corporation . . . shall be, and is hereby declared to be a public agency, and shall have within its limits for which it was formed the same rights as any other political subdivision of this state. . . ." (Their Emphasis). Secondly, N. C. Gen. Stat. § 159-7(b)(10) includes within the definition of a "public authority" . . . a local government authority, board, commission, council, or agency that (i) is not a municipal corporation, (ii) is not subject to the Executive Budget Act, and (iii) operates on an area, regional, or multi-unit basis, and the budgeting and accounting systems of which are not fully a part of the budgeting and accounting systems of a unit of local government." Thirdly, N. C. Gen. Stat. §§ 159-30 and 31 require the deposits of "a local government or public authority" to be secured.
In summary, the depository bank contends that because a TMC is a "public agency," it is also by definition a "public authority" and is, therefore, subject to the collateralization provisions of N.
C. Gen. Stat. §§ 159-30 and 31.
B. Murphy Electric Power Board
The Town of Murphy Charter was revised and consolidated by the North Carolina General Assembly as Chapter 261 of the 1979 Session Laws. Article V of the Charter created the "Town of Murphy Electric Power Board."
It is your understanding that the Murphy EPB is regulated by the Tennessee Valley Authority, not the North Carolina Utilities Commission, and that the TVA auditors insist that the deposits of Murphy be collateralized.
Again, the depository bank contends that Murphy is either (i) a "public authority" pursuant to N.
C. Gen. Stat. § 159-7(b)(10), as cited above, or (ii) is a local government pursuant to N. C. Gen. Stat. § 159-7(b)(15). The latter provision of law defines a "unit," "unit of local government," or "local government" as a municipal corporation . . . not subject to the Executive Budget Act . . . and that has the power to levy taxes, and all boards, agencies, commissions, authorities, and institutions thereof that are not municipal corporations." (Their Emphasis). Finally, the depository bank reiterates that the deposits of a public authority or local government must be collateralized pursuant to N. C. Gen. Stat. §§ 159-30 and 31.
DISCUSSION
We revisited the question of whether or not a bank may, as a general rule, pledge assets to secure deposits and found that the principles of law recited in our earlier opinions continue to be the prevailing rules of law. First, ". . . attributable directly or indirectly to statutory provisions . . . " a bank may pledge assets to secure public deposits. 10 Am. Jur. Banks § 419 (1963). Secondly, with regard to the collateralization of private deposits, the heavily prevailing rule is that ". . . a bank, in the absence of express statutory authority, has no legal authority to pledge its assets or any part thereof to secure the deposits of private funds." Ibid at § 421. The rationale for the latter rule is that collateralization of private deposits gives an extra or secret protection to the secured depositor at the expense of the unsecured depositor.
Most importantly, our Supreme Court held in Sparks v. Trust Company, 256 N.C. 478, 124 S.E.2d 365 (1962), that "(s)tate banks have no powers beyond those expressly granted, or fairly incidental thereto. . . ." Although an earlier decision, Page Trust Company v. Rose, 192 N.C. 673, 135 S.E. 795 (1926), indicated that "(t)here is no statute in this state forbidding a transfer or assignment by a bank of its property as security for one who is a depositor in the bank," thus suggesting that a bank may secure the funds of any depositor, this was merely dicta as the issue of deposit security was not before the court. Furthermore, the reference to securing deposits in Page is contrary to the construction of banking powers reached in Sparks, a later decision, and the weight of authority against banks being able to secure nonpublic funds. For these reasons, we do not consider Page controlling and, therefore, continue to believe that a state bank may not, without express statutory authority, secure deposits.
Under specified circumstances, the North Carolina General Statutes expressly require collateralization of public funds. For instance, N. C. Gen. Stat. § 18B-702(d)(Cum. Supp. 1994) requires deposits of local ABC Boards to be secured; N. C. Gen. Stat. §§ 115C-444(b) and 115D58.7, respectively, require the funds on deposit by local school administrative units and community colleges to be collateralized; N. C. Gen. Stat. §§ 147-69 and 79 require funds deposited by the State Treasurer to be amply secured; and, as recited above, N. C. Gen. Stat. §§ 159-30(b) and 31(b) require the deposits of a "local government" or a "public authority" to be secured. We do not, however, find any specific statutes requiring or providing a bank with the authority to secure deposits of a TMC or a power board.
In view of the established rules of law and the North Carolina statutes on security of deposits, we focused our attention on whether or not the deposits of Star or Murphy EPB could be considered public or private funds. Clearly, if either entity’s deposits can be found to be "public funds," then a state bank may lawfully secure the same. If on the other hand, they are in fact private funds, it would be improper for the bank to collateralize these deposits.
A. Star Membership Corporation
As the facts indicate, Star is a TMC organized under the provisions of N. C. Gen. Stat. § 117-29. While N. C. Gen. Stat. § 117-33 declares that TMC’s are "public agencies" and gives them rights equivalent to a political subdivision of the state for the purpose for which they are formed, i.e., the delivery of telephone services to members, they are not made an agency of government. A public agency is not, in our view, a public authority or unit of government as defined by N. C. Gen. Stat. § 159-7(b)(10).
We further examined the matter by reference to rules promulgated by the State Treasurer regarding the collateralization of deposits. We note that 20 NCAC 07 .0102(6) defines a "Governmental Unit" to include ". . . any city, town, county, special district, public hospital, (or) public authority. . . ." Moreover, subpart (7) defines a "Participating Unit" as ". . . any governmental unit, any city or county school administrative unit, any community college, any local ABC Board, any university depositing money pursuant to G.S. 116-36(h), and the State Bar of North Carolina." Finally, the State Treasurer’s rules define "public deposits" as ". . . all deposits made to the account of the State Treasurer and all deposits made by a participating unit in any depository, including those held by the depository in an escrow capacity." (Emphasis Added). It is clear from the Treasurer’s rules that unless a TMC is included within the scope of a "public authority" its deposits are not "public deposits" and are not, therefore, required to be collateralized. The Rural Electrification Authority confirmed to us that TMC’s are in fact private nonprofit corporations.
Since we are of the opinion that a TMC is not a public authority or unit of government, and that there is no express statutory requirement that their deposits otherwise be secured, we conclude that a North Carolina bank may not lawfully collateralize Star Telephone Membership Corporation’s deposits.
B. Murphy Electric Power Board
As you have indicated, the Town of Murphy Charter was reestablished by the General Assembly through Chapter 261 of the 1979 Session Laws. Article V of the Charter, in particular, § 5.6, establishes the Electric Power Board as an independent unit of government insofar as the control, management and operation of the power system are concerned and also provides that this ". . . Article (V) shall be liberally construed to encompass such intent and purpose."
In view of this provision of law, the Murphy EPB would, in our opinion, clearly come within the scope of a "public authority" at N. C. Gen. Stat. § 159-7(b)(10). Additionally, it is, in our opinion, a board of the Town of Murphy, North Carolina, as conceived by N. C. Gen. Stat.§ 1597(b)(15). In either case, we conclude that it is entitled to have its deposits collateralized pursuant to N. C. Gen. Stat. §§ 159-30(b) and 31(b) and the rules promulgated thereunder by the State Treasurer.
Summary
It is our conclusion that Star Telephone Membership Corporation, although declared by statute to be a public agency, is not a public authority or unit of government. Therefore, without express statutory authority, its funds may not be lawfully secured by a North Carolina bank. On the other hand, the Murphy Electric Power Board is expressly declared by an act of the General Assembly to be a unit of government. It may, therefore, require its deposits to be secured as provided by law.
We trust this answers your inquiry on the matter. If we may be of further assistance, please do not hesitate to let us know.
Ann Reed Senior Deputy Attorney General
L. McNeil Chestnut
Assistant Attorney General