1977, January, Pg. 24. Off-Premises Customer-Bank Communication Terminals: New Growth on the Old Branch Doctrine.

• Author: by Thomas P. McMahon

6 Colo.Law. 24

Colorado Lawyer

1977.

1977, January, Pg. 24.

Off-Premises Customer-Bank Communication Terminals: New Growth on the Old Branch Doctrine

24Vol. 6, No. 1, Pg. 24Off-Premises Customer-Bank Communication Terminals: New Growth on the Old Branch Doctrineby Thomas P. McMahon and Neil PeckThomas P. McMahon, Denver, is associated with, and Neil Peck, Denver, is a partner in the firm of Davis, Graham & Stubbs.25Colorado law, like that of many states, provides for "unit" banking: in general, with but one minor exception for a limited-purpose "detached facility," it prohibits any bank situated in Colorado from doing business at any "branch" location separate and apart from its main office.(fn1) On August 20, 1976, the United States Court of Appeals for the Tenth Circuit ruled, in Colorado ex rel. State Banking Board v. First National Bank of Fort Collins,(fn2) that First National's establishment of an Automated Teller Machine ("ATM") approximately three miles away from its main office constituted branch banking in violation of applicable Colorado and U.S. statutes. In so doing, the Tenth Circuit became the fourth federal appellate court to rule that national banks' off-premises Customer-Bank Communication Terminals ("CBCTs")(fn3) are branch banks within the meaning of federal law.(fn4)

The legal status of such devices became a matter of concern among banking interests as the result of an interpretive ruling promulgated late in 1974 by the United States Comptroller of the Currency.(fn5) He declared that off-premises CBCTs do not constitute bank branches and therefore may be established and operated by national banks without regard for state and federal branching restrictions to which national banks are otherwise subject by virtue of the McFadden Act.(fn6) The purported effect of the Comptroller's ruling was to authorize national banks to engage electronically in off-premises banking transactions which, in those states restricting branch banking, were prohibited to state banks. As a result, in an effort to preserve state banks' "competitive equality" with national banks, lawsuits attacking the ruling as violative of state and federal law were filed in several federal courts.

This article, focusing on the Ft. Collins case, analyzes the opinions of those federal trial and appellate courts which have considered whether CBCTs are branch banks, and seeks to demonstrate that the manner in which this issue has been resolved by the courts can materially affect both the speed and direction of the development and implementation of Electronic Funds Transfer ("EFT") systems of which CBCTs are a part.

The Federal Statutory LawThe McFadden Act, Section 36 of the National Bank Act, deals with the subject of branching by national banks. Section 36(c) permits the law of a state to determine whether a branch of a national bank

26may exist within that state, and if so, where it may be located(fn7) and, impliedly, upon what conditions and in what manner it may be operated.(fn8) However, Section 36(f) delimits the activities which constitute branch banking insofar as national banks are concerned. In pertinent part, it provides, "The term 'branch'. . . shall be held to include any branch bank, branch office, branch agency, additional office or any branch place of business located in any State. . . at which deposits are received, or checks paid, or money lent."(fn9) Consequently, in litigation over participation by national banks in EFT systems in states imposing limitations on branching, the central issue has been whether deposits are received, checks are paid or money is lent at off-premises CBCTs, thus constituting such facilities branch banks.

The Federal Case LawThe definitive interpretation of the McFadden Act was set forth by the Supreme Court in First National Bank of Logan v. Walker Bank & Trust Co.(fn10) and First National Bank in Plant City v. Dickinson.(fn11) In Walker Bank the Court determined that the entire legislative purpose of the Act was to place national banks on a footing of "competitive equality" with state banks regarding branch banking by granting them specific authority, which they had previously lacked, to engage in branching to the same extent that state banks were authorized to do so. In Plant City the Court, relying on the legislative comment of Rep. McFadden that a branch is "(a)ny place outside of or away from the main office where the bank carries on its business of receiving deposits, paying checks, lending money, or transacting (sic) any business carried on at the main office. . .,"(fn12) stressed that the definition of a "branch" set forth in Section 36(f) constitutes merely the minimum content of that term and must not be given a restrictive meaning which would frustrate the foregoing legislative purpose. Thus, with respect to whether off-premises activities by national banks constitute branching, the Court emphasized that the decisive factor is whether the banks in question thereby achieve a competitive advantage over state banks prohibited from providing such off-premises services.

The Fort Collins CaseIt was against this backdrop that Judge Richard P. Matsch of the United States District Court for Colorado was called upon, in the Fort Collins case, to render the very first judicial assessment of the validity of the Comptroller's ruling and the status of a national bank's off-premises CBCT. There Colorado banking authorities sought to preclude First National's operation of the off-premises ATM, alleging that it was violative of both Colorado law restricting branch banking(fn13) and federal law making such restriction applicable to national banks in Colorado.(fn14)

In his ground-breaking opinion, Judge Matsch first took note of the Supreme Court's finding in Walker Bank that the intent of Congress in enacting the McFadden Act was to place national banks on a footing of "competitive equality" with state banks concerning branch banking. He likewise noted that in Plant City, a case involving a stationary off-premises receptacle for the receipt of packages containing cash or checks for deposit, the Supreme Court gave further definition to that standard. There the Court rejected the argument that deposits could not be considered "received" until taken to the bank and verified, reasoning that since convenience to the customer is not dependent on the timing of the actual establishment of the debtor-creditor relationship, the goal of "competitive equality" would be frustrated if national banks alone were able to

27provide the service of accepting monies for deposit at locations separate from their main offices.

With the foregoing rationale in mind, Judge Matsch could see no difference between the depository function of the ATM in question and that of the deposit receptacle which was the subject of the decision in Plant City. As a result, notwithstanding his apparent recognition of the fact that mailboxes are not considered branches even though they too are commonly used to accept deposits for ultimate transmission to a bank, he concluded that the ATM was, within the meaning of Section 36(f), a place at which deposits were "received."

Without any explanation, however, Judge Matsch ruled that the utilization of the ATM by First National's customers merely to transfer funds between their own accounts at the bank did not constitute the making of a "deposit." Evidently this conclusion was based on his perception that it is a common (and analogous) banking practice for customers to transfer funds between accounts in different banks through communications by wire or telephone without the telegraphs or telephones so utilized being deemed branch banks.

Apparently assuming, without deciding, that withdrawals from savings accounts do not constitute the paying of checks because checks are not drawn thereon,(fn15) Judge Matsch next considered only the legality of the use of the ATM to make cash withdrawals from checking accounts. Although noting the obvious similarity of result between customers' use of the ATM to obtain cash and their drawing and presentment of checks at the bank for the same purpose, he deemed the controlling difference to be the means by which the customers communicated with the bank. Relying upon both the dictionary and UCC definitions of a check, Judge Matsch concluded that instructing the bank to pay out cash by depressing keys on the machine did not constitute the writing of an order drawn on the bank and payable as stated; rather, such use of the ATM was comparable to the wire transfer of funds not normally considered to be payment of a "check." Consequently, he ruled that use of the ATM to withdraw cash from checking accounts did not make that device a place at which "checks" were paid. Thus, he did not reach the question where "payment," if it occurred, took place.

The final function evaluated by Judge

28Matsch was the utilization of the ATM by First National's customers to obtain cash advances on prearranged credit accounts (whether charge accounts or lines of credit in conjunction with checking accounts). He could find no apparent functional difference between such use of lines of credit and the use of bank credit cards (or, presumably, overdraft credit checks or debit cards) to obtain cash, services or products from retail merchants who accept them.(fn16) Thus, in Judge Matsch's view, to conclude that obtaining cash advances on prearranged credit accounts constituted branch banking would have...