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(88 Conn. 185) LIPPITT et al., Bank Com'rs, v. THAMES LOAN & TRUST CO.

(Supreme Court of Errors of Connecticut. April 28, 1914.)

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1. CORPORATIONS (§ 566*) · INSOLVENCY CLAIMS-PRIORITY.

6. BANKS AND BANKING (§ 299*)-SAVINGS BANKS-INSOLVENCY-SET-OFF.

A depositor in the savings department of a trust company cannot, on its insolvency, set off his deposit in the commercial department or in the savings department against his debt to the company as a borrower from the savings department.

[Ed. Note.-For other cases, see Banks and Banking, Cent. Dig. 88 1157, 1158; Dec. Dig. § 299.*]

Upon the insolvency of a corporation equity will place all creditors upon an equality, in the absence of a statute or rule of law prevent-7. BANKS AND BANKING (§ 315*)-INSOLVENing it from doing so.

[Ed. Note. For other cases, see Corporations, Cent. Dig. §§ 2283-2286; Dec. Dig. § 566.*] 2. CORPORATIONS (§ 566*)-INSOLVENCY-DISTRIBUTION OF ESTATE-PRIORITY OF CLAIMS. In the distribution of an insolvent corporate estate, the expenses of administration and taxes have priority of payment.

[Ed. Note. For other cases, see Corporations, Cent. Dig. §§ 2283-2286; Dec. Dig. § 566.*] 3. BANKS AND BANKING (§ 317*)-TRUST COMPANIES INSOLVENCY-DISTRIBUTION OF ASSETS.

Gen. St. 1902, § 3482, provides that the avails of the property of any bank or trust company in the hands of a receiver shall be appropriated ratably to the payment of: (1) The charges and expenses of settling its affairs; (2) any circulating notes; (3) all deposits; (4) al sums subscribed and paid in for its stock by the state, and (5) all other liabilities, and that the surplus shall be distributed among stockholders. The charter of the Thames Loan & Trust Company, section 5, provides that all the capital stock, property, and estate of every kind belonging to the company shall be charged with the fulfillment of the trusts and the bank deposits, and said trusts and other funds, as the first and prior lien thereon, in case of the failure of said corporation. Held, that all deposits of an insolvent trust company, whether in a savings or commercial department, should be treated alike, and are payable from the avails after payment of the expenses of settling the receivership, including taxes, and any outstanding circulating Lotes, etc.

[Ed. Note.-For other cases, see Banks and Banking, Cent. Dig. § 1222; Dec. Dig. § 317.*] 4. BANKS AND BANKING (§ 317*)-SAVINGS BANKS-INSOLVENCY-DISTRIBUTION OF DE

POSITS.

Pub. Acts 1907, c. 85, § 1, provides that all trust companies maintaining a savings department shall invest savings deposits according to the statutes concerning the investment of depos its in savings banks, and such investments shall be for the exclusive protection of the depositors in the savings department, and shall not be used to pay any other obligation of the company until after payment of all deposits in the savings department. Held, that the statute does not deprive a savings depositor in an insolvent trust company of his right, under its charter, to a prior lien upon all of the assets of the company, or the right to share ratably in the avails in the hands of the receiver in the order fixed by statute, but merely adds to those privileges the right given by section 1.

[Ed. Note. For other cases, see Banks and Banking, Cent. Dig. § 1222; Dec. Dig. § 317.*] 5. BANKS AND BANKING (§ 299*)-SAVINGS BANKS RELATION WITH DEPOSITOR.

A certificate of deposit issued by the savings department of a trust company created the relation of debtor and creditor.

[Ed. Note.-For other cases, see Banks and Banking, Cent. Dig. §§ 1157, 1158; Dec. Dig. § 299.*]

CY-SET-OFF OF DEBTS.

A borrower from the commercial department of an insolvent trust company may, unlike a borrower from the savings department, set off his claim against the commercial department as a depositor against his debt, the receiver of the trust company taking the property subject to all claims against it before insolvency, leaving only the balance as assets.

Banking, Cent. Dig. §§ 1219-1221; Dec. Dig. § 315.*]

[Ed. Note.-For other cases, see Banks and

8. BANKS AND BANKING (§ 317*) — TRUST COMPANIES-INSOLVENCY-SET-OFF.

A set-off cannot be allowed in distributing the assets of an insolvent trust company, where of distribution provided by statute. its allowance will destroy the order or equality

[Ed. Note. For other cases, see Banks and Banking, Cent. Dig. § 1222; Dec. Dig. § 317.*] 9. BANKS AND BANKING (§ 315*)-INSOLVENCY-DISTRIBUTION-SET-OFF.

A borrower from the commercial department of an insolvent trust company in the hands of a receiver may set off his deposit in the savings department against his loan from the commercial department, and the fact that he deposited with his savings deposit book two orders as collateral security when he procured the loan, and is financially responsible, will not prevent such set-off.

[Ed. Note.-For other cases, see Banks and Banking, Cent. Dig. §§ 1219-1221; Dec. Dig. § 315.*]

10. MORTGAGES (§ 278*) CONVEYANCE OF EQUITY OF REDEMPTION-PERSONAL LIABILITY OF GRANTEE.

A conveyance to a grantee "subject to said mortgage" did not impose any personal liability on the grantee for the mortgage debt.

[Ed. Note. For other cases, see Mortgages. Cent. Dig. §§ 729-736; Dec. Dig. § 278.*1 11. BANKS AND BANKING (§, 315*)-CLAIMS SUBJECT-MUTUAL DEBTS."

"Mutual debts," within Gen. St. 1902, § 649, providing that if there be "mutual debts between the plaintiff or plaintiffs, or either of them, and the defendant or defendants, or either of them, one debt may be set off against the other," means cross debts in the same capacity and right, and of the same kind and quality, so that, in an action by the receiver of an insolvent trust company against a partnership upon its negotiable note, a partner could not set off his individual debt due from the trust company, if the note was joint as to the partners, but the cross debts would be mutual so as to permit a set-off if the note was joint and several.

[Ed. Note.-For other cases, see Banks and Banking, Cent. Dig. §§ 1219-1221; Dec. Dig. § 315.*

For other definitions, see Words and Phrases, vol. 5, pp. 4649, 4650.]

12. BANKS AND BANKING (§ 135*)—INSOLVENCY-SET-OFF.

An indorser upon a note, held by an insolvent bank may, after the bank's insolvency,

•For other cases see same topic and section NUMBER in Dec. Dig. & Am. Dig. Key-No. Series & Rep'r Indexes

set off his deposit in the bank against its demand upon him as indorser, provided, however, the maker cannot pay and the indorser has not been indemnified against loss.

[Ed. Note. For other cases, see Banks and Banking, Cent. Dig. §§ 375-379; Dec. Dig. 8 135.*]

13. BILLS AND NOTES (§ 190*)-INDORSEMENT FOR COLLECTION-RELATION CREATED.

An indorsement of notes "for collection and remittance" was a restrictive indorsement, which created the relation of principal and agent, and the agent stood toward the principal as a trustee.

[Ed. Note. For other cases, see Bills and Notes, Cent. Dig. §§ 454, 455; Dec. Dig. 190.*]

14. BANKS AND BANKING (§ 156*)-INDORSEMENT FOR COLLECTION.

A bank to which notes were indorsed for collection would change its relation to the indorser, from that of agent to that of debtor, by mingling the funds collected with its own funds and crediting the collections to the indorsing bank, but if it held the funds collected for the purpose of making immediate remittance in due course of business, the relation would not be changed, and on the collecting bank's failure pending transmission the indorsing bank would be entitled to the funds.

[Ed. Note.-For other cases, see Banks and Banking, Cent. Dig. §§ 539-546; Dec. Dig. § 156.*]

15. BANKS AND BANKING (§ 166*)-INDORSEMENT FOR COLLECTION.

One who indorsed notes to a bank for collection, which afterwards became insolvent, had the burden of proving, in proceedings by the receiver of the insolvent bank for distributing its assets, that the bank, after collecting the notes, mingled the proceeds with its own funds instead of transmitting them immediately to the indorser, so as to make it a trustee as to such

funds.

[Ed. Note.-For other cases, see Banks and Banking, Cent. Dig. §§ 574–578, 586; Dec. Dig. § 166.*]

16. BANKS AND BANKING (§ 166*)—TERMINATION OF AGENCY.

The insolvency of a bank to which notes were forwarded for collection and remittance terminated its authority to collect.

[Ed. Note. For other cases, see Banks and Banking, Cent. Dig. §§ 574–578, 586; Dec. Dig. § 166.*]

17. BANKS AND BANKING (§ 166*)-COLLEC

TION.

If a trust company to which notes were forwarded for collection collected the notes after its agency to collect was terminated by its insolvency, it held the proceeds as agent for the indorsing bank, impressed with a trust, so as to give such funds the character of trust funds in the distribution of the assets of the insolvent trust company.

[Ed. Note.-For other cases, see Banks and Banking, Cent. Dig. §§ 574-578, 586; Dec. Dig. § 166.*]

18. EVIDENCE (§ 20*) -JUDICIAL NOTICE BANKING CUSTOMS.

The Supreme Court of Errors will take judicial notice that items of indebtedness collected by one bank for another are in fact credited to the forwarding bank, whether or not the letter to the collecting bank states that the items are forwarded "for collection and remittance," and that moneys so collected are mingled with the funds of the collecting bank.

[Ed. Note. For other cases, see Evidence, Cent. Dig. § 24; Dec. Dig. § 20.*]

19. BANKS AND BANKING (§ 315*) - CLAIM SUBJECT.

Where an insolvent trust company held as trustee an amount which it had collected as agent of a correspondent bank, an amount due the insolvent trust company in its corporate capacity from the correspondent bank could not be set off against such amount held in trust.

[Ed. Note.-For other cases, see Banks and Banking, Cent. Dig. §§ 1219-1221; Dec. Dig. § 315.*]

20. CORPORATIONS (§ 565*)-INSOLVENCY-ALLOWANCE OF INTEREST.

Only claims existing at the time of the in-
solvency of a corporation are, as a rule, deemed
obligations of the estate; and hence interest
cannot be allowed on claims after insolvency is
pursuant to Gen. St. 1902, § 3461.
judicially declared or a receiver is appointed

Cent. Dig. §§ 2281, 2282; Dec. Dig. § 565.*]
[Ed. Note. For other cases, see Corporations,
21. BANKS AND BANKING (§ 80*)—INSOLVEN-
CY-INTEREST ON CLAIMS.

Interest cannot be allowed on claims against an insolvent banking corporation between the making of an order pursuant to Pub. Acts 1913, c. 187, § 10, restraining the corporation from paying its deposits or any dividend thereon, and the appointment of a receiver.

[Ed. Note. For other cases, see Banks and Banking, Cent. Dig. §§ 184-196; Dec. Dig. § 80.*]

22. CORPORATIONS (§ 565*)—INSOLVENCY-INTEREST ON CLAIMS.

Claims against an insolvent corporation, which carry interest by contract or as legal damages for a debt already due, draw interest up to the adjudication of insolvency or the appointder restraining the payment of dividends. ment of a receiver, or the making of a court or

[Ed. Note. For other cases, see Corporations, Cent. Dig. §§ 2281, 2282; Dec. Dig. § 565.*] 23. CORPORATIONS (§ 565*)--INSOLVENCY-IN

TEREST ON CLAIMS.

more than sufficient to pay the claims as against If an insolvent corporate estate proves the company and its shareholders, interest should be allowed upon the claims as due at the date of adjudication of insolvency, or the ap pointment of a receiver, or the making of an order restraining the payment of dividends.

[Ed. Note. For other cases, see Corporations, Cent. Dig. §§ 2281, 2282; Dec. Dig. § 565.*1 24. BANKS AND BANKING (§ 80*)-DUTY OF RECEIVER.

The receiver of an insolvent banking corporation should take such position with reference to the payment of claims, etc., as in his judgment will best protect the estate.

[Ed. Note.--For other cases, see Banks and Banking, Cent. Dig. §§ 184 196; Dec. Dig. § SO.*]

Case Reserved from Superior Court, New London County; Gardiner Greene, Judge.

Bank Commissioners, against the Thames Proceeding by Norris S. Lippitt and others, Loan & Trust Company. Application by the receiver of the trust company for advice in the execution of his trust, brought to the superior court and reserved upon stipulated facts for the advice of the Supreme Court of Errors. Judgment advised as stated.

Williams, a judge of the superior court, made On April 16, 1913, Hon. William H. an order pursuant to G. S. § 3460, restraining the Thames Loan & Trust Company for

depositors," and if these prove insufficient are they entitled as to the balance to share in the other assets? And is the said sum of $$1,035.66 to be included in the investments set aside for savings depositors?

[1-3] Upon insolvency of a corporation, a court of equity will, unless the rules of law, or statute law, forbid, place all creditors upon an equality. Certain priorities are generally recognized in the distribution of the avails of the insolvent estate. The expenses of administration are first paid, and all taxes have priority of payment. Frequently the order of payment of creditors is prescrib

a period of three months from paying outings department depositors entitled to be funds or deposits and from declaring and paid out of the assets "set aside for savings paying dividends on its deposits or capital stock. On June 27th the court appointed Hon. Charles F. Thayer, receiver of the company, and on July 3d he qualified. The Thames Company was chartered in Connecticut in 1869, and since 1903 has done in Norwich a general banking and trust company business, taking general and special deposits, and has also conducted a savings department in which it had three classes of savings depositors, called a savings department, a home department, and a school savings system. Its commercial deposits were evidenced by pass books and certificates of deposit; and its savings department deposits by passed by statute in whole or in part. Our statbooks. All of the business was conducted in the same rooms and by the same persons, and all moneys were paid in and out over the same counter and by the same clerks, and when paid in the moneys were mingled in the same till or drawer. Moneys received in the commercial department were entered in separate books, and, so far as the book keeping was concerned, kept separate from the savings deposits. Moneys received from the depositors in the three classes of the savings department were entered in separate books, and an account kept with each depositor. On April 16, 1913, the credit balance in the savings department was $589,536.59, and the company had set aside for the savings depositors assets aggregating $508,500.93. The balance, $81,035.66, was uninvested and in the general fund. The appraisal value of these is $399.225.43. The appraisal value of all other assets is $322,972.37. The total liabilities are $884,185.38. The questions on which advice is asked, together with the special facts relating to them, are sufficiently

ute so prescribes in the case of a bank or trust company in the hands of a receiver. G. S. § 3482, provides: "The avails of the property of any bank or trust company in the hands of a receiver or receivers shall be appropriated ratably to the payment of: (1) The charges and expenses of settling its af fairs; (2) the circulating notes, if any; (3) all deposits; (4) all sums which have been subscribed and paid in for its stock by the state or the school fund; (5) all other liabilities; and the surplus shall be distributed among the stockholders." This statute has been in force since 1837, long prior to the granting of the charter to the Thames Company. Under it all deposits of a trust company, whether in a savings or a commercial department, are to be treated alike and payable from the avails after payment of the charges and expenses of settling the receiv ership (including taxes) and of any outstanding circulating notes. Savings deposits and commercial deposits are referred to as deposits in the statutes in force at and prior to the granting of its charter to the Thames Charles F. Thayer and Charles V. James, Company. Our statute in treating all deposiboth of Norwich, for receiver. Amos A. tors alike, whether savings or commercial. Browning and Virtume P. A. Quinn, both of appears to have followed the general rule of Norwich, for Mary L. Avery and others, de- the law. People v. Mechanics & T. S. Inst., positors in savings department. Thomas M. 92 N. Y. 7; First Nat. Bank v. Armstrong Shields, of Norwich, for Jacob Gordon and (C. C.) 39 Fed. 231; Receivers of CorporaIrving L. Gardner. Lucius Brown, of Nor- tions, Gluck & Becker (2d Ed.) 339, 340. wich, for William H. Doane, Emma A. Warn- Unless repealed or modified by the charter er. Frances Tibbetts, and others. Joseph T. of the Thames Company or by subsequent Fanning, of Norwich, for City of Norwich statute, section 3482 provides the method of and others, depositors in savings depart-distribution of the avails of the company in ment. Ralph Royall, of Norwich, for National Reserve Bank of New York City.

stated in the opinion.

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the hands of the receiver.

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The charter authorizes the company to accept and execute all trusts and receive money on commercial or savings deposits. tion 5 provides: "All the capital stock, property and estate of every kind belonging to said company shall be and stand charged with the fulfillment of said trusts, and the payment of said deposits, and said trusts and other funds, as the first, and prior lien thereon, in case of the failure of said corporation." In terms the section impresses a prior lien upon all the assets of the company

certain order. Neither privilege was taken from him by this statute. Another protectory privilege was added to these. If the investments in the savings department should not suffice to pay the savings department de

posit was placed on a parity with all other depositors, and entitled on distribution to share ratably in the order prescribed by section 3482. The certificate of deposit creates the relation of debtor and creditor between it and the Thames Company. It stood in precisely the position of other deposits in its right to share in the distribution of the avails.

with it. The relation of debtor and creditor entered into between the depositors and the company was additionally protected by the preference accorded deposits in the assets. In the event of failure, their prior lien was to be satisfied ahead of the general liabili-positor in full, the unpaid balance of his deties of the company. G. S. § 3482, should be construed in connection with section 5 of the charter. Both effect the same purpose, to give all deposits and funds intrusted to it priority of payment over all general liabilities. The expenses of administration are in any event a first charge. So that only one class of creditors, holders of circulating notes, are placed by the statute ahead of depositors who, if the charter stood alone, might perhaps be held subordinate to depositors. As there is no contest in this case between holders of circulating notes and depositors, we need not determine which would be entitled to priority as against this company. Certain it is there is no suggestion in the charter that other parts of this statute are affected by the charter, so that claims against the estate must be marshaled in accordance with its terms. So far as concerns the questions submitted to us, there is no inconsistency between the charter and section 3482. Both may and should be given complete effect.

It follows from what we have said that all depositors in the several savings departments are on a parity; that the said assets "set aside for savings depositors" are to be applied to the payment ratably of all deposits in the several savings departments after paying the expenses of administration and taxes; that the avails remaining in the hands of the receiver are to be appropriated ratably to the payment of the balance of the savings department deposits and all other deposits; that the balance, if any, is to be distributed in accordance with section 3482; that the $81,035.66 is to be included with the commercial deposits, and is not to be treated as included in "investments set aside for savings depositors"; and that the Doane certificates of deposit are to be included among the commercial deposits.

[4] All classes of deposits in the distribution of the avails in the hands of the receiver would have shared ratably had not the distributions been affected by P. A. 1907, c. 85, § 1, which provides: "All banks and trust [6] Let us now take up the many questions companies maintaining a savings department, relating to set-off's. The Thames Company or soliciting or receiving deposits as sav- in its savings department was in reality ings, shall invest all such deposits hereafter operating a savings bank. The depositors in so received according to the requirements of this department were the equitable owners the statute laws of this state concerning the of the savings assets set apart in this deinvestment of deposits in savings banks; partment, and had made the company their and said investments shall be for the exclu- agents to receive, care for, and invest their sive protection of the depositors in said sav-moneys. Each depositor had an equal right ings department and shall not be liable for to his proportional share of all the funds of or used to pay any other obligation or lia- this department. Any debt he owed to the bility of said bank or trust company until department was owed to all of its depositors. after the payment of all of the deposits in Upon dissolution or insolvency he was ensaid savings department." Obviously this titled to share in its assets ratably with othprovision was intended to safeguard the saver depositors. If a depositor who was a borings department deposits of a bank or trust rower could set off his deposit at its face company by requiring: (1) That the invest-value against his debt, he might secure full ment of all such deposits shall be in the in-payment of his deposit and a greater share vestments by law permitted deposits in sav- of the assets than his fellow depositors. ings banks; (2) that the investments of such deposits shall be for the exclusive protection of the depositors in the savings department; and (3) that these investments shall be used to pay the savings department deposits before they can be used to pay any other liability of the bank or trust company.

[5] The purpose of the statute was to add to the protection of the savings department depositor, and not to diminish that which he already had. He had by the charter a prior lien upon all of the assets of the company. He had the right to share ratably in

This would destroy the rule of equality, and give a greater share of the assets to the borrowing than to the nonborrowing depositor.

For these reasons we have held that the depositor in a savings bank on the insolvency of the bank cannot set off his deposit against his debt. Osborn v. Byrne, 43 Conn. 155. 159, 21 Am. Rep. 641. The same rule must hold in the case of borrowers from the savings department of the Thames Company. The deposits of Case and of Mrs. Turner in the savings department cannot be set off

uation changed and the rule of equality to, ings department. At the beginning of the Le departed from because the borrower in the opinion we adopted the view that the savsavings department holds a deposit in the ings depositor is a creditor of the company commercial department. If the commercial for the whole of his deposit, and that he is depositor may set off his deposit against his additionally protected by the statute, which loan from the savings department, this may provides that the investments of the savings diminish the assets of that department and department shall be first used to pay savings give this borrower a larger share than other depositors. These conclusions might suggest depositors. The commercial deposit of Gor- a result that the depositor in the savings don and of Mrs. Turner cannot be set off department should first exhaust his deposit against their loans from the savings depart- and then set off merely the balance remainment. The deposit of Mrs. Turner as guard- ing due him against his debt to the comian of her minor son in the home depart-mercial department. But the only practiment is a savings department deposit, and it cannot be set off against her own loan from that department because set-off is not applicable to savings deposits, and, further, the debt owed by Mrs. Turner is owed in a different relation from that owed by the savings department to her as guardian. She could not, for the reasons stated, set off the deposits now belonging to her husband's estate in the commercial or savings departments against her debt due the savings de-mercial department is what will happen partment. And, further, her husband's estate has not yet been administered, and, so far as appears, she does not own either of these deposits.

cable and workable rule compels the set-off of the savings deposit against the loan from the commercial department. Such a rule may benefit the savings depositor by increasing his proportion in the savings assets although diminishing his dividend from the assets of the commercial department. Likewise it may benefit this borrower and deplete the assets of the commercial department. But this result to the borrower and to the com

where the deposit of a borrower in the commercial department is set off against his loan.

If the rule should be adopted that the set-off allowed should only be the amount of the balance due after receipt of the dividend from the savings department, the company could not collect such loans until all the sav

over. This would prejudice the borrower, as the interest upon his loan would continue. And it would delay the settlement of the estate, add to the administration and accounting burdens of the receiver, and by deferring the payment of dividends to the depositors in all likelihood lose the gain to them from the adoption of this rule in place of that adopted by us. The rule we adopt is far simpler and better adapted to the purposes of business. The simpler the rules of law affecting business relations can be made the better for business.

[7] The commercial department borrower, unlike the savings department borrower, may set off his claim against the commercial department, whether it be in the form of a deposit or otherwise. This follows from the re-ings investments were liquidated and paid lationship of the receiver to the company. The receiver is a mere trustee for the creditors, and takes the property subject to all the claims and defenses that were available against the company before its insolvency. [8] Mutual debts contracted in ordinary course of business before the insolvency may be set off. The balance only is an asset of the insolvent. Carroll Tr. v. Weaver et al., 65 Conn. 76, 81, 31 Atl. 489; Scott v. Armstrong, 146 U. S. 499, 13 Sup. Ct. 148, 36 L. Ed. 1059; Merwin v. Austin, 58 Conn. 22, 18 Atl. 1029, 7 L. R. A. 84; High on Receivers (4th Ed.) § 247; note, 23 L. R. A. 313. To this general rule there are certain limitations which do not concern us in this case. One of these is that set-off cannot be allowed when it will destroy the order or equality of distribution of the insolvent estate provided by statute.

Against the nine notes, upon some or all of which Norwich Overall & Shirt Company, Davidson, Rosenberg, Jacob Gordon, and David Gordon are makers, may be set off pro rata the deposit in the commercial department of Norwich Overall & Shirt Company. Gordon has the right to set off his deposit in the commercial department against his loans of $700 and $300. The estate of Turner may set off the deposit of Turner in the commercial department against his loan of $2,000 from it.

[9] We are also asked whether the borrower from the commercial department may set

We can see no adequate reason for creating out of this situation an exception to the ordinary rule permitting the set-off unless it be held that the savings department and the commercial department were in fact separate and independent institutions. In some respects the relation between these depositors is not unlike that of depositors in separate institutions. The law required the funds from the savings department to be kept separate, and invested in investments required by law for savings bank deposits, and required the company to pay the same tax as paid by savings banks, but did not require it to maintain the same statutory reserve as they were required to. In other features fundamental differences appear. The trustees, and not the depositors, control and manage the savings department fund.

We have seen that under the charter the savings depositors may, if the assets set

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