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March 14, 1975

M & M LEASING CORPORATION et al., Plaintiffs,
SEATTLE-FIRST NATIONAL BANK et al., Defendants. M & M LEASING CORPORATION et al., Plaintiffs, v. PEOPLES NATIONAL BANK et al., Defendants

Morell E. Sharp, District Judge.

The opinion of the court was delivered by: SHARP

These cases, consolidated for a nonjury trial before this Court, involve the legality under the National Bank Act, 12 U.S.C. § 24, of the motor vehicle leasing activities of national banks and their subsidiaries.

 The plaintiffs seek a declaration that the Comptroller's sanction of personal property leasing by national banks is invalid with respect to motor vehicle leasing because not authorized by 12 U.S.C. § 24 (Seventh). The plaintiffs also request an injunction barring defendant banks and their subsidiaries from further motor vehicle leasing activities. Even if the Comptroller's interpretive rulings are valid, plaintiffs argue that the defendant banks' activities have exceeded this authorization and should be enjoined to that extent.

 The National Bank Act, 12 U.S.C. § 24 (Seventh), grants national banks the power

"To exercise by its board of directors or duly authorized officers or agents, subject to law, all such incidental powers as shall be necessary to carry on the business of banking; by discounting and negotiating promissory notes, drafts, bills of exchange, and other evidences of debt; by receiving deposits; by buying and selling exchange, coin, and bullion; by loaning money on personal security; and by obtaining, issuing, and circulating notes according to the provisions of this chapter. . . ."

 The challenged Comptroller's interpretive ruling, 12 C.F.R. § 7.3400, states:

"A national bank may become the owner or lessor of personal property acquired upon the specific request and for the use of a customer and may incur such additional obligations as may be incident to becoming an owner and lessor of such property. Lease transactions do not result in obligations for the purpose of 12 U.S.C. 84. Since the lease payments are in the nature of rent rather than interest, 12 U.S.C. 85 and 86 are not applicable."

 Also involved is the interpretive ruling regarding operating subsidiaries, 12 C.F.R. § 7.7376, which states in part:

"(a) General rule. With the prior approval of the Comptroller of the Currency, a national bank may engage in activities, which are a part of the business of banking or incidental thereto, by means of an operating subsidiary corporation. In order to qualify as an operating subsidiary hereunder, at least 80 percent of the voting stock of the subsidiary must be owned by the parent bank.
"(b) Activities permitted. An operating subsidiary may perform any business function which the parent bank is permitted to perform. For example, through a bank department or an operating subsidiary, a national bank may issue credit cards, service mortgages, lease property, offer travel services, or operate a credit bureau."

 Plaintiffs' principal contention is that the "business of banking" does not include motor vehicle leasing. Defendants claim that such leasing is in substance the equivalent of traditional loan financing, which always has been a banking function and therefore falls within the scope of bank activities permitted by 12 U.S.C. § 24 (Seventh).


 In 1963 James J. Saxon, then Comptroller, issued the interpretive ruling, presently 12 C.F.R. § 7.3400, which authorizes the leasing of personal property by national banks. Today there are at least 650 national banks engaged in such leasing activity, with leases worth more than $2 billion. In addition, the statechartered banks of forty states are authorized either by state statute or by administrative regulation to engage in personal property leasing, and the value of such leasing is about $1 billion. Much of bank leasing activity involves so-called "big ticket" items, such as aircraft and ships. Motor vehicle leasing by banks is a relatively recent phenomenon; for example, Peoples entered this field in February of 1972, Seattle-First in April of 1973.

 Almost all of the defendant banks' motor vehicle leases are dealer-generated leases. *fn1" Each bank has entered into agreements with many franchised automobile dealers whereby the bank agrees to purchase leases generated by the dealer. The dealer is usually free to lease vehicles under any conditions satisfactory to him. He concludes the lease transaction with the lease customer, makes delivery of the automobile, and then promptly assigns the lease paper to the bank. However, before a dealer-generated lease is accepted by the bank, the bank approves both the substantive terms of the lease and the credit-worthiness of the lessee. The bank requires a higher credit rating for a lease customer than it does for a customer who purchases an automobile with a substantial down payment and a time-payment contract. The bank pays the dealer an agreed price for the lease, generally purchasing the paper without recourse. The vehicle title application is ...

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