## Facts

- Shillington Bank was a small Pennsylvania state-chartered bank in the Reading area that became financially distressed in the early 1930s.
- To prevent Shillington Bank from closing, eight nearby banks agreed to support it by guaranteeing credit: each bank guaranteed $12,500, for a total guarantee of $100,000.
- The participating banks acted on the view that a bank closure would damage public confidence and could trigger withdrawals at other banks, harming the local banking business generally.
- Farmers National Bank & Trust Company of Reading (a national bank) was one of the eight banks that joined the guaranty arrangement.
- Shillington Bank owned shares of Farmers Bank and became entitled to dividends Farmers declared on those shares.
- After Farmers Bank went into receivership, H. F. Dunn, as receiver, refused to pay a dividend owed to Shillington Bank (then represented by liquidating trustees, including McCoy).
- The Shillington trustees sued the receiver to recover the unpaid dividend.
- The receiver counterclaimed, seeking to recover dividends previously paid to Shillington Bank, arguing that the underlying guaranty arrangement was beyond the national bank’s statutory powers (ultra vires), making the dividend payments improper.

## Issues

1. Whether a national bank has authority, as part of its incidental banking powers, to participate in a credit-guaranty arrangement designed to keep another bank open and protect local banking conditions.
2. If the guaranty were beyond the bank’s powers, whether the receiver could (a) refuse to pay a declared dividend on stock held of record by Shillington Bank’s liquidating trustees and (b) recover dividends already paid on the theory that the prior payments stemmed from an ultra vires arrangement.

## Decision

- The Third Circuit affirmed the district court’s judgment for the Shillington Bank liquidating trustees.
- The court held that the receiver was required to pay the declared dividend.
- The court rejected the receiver’s counterclaim for repayment of earlier dividends.

## Legal Principles

- National banks have not only express statutory powers but also incidental powers necessary to carry on the business of banking; a guaranty-type commitment can be within those incidental powers when it is tied to legitimate banking interests rather than a separate surety business.
- A national bank may take reasonable steps, through ordinary banking arrangements, to protect its own business and the local banking environment, including joining a coordinated credit plan intended to prevent a neighboring bank’s failure.
- A receiver generally stands in the bank’s position and may not use an ultra vires theory to keep benefits or unwind completed dealings in a way that would be unfair to parties who relied on the bank’s participation.
- Dividends declared on stock are payable to the shareholder of record (or its successor, such as liquidating trustees) absent a valid defense; an asserted lack of authority in an earlier related transaction did not, on these facts, defeat the trustees’ right to the dividend or justify restitution of dividends already paid.

## Conclusion

Dunn v. McCoy held that Farmers Bank’s participation in a multi-bank credit guaranty to keep Shillington Bank open fell within the national bank’s incidental powers given the banking purpose of preventing a damaging local bank failure; accordingly, the receiver could not withhold a declared dividend owed to Shillington Bank’s liquidating trustees or recover earlier dividends by labeling the guaranty arrangement ultra vires.


Dunn v. McCoy, 113 F.2d 587 (1940)