## Facts

- Drake leased office premises in Tucson, Arizona, to the Arizona National Bank of Tucson (Arizona Bank) for use as Arizona Bank’s banking office.
- Arizona Bank became financially unsound, and a transaction was arranged for the Consolidated National Bank of Tucson (Consolidated Bank) to take over most of Arizona Bank’s assets and assume certain obligations.
- As part of the takeover, Consolidated Bank accepted an assignment of Arizona Bank’s lease with Drake.
- Consolidated Bank did not intend to conduct its regular banking business at the leased premises except for a short period while Consolidated Bank’s main banking property was under construction.
- Years later, Consolidated Bank went into voluntary liquidation under the National Bank Act, and Houston was appointed as Consolidated Bank’s voluntary liquidating agent by the required shareholder vote.
- Houston notified Drake that he rejected the lease and refused to treat it as a continuing obligation of the liquidating bank.
- Houston filed an action seeking declaratory relief to determine Consolidated Bank’s rights and obligations under the lease.
- Drake counterclaimed for rent allegedly due under the lease, and the district court ruled that Consolidated Bank’s assumption of the lease was valid and enforceable against the bank in liquidation.
- Houston appealed, arguing Consolidated Bank lacked statutory authority to assume and carry the lease as a continuing obligation when the premises were not being held for the transaction of the bank’s business.

## Issues

1. Whether a national bank has authority under the National Bank Act to assume a long-term lease that is not taken or held for the bank’s accommodation in conducting its banking business (beyond a brief temporary use).
2. If the lease assumption exceeded the bank’s statutory powers, whether the voluntary liquidating agent may reject the lease and avoid liability for rent accruing after rejection.

## Decision

- The Ninth Circuit reversed the district court’s judgment and remanded.
- The court held that Consolidated Bank’s assumption of the lease was beyond the statutory powers of a national bank because the record did not show the premises were acquired or retained for bona fide banking use.
- Because the assumed lease obligation was ultra vires, Houston, as voluntary liquidating agent, could reject it and the bank’s estate could not be charged with rent accruing after the rejection (subject to any allowance for value received during any period of actual use or occupancy).

## Legal Principles

- A national bank’s powers are limited to those granted by the National Bank Act and those incidental powers necessary to carry on the business of banking.
- Under the Act’s restrictions on real-estate interests, a national bank may acquire or hold premises only when tied to the bank’s accommodation in conducting banking business (or within other specific statutory categories); holding a long-term lease as a continuing real-estate commitment without such a banking purpose exceeds the bank’s authority.
- The legality of a bank’s real-estate holding turns on the bank’s actual or intended use for banking operations; temporary, transitional use does not justify a long-term assumption when the ongoing purpose is not the transaction of banking business.
- In liquidation, a voluntary liquidating agent may refuse to perform an obligation the bank lacked power to undertake; an ultra vires contract cannot be enforced to impose continuing liabilities on the liquidating estate for periods after the agent’s rejection.
- Even when a contract is rejected as ultra vires, courts may allow recovery measured by benefits actually received (such as reasonable value for use and occupancy during any period the premises were used), rather than enforcing the full ongoing contract rent.

## Conclusion

In *Houston v. Drake*, the Ninth Circuit held that Consolidated Bank’s assumption of Arizona Bank’s lease was unauthorized because the premises were not taken or held for bona fide banking use beyond a short interim period, making the assumption ultra vires under the National Bank Act; accordingly, Houston, as voluntary liquidating agent, could reject the lease and prevent the liquidating estate from being bound for rent accruing after rejection, with any recovery limited to the value of benefits actually received.


Houston v. Drake, 97 F.2d 863 (1938)