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Property of Ihe Committee on the History of the Federal Reserve System Court Decisions and Opinions of the Attorney General affecting the Federal Reserve System Digests selected in 1955 for the Committee on the History of the Federal Reserve System by members of the Legal Division, Federal Reserve Board by courtesy of Mr. George Vest, Counsel, Federal Reserve Board. COURT DECISIONS and OPINIONS OF ATTORNEY GENERAL AFFECTING FEDERAL RESERVE SYSTEM The following pages contain digests of the principal court decisions and opinions of the Attorney General relating to the powers, duties, responsibilities and characteristics of the Federal Reserve System. The arrangement follows the plan used in the "Digest of Rulings of the Board of Governors of the Federal Reserve System11 dated October 1, 1937. In that book (which also contains digests of rulings by the Board, as well as digests of many court decisions not included in the following pages) each paragraph bears a number indicating the subject matter to which it relates. In general, the numbers correspond to a section of a statute, as explained more fully in the preface to the book. For example 13.100 is the first ruling under section 13 of the Federal Reserve Act, etc.. In the pages which follow, digests up to October 1, 1937 have been lifted from the book and carry the same paragraph numbers as they carry in the book. Digests after that date have been correspondingly numbered so as to place them with the earlier cases relating to the same subject• Any selection of this kind is a matter of judgment, and no two people would choose precisely the same cases. For example, the following pages do not contain digests of cases relating to matters which are not peculiar to the Federal Reserve System, such as cases arising out of personal injuries occurring on the premises of Federal -2Reserve banks, or in which the Federal Reserve bank appeared merely as the lessor of office space, or as the pledgee of property securing a promissory note. Criminal cases likewise have been omitted, even those arising out of regulations issued by the Board, because neither the Board nor a Reserve Bank was a party to those cases or directly interested in then* On the other hand, cases dealing with trust powers of national banks (Sec* 11 (k) of the Federal Reserve Act) are included because they reflect the struggle between State and federally chartered institutions for a class of business which previously had been regarded as the exclusive field of State chartered institutions• Consequently, anyone desiring to see digests of Board rulings relating to any of the topics covered in the following pages may do so by referring to the 1937 Digest of Rulings under corresponding paragraph numbers, and anyone desiring digests of cases relating to personal injuries, pledges, and other matters not covered herein will find digests of all such cases prior to October 1, 1937 in the Digest of Rulings, TABUS OF CUNTENTS FEDERAL RESERVE DISTRICTS 1 FEDERAL RESERVE BANKS Stock Branches Powers Suits against Taxation of 4 5 6 8 10 STATE MEMBER BANKS Membership, generally Conditions of Membership Investments Embezzlement 16 19 21 22 BOARD OF GOVERNORS 24 TRUST POWERS OF NATIONAL BANKS 31 FEDERAL ADVISORY COUNCIL 53 FEDERAL DEPOSIT INSURANCE 55 CHECK CLEARING AND COLLECTION 57 LOANS AND DISCOUNTS BY FEDERAL RESERVE BANKS 105 INDUSTRIAL LOANS BY FEDERAL RESERVE BANKS 130 OPEN MARKET OPERATIONS 132 DISCOUNT RATES 134 FEDERAL RESERVE NOTES 137 FEDERAL RESERVE BANK NOTES 139 RESERVES OF MEMBER BANKS 141 FOREIGN BANKING CORPORATIONS 145 JURISDICTION OF SUITS 147 PROPERTY OF FOREIGN STATES 150 TAXATION OF NATIONAL BANKS 152 RECEIPT OF UNLAWFUL PREFERENCES BY FEDERAL RESERVE BANKS 154 CLAYTON ANTITRUST ACT Acquisitions of Stock Interlocking Directorates 160 162 INTERLOCKING REUTIONSHIPS WITH SECURITIES DEALERS 163 FOREIGN FUNDS CONTROL 165 CERTIFYING CONVERSION RATES FOR FOREIGN CURRENCIES 167 FEDERAL RESERVE DISTRICTS 2.100. Abolishment of Federal Reserve districts or banks.— Under the Federal Reserve Act, the Board is not expressly and affirmatively given the power to abolish the Federal Reserve districts or Federal Reserve banks; it may only "readjust" such districts. 30 Op. Atty. Gen. 497(1915). 1915 BULLETIN 396. A ' ' 2.102. Change of location of Federal Reserve banks.—The Board docs not possess the power to change the present location of any Federal Reserve bank, irrespective of whether there has been an alteration or readjustment of the district line. 30 Op. Atty. Gen. 517 (1916). 1916 BULLETIN 207. FEDERAL RESERVE BANKS 4 2.300. Minimum capitalization.—The minimum capitalization of $4,000,000*of Federal Reserve banks, while a condition precedent to commencing business, is not a requirement that must continue to be complied with' after a Federal Reserve bank has commenced business. 30 Op. Atty. Gen. 517 (1916). 1916 BULLETIN 207. 3.100. Status of branch banks.—The Jacksonville Branch of the Federal Reserve Bank of Atlanta is not a mere messenger to receive and deliver papers and money on the orders of the Atlanta office, but is a true branch office authorized to act in ordinary banking transactions with member banks, with only a correctional supervision in Atlanta in case of error, or mistake or fraud. What occurs at the branch office has the same significance and effect as if it had o^jrred at the Atlanta bank. Anderson v. Federal Reserve Bank of l^oafji, 69 Fed. (2d) 319 (CCA. 5th, 1934), cert, den., 293 U. S. 562 (1934). NOTE.—For a full statement of this case see 13.1705. 4.424. Holding political office.—Directors of a Federal Reserve bank Tcannot hold active political offices. 1916 BULLETIN 168. 4.425. Holding over after expiration of term.—A director of a Federal Reserve bank has no authority to continue to serve as such 7 4.202. Power to purchase real estate.—While the Federal Reserve Act does not give to the Federal Reserve banks express power to acquire real property, a Federal Reserve bank has authority to purchase and own real estate for the purpose of supplying suitable banking quarters, such authority being implied from the power conferred by section 4 of the Federal Reserve Act upon Federal Reserve banks to exercise such incidental powers as shall be necessary to carry on the business of banking within the limitations of the Act, 34 Op. Atty. Gen. 527 (1925). 4.304. Board as indispensable party to suit against Federal Reserve bank.—In a suit to enjoin a Federal Reserve bank from restricting the supply of credit available for investment purposes by engaging in open market operations, from raising the rediscount rates, and from ! wrongfully coercing member banks to call collateral loans made to their customers by refusing to rediscount paper for such member banks, it was held that since the Federal Reserve Board was specifically authorized to regulate open market transactions, to review and determine rediscount rates and to make reports as to conditions in the Federal Reserve System, and since the Federal Reserve bank was a governmental agency under the direction of the Board, the Board was therefore an indispensable party to the suit and the bill should be dismissed for non^ , , - — ^ . • - 4.305• Certification by Reserve Rank Not Reviewable by Court*— The plaintiff imported, hides from Brazil in 1935. In liquidating the entry, the Collector converted the currency of the .invoice (Brazilian milreis) into United States dollars at a rate (#.08374) which had been certified to the Secretary of the Treasury by the Federal Reserve Bank of New York, acting under section 522(c) of the Tariff Act of 1930. The plaintiff protested, claiming that the rate was "erroneous and improper". The plaintiff served a subpoena duces tecum upon the Federal Reserve Bank, seeking production at the trial of the records upon which its certification had been based. The court quashed the subpoena, on motion of the Federal Reserve Bank, on the ground that its action in certifying such rates is not subject to judicial review. Armand Schmoll, Inc. v. United States. 20 Cust. Ct. 137s C. D. 1097 W . 3, Customs Court, Third Division, 1948). 19 7.203. Effect upon taxation of national banks.—The exemption of the capital stock of Federal Reserve banks from taxation under this section does not relieve the owners of shares of stock of national banks from : the taxation authorized by section 5219 of the Revised Statutes. Accordingly, the value of Federal Reserve bank stock which is held by a national bank can not be deducted from''the value of the shares of the latter for the purpose of taxation of such shares. First National Bank of Cincinnati v. Dim, 246 Fed. 163 iS.D.Ohio, 1917), affirmed in First National Bank of Cincinnati v. Beaman, 257 Fed. 729 (CCA. 6th, 1918). 1917 N 955. NOTE.—See also 7292; 26.100. . 7.204. Stamp tax on certificates of stock.—In the opinion of the Attorney General certificates of stock issued to member banks by Federal Reserve banks are exempt from the stamp tax imposed in Schedule A of the act of October 22, 1914 (38 Stat. 759). 30 Op. Atty. Gen. 511 (1916). 1916 BULLETIN 172. NOTE.—For text of letter of Secretary of Treasury relating to applicability of excise and check taxes under the Revenue Act of 1932 to the operations of the Federal Reserve banks, see 1932 BULLETIN 537. *'' r ; 12 7.206. State Taxation of Salary of Officer of Federal Reserve Bank.—The Governor of the Federal Reserve Bank sought to recover State income tax paid under protest on his salary. The Supreme Court of Minnesota held that the question depended on whether or not the functions ana purposes served by the Federal Reserve Bank are of such a character that the Governor of the Bank might be said to be employed as a necessary and proper means of executing the sovereign power of the United States. The court reviewed at length the purposes for which the Federal Reserve Banks were established. It alluded to the exemption from taxation given by the Federal Reserve Act, and said that this was a declaration that the functions of the bank are regarded by Congress as an exercise of sovereign power. After an extensive review of the legal questions, the court concluded that the salary was not subject to the State income tax. Geery v. Minnesota Tax Commission. 202 Mian. 366; 278 N. fc« 594 (1938). The Tax Commission appealed again, and the Supreme Court of Minnesota reaffirmed its decision. 204 Minn. 107; 282 N.to.673. The Commission petitioned the Supreme Court of the United States for a writ of certiorari. Thereafter, the petition was dismissed on the motion of the Commission, 307 U. S. 648, and the Supreme Court of Minnesota vacated its prior judgment en the basis of a stipulation of the parties that Geery should recover one-half of the taxes paid, the reason being that, since the decision of the Supreme Court of Minnesota, the Supreme Court of the United States had overruled its decisions relied on by the Minnesota courts in their earlier decisions. 204 Minn. 622; 285 N. W, 614 (1939). [The reason for stipulating that Geery should recover one-half of the taxes paid by him was that the decisions of the United States Supreme Court should not be given a retroactive effect, but that his salary should be taxable thereafter.] Geery v. Minnesota Tax Commission, 204 Minn. 107; 282 N.to. 673• 13 7.207. State Sales Tax,—The Federal Reserve Bank brought suit against the Michigan Department of Revenue to obtain a declaration of rights with regard to liability for payment of the Michigan sales tax on supplies and equipment purchased ty it and on personal property sold by it principally in the bank-operated cafeteria. Plaintiff relied upon implied constitutional immunity from State taxation and express statutory exemption under section 7 of the Federal Reserve Act, Ths Michigan Supreme Court upheld the decree of the trial court in favor of the defendant„ It was held that for the purpose of determining exemption the legal incidence of a tax is the decisive factor and that under the Mchigan statute the legal incidence of the sales tax is upon the retailer, rather than the purchaser, regardless of the fact that the tax may be passed on to the purchaser who bears the econcmic burden of the tax. Accordingly, it was held that plaintiff is entitled to exemption from the tax with regard to sales made by it but is subject to the tax with regard to purchases made by it from i-JLcnigan retailers • Federal Reserve Bank of Chicago v. Department of Revenue of the State of hichigan. 339 Michigan 587; 64 N.VJ. 2d, 639"(l954lT" 14 7a208, State Tax on Mortgages, Held by Reserve Bank,—The Federal Reserve Bank made an industrial loanTunder section 13b of the Federal Reserve Act) secured by a mortgage. The Register of Deeds refused to record the mortgage without payment of the State tax on mortgages. The statute provided that no tax was imposed upon "any mortgage made and running to the reconstruction finance corporation or to any other United States governmental corporation or agency or trustee for the benefit of such governmental corporation or agency, to secure a loan from such governmental corporation or agency." The Supreme Court of Michigan held "The Federal Reserve Bank is an operating agency of the Federal government. Its creation was to supply a need of the national government." Consequently, the court held the tax was not imposed on a mortgage securing a loan made by the Reserve Bank, Federal Reserve Bank of Minneapolis v, Register of Deeds. 288 Mich. 120; 284 N. SI 667 (1939). 15 STATE MEMBER. BANKS 9.100. Constitutionality of provision authorizing State banks and trust companies to become members.—An officer of a State member trust company, convicted for making false entries in the books of the bank in- violation of section 5209 of the Revised Statutes, contended, amongvother things, that the provision of section 9 of the Federal Reserve Act authorizing any bank or trust company of the State to become a member bank of the Federal Reserve System was beyond th^constitutional powers of Congress. Holding to the contrary, the court Seclared that if, in the wisdom of Congress, it seemed that the inclusion df State banks'mid trust companies would contribute to the legitimate gilrposes of the# Federal Reserve System, including the control and prevention of sudden and violent crises in financial affairs, the right to so include such, State banks and trust companies was not open to question. To this end, the court pointed out that the Government may make use of concerns incorporated under State charters and that the provision for membership of State banks in the Federal Reserve System is in no sense compulsory. Hiatt v. United States, 4 Fed. (2d) 374 (CCA. 7th, 1924), cert, den., 268 U. S. 704 (1925). NOTE.—See also 9.801. 9.102. Kentucky statute authorizing State banks to become members.—Under applicable Kentucky statutes, State banks and trust companies in that State were authorized to become members of the Federal Reserve System and to subject themselves to all provisions of the Federal Reserve Act and amendments and to the regulations of the Federal Reserve Board applicable to State member banks. Louisville Bridge Commission v. Louisville Trust Co., 258 Ky. 846, 81 S.W;(2d) 894 (1935)'. ~ 18 JKT. 9.103. Relation between member banks and Federal Reserve banks.—A Federal Reserve bank and its member banks are separate and distinct corporate entities; and no relationship of agency exists between them except such as arises from contract. Federal Reserve Bank of Richmond v. Kalin, 81 Fed. (2d) 1003 (CCA. 4th, 1936). Accordingly, the agency of a member bank to collect a note payable to such bank and discounted with a Federal Reserve bank can not arise from the mere fact that the bank in question was a member of the Federal Reserve bank. Federal Reserve Bank of Philadelphia v. Gettleman, 189 Atl. 86 (N.J. 1937). 19 9.184. Applicability of Regulation F to State member ^ The Louisville Bridge Commission issued bonds under which the Louisville Trust Company acted as trustee. Pursuant to the State Declaratory! Judgment Act, the court was presented with the question wJietA^ thoptrust company, which was a member of the Federal Reserve System, might secure the deposits of the Bridge Commission by transferring them to its commercial department and by setting aside specific readily marketable securities in its trust department to secure their repayment. It was held that the right of the depositary trust company to pledge such collateral to secure the deposits was permitted by Regulation F of the Federal Reserve Board, since those regulations provided that trust funds held by a member bank {sic) might be deposited in its commercial or savings department to the credit of the trust department provided that the bank should first deliver to the trust department, as collateral security, bonds, notes, or certificates of indebtedness of the United States, or other readily marketable securities. It was pointed out that, while the Board's Regulation F speaks only of national banks, "it is clear that iwwas intended to apply to all member banks, especially when' it is read in connection with that portion of the National Banking Act dealing with the rights and powers of State banks as members of the Federal Reserve System, U.S.C. Title 12, sec. 330 (12 U.S.C.A. sec. 330)," (Paragraph 12 of section 9 of the Federal Reserve Act). It was held, therefore, that pursuant to the Regulation F of the Federal Reserve Board the trust company had the right to secure the deposits of the Commission in the manner described. LoUMviUe Bridge Commission v. Lou-is- vill&Trust Company, 258 Ky. 846, 81 S.W. (2d) 894 (1935). • NOTE.—Notwithstanding the above decision, it should be noted that section ll(k) of the Federal Reserve Act, authorizing the Board to promulgate ragvkions for tlw •eflforcement of that section, relates to the exercise of trust powers by national banks only. :0 91185• Suit to Enjoin Enforcement of Membership Condition• — This was a suit by a member bank to annul and enjoin the enforcement of a condition of membership. The court dismissed the complaint (1) against the Federal Reserve Board because Congress had not given its consent to suits against the Board and because the Board is not an "inhabitant" of the district where the suit was brought; (2) against the Federal Reserve Agent because he had no authority to enforce the condition; and (3) against the Federal Reserve Bank because the power to enforce the condition was vested in the Board only, with the result that a suit against the Bank was a suit "against a subaltern without authority:!; and was, therefore, not maintainable. The court also pointed cut that the plaintiff had sustained no present injury and consequently there was no proper case for a declaratory judgment. Peoples Bank v. Federal Reserve Bank of San Francisco, 58 F. Supp. 25 \1944)j appeal dismissed, 149 F 2d. 8$1. 9.186* Same.—Peoples Bank sought a declaratory judgment and decree invalidating and restraining enforcement by the Board of a condition of membership in the Federal Reserve System requiring plaintiff to withdraw from the System if (1) Transamerica Corporation acquired an interest in plaintiff and (2) if the Board required the withdrawal. The Supreme Court decided that, although such an interest had been acquired, the bankTs grievance was too remote to justify an injunction or declaratory judgment, since the Board had formally disavowed any intention to invoke the condition in the absence of any indication of subversion of the bankEs independence, [This, in effect, reversed Peoples Bank v* Eccles et al 0 , 64 Fff Supp, 811 (Dist of Colo 1946), holding the facts above to warrant adjudication in an action for declaratory judgment.] Secies v* Peoples Bank of Lakewood Village, 333 U e S. 426 (1948). 9.401. Power of Board to control purchase of stock by State member banks prior to 1933.—A State member bank, authorized to purchase stock by its charter and the laws of the St$te, may lawfully purchase the controlling stock interest of a new bank; "and the Federal Reserve Board has no present statutory authority, either express or implied, to regulate, control, or prevent the purchase of such stock interest, so long as the solvency of the bank or the safety of its customers are not thereby jeopardized and the standard required as a condition of membership is maintained. Furthermore, since it does not possess power to prevent the purchase, the Board would not have power to compel such bank to divest itself of the stock when purchased; nor would the Board have authority to require such bank to surrender its stock in the Federal Reserve bank and forfeit its membership in the Federal Reserve System, unless the amount and character of stock investments held by such bank are deemed by the Board to jeopardize the safety of. depositors, the solvency of the bank, and/or lower the standard required as a condition of membership in the Federal Reserve System. 35 Op. 'Atty. Gen. 449 (1928). NOTE.—Section 9 of the Federal Reserve Act was amended by the Banking Act 1933 so as to make State member banks subject to the limitations of section f36 of the Revised Statutes, with respect to the purchase of investment securities id stock, and so as to require State member banks to submit reports of their iliates and to obtain from their holding company affiliates agreements that such affiliates should be subject to the same conditions anji limitations as are applicable under section 5144 of the Revised Statutes in the case of noldin^ company affiliates of national banks. See 9.402. 1 / Li 9.800. Constitutionality of provisions subjecting State member banks to section 5209, Revised Statutes.—In the prosecution of de-' fendant for aiding and securing the branch manager of a State member bank in misapplying funds of that bank in violation of section 5209 of the Revised Statutes, it was contended that that provision of section 9 when subjects the officers and employees of member banks to the provisions of section 5209 of the Revised Statutes was unconstitutional since Congress had no power to punish offenses against the property rights of State banks. It was held, however, that if a State bank chooses to come into the Federal Reserve System, the United States may punish acts injurious to the System although done to a corporation that the State also is entitled to protect; that every fraud like the one here involved weakens the member bank and therefore weakens the System; that Congress may employ State corporations with their consent as instrumentalities of the United States and may make frauds that impair their efficiency crimes; and ^lat therefore the provisions of section 9 in question are constitutional. Westfall v. United States, 274 U. S. 256 (1927). 1927 BULLETIN 434. /,-.9.801—An officer of a State member bank was convicted by a Federal, Distinct Court for a violation of section 5209 of the Revised Statutes and upon appeal to the Circuit Court of Appeals, defendant contended, among other things, that the provision of section 9 of the Federal Reserve Act making section 5209 of the Revised Statutes applicable to State member banks was repugnant to the Federal Constitution and. beyond the power of Congress in that it withdrew from the State the power to enact similar laws with respect to the same offenses. The court held, however, that the acts which are made offenses under section 5209 are those committed by officers of a State bank pertaining to matters affecting the relations between the member banks and the Federal* Reterve banks and that the commission of such acts would necessarily affect the relations between the member bank and the Federal Reserff bank and would affect injuriously the Federal Reserve System., cordingly, the conviction was affirmed. Matt v. United States, (2d) 374 (CCA. 7th, 1924), cert, den., 268 U.S. 704 (1925). ^ 9.100. BOARD OF GOVERNORS or; 10.100. Status as independent establishment. —The Federal Reserve Hoard iMMyM^fprmlrnt hoard or Government establishment with distinctly : i < l n ) i J B P m ^ | h e r than merely supervisory Ml) Op. % Atty.Gi ill (1914* y V 10.101. Qualification of Comptroller of Currency after expiration of term as member of Board.—Where the Comptroller of the Currency was nominated for reappointment but the nomination was not-acted upon by the Senate prior to its adjournment, and the Comptroller^pntinued to exercise the duties of his office, he remained Comptroller of the Currency de jure and consequently was a legally qualified member of thi|Federal Reserve Board and entitled to receive the salary prescribed by section 10 of the Federal Reserve Act to be paid to the Comptroller as e*. officio member of the Board. 31 Op. Atty. Gen. 401 (1919). 'NOTE.—By virtue of the Banking Act of 1935, the Comptroller of the Currency ceased to be an ex officio member of the Board of GoWMpors of the Federal Rese System (formerly the Federal Reserve Board). ^ ^ <Q t 10.102. Funds of Board as "public moneys."—Moneys received by* the Federal Reserve Board from assessments upon the Federal Reserve nk? are "public moneys" within the meaning of the auditing statttes •bank? land are therefore subject to audit by one of the auditors of the Treasury Department. Such is the case because the assessments are levied by a coard whose members meet all the requirements of the definition of "public officers" and "officers of the United States"; because the assessments are levied pursuant to a Federal statute and are devoted to the payment of official salaries and the expenses of an official board; and because these moneys, after collection, are no longer the property of the paying bank and must be regarded as moneys belong to the United States 30 Op. Atty. Gen. 308 (1914). NOT*—The funds of the Board are no longer subject to audit under the auditing statutes of the United States by reason of the amendments made to section 10J of the Federal Reserve Act by the Banking Act of 1933 providing that the funds derived from assessments on the Federal Reserve banks shall not be constnira to bt "government funds or appropriated moneys." ^Mhfc^^j—- ^0.201. Lease of banking quarters for branch ,in ^uilding constructed on premises leased by Federal Reserve b|uk.—A transaction by which the Federal Reserve Bank of Cleveland leased certain rea^property belonging to it in Cincinnati to the Chamber of Commerce with an agreement that the Chamber of Commerce would erect a "building thereon, space in which would be leased to the Federal Reserve Bank of Cleveland as banking quarters for the Cincinnati bra'nch of the1 T^cferailleserve bank was not a transaction in violation of the limitat i o n ^ ! £&tten 10 of the Federal Resent Art. 34 Op. Atty; Gen. 527 . -inndi vrifi iol hmesb ad ' 11.100. Authority of Board to issue public statements.—In yi$\v of the provisions of section 11 of the Federal Reserve Act requiring the Federal Reserve Board to examine the boolo and affairs of the Federal Reserve banks, to require such statements, asun^y b& deemed necessary, and to publish weekly and consolidated statements showing the conditioner the Federal Reserve banks, and in view of the powers conferred Federal Advisory Council, the Board is warranted in issuing tements and, when the situation warrants, in publishing warnings as to the condition of affairs. The necessity for such warnings is left'with those clothed with responsibility for acting. Raichle v. Federal Reserve Bank of New York, 34 Fed. (2d) «910 (CCA. 2d, 1929). NOTE.—See also 12.100. For other questions decided by this case, see 4.304; 13^801; 14.502. 11.400. Authority of Board to make regulations for the conduct of collections by Federal Reserve banks.—The provisions of subsections (i) and (j) of section 11 of the Federal Reserve Act furnish ample authority to the Federal Reserve Board to make any lawful rul^'and regulations for the conduct of the business carried on by a Reserve bank in its capacity as a clearing house or collection and accordingly the rules governing collections contained in Regi .1 and in the collection circulars issued by the Federal Reserve not unlawful and are binding upon the owner of a check deposited with a member bank for collection. Fergus County v. Federal Reserve B&tik of Minneapolis, 75 Mont. 582, 244 Pac. 883 I l!>2f>.i. A | ' m Nora—For statement of facts in this case, see 13.542. For cases, holding tion J to be binding upon forwarding banks and upon person? depositing check* for collection, see 13.201, 13.520, 13.542. 31 TRUST POWERS OF NATIONAL BANKS 4.201. Incidental powers.—The section of the Federal Reserve Act granting incidental powers to Federal Reserve banks is practically the same as the section granting incidental powers to national banks. These powers are such as are necessaiy to meet all the legitimate demands of the authorized business and to enable the bank to conduct its affairs within the general scope of its charter, safely and prudently. Federal "serve Bank of Richmond v. Duffy, 210 N.C. 598, 188 S.E. 82 (1936). 11.500. Decision of United States Supreme Court.—In a suit by a State Attorney General on the relation of certain State jrust coioataies to test the right of a national bank to exercise trust powers, it was contended that section 11 (k) of thefederal Reserve Act was unconHcutionaU The Supreme Court of the I nited States held that, under the doctrine pf implied powers laid down in McCulloch v. Maryland, 4 Wheat. 416, Congress Jjas authority to confer upon nBfconal bankis power to exercise particular trust functions when not in contravention of fitate law, since the implied power of Congress is not to be tested by the private functions and attributes of the national bank. The court further held that section 11 (k) is^ot onpn to the objection that it confers legislative power upon the Federal Reserve Board. It was also held that Congress had impliedly, if not expressly, authorized the institution of proceedings the nature of quo warranto in the State courts in order to test whetke.r e exercise of trust functions conferred upon a national bank is consistent with State law. First National Bank of Bay City v. Fellows, 244 T. S. 416 (1917). 1H17"BULLETIN 534. (Brief of Federal Reserve Board as amicus curiaewt forth in full^a 1917 BULLETIN 255.) S NOTE.-—In so far as this decision appears to imply that State courts may determine whether trust powers exercised by national banks are consistent with State law, it has apparently been qualified by Rtatt cr ret Burnm National Bank v. Duncan, 265 U. S. 17 (See 11.600). 33 ^ 11.501. Allegation of unconstitutionality insufficient to give Federal jurisdiction.—In a suit brought in a Federal cdurt agtfinst a national bank, attacking the validity of'a will, the conduct or ^ H R u t o r s under the will, and the right of the national bank to act as executor, it was alleged tnat the act authorizing the national bank to exercise trust powers was unconstitutional and that the court had jurisdiction of the case because the issues involved depended upon the constitutionality of an Act of Congress. It was held that since the Supreme Court of the United States had previously upheld the constitutionality of the provision in question (see 11.500), the averment of a constitutional question was without substance and that therefore the court had no jurisdiction. NatiwaLBank o] Chester CwMfatit Fed. (2d) 195 (CCA. . tfm., 294 U.S. 710 (1935)79 TIGI) (abnod bat ». 11.600. Decision of United States Supreme Court.—Section 11 (k) of the Federal Reserve Act was amended by an act approved September 26,1918 (40 Stat. 967) to provide that whenever the laws of a State authorize.or permit the exercise of any of the trust powers enumerated in that section by State institutions which compete with national banks, the granting to and the exercise of such powers by national banks shall not be deemed to be in contravention of State law within the meaning of the Federal Reserve Act. Notwithstanding this provision, the Supreme Court of Missouri held that since, of banking institutions, only trust companies were permitted to act as executors under the law of Missouri, a national bank was not authorized to act in such capacity. (302 Mo. 130, 257 S. W. 784.) The Supreme Court of the United States, however, reversed this decision and held that section 11 (k) authorizes a national bank to act as executor if trust companies competing with it have, that power by thela# ; of the State in which located, regardless of the fact that the exercise'of such power by the national bank is contrary to State law. State ex rel. Burnes National Bank v. Duncan, 265 U. S. 17 (1924). 1924 BULLETIN 418. NOTE—See also 11.601. 11.603. Connecticut.—A probate court in Connecticut held that .it had no power to appoint a national bank as guardian of an estate. Upon appeal to the Supreme Court of Connecticut, it was held that a State may not withhold from a national bank located within its borders the right to exercise fiduciary powers which competing State'1 cprporations are permitted to exercise, irrespective of whether the attempted discrimination by the State takes the form of an express statutory prohibition or is to be implied from the mere absence of permissive legislation; and that therefore the bank could properly be appointed as guardian. Hamilton v. State, 94 Conn. 648, 110 Atl. 54 (1920). 1920 BULLETIN 610. 3o 11.605. Illinois.—The Supreme Court of Illinois denied a writ of mandamus to compel a State official to issue to a national bank a.license authorising it to exercise trust powers. In a former proceeding involving the^same question/-the court had denied the writ on the grounds that the exercise of trust powers by national banks is Illinois was in corira r ven&on of State law, and that section 11 (k) was unconstitutional (People v.(Bradfr271 111. 100,110 N. E. 864). The second denial of the writ was im th#^r*Bnd that the former decision was res indicate and was conclusive until reversed oH. set aside, although the court expressly admitted that this decision was erroneous Hnder the United States Supreme court decision. People v. Russell, 283 111. 520, 119 N. E. til (1918). 191&SULLETIN 522. NOTE.—It is understood that this decision was subsequently set aside in an appropriate proceeding, and that licenses to exercise trust powers are issued to national banks in Illinois having the requisite permission from the Board. 11.606. Missouri.—In an opinion dated June 12,1919, the assistant attorney general of Missouri held that the Missouri superintendent of banks is required to receive from national banks, authorized by the Board to exercise trust powers, deposits of securities tendered by such banks in order to enable them to qualify without giving bond, in the same manner as such deposits are received from Missouri trust companies. 1919 BULLETIN 655. Nora.—For other rulings relating to the e*rcise of trust powers in Missouri, see 11.600; 11.607. _ _ _ _ _ _ _ ^ 38 11.607.—A state statute prohibited the use of the words "trust company" by any person or corporation as a part of its corporate title unless such person or corporation was authorized by the law? of the State to do business as a trust company. A national bank was organized in the State with the name of ''Fidelity National Bank and Trust Company of Kansas City, Missouri^ and its title was approved by the Comptroller of the Currency. The State bank commissioner, however, took the position that the national bank in question, by assuming such name, acted in violation of State law; and accordingly, he refused to approve the national bank as a depository of reserves of State banks and trust companies. Thereupon, the national^ank brought suit to enjoin the action of the State bank commissioner. It was held that since the right of Congress to confer trust powers upon national banks had been upheld by the Supreme Court of the United States (Sec 11.500), any act on the part of a State which would impair or restrict the discharge of its functions as a national bank, with the incidental powers enumerated, is void because in conflict with the paramount laws of the United States. The right of the bank to use? the words "trust company" as a part of its name was therefore sustained. Fidelity Natl. Bank and Trust Co. v. Enright, 264 Fed. 236 (D. C. Mo., 1920). 1920 BULLETIN 497. 39 11.608. New Hampshire.—A New Hampshire statute provides that no trust company, loan and trust company, loan and banking company, bank or banking company or similar corporation should be appointed administrator of an estate. The Supreme Court of New Hampshire held that this statute was sufficiently broad to apply to national banks as well as to State banks and that therefore a probate court in New Hampshire could not legally appoint a national bank as administrator notwithstanding the provisions of section 11 (k) of the Federal Reserve Act authorizing the Federal Reserve Board to grant national banks the right to act as trustee., executor, administrator, or registrar of stocks and bonds when not in contravention of State or local law. Appeal of Woodbury, 78 N. H. 50, 96 Atl. 299 (1915). 11.610.—Since section 11 Ik) authorizes the Board to grant trust powers to national banks only when ''not in contravention of State or local law" and since the New York statute expressly prohibits the exercise of trust powers except by trust companies organized under the laws of that State, the "Federal Reserve Board has no authority to grant to a national bank located in New York the power to act as trustee, executor, and administrator. 31 Op. Atty. Gen. 186 (1917). NOTE.—This ruling became obsolete as the result of the amendment to section ll(k) made by the Act of Sept. 26, 1918 and as the result of the decision in In re Mollineaux (11.611), holding that the State no longer had power to prohibit the exercise of trust powers by national banks. 11.611.—The purchaser of an infant's real estate refused to accept title on the ground that the Supreme Court had no power to appoint aj national batik as special guardian in the proceedings for the sale of the estate since such a corporation was not anion^ those qualified under State law. In a suit to compel the purchaser to accept title, it was held that the Federal statute vesting;jaational banks with power to fct in enumerated trust capacities was superior to any inboosistent State legislation; that, while a State might reasonably regulate, the exercise of the powers so conferred, it could not prohibit the exercise within its domain of the powers and functions conferred upon national banks; and that therefore, since the national bank was a "suitable person" within the meaning of the State statute, it was within the power of the State court to appoint the national bank as special guardian. In re Mollineaux, 109 Misc. 75, 179 N. Y. Supp. 90 (1919). 1919 BULLETIN 1059. ' _ rs 11.6X2i Pennsylvania.—The application of a national bank in Pennsylvania 4o be appointed guardian of infants interested in an estate was denied by the lower court, but this decree was reversed by the Superior Court and aft appeal was taken to the State Supreme Court. It was contended that to permit a national bank to act in a fiduciary capacity in Pennsylvania under the provisions of section 11 (k) of the Federal Heserve Act would amount to a violation of the laws of Pennsylvania relating to the exercise of trust powers by banking institutions. It was held, however, that in so far as the State law was inconsistent with the Federal statute, the former must yield to the latter even though the result might be to place upon national banks a benefit or burden not received or assumed by State banks and trust companies; and, further, that if the rules and regulations of the Federal Reserve Board conflicted with State regulations on the subject, the latter must yield to the former. Accordingly the decree of the Superior Court granting the application was affirmed. In re Turner's Estate, 277 Penn. 110, 120 Atk 701 (1923). 1923 BULLION 560. NOTE.—For opinion of the lower court, see 1923 BULLETIN 20. ^ 11.613. Rhode Island.—Under the laws of Rhode Island, trust companies, but not other banking institutions, were authorized to act as cecutors. A national bank tendered bond:? to the Treasurer of the ite as security for the performance of its duties in a fiduciary capacity. Treasurer refused to accept the bonds, and the bank sought by landamus to compel his acceptance thereof. The Supreme Court of Rhode Island held that the exercise of trust powers by a national-Jbank in Rhode Island was in contravention of the laws of that State and that Congress could not give national banks in that State the right to demand that the Treasurer perform for their benefit the same duties which, under State law, he performs for trust companies. In thfc court's opinion, the amendment made to section 11 (k) of the Federal Reserve Act in 1918, providing that the exercise of such powers^by national banks should not be deemed in contravention of State late, where the laws of the State authorize the exercise of trust powers by* State banks, trust companies, or other corporations competing with national banks, could not operate to control the State court in the construction of a State stance. Aquidneck National Bank v. Jennings, 44 R. I. 435, 117 Atl. 743 (1922). ^ i i W l ^ , ^ NoA—But see 11.614 in which the Supreme Court of Rhode Island felt compelled to modify the above decision. ^ ^ 11.614.—The Attorney General of Rhode Island brought quo warranto proceedings against the Aquidncck National Bank for the purpose of excluding and ousting that bank from th& farther exercise of fiduciary powers. Under State law, only trust itoapanies were authorized to exercise fiduciary powers, and the Sta£e court had previously held (See 11.613) that the exercise by nationaQ^nks of fiduciary ^jpwers woulU be in contravention of State law. In the meantime, however, the Supreme Court of the United States had upheld the constitutionality of the 1918 amendment to section 11 (k) of the Federal Reserve Act State ex rel Burnes National Bank v. Duncan, 265 U. S. 17 (See 11.60 and on the authority of that case the Supreme Court of Rhode Island felt itself constrained to hold that a national bank in J&hode Island was authorized to act as executor in view of the right of courting trust companies in that State to act in the same capacity. Jjij^gment was therefore entered for the defendant. \£arpenter v. Aquidneck National Bank, 46 R. 1.152,125 Atl. 358 (1924). 1924 BULLETIN 639. A5 11.615. Wisconsin.—Application was made to the county court for the appointmenkof a naiinttdlbank as administrator under a will. The county court cLerged/thc application upon the ground that Wisconsin law prohibited thtf/Sttttfe .etaiirtiifinSm appointing rn.*r»fitiueiary capacity any corporation other than a trust company organized under the laws of that State. Upon appeal lu tl^jBupreme Court of the State, it was held that the provisions of section 11 (k) of the Federal Reserve Act, authorizing national banks to act icucertain fiduciary capacities where similar State organizations are authorized to act in such iiapaeitics, must prevail over the conflicting prtayJHotis of State daw^fBodiaccordingly, the decision of the county court was reversed. In re SMtichfield's Ekt&te, 171 Wis. 553, 178 N. W. 310 (1920). 1920 BULLETIN 700. franchises and interest, including the right of succession as trustee, executor, or otheiBfidueiary capacity, in the same manner and to the .same extent as was held and enjoyed by the State corporation, but that no such consolidation should be in contravention of State law. The Supreme Judicial Court of Massachusetts held that the Federal statute coftfeemplated that the original appointment of a State trust company was to continue in the consolidated national bank, wholly unaffected by the fact that the State trust company had ceased to exist, and that, as so interpreted, the provision was in contravention of the State law and OQHJtrary to the State and Federal Constitutions; that, iii the absence of its appointment by the Probate'Court, the consolidated national bank had not succeeded the State trust company as executor under the will and, accordingly, its application for the allowance1 of its account should be~ denied (263 Mas.-. 444. 362 N.E. 217). On appeal ty-Jjie. Supreme Court of the United States^ that'court held that the Federal statute was constitutional but that', in view of the State law, the effect of the statute in Massachusetts was only to-transfer the property and estate from the 11.641.—A State trust company duly appointed by a probate court as trustee under a will subsequently was converted into a nation^bank and thereafter consolidated with another national bank. The coflfiolidated national bank filed a petition for the allowance of its account as trustee. It was held that the case was indistinguishable from Petition of Commonwealth-Atlantic National Bank, 249 Mass. 440,144 N. 15. 443 (11.640), and that therefore the national bank, not being the trustee named under the original appointment, could not qualify as suck trustee so as to be entitled to render the account as a duly appointed fiduciary. In the opinion of the court the State trust company had no such property interest in its appointment as trustee as could pass to the national bank as its successor. Accordingly, it was held that the national bank could account for the tnwfc only de son tort. Petition^ommonw* Atlantic National Bank, 261 Mass. 211, 158 N. E. 7*0 (1927). •NOTE—See note to 11.640; and see U8&- ___5^ 11.642. Right to succession after 1927 amendment.—A State trust company, which had been appointed by the Probate Court ^asyycecutor under a will, was consolidated.with a national bank and the consolidated national bank, which had been properly authorized to exercise trust powers, applied to the Probate Court for the allowance of its accent as executor. The consolidation had been effected under the provjsjoos of the Act of November 7, 1918," as amended by the Act of February 25, 1927, providing that in cases of consolidation, the consolidated national bank should hold and enjoy >\he same and all rights and property, franchises and interest, including tiiftifight of succession afjo^rustee, executor, or other fiduciary capacity, 4nf the same manner ajj^to the same extent as was held and enjoyed by the State corporation, Jjftit that no such consolidation should be in contravention of State law. 'The Supreme Judicial Court ^Massachusetts held that the Federal statute contemplated that the efriginal appointment of a State trust company was to continue in the consolidated national bank, wholly unaffected by the fact that the State trust company had ceased to exist, and that, as so interpreted, the provision was in contravention of the State law and contrary to the State and Federal Constitutions; that, in the absence of its appointment by the Probate Court, the consolidated national bank had not succeeded the State trust company as executor under the will and, accordingly, its application for the allowance of its account should be denied (263 Mass. 444, 162 N.E. 217). On appeal to the Supreme Court of the United States, that court held that the Federal statute was constitutional but that, in view of the State law, the effect of the statute in Massachusetts was only to transfer the property and estate from the State trust company to the consolidated national bank and not to transfer the office of executor from the State trust company to the succeeding national bank; and that it was necessary for the national bank to apply for a new appointment as executor. Accordingly, the decision of the State court was affirmed and,the case-was remajosied to the Probate Court for a proceeding by the national bank as exe$afc<> son tort. Ex Parte Worcester National Bank, 219 IT. S. Ul (1! 1929 BULLETIN 407. , r 49 11.643, Qualification as executor where testator died after consolidation.—The plaintiff and a Stat£l-bank were nominated as joint executors in a will. Before the death <$f the testator, the State bank was consolidated with the defendant national bank. Upon the death of the testator, both the plaintiff and the national bank were permitted to qualify as executors; and the plaintiff brought error. It was held that upon the consolidation, the State bank ceased to exist as a bank and that at the date of the consolidation, since the testator was still, .alive, the State bank had nothing to which the national bank could succeed. On this ground, the case was distinguished from the Worcester County Bank Case (See 11.642) in which the testator's death had occurred before the consolidation and the State bank had qualified as executor before tiie consolidation took place. It was held, therefore, that in the present case the consolidated national bank was not entitled to qualify as executor and that the decision of the trial court should -be reversed. Hofheimer v. Seaboard Citizens' National Bank oj Norfolk, ^ 4 Va. 392, 153 S. E. 656 11930), aff'd., 154 Va. 896, 156 S.E. 581 (1931), cert, den., 283 855 (1931). 50 11.644. Succession to rights as trustee under deed of trust Where a State bank which has been appointed trustee under a trust deed conveying real estate to secure payment of certain notes subsequently; consolidates with a national bank under the Act of November 7, 1918,'as amended by the Act of February 25, 1927, the national bank succeeds to the rights and title of the State bank as such trustee./In such a case, a person designating a corporation as trustee must be held to do so with knowledge that the trust is to be administered by those persons to whom the stockholders of the corporation commit the control of its affairs. In the present case, as distinguished from the case of Ex parte Worcester National Bank, 279 U. S. 349 (See 11.642), the authority to administer the trust was altogether derived from the instrument appointing the State bank trustee and not from appointment by a court. First National Bank of Chattanooga v. Harry E. Chapman Company. IHOTenn. 72,22 S.W. (2d) 245 (1929). 1930 BULLETIN jT 51 11.743. Power, as executor, to sell trust property.—The plaintiff acted as broker,^ ii^ procuring a customer for the sale of certain real property which was^part of a trust estate being administered by the defendant national bank as executor under a will. In a suit by the plaintiff to recover compensation for her services, it was defended among other things, that the alleged contract with the plaintiff was beyond the powers conferred upon the bank by statute. The court held that the defendant bank, acting as executor, was assumed to have exercised the right to act as such with the permit of the Federal Reserve Board; and that, as such executor, it was clothed with all powers essential to the performance of its duties under the will, including authority to sell property of the trust estate, to employ a broker, and to pay a commission for the broker's services. It was further held that the terms of the sale contemplating that the bank should take a mortgage in excess of 50 per cent of the actual value of the property did not make the contract with the plaintiff illegal as in violation of the provisions of section 24 of the Federal Reserve Act. Harvey v. First National Bank of Boston, 270 Mass. 280, 169 N.E. 920 (1930). 52 ll»1202. Right to Possess Gold.-—The corporation sued the Reserve Bank for damages for conversion of gold bullion. The court held that the refusal of the ban1.: to turn the bullion over to the plaintiff could not be a conversion because if the defendant had turned the bullion over, the plaintiff would have been bound to hand it back at once (in view of the statute authorizing the President to prohibit the exporting, hoarding, etc, of gold, and the executive order and the regulations of the Treasury issued pursuant thereto)c British-American Tobacco Cp_o_.Ltd« v. Federal Reserve Bank of Efew York. 105 F. 2d 935, "affirming and correcting, 104 F. 2d 652~ cert, den. 308 UB 3, 600 (1939). 11•1203• Reserve Bank Not Liable for Conversion of Gold Certificate»—Plaintiff found a #10,000 gold certificate, which had previously been redeemed by the Treasury, canceled, and subsequently stolen from the General Accounting Office. He presented it to the Reserve Bank for collection, but the latter returned it to the General Accounting Office. Plaintiff sued the Reserve Bank for conversion of the certificate, but the court decided against him5 saying the Reserve Bank could not be liable for conversion, since it had returned the certificate to its actual owner. Gross v 0 Federal Reserve Bank of Cleveland, 29 F. Supp. 1005 (1939). 53 FEDERAL ADVISORY COUNCIL 12.100. Authority to issue public statements.—The Federal visory Council is authorized to confer with the Federal Res general business conditions, to make oral or written concerning matters within the jurisdiction of the Board, and to call for information and to make recommendations in regard to discount rates, rediscount business, reserve conditions in the various districts, the purcfiase and sale of gold and securities by the Reserve banks, open market operations, and the general affairs of the Federal Reserve System. In vie# of these provisions, and the provisions of section 11 of the Fed-: eral Reserve Act authorizing the Board to require reports on the condition of the Federal Reserve banks, it is most unlikely that statements as to the condition of affairs cannot be made public by the Board, the council, and the Federal Reserve banks. These provisions imply public information and, when the situation warrants it, public warning. Accordingly, the charge that a Federal Reserve bank and the Federal Reserve System generally had wrongfully "spread propaganda concerning an alleged money shortage and expressed alarm over the increasing volume of collateral loans," resulting in loss to the plaintiff, was held to be without legal significance. Raichle v. Federal Reserve Bank of< New York, 34 Fed. (2d) 910 (C. C. A. 2d, 1929). « NOTE.—See also 11.100. ^ . 5 FEDERAL DEPOSIT INSURANCE 56 12B.102. Insured banks as Federal instrumentalities.—In a prosecution of an officer of an insured State bank for embezzlement under section 5209 of the Revised Statutes, it was contended that Congress had no constitutional powrer to make the criminal provisions of that section applicable to an officer of a State nonmember bank. It was held, however, that the Federal Deposit Insurance Corporation is an instrumentality of the United States; that a States bank which makes application for the insurance benefits of the law creating that instrumentality thereupon submits itself and its officers to the provisions of the federal law and consents to serve asia constituent part of an instrumentality of the United States; and that, under its broad powers to protect the currency system, Congress may constitutionally make the penal provisions of section 5209 of the Revised Statutes applicable to such an insured Sti bank. Accordingly, the defendant's demurrer was overruled. Ut ' States v. Doherty, 18JFed. Supp. 793 (D. C. Neb., 1937.). 57 CHECK CLEARING AND COLLECTION 13.201. Regulation J as controlling.—The Board's Regulatioi the authority of Federal Reserve banks to act as collectors of che under section 16 of the Federal Reserve Act. It is the agreement ^ which all banks dealing with a Federal Reserve bank in respect of such collections act and is binding upon such banks and upon the Federal Reserve bank. Anderson v. Federal Reserve Bank of Boston, 69 Fed. (2) 319 (C. C. A. 5th, 1934), cert. den. 293 U. S. 562 (1934). NOTE.—As to effect of Regulation J as authorizing Federal Reserve banks to send checks direct to the drawee bank for payment and to accept exchange drafts in remittance, see 13.520; 13.521; 13.540; 13.541; 13.562. For full statement of tfce a bo v e case^see_13.705. — •— ••' 13.202. Federal Reserve bank as agent of forwarding bank.—A Stifle member bank, in possession of the State Secretary of Banking, brought suit against a national bank to recover the amount of a deposit* made by the former bank with the latter. Defendant claimed the right to set off the amount of checks drawrn on the plaintiff bank and deposited with the defendant for collection. The checks had been forwar<^d to the Federal Reserve bank by the defendant for collection and the latter bank had presented them to the plaintiff for payment, and had accepted, as p^anent therefor, a draft of the plaintiff on a national bank. The drait was dishonored as a result of the closing of the plaintiff bank. jEJvncr n .._ ' Meanwhile, however, the defendant bank had changed the deposit account of the plaintiff bank with the total of the checks deposited with the defendant for collection and such credit had been made before the closing of the plaintiff bank. Plaintiff contended that its only live obligation was the draft sent by it to the Federal Reserve bank and that consequently the Reserve bank and not the defendant could make a claim., It was held, however, that by virtue of Regulation J, Series of 1924, the Reserve bank acted as defendant's collecting agent; that the defendant was tb# principal, though not named, and could assert its right notwithstanding the agency, no subsequent superior rights having Mfl|rvened; and that therefore the defendant was properly entitled to charge the deposit account of the plaintiff bank with the total of the checks,presentWl to;that bank before its closing and was therefore justified in setting otf the amount of such checks against the plaintiff's deposit account. Peoptes Bank v. McDowell National Bank, 307 Pa. 247, 161 Atl. 803 (1932), affirming 103 Pa. Super. 241, 158 Atl. 293 (1931). ** NOTB.—For other decisions holding the Federal Reserve banks to1"!)^ agents in collection transactions, see 13.561; 13562; 13.703; 13.706. 60 13.206. Right of Reserve bank to sue on note as agent of Federal Reserve Agent for collection.—A note given by defendant to a national bank was transferred to the Federal* Reserve bank and by the latter bank transferred to the Federal Reserve Agent. Suit was brought on the note by the Federal Reserve.bank as agent for collection for the account of the Federal Reserve Agent. It was held that since the Reserve bank held the note only as agent for collection, it could not, ui State statute, sue thereon in its own name. Accordingly^ judgment' the defendant was affirmed. Federal Reserve Bank of Richmond v. Whitford, 207 N.C. 267,176 S.E. 584 (1934). ^ x 61 13.260. No right to immediate credit for checks deposited for collection.—The Pascagoula National Bank sought an injunction against the Ftderal Reserve Bank of Atlanta to require the*. .Federal Reifsrve bank tcyjjive immediate credit to the plaintiff for its deposits of checks and drafts drawn on other member banks in the Atlanta District; ip prohibit the Federal Reserve bank from handling checks for any baJlks other than its own members and, for its own members, any checks not payable within the Atlanta District; and to permit the plaintiff to charge exchange on checks drawn upon it and presented for payment by or through the Federal Reserve bank. The United States District Court for the Northern District of Georgia, in an oral decision denied a preliminary injunction and dismissed the Federal Reserve Board from the litigation on the ground that the Board was not subject to the court's jurisdiction. (1924 BULLETIN 866.) Upon a hearing on the merits, the District Court held that a check drawn on a bank at a distant point which is deposited by a national bank with a Federal Reserve bank for collection does not entitle the depositing bank to credit until after the expiration of the number of days fixed by the time schedule for the collection of checks by the Board's Regulation At the end of that time the transaction becomes a general deposit d th^eheck is then "received on deposit at par," as required by section 16. (g^Fed. (2d) 465; 1925 BULLETIN 32,100.) On appeal to the United States Supreme Court, that court transferred the case to the Circuit ourt'of Appeals for the Fifth Circuit because the constitutional queson involved was not sufficiently substantial to support the Supreme Court's jurisdiction on a direct appeal. (269 U.S. 537; 1925 BULLETIN 848.) . ThS Circuit Court of appeals affirmed the decision of theS|)istrict Court^nd held that a Federal Reserve bank is not required bjf> eection 16 of the Federal Reserve Act to give immediate credit for checks deited with it for collection by a member bank and that the Board's egulation J, deferring the time for giving credit, is not inco»Bistent ith section 16. Pascacvula National Bank v. Federal Reserve Mink of \tlant d,i2d)1926 BULLETIN 174; cerC m., 271 U*.S. $& (1926)-. ]9'2fi BTLLFTIN 378. ( Nom—for tkcisio^m this case on question of right of national ban exchange, Bee 13 300. ^ 13.264. Right to set off credit for checks collected against indebtedness of member bank.—The plaintiff corporation deposited checks in a member bank and the latter bank forwarded the checks to the Federal Reserve bank for collection. The Federal Reserve bank completed collection of the checks and gave credit therefor to the account of the member bank. On the next clay, the member bank was closed by the Superintendent oTTSanks. The Federal Reserve bank, to which the member bank was heavily indebted, offset against the amount which the member bank^owed to it the sums collected on plaintiff's checks. Plaintiff sued the^ederal Reserve bank to impress a trust on the proceeds of the checkpfc fSfhestion. It was held that the Federal Reserve bank was invested with a lien on the checks sent to it by the member bank in ordinary course of business for any moneys owed to it by such member bank and $hat this lien was superior to the plaintiff's right to the checks. Moreover, the court held that the situation here involved was res judicata by reason of a decision of a State court refusing to impress a trust upon the proceeds of the same checks in an action against the closed member bank. Bickford's Inc. v. Federal Reserve Bank of New York, 6 Fed. Supp. 928 (D. C. N. Y. 1934). NOTE.—As to right of Reserve bank to set off amount of uncollected checks against reserve account of member banks, see 13.700 et seq. » 63 13.300. Validity of prohibition.—A national bank may not charge exchange for the payment and remission to a Federal Reserve bank of a check drawn upon such national bank and cleared through the federal Reserve bank, irrespective of whether the Federal Reserve bank was the owner of such check or held it as agent for collection. The provision of section 13 prohibiting exchange charges against Federal Reserve banks is valid, notwithstanding the preceding provision to the effect that nothing in*'that section shall be construed as prohibiting a member or nonmember bank from making reasonable charges. Pascagoula National Bank v. Federal 'XHmrve Bank of Atlanta, 3 Fed. (2d) 465 (D.C Ga. 1924); 11 Fed. (2>ff 866 (CCA. 5th, 1926); cert, den., 271 U.S. 685 (1926). 1924 BuLLKfriN 866;•• 1925 BULLETIN 32,100, 843; 1926 BULLETIN 151,174, 378. *«^ NOTE.—For complete statement of this case, see 13.260. 13.301. Application to both member and nonmember banks. —The provisions of section 13 which prohibit collection .charges to | made a "ederal Reserve banks apply equally to nonmember well as to member banks. Consequently Federal Reserve banks prohibited from paying such charges when assessed by nonmember baf Checks on banks making such charges should not be cleared or collected through the Federal Reserve banks. 31 Op. Atty. Gen. 245 (1918). 1918 BULLETIN 367. NOTB.-T-AS to right of nonmember banks to make exchange charges generally, 6 ^ 13.440. Right to present checkes "over the counter." -- Certain restrafaing the Fede Atlanta from presenting Q$mk drawh- ^Sinst suchhonrii'eraber banks over the counter for pafrmen The case was removed %o the Uft&ed States District Court far thr Northern District of Georgia and that court cfemissed the petition for want of equity, and also refused to grant a motion to remand to the State court on the ground that the Federal court was without jurisdiction. (1920 BULLETIN 496). This decision was affirmed by the Circuit Court JJf App^lp for the Fifth Circuit (269 Fed. 4*; 1920 BULLETIN 1303) and .an appeal war, taken to the Supreme, Court of the United States, the Supreme Court held that.J«he Federal.Reserve banks were organized under Federal law and that the suit was, therefore, one arising under a law. of the United States ;!*fcilt!>!%versed the decision of the CircuifaGtiurt of Appeals on the ground that the right to present checks to the drawee banks for payment is not unqualified and that the plaintiffs had presented- a ground for relief if they could prove that the Federal Rebank was making an improper and coercive use of this right. (256 U. > 350; 1921 BULLETIN 700.) ' Upon reconsideration, the Federal District Court held that th#i$a'eral Reserve bank may employ any proper instrumentality to collect checks drawn against nonmember banks which refuse to remit at par; that the evidence was insufficient to show that the Federal Reserve k had accumulated checks upon nonmember banks and presented them for payment over the counter for the ulterior purpose of driving such banks out of business. (280 Fed. 940; 1922 BULLETIN 436). This decision was affirmed by the Circuit Court of Appeals (284 Fed.:424; 1922 BULLETIN 1408), and an appeal was then taken to the Supreme Court of the United States. The Supreme Court held that the Federal Reserve banks are authorized by the Federal Reserve Act to collect for other Federal Reserve banks, for member franks, and for affiliated nonmember banks, checks on a bank witliin their respective districts if the check is payable on pi tatioi^^Mfan/in fact, be collected consistently with the legal ril of the.-j^wee without the payment of an exchange charge; that wit these limits Federal Reserve banks have the same right to present check^o the drawee for payment over the counter as any other would have; and that there was insufficient evidence to show a wrc intent or coercion on the part of the Federal Reserve Bank of Atl of this right. Accordingly, the decision of the Circuit. in it Appeals was affirmed. American Bank and Trust Co. v. Federal 'ou f Bank of Atlanta, 262 U. S. 643 (1923).' 1923 BULLETIN 788. 66 13.441.—A State nonmember bank which had refused to remit at par checks drawn upon it and forwarded for payment by the Federal Reserve bank, brought action against the Federal Reserve ba^k^or ^Hftges alleged to have resulted from coercion on the part of the latter bKnk in presenting checks over the plaintiff's counter for payment and thus forcing plaintiff to agree to remit to defendant at par. The court pointed out that the Federal Reserve banks are required to receive on deposit at par from member banks and Reserve banks checks and drafts on any of their member banks; that they are authorized to so receive checks payable on presentation upon any banks within their districts whether such banks are member banks or not; that no exchange charge can be made against the Reserve banks by the member banks and that Reserve banks may not pay exchange; and that the result is a sfsfem of par clearance of checks and items among member banks and between such banks and the Reserve banks. It was held, therefore, that the Federal Reserve bank was justified in employing agents for the presentation of checks drawn on the plaintiff nonmember bank over thei plaintiff's -^punter for payment provided such checks were not accumulated and presented by the Federal Reserve bank in an oppressive manner; and that evidence of oppression or coercion was lacking in this case. Accordingly, judgment for the plaintiff was reversed. First State Bank of Hugo v. Federal Reserve Bank of Minneapolis, 174 Minn. 535, 219<N.W. 908 (1928). 1928 BULLETIN 517. 6? 13.442.—A nonmember State bank sought to restrain the Federal Reserve Bank of Clevehtnd from presenting checks over its counter for cash payment on the ground that the purpose was to coerce the State bank into clearing its checks at par. The Federal District Court for the Eastern District of Kentucky held that while a Federal Reserve bank has the legal right to present a check over the counter for payment, it cannot accumulate such checks and make demand for payment in an unusi&rinanner for the purpose of coercing the State bank into changing its mettfbd of doing business by agreeing to clear its checks at par. It was found that the evidence was sufficient to show unlawful coercion upon the part of the agents of the Federal Reserve bank and accordingly die court granted a preliminary injunction restraining the Federal Re-. serve bank from continuing to make collections against the plaintiff bank in such manner. Farmers' and Merchants' Bank v. Federal Reserve Bank of Cleveland, 286 Fed. 610 (D.C. Ky., 1922). 1922 BULLETIN 1 4 0 ^ ^ 68 13.444. Validity of State statute authorizing banks to remit by draft.—A North Carolina statute authorised State banks to exchange and to make payment in exchange drafts on their deposits for checks presented to them over the counter by a Federal Reserve bank unless the drawer of the check should expressly desknate to the contrary. Pursuant to this statute, certain nonmember •Riks paid checks presented over the counter by the Federal Reserve .Bank of Richmond in exchange drafts and the Federal Reserve bank later returned such checks as dishonored when payment in money was refused. The State banks sought to restrain the Federal Reserve bank from returning such checks and to compel the Federal Reserve bank to accept such drafts in payment. The Supreme Court of North Carolina held that the .State law was unconstitutional since-it attempted,to authorize .the payment of checks in other than legal tender money and since it conflicted with the provisions of the Federal Reserve Act prohibiting the making of exchange charges against the Federal Reserve banks. (112 S.E. 252; 1922 BULLETIN 701). Subsequently the North Carolina Supreme Court denied a petition for a rehearing (1923 BULLETIN 20) and an appeal was taken to the Supreme Court of the United States. The Supreme Court of the United States held that the North Carolina statute was not an attempt to make anything except gold and silver coin tender in payment of debts, but merely provided that unless the depositor specified to the contrary he should be deemed to have assented to payment by exchange drafts; and that the statute did not violate the due process clause or the equal protection clause of the Federal Constitution. The court further held that no duty to establish a universal par clearance system was imposed by law upon the Federal Reserve Board*taid that the North Carolina statute was not an interference with ^uch alleged duty; that unaffiliated nonmember banks have an unregtrictedl right to charge for exchange notwithstanding the fact that no such otearge may be made against a Federal Reserve bank; and tha^fhe statutJgwas not in conflict with the provisions'of the Federal Reserve Act a^d was not unconstitutional. The decision of the Supreme Court of North Carolina was reversed. Farmers' and Merchants' Bank v. Federal Reserve Bank of Richmond, 262 U.S. 649 (1923). 1923 BULLETIN 789. 69 / 13.445. Coercive action of Federal Reserve bank in returning as "dishonored" checks not paid bf^nonmember bank at par.—A S t a t e nonmember bank sought to restrain the Federal Reserve Bank of San Francisco from sending to it for collection checks drawn upon such bank with the request that the checks be paid at par, and upon their return unpaid, horn returning the checks to the correspondents with the advke that theylfcad been dishonored. The Federal District Court for the District of Oregon granted a preliminary injunction. (271 Fed. 430). Later, upon application to make the injunction permanent, the District Court held that a nonmember bank has the right to charge exchange and thatjif a Federal Reserve bank sends to it for collection at par checks drawn upon such bank, and they are returned unpaid, the action of tfc^ drawee bank in returning the checks does not constitute a dishonor of those checks and, accordingly, the Federal Reserve bank is not authorized to advise the correspondents that the checks have been dishojjypred. Such action on the part of the Federal Reserve bank was for the purpose of coercing the State bank in question to remit at^gar. Accordingly, the iajunction was made permanent. Brooking State ffenk v. Federal Reserve Bank of San Francisco, 281 Fed. ,222 (D.C. Ore., 1922). ' W : aV 13.500. Necessity for proving actual damage.—Certain checks deposited by plaintiff with a national bank werevfpr\varded to the Federal Reserve bank for collection, and the latter bank presented the checks by mail directly to the drawee bank for payment. Upon the failure of the drawee and nonpayment of the checks, plaintiff brought suit against both the national bank and the Federal Reserve bank, alleging negligence on the part of the latter in presenting the checks for payment directly to the drawee rather than through a member bank in the same locality. It appeared that a number of other checks had been, presented to ;the 'drawee prior to the presentation of the plaintiff's checks and that at no time did the drawee bank have sufficient funds to pay such checks. In the opinion of the court, plaintiff's checks would not have been entitled to any preference and there was no evidence to show that the checks would have been preferred even if they had been presented by the Federal Reserve bank through other banks; and since, therefore, the alleged negligence of the defendant did not result in any actual damage to the plaintiff, it was held that there could be no recovery. In, these circumstances, the court deemed it unnecessary to discuss the question whether the authority of the Federal Reserve bank to present the checks directly to the drawee bank for payment was in conflict with or superseded the State statute prohibiting the collection of checks in this manner. Louisville & N. RsCv. v. Federal Reserve f}ar\k of Atlanta, 157 Tenn. 497, 10 S:W. (2d) 683 (1928). NOTE.—For opinion in trial court, see 1927 BULLETIN 505. 13.501. Venue of suit against Federal Reserve bank.—In a suit against the Federal Reserve Bank of Dallas and other collecting banks for negligence in clearing checks, the Federal Reserve bank did not contend that the petition failed to assert a cause of action against all the cfeMcfiftite, but filed a plea of privilege on the ground that it should have be^Wted in Dallas County, the county in which it had its principal office. The plea was overruled by the trial court and defendant appealed. It was held that since the findings of the trial court supporting the order overruling the Reserve bank's plea of privilege had not been challenged by specific assignments of error and since the proposition submitted as ground for reversal was too general in its terms, the judgment of thec trial court overruling the plea of privilege should be affirmed, 1926). 'federal ffetferve Bank;of Dallas v. Odlr, 28R S.W. 248 ' ^-~«^ ^ n 13.502. Judgment against Federal Reserve bank set aside for lack of notice to attorneys.—In a suit by a national bank against the Jfederal Reserve Bapk of Chicago for alleged negligence on the defendant's part & selecting a correspondent bank, the attorney for the plaintiff agreed with an attorney for the defendant not to proceed with the case during the February term of court without notifying the defendant's attorney. Subsequently, the defense attorney dropped dead amf^rauring the April term, without notice ia the defendant, the plaintiff obtained a default judgment. Subsequently, counsel for the defendant applied to have the judgment vacated and the application was denied. On appeal, it was held that under the agreement, the defendant was entitled to expect notice during ike April term as well as during the February term, and that therefore defendant's application to vacate the judgment should have been granted. First National Bank of Newton v. Federal Reserve Bank of Chicago, 210 Iowa 521, 231 N.W. 453 (1930). Effect of Regulatifili-J as contract term permitting direct tion.—Certain checks belonging to the plaintiff came to the Federal Reserve banKior collection and the Reserve bank presented the checks direct to the drawee bank and accepted a draft in payment therefor. Upon the failure of the drawee bank, plaintiff brought suit aitamst the Federal Reserve bank for damages resulting from the alleged eegligence of the defendant in presenting the checks direct to the drawee and in accepting a draft, instead of lawful money, in payment for the! same. It was held that, by virtue of State statute, a collecting bank was not liable for presenting checks for payment direct to the drawee bank and in accepting a draft of the drawee in remittance. It was further held that the Board's Regulation J authorized the collection of checks in this manner and that that regulation constituted a part dff the agency contract between the plaintiffs and the defendant with respect to collection of checks; and that accordingly, the plaintiff must be held to have consented and agreed that the checks might be sent directly to the drawee bank for collection and also that such bank might remit by drafts. It was held, therefore, that plaintiff's petition stated no cause of action. Massey-Harris Harvester Co. v. Federal Reserve Bank 0/ Kansas City, 226 Mo. App. 916, 48 S.W.(2d) 158 (1932), aff'd in 104 S.W.(2d) 385 (1937). NOTE.—Yor cases involving substantially similar facts and holding to the same effect, see Oklahoma Gas and Electric Co. v. First National Bank of Oklahoma City, 179 Okla. 475, 66 Pac. (2d) 29 (1937); Osage National Bank v. Federal Reserve Bank of Minneapolis, 184 Minn. I l l , 238 N.W. 44 (1931); Transcontinental Oil Co. v. Federal Reserve Bank of Minneapolis, 172 Minn. 58, 214 N.W. 918 (1927); Chicago, M. & St. P. Ry. v. Federal Reserve Bank of San. Francisco, 70 Utah 310, 260 Pac. 262 (1927); Jensen v. Laurel Meat Co., 71 Mont. 582, 230 Pac. 1081 (1924); International Shoe Co. v. Federal Reserve Bank of Minneapolis, Dist. Ct. of the I^urth Judicial District for the County of Hennepin, State of Minnesota, Jan. 12, 1929 (unreported); Vacuum Oil Co. v. Federal Reserve Bank of Dallas, County Ct. at Law, Dallas, Tex., Feb. 6, 1926 (unreported); Jack & Jake v. Federal Reserve Bank of Atlanta, Circuit Court of Tenn., Oct. 14, 1924 (unreported). See also 13.201; 13.521. 13.521. State statute authorizing direct presentment to drawee. —A check drawn by the plaintiff on an Alabama bank came into the hands of the Federal Reserve Bank of Atlanta for collection and was forwarded by the latter direct to the drawee bank for payment. The drawee charged the check to plaintiff's account and remitted its draft on thetReserve bank in payment. Though there were fuibia. to the credit* Of the drawee bank with the Federal Reserve bank sufficient to pay the draft, it was not paid and the proceeds were not remitted. On the following day the drawee bank was put into the hands .of a receiver. Plaintiff sued the Reserve bank, alleging negligent on the part of the defendant, knowing the weak condition of the drawee, in having delayed collecting the check and in having sent it direct to the drawee for payment. It was held that the relationship between plaintiff and the collecting bank was controlled by the law and the.: contract at the place of deposit; that under Alabama and Georgia law, checks drawn on a bank in another city within or without the State might be sent for payment by a collecting bank direct to the drawee bank without incurring liability, provided due diligence is used in other respects in connection with the collection of the instrument; and that the mtiv sending of the check direct to the drawee bank for payment was not negligence. It was held, however, that the collecting defendant bank might be liable for negligence if it knew that the drawee bank was in a failing condition, but that this question wa- une to be pWtepiinpd by a jury. Accordingly, the answer of the defendant lined in certauvespects and overruled in others. Capital Grain and Feed Co. v. Federal Reserve Bank of Atlanta, 3 Fed. i2d) 614 iD.C. Ga., 192; NOTE.—For oase involving substantially Similar facts and holding to same see Hicks Co. v. Federal Reserve Bank of St. Louis, 174 Ark. 587, 296 S. W. 46 (1927). 45 13.540. Regulation J, Series of 1920, Held Not to Authorize. —A check drawn to the order of the plaintiffs wasSf^ceived by the Federal Reserve Bank of Richmond for collection, and forwarded by the latter to the drawee bank for payment. On the same day the drawee transmitted to the Reserve bank its draft on a State bank. This draft was dishonored for lack of sufficient funds and the Federal Reserve bank charged the amount of the check to the bank from which it had been received for collection and the latter bank in turn charged the amount to its immediate correspondent and so on until it was finally charged back to plaintiffs. Plaintiffs thereupon brought suit against the Federal Reserve Bank of Richmond and recovered judgment in the Federal District Court (281 Fed. 997) which was affirmed by the Court of Appeals (291 Fed. 763). On appeal to the Supreme Court of the United States, the defendant Federal Reserve bank contended that the method of collection pursued by it, by which an exchange draft was accepted from the drawee bank in payment of the check, was authorized by regulation of the Federal Reserve Board and that such method was justified by a custom binding upon th« plaintiffs. It was held that the Boardfa Regulation J, Series of 1920, while it contemplated the sending of checks for 'Collection direct to the drawee bank, did not expressly permit the acceptance of payment other than in money; that payment by draft was not impliedly authorized by the regulation; and that the general rule forbidding a collecting agent to accept anything but money in payment applied in this c-ase- inasmuch as there was no evidence of any definite and uniform custoift.as to methods of collection contrary to the general rule which were bindin$upon the plaintiffs. Accordingly, the judgment of the Circuit Court ol Appeals was affirmed. Federal Reserve Bank of Richmond v. Mdloy, 264 U.S. 160 (1924). NOTE.—-Likewise holding thati^fegulation J, Series of 1920, conferred no authority upon a Federal Reserve bank 4o accept drafts in payment of checks, see First National Bmk of Denver v, Federal Reserve Bank of Kansas City, 6 PW. (2d) 339 ( C C A . 8th,~t925), reversing 283 Fed. 700 (D. C. Colo. 1922). 76 13.541. Regulation J, Series of 1930, held to authorize acceptance of drafts.—The plaintiff brought an action against the defendant Federal Reserve bank for alleged negligence in presenting checks o-rtned by the plaintiff for payment to the drawee bank and for accepting, in lieu of cash, a draft drawn by that bank which subsequently closed before collection of the draft could be made. It was held that, while it had been weflfsettled before the promulgation of Regulation J, Series of 1930, that a collecting agent had no authority to accept other than legal tender in^ collecting a check for a principal, the situation had been changed fk the provisions of Regulation J, Series of 1930, and by the rovisions of a circular letter issued by the Federal Reserve Bank here l question, which expressly permitted the acceptance of drafts in payment ofrjehecks. It was further held that the enactment of the provisions of Regulation J permitting the acceptance of exchange drafts appeared to be a valid exercise of the powers reposed in theFederal Reserve Board by Congress. It was concluded, therefore, that the Federal Reserve Bank, acting within its authority, was not liable to he, paint.ffs. Terminal Gas and Supply Co. v. Federal Reserve Bank of Boston, 18 Tem 37) Fed Supp. 901 (D.C. Mass., 1937) E • 13.521; 13.542; 13.543; 13.544. 13.542. Power of Federal Reserve Board to authorize clearance of checks on specified conditions.—Certain checks deposited in a member bank by the plaintiff for collection came to a branch of the Federal ReseiVe Bank of Minneapolis for collection and were traajr mitted by such branch to 'the drawee State bank for payment. The drawee charged the checks to the drawer and remitted its draft for the amount thereof; but before the draft could be collected, the drawee bank failed and the draft was dishonored. Action was then instituted by the plaintiff to recover the amount of the checks on the theory that the defendant Federal Reserve bank had rendered itself liable for* the resulting loss by accepting a draft instead of money in payment of the checks. It was held that'Regulation J and the Federal Reserve baiik's collection circular, providin^Tor the collection of checks in this manner, were properly authorized by law; and that when the collecting member bank delivered the checks to the Federal-Reserve bajik for collection, the terms of the regulation and the collection circular became binding upon the collecting member bank and upon the plaintiff. Plaintiff argued that under the Federal Reserve Act, the collection of checks was mandatory and that it was beyond the power of the Federal Reserve Board or the defendant Federal Reserve bank to perform its public duty of collecting checks only upon the conditions specified. On this point, the court held that the provisions of section 13 and 16 of the Federal Reserve Act do not compel a Federal Reserve bank to receive checks or collect them; that the power of the Federal Reserve Board to, require Federal Reserve banks to act as dealing houses? is permi^ivi^nd not mandatory; and that, therefore, the Federal Reserve Board may propexly. authorize the clearing of checks only upon compliance witho certain conditions. Accordingly, judgment for the plaintiff and against the FederalJfCeTJerve bank was reversed. Fergus County v. Federal Reserve Bank of Minneapolis, 75 Mont. 582, 244 Pac. 883 (1926). 13.543. Banking custom as justifying acceptance of drafts.— Where a Federal Reserve bank, in the collection of checks, accepts a draft from the drawee hank in payment thereof, acceptance of such draft is not negligence on the part of the Reserve bank where the prevailing banking custom is to accept drafts in such cases drawn by the drawee bank on its correspondents.' 'Hicks Co. v. Federal Reserve Bank of St. Louis, 174 Ark. 587, 296 S.W. 46 (1927). NOTE.—For cases involving substantially similar facts and holding to the same effect, see Osage National Bank v. Federal Reserve Bank of Minneapolis, 184 Minn. 11, 238 N. W. 44 (1931); Chicago, M. & St. P. Ry. Co. v. Federal Reserve Bank of San Francisco, 70 Utah 310, 260 Pac. 262 (1927); Grover v. Federal Reserve Bpnk of San Francisco, Idaho State Dist. Ct., July 31, 1926 (unreported). See also Odle v. Barnes, 2 S. W. (2d) 577 (Tex. 1927), where the right to accept drafts in payment, in accordance with prevailing custom/HBRfDnceaed. 13.544. State statute authorizing acceptance of drafts.—A. check owned by the plaintiff was forwarded to the Federal Reserve Bank of Richmond for collection and the latter bank sent the check to th^.bank on which it was drawn for remittance. The drawee l^ank sent a draft for the amount of the check to the Federal Reserve bank but the draft was dishonored for lack of sufficient funds. Thereafter, the drawee bank failed and the plaintiff instituted an action against the drawer of the check and also against the Federal Reserve bank alleging that the latter bank had been negligent in accepting an exchange draft in payment of the check and in failing to require payment by a draft bearing the '"I.C." (immediate credit) symbol. While the drawer of the check was held liable for the amount thereof, it was .held that, with respect to the liability of the Federal Reserve bank, the case was distinguishable from Federal Reserve Bank v. Mailoy, 264 U.S. 160, since in the present case the Federal Reserve bank, by virtue of State statute, was not chargeable with negligence in accepting an exchange draft in payment of the check, or in failing to require payment by a draft bearing the "I.C." symbol.. Accordingly, judgment in favor of the Federal Reserve bank was affirmed. Cleve v. Craven Chemical Co., 18 Fed. (2d) 711 (CCA. 4th, 1927). . NOTE.—See also 13.541. J .545. Negligence in accepting worthless drqft.-^-Checks deposin the plaintiff bank by a corporation for collection were forwarded to the defendant Federal Reserve bank. The latter bank forwarded the checks difect to the drawee bank and received a draft of that bank in payment. The draft was dishonored and thereupon the plaintiff bank, as assignee of the rights of the corporation, brought action against the Federal Reserve bank for damages resulting from the alleged negligence of the defendant in handling the?«oliection. It was held that, notwithstanding banking custom, it was negligence for the Federal Reserve bank to send the checks direct to the drawee bank and accept a tffcfchless draft in payment and that the defendant was also negligent, under the circumstances disclosed, in delaying action for a period of nine days. Accordingly, judgment for the plaintiff was affirmed. Federal Reserve Bank of Kansas City v. First National Bank oj Denver, 87 Colo. 158, 286 Pac. 116 (1930). 13.580. "New York rule" denying privity of contract.—In a suit by the payee of a check which the Federal Reserve bank had forwarded direct to the drawee and for which a remittance draft, subsequently dishonored, was accepted in payment, defendant maintained that the "New York rule" was applicable and that therefore there was no privity of contract between the plaintiff and the defendant Reserve bank. On this theory, the court sustained the defendant's general demurrer and ordered the suit dismissed. Denning v. -Federal Reserve Bank of San Francisco, Idaho State Dist. Ct., Jan. 14, 1936 (unreported). NOTE.—The "New York rule" was likewfefe applied in Whittinqham v. Federal Reserve Bank of Kansas City, Nebraska State Dist. Ct., 1926 (unreported). For dictum stating the "New York rule" applied by the Federal courts, zee City of Douglas v. Federal Reserve Bank of Dallas, 271 U. S. 489 (1926), affirming 2 Fed. (2d) 818 ( C C A . 5th, 1924). ^ 13.581. Variation of "New York rule" by statute.—In a suit by the owner of an uncollected check against a Federal Reserve bank for damages resulting from alleged negligence in collection, the defendant Federal Reserve bank contended, that there was no privity of contract between the plaintiff and defendant and that the action could not be maintained. It was held that, while the so-called "New York rule" had been adopted by the Supreme Court, such rule might be varied by contract, express or implied; that in the present case the relations of the drawee bank to the initial bank of deposit were.jpontrolled by the Florida statute which had the effect of importing the; "Massachusetts rule" into the contract, with the result that the initial bank had implied authority to entrust the collection of the check-to a subagent and that subagent, in turn, to another; and that therefore the action was properly brought against the Federal Reserve bank. Federal Reserve Bank of Richmond v. Malloy, 264 U. S. 160 (1924). • NOTE.—For statement of facts in this case and decision on another point, see 13.540. 83 13.582. Variation of "New York rule" by contract.—Where a check drawn on an Alabama bank is forwarded to a New York banjc for collection, the "New York rule," by which the collecting bank undertakes to make ultimate collection, furnishing the necessary agencies therefor, would ordinarily apply in fne Federal courts. In such case, the drawer would not be entitled to sue a correspondent bank to whom the check was sent by the New York bank. However, where the New York bank specifically agrees jtjiat it acts only as collecting agent and assumes no liability on account of delay or loss while the item is in trans^or until it receives final payment from its co-respondents, such agreement abrogates the presumption of law contained in thefj'New York ifl^e" and the drawer of t^pheck may properly sue a correspondent bank to which the check is sent by the New York bank for collection to recover for damages resulting from the negligence of such correspondent bank. In such a case, each correspondent is the agent of the plaintiff and is answerable to him for its conduct. Capital Grain and Feed Co. v. Federal Rejwrvc Bank of Atlanta, 3 Fed. (2d) 614 (D.C. Ga., 1925). NOTE.—To trie Marine effect, where the plaintiff was the original depositor of the check, see First National Bank of Denver v. Federtd Reserve Bank of Kansas City, 6 Fed. (2d) 339 (CCA. 8th, 1925). reversing 283 FecL<T0O (D.C Colo., 1922). 84 13.583. Unrestricted indorsement by original depositor as precluding right to sue.—Plaintiff deposited a check in a national bank 'for collection and the bank forwarded the check to a branch of the Federal Reserve Bank of Dallas which, in turn, sent the check tp the drawee bank for payment. The draft remitted by the drawee bank was dishonored; and the plaintiff sued the Federal Reserve bank, alleging negligence on the defendant part in sending the check to the drawee bank instead of to some other agency for collection. Defendant contended that jjfeintiff was not entitled to bring the action. It was held that, since the clfefck in question had been indorsed by the depositor without restriction, it" became the property of the bank in which it was deposited and such bink therefore did not become the agent of the depositor in making the collection. In the opinion of the court, a statement in the pass book thatiftll'out-of-town items were credited "subject to final payment" did not Hiflfce to alter the situation. Accordingly, it was held that the suit couldtiiot be maintained. City of Douglas v. Federal Reserve Bank of DaHn*j2n U.S. 489 (1926) affirming 2 Fed. (2d) 818 (CCA. 5th, 1924). NOTE.—For opinion in Circuit Court of Appeals, see 1925 BULLETIN 30. To the same effect was the holding in Whittingham v. Federal Reserve Bank of Kansfts City, Nebraska State Dist. Ct., 1926 (unreported), where the facts were substantially similar. 85 13.584. Drawer of check held to have no right to sue.—The plaintiff drew a check on funds to his credit in a State bank in payment for a draft purchased by him from another bank. The check was forwarded to the Federal Reserve Bank of Minneapolis for collection and the latter bank transmitted the check to the drawee bank for payment and accepted the draft of that bank in return. The draft was presented by the Federal Reserve bank for payment on the same day, but payment was refused and the draft protested for nonpayment. Upon the failure of the State bank, plaintiff brought suit against the Federal Reserve bank alleging negligence in the collection of the check. It was held that the bank to which the check had been delivered as payment for the draft had not received the check for collection but becaine the owner thereof; and that there was therefore no such relationship btetween the plaintiff and defendant Federal Reserve bank as would entitle the plaintiff to bring suit against the defendant for negligence in collection. Berg v. Federal Reserve Bank of Minneapolis, 55 X.D. 406, 213 N.W. 86 -^ 13.600. Drawee bank held agent for collection.—Certain checks were presented for payment by a Federal Reserve bank to a nonmember State bank pursuant to a standing arrangement that all checks drawn on the latter bank should be sent to it by the Reserve bank and that the State bank, when the checks were received, would present or cause them to be presented to itself, and would immediately remit the amount thereof by means of currency or draft upon some other bank. The draft remitted in payment was dishonored because the drawee, in the meantime, had closed its doors. The Reserve bank thereupon brought suit against the receiver ofethe*Mrawee bank claiming a preferred claim upon the assets of the bank for the amount of such checks. It was held that, by virtue of the agreement, the drawee bank became the special agent of the Reserve bank to collect and remit immediately the proceeds of checks presented to it for payment; that the commingling of the proceeds of the checks with the funds of the drawee bank did not bring about the relation of debtor and creditor; that the draft of the drawee constituted an equitable assignment of funds to the Federal Reserve bank; and that therefore the claim of the Federal Reserve bank should be sustained. Federal Reserve Bank of Richmond v. Peters, 139 Va. 45, 123 S.E. 379 (1924). NOTE.—For substantially similar cases holding to the same effect, see Federal Reserve Bank of St. Louis v. Quigley, 284 S. W..164 (Mo. App., 1926); Rainwater v. Federal Reserve Bank of St. Louis, 172 Ark. 631, 290 S. \Y. 69 (1927) ; f l H b f c ^ n r Bnnk of St. Louis v. Mflhjwugh, 314 Mo. 1, 282 S. \V. 706 (1926); I Bank of San Francisco v. Bank of Phoenix, Super: Ct. of Muricopa County,"Arizona. 1925 (unreported). For cases holding to the contrary, ?ee 13.640 and no' 13.601. Lien on cash in vaults of closed bank.—A Federal Reserve bank received checks drawn on a nonmember State bank and. presented them to the latter bank for payment. The nonmember bank remitted a draft on a national bank, but in the meantime the nonmember bank was closed and the draft was therefore dishonored. In a suit by the Federal Reserve bank against the receiver of the closed bank, it was held that that bank was bound by its agreement to remit for checks upon it forwarded by the Federal Reserve bank; that the drawing of the draft on the national bank did not operate as a waiver of the Federal Reserve bank's lien on cash in the vaults of the nonmember bank; and that therefore the Federal Reserve bank should recover. Federal Reserve Bank of Richmond v. Bohannan, 141 Va. 285,127 S.E. 161 (1925). 13.602. Funds of drawee in another bank held subject to claim of Reserve bank. —Checks drawn upon a nonmember State bank were sent direct to the drawee bank by the Federal Reserve Bank of Richmond, pursuant to an agreement between the two banks. The drawee bank charged the checks against the account of the drawers and remitted to the Federal Reserve bank drafts upon a bank in which the drawee had funds on deposit. Payment of the drafts was refused by the depository bank although it had sufficient funds belonging to the drawee bank to pay such drafts; and the Federal Reserve bank, as intervener in a suit to settle the affairs of the drawee bank, filed a claim to establish a preference on the unpaidaamittance draft. It was held that the drawee bank was the agent of the* Reserve bank for collection and remittance of the checks in question; that therefore a trust was created as to the funds on deposit in the depository bank; and that the Federal Reserve bank should be preferred as an equitable assignee of such funds-over general creditors. Central Trust Co. v. Bank oj Mullens, 108 W. Va. 12,150 S 137 (1929). NOTE.—See contra 13.643. *> 89 13.603. State statute allowing preference for items "not treated as dishonored."—Checks received by the Federal Reserve Bank of New York for collection were forwarded to a national bank and by that bank presented to the drawee bank for payment. The drawee bank charged the checks to the account of the respective makers and remitted a draft on another bank in payment. The draft was indorsed by the collecting national bank to the Federal Reserve bank but was dishonored when presented for payment. Thereupon the Federal Reserve bank charged the items back to the accounts of the respective banks from which the checks had been received, but did not cause any item to be protested nor demand nor attempt to obtain the return of any of the items. In liquidation proceedings, the Federal Reserve bank filed a claim with the State Superintendent of Banks for a preference against the assets of the closed bank for the amount of the checks. Such a preference was allowed by State statute except in cases where the items were treated as dishonored by nonpayment. It was held that the act of the Federal Reserve bank in charging back the checks to the forwarding banks did not constitute an election to treat the items as dishonored by nonpayment; and that therefore the Federal Reserve bank, under the statute, was entitled to a preferred claim. In re Jayne & Mason, 140 Misc. 822, 251 N.Y. Supp. 768 (1931). > 30 13.604. Bank Collection Code authorizing preference.—The Federal Reserve Bank of Chicago sent to a State bank for collection cheeks drawn upon such bank; the checks were charged on the books of the latter bank to the accounts of the Respective.drawers; and a draft was remitted to the Federal Reserve bank in payment. After the draft was issued, but before it was presented for payment, the drawee bank failed. In an action for the appointment of a receiver, the Federal Reserve bank intervened to establish a preferred claim against the assets of the bank. It was held that since the items in question were not paid or settled for, and since the draft issued by the State bank was not payment or an unconditional credit, the facts of the case met the requirements of the State Bank Collection Code allowing a preference in such circumstances. Accordingly, judgment for the Federal Reserve bank was affirmed. Federal Reserve Bank of Chicago v. American Trust and Savings Bank of Hammond, 200 N.E. 248 (Ind. 1936). ^ — 13.640. Drawee bank held not to be agent of Reserve bank for collection.—By agreement, the Federal Reserve Bank of Chicago forwarded directly to a nonmember bank for collection checks drawn upon such bank and received in payment therefor the draft of the nonmember bank on a national bank. Subsequently, the drawee bank was closed and payment of the draft was refused. The Reserve bank thereupon filed a petition of intervention in receivership proceedings for the establishment of .a preferred claim for the amount of such draft. It was held that the drawee bank was not acting as agent for collection but was acting in its own behalf in the capacity of drawee and payor; that the insolvent bank was liable to the Reserve bank only as drawer of the draft and was not a trustee for the Reserve bank for the latter bank's funds in its possession; that the contention that the Reserve bank had no power to become a creditor of the nonmember bank in this manner was without foundation; and that therefore the plaintiff had no preferred claim against the assets of the insolvent bank for the amount of the draft in question. Leach v. Farmers' and Merchants' Savings Bank, 207 Iowa 471, 220 N.W. 10 (1928). NOTE.—See also 13.641. And to the same effect, see Bassett v. City Bank and Trust Co., 115 Conn. 12,^160 Atl. 60 (1932), where the facts were 'Substantially similar. For cases holding to the contrary, see 13.600. 13#64i.—A State nonmember bank to which the Federal Reserve Bank of Chicago h'Sfl sent checks for payment was closed and the drafts remitted by the bank in payment were dishonored. The Federal Reserve bank claimed a preference in the distribution of the bank's assets on the theory that the failed bank held the amount of the checks forwarded to it for payment as trustee. It was held that the Federal Reserve bank was merely the holder of checks drawn by depositors in the drawee bank; that if the checks had been personally presented at the counter of the drawee by an agent of the Federal Reserve bank, no trust would have been created; that the situation was not altered by reason of the fact that the checks in question were sent by mail to the drawee bank for remittance; and that therefore the drawee was not the agent of the Federal Reserve bank for collection of the checks and no trust was created in the Reserve bank's favor. Accordingly, the decree of the trial court granting the Reserve bank a preference in the assets of the closed bank was reversed. Leach v. Citizens State Bank of Arthur (Federal Reserve Bank of Chicago, Intervener), 203 Iowa 782, 211 N.W. 522 (1926). 13.642. Funds of failed bank not increased by transaction.— Checks drawn upon a State bank were forwarded to that bank for collection by the Federal Reserve Bank of Richmond; and the drawee bank remitted therefor drafts on certain banks in Richmond, Baltimore, and New York. All of these drafts were dishonored for the reason that' before they were presented for payment the State bank had closed its doors. Thereupon, the Federal Reserve bank filed its complaint against the receiver of the State bank in order to establish a preferred claim against the assets of that bank. It was held that inasmuch as the funds of the bank were not increased by the transaction's in' question and the only result was to substitute one creditor for another, the plaintiff was not entitled to be preferred over the other creditors of the bank; and, accordingly, the demurrer to the plaintiff's complaint was sustained'£nd the complaint dismissed. In re South Carolina Loan & Trust Co., 150 S.C. 25, 147 S.E. 653 (1929). 13.643. Funds on deposit in another bank not impressed with trust.—The Federal Reserve Bank of Richmond forwarded certain checks for collection and payment to the State bank -upon which they were drawn; and the latter bank remitted by a draft on a national bank with which it had funds on deposit. The drawee bank failed and its draft was dishonored by the depositary national bank. It appeared that the failed bank was indebted to the national bank and the latter £ank therefore claimed the right to apply the deposits of the drawee, bank to such indebtedness. The Federal Reserve bank, on the other hind, contended that upon the collection by the drawee bank of the checks drawn upon itself and the issuance of a draft on the national bank, thje funds in the national bank became impressed with a trust in fAVQK< of the Reserve bank in the amount of such checks. It was held that-rfcUe f deposited b y ^ e drawee bank with the national bank became the property of the Utter bank and created ^.relationship of debtor ^ i ^ ^editor; that no "trust, was created i»-favor of the Federal Reserve-fcank; and that therefore the equity of the national bank in the funds in question was superior to that of the Federal Reserve bank. Federal Reserve Bank of Richmond v. State and City Bank and Trust Co , 150 Va 423 143 S.E. 697* (1928). NOTE.—See contra 13.602. " 95 13.644. Statute allowing preference held inapplicable because of insufficiency of title.—The Federal Reserve Bank of San Fran brought suit to establish a preferred claim against the assets of & closed State bank which had remitted to the Reserve bank a draft in payment of checks drawn upon such State bank. The suit was based upon" a Brate statute whicsh expressly gave a preference to t^jegyei^lp^bank in such circumstances. It was held that the title of.-thflr^gtv^%$fejl.uestion w&s insufficient to express the subject matter ^u^hft^^ifogfe^S preferred clainps; was therefore in violation of th$$fy^-goii^t#(tjo|ftfafld did not apply to the transaction under consideration jj^^r^in^y, judgment tor the defendant was affirmed. Federal Reserve Bank of San Francisco v. Citizens' Bank & Trust Co., 53 Idaho 316, 23 Pac. (2d) 735 (1933). 96 (8) Right to Charge Uncollected Checks to Member Bank's Reserve Account 13.700. Whetf aright to change dta\fcee's account becomes fixed.-^ Checks received Jt>y a Federal Reserve bank for collection were forwarded to the drawee bank which immediately acknowledged receipt thereof but did not remit. On the next day, the drawee bank failed and a receiver was appointed. Thereupon the Federal Reserve bank, before the expiration of the three-day transit time provided for in the Federal Reserve bank's collection circular, charged the checks to the account of the failed bank. The receiver sued the Federal Reserve bank to recover the amount of the failed bank's deposit balance with the Federal Reserve bank and also to recover the surrender value, with dividends, of shares of stock in the Federal Reserve bank owned by the bank at the time <5f its failure. The Federal Reserve bank claimed the right to apply the amount of the checks in question against the failed bank's reserve balance and to set off the amount of the checks against the amount due on the Federal Reserve bank stock. The receiver contended that the bank's balance could not have been charged wifcn'Hfte Checks until the expiration of the three-day transit period, and ih^Pmitif the expiration of that period the bank was entitled to draw upon it? reserve balance in accordance with section 19 of the Federal"Reserve Act. Tt was held, however, that the right of the Federal Reserve bank to charge the drawee bank with the checks became fixed, under the terms of its circular letter, when the checks were accepted by the drawee bank; that an equitable charge on the reserve balance was created in favor of the owners of the checks; and that therefore the checks could properly be applied against the receiver's claim for the reserve balance. On the other hand, it was held that the Federal Reserve bank could not set off the amount due on the checks in question against the amount due the failed bank on stock in the Federal Reserve bank since the checks did not represent a debt of the insolvent bank to the Federal Reserve bank and the mutuality necessary to a set-off was therefore lacking. Federal Reserve Bank of Richmond v. Early, 30 Fed. (2d) 198 (CCA. 4th, 1929), affd, 281 U. S. 84 (1930). NOTE.—See 13.703 and note. 13.701. Set-off against drawee's reserve account allowed.—Where a Federal Reserve bank presented to a certain member bank for collection checks drawn on such member 'bank and other member banks and where the checks drawn on othe'rnftfe'iober banks were collected by the first member bank and paid and ft "Hraft therefor was issued to.the Federal Reserve bank, it was held that such draft was an absolute liability of the member bank to the Federal Reserve bank and that the latter bank was entitled to apply the draft against the member bank's credit in its deposit account with the Federal Reserve bank and against its credits for canceled stock. Federal Reserve Bank of Minneapolis v. First National Bank of Eureka, 277 Fed. 300 (D. C. S. D., 1921). NOTE.—As to set-off against amount due on Federal Reserve bank stock, see contra 13.700. 13.703. Right of set-off denied.—Under the Board's Regulation J, checks received by a Federal Reserve bank for collection are held by it as agent only. Accordingly, where such checks are presented by the Federal Reserve bank to the drawee bank and the latter bank remits a draft in payment, there is no such mutuality of debts between the drawee bank and the Federal Reserve bank as would justify th'fe Reserve ^ p k in offsetting the draft against the drawee's reserve accoittit. Anderson Federal Reserve Bank of Boston, 69 Fed. <2d) 319 (CCA. 5th, • J934), cert, den., 293 U. S. 562 (1935). to # NOTE.—In this case the court distinguished the case of Early v. Federal Bank of Richmond (See 13.700) on two grounds, one of which was that ai time of that decision Regulation J expressly authorized the Reserve bank to chEtrge against a member bank's reserve balance checks sent to the latter fojpcollection. For statement of facts in the Anderson case, see 13.705. 33 13.705. Liability of Federal Reserve bank for checks credited after failure of drawee bank.—Checks drawn on a national bank were presented by mail through a Federal Reserve bank: The national bank honored the checks and canceled them and in pa#nfetti; therefor issued its draft against its reserve account with the Feder^Mserve bank. The draft was mailed to a branch of the Federal Reserve bank which set it aside for report to the main office and entry on the books thereof. Subsequent to receipt of the draft by the branch of the Federal Reserve bank, but before the transaction had been reported to the Federal Reserve bank, the national bank was suspended and a receiver appointed an^ notice of this fa.ct came to the Federal Reserve bank. The Federal R e ^ v e bank thereupon sought and obtained an interpleader for the purpose of determining wrhether the amount of the checks was owed by the Federal Reserve bank to the check holders or to the receiver of the national bank as a part of that bank's reserve. It was held that the action of tbf ^branch of the Federal Reserve bank in acting upon and consenting to the draft of the national bank was as effective as if such action had been taken by the Federal Reserve bank itself; that the draft had therefore been consented to prior to the national bank's failure; and that the checkholders and not the receiver of the national bank were the creditors of the Reserve bank for the sums represented by such draft. Anderson v. Federal Reserve Bank of Boston, 69 Fed. (2d) 319 (CCA. 5th, 1934), affirming 2 Fed. Supp. 25 (D.C Fla., 1932), cert, den., 293 U.S. 562 (1935). 100 13.706. Right of Reserve bank to charge reserve account where remittance is made by "immediately available exchange."—A check deposited by the plaintiff in a national bank fo'rcoltection was forwarded through the defendant Federal Reserve bank direct9?© the drawee bank; and ih payment therefor, the drawee sent to the Reserve bank its draft on its reserve account. Upon the failure of the drawee, "Che Reserve bank charged the amount of the check to the forwarding bank and the latter bank in turn charged the check to the plaintiff's account. In an acltan against the depository bank and the Federal Reserve bank, plaintiff charged that even if the Federal Reserve bank may have acted within its rights in forwarding the check direct to the drawee and in accepting a draft in payment, the Reserve bank was nevertheless liable to the plaintiff for its failure to charge the reserve account of the drawee bank with the amount of the check. It was held that, under the provisions of the Federal Reserve bank's collection circular, which was binding upon the plaintiff, the Reserve bank was authorized to charge the reserve account of a membern&ank with the amount of a cash letter only in cases where the member bank remitted in some manner other than by "immediately available exchange"; that remittance made by draft drawn directly upon the Reserve bank was clearly a remittance by immediately available exchange; that therefore the Reserve bank had no authority to charge the amount of the cash letter to the reserve account of the drawee bank; and that, accordingly, no lien could exist against such account in favor of the Reserve bank for the benefit of the depositor, the plaintiff in this case. It was further held that the draft of the drawee bank did not itself constitute an assignment of its reserve deposit for the benefit of the plaintiff; and that even if it could be said that the draft was issued for the plaintiff's benefit, the assignment was not complete since the draft had not been accepted by the Reserve bank. Oklahoma Gas and Electric Co. v. First National Bank of Oklahoma City, 179 Okla. 475, 66 Pac. (2d) 29 (1937). NOTE—For holding in the above case as to the liability of the Reserve bar forwarding the check direct to the drawee bank and in accepting a draft in ment, see 13.521. ioi -*~ ^ 13.707. Right to charge back uncollected checks to forwarding bank.—Believing that defendant bank was in an unsafe condition," the plaintiff withdrew funds from that bank by a check payable to a second bank. The second bank forwarded the check to a Federal Reserve bank for collection and the latter bank, after charging the reser^eiaccount of the defendant bank pursuant to an agreement, presented the check to the defendant. Defendant returned the check to the Federal Reserve bank stating that the check had been recalled by the plaintiff- .^?his was a misrepresentation, unauthorized by ih<fti plaintiff. Upon the! failure of defendant, plaintiff brought suit against' the defendant to impress a trust upon .the assets of the bank in the amount of the check. Several years later the Federal Reserve bank was also made a party defendant. It was held that since the -Federal Reserve bank acted merely as agent in collecting the check and,hinder its circular governing collections, had authority to charge back to the forwarding bank any checks rsbt actually and finally paid, the charge against the reserve balance of the defendant was merely provisional and the Federal Reserve bank was therefore not liable to the plaintiff. Convqtse Rubber Co. v. Boston-Continental National Bank, 12 Fed. Supp. 887 (D. C. Mass., 1935), aft'd, KJ Fed. (2»d) 8 (CCA. 1st, 1936). 13.708. Right to charge back check returned for forgery.—Where a check drawn on the Treasurer of the United States was presented by a member bank to a Federal Reserve bank for collection and a'year later the check was returned unpaid by the Treasurer of the'tfaited States because of forgery, it was #eld that the Federal Reserve bank might properly charge back to the member bank the amount of such check, particularly in view of the fafet that this right was specifically reserved to the Federal Reserve bank by( the Federal Reserve bank's collection circular according to the terms, of which collections were made. Closter National Bank v. Federal Reserve Bank oj New York, 285 Fed. 138 (CCA. 2d, 1922), cert, den., 261 U.S. 613 (1923). 1923 BULLETIN 22. "> 103 13o709• Indemnification of_ Reserve Bank for Loss Arising. Out of Collection of Forged Check,—Under Regulation J, the Federal Reserve Bank of Atlanta received checks from a member bank for collection and forwarded the checks to the Federal Reserve Bank of Chicago, More then six years after the checks were paid, a judgment for the proceeds of the check? was taken against the Federal Reserve Bank of Chicago on grounds that the checks bore forged endorsements. tdthin a year after reimbursing that bank upon its demand, the Federal Ressrve Bank of Atlanta brought suit against the member bank from which it had received the checks0 The member bank contended that, since the suit was brought either for money wrongfully had and received, or upon its guaranty of prior endorsements, the action was barred in either case by the statute of limitations. The Court of Appeals held that the action was not barred, because it was based upon provisions of Regulation J giving the Reserve Bank, as an agent for collection, a right to be indemnified by its principal, the member bank, for a loss sustained through making the collection. This right became enforceable when the Reserve Eank made good the forged checks, and not when it credited the amount of the checks to the member bank's account0 Federal Reserve Bank of Atlanta v. Atlanta °»9 91 P. 2d 283f cert. den. 302 U. S c 738 (1937). 13.7103 Liability of Reserve Bank on Its indorsement,—The life insurance company agent forged the name of the payees on checks issued by the company to policy holders. The checks were cleared through the Cincinnati Branch of the Federal Reserve Bank and presented to the banks upon which they were drawn* This suit was brought against the Federal Reserve Bank upon its endorsement of the checksa The court held that the failure of the insurance company to compare the signatures on the checks with the genuine signatures in its possession made it solely and v:holly responsible for the loss because where one of two innocent persons must suffer, the one who commits the first oversight must bear the loss, and further because the delay of over two years in notifying the defendant of the forgeries discharges the defendant Royal Indemnity Company v. Federal Reserve Bank of Cleveland« 3& F; Supp, 621 (1939)$ aff'd. without opinion 119 F. 2d 773. 13«711. Same,—The plaintiff, the drawer-drawee of checks presented to it by the Federal Reserve Bank of New York for payment, commenced suit against the Federal Reserve Bank more than six years after payment, on the ground that prior endorsements, necessary to the transfer of title to the checks, had been forged, that a New York statute (Sec, 35C-c of the Negotiable Instruments Law) created a liability on the part of the federal Reserve Bank to indemnify the plaintiff against loss, and that the loss had occurred within six years of the commencement of the action. The court dismissed the complaint on the ground that the loss had occurred when the checks were paid, and not when the 104 13.711 (Cont'd.) plaintiff settled a claim made by persons entitled to the proceeds of the checks; and that the six-year statute of limitations had run. The court of first instance said, obiter, that the fact that Regulation J limits the Federal Reserve Bank's liability, In the circumstances, to its guaranty of prior endorsements, does not prevent the Bank, under a State statute, from having responsibility if its endorsement is in sucli form as to constitute an indemnity agreement. Mount Vernon,Trustr Company v. Federal Reserve Bank of Mew York, 1B2 Misc, 7, "*45 N. f. S. 2d 3l6 (Supfct., West Chester Co«), aff »d. 267 App. Div. $82, 46 N. Y. S. 2d 450 (2nd Dept.), aff'd. without opinion 293 N. Y. 654 (1944). 13o712 Liability of Reserve Bank.,—Plaintiff, the payee of a check, caused it to be endorsed "for deposit", and gave it to Handrulis for safekeeping^ Handrulis caused the check to be endorsed by one Alkoff and deposited in Alkoff 's account in a commercial bank in New York City. The bank, a member of the Federal Reserve System, sent the check to the Federal Reserve Bank of New York, which collected the check and remitted the proceeds to its member bank. Plaintiff, never having received the proceeds, sued Handrulis, Alkoff and the Federal Reserve Bank, in conversion. The Court of Appeals, in reversing a judgment dismissing the complaint against the Federal Reserve Bank and granting a new trial, said that the bank, in a commercial sense, acted in bad faith because it was under a duty of inquiry by virtue of the endorsement, and that in these circumstances the failure to make inquiry made the bank liable, even within the reservations stated by Regulation J ("a Federal Reserve bank will . • . assume no liability except for its own negligence and its guaranty of prior endorsements"). Soma v. Handrulis, et al o t 277 N. Y. 223 (1938). 1 0' > LOANS AND DISCOUNTS BY FEDERAL RESERVE BANKS .Jo 13.801. Rediscount of eligible paper not mandatory.—In a suit to enjoin a Federal Reserve bank from engaging in open market operations, frdffi raising the rediscount rates, and from declining to rediscount eligible paper, it was held that, since the Federal Reserve Board was an indispensable party and since the Board had not been joined, the bill must be dismissed. As dictum, however, it was held that the charge that the Federal Reserve bank, by declining to rediscount eligible papery of member banks which had not reduced their loans upon securities, constituted a wrongful coercion of "the member banks was without' foaiidation. In this connection, it was pointed out that the Federal Reserve banks are not under any compulsion to rediscount eligible paper. Msince the statute is merely permissive and does not require a Federal Reserve bank to discount unless so ordered by the Federal Reserve Board. Raichle v. Federal Reserve Bank of New York, 34 Fed. (2d) 910 (OCA. 2d, 1929). NOTE.—For o A points decided in this case, see 4304; 11.100; 12.100: 14.100; 14.502. 6 As to right of Federal Reserve bank to decline to discount eligible acceptances, see 13.1602. r.\ iCT 13.802. Advance to member bank is loan and not donation.— A Fed||ral Reserve bank agreed to make an advance to a national bank for the purpose of rehabilitation, provided an assessment should be made against the shareholders of the bank and provided the advance should be a first lien upon the assets of the bank. Upon the failure of the bank, the Federal Reserve bank became the owner of certain notes which had been pledged to it as security for the advance and among the notes was one executed to the failed bank by the plaintiff. Plaintiff e note before it was due but later claimed that he had paid under and sued the Federal Reserve bank to recover the amount of and to have the agreement between the receiver of the failed bank and the Federal Reserve bank set aside on the ground that the advance made by the Federa.1 Reserve bank was a donation. It was held, howeyer, that plaintiff had paid the note voluntarily*! that the advance by the Federal Reserve bank was a loan and not a donation, and that plaintiff could not recover. Crowvll v. Federal Reserve Bank of Dallas, 12 Fed. (2d) 259 (CCA. 5th, 1926). ±23 13.833. Right to object to action of Federal Reserve bank in discounting ineligible paper.—Irrespective of the power of a Federal Reserve bank to take as collateral paper not eligible for discount, no one can complain of >ucfrraction except the Government itself. Accordingly, the maker of a note secured 'fflr' real estate cannot complain, in a suit by the Federal Reserve bank on the note, that the,.note was not given for an agricultural, industjjtiis4>r commerciftj^gurpoee and could not therefore be lawfully discounted by the Feder4fc3teserve bank. Federal Reserve Bank of Richmond v. Duffy, 219 N.C. 598, 188 S.E. 82 (1936). NOTE.—See also 13.863; 13.1002. 109 13.863. . Power of Reserve bank to take as collateral security paper not eligible fdr discount.—A national bank took over the assets and assumed the liabilities of a State bank at the instance of the defendant Federal Reserve Bank, the officers of whicli_ promised to extend to the nationalikanlvadditional accommodation? to meet the additional burden. Upoaihe" mrolvencv of the national bank-,t,its stockholders and creditors brought suit against the Federal Reserve bank aliening, MIUU^ things, that, in violation of its agreement, the Federal' Reserve had reo^ui^eti additional security of th^iational bank in q u e s t j | ^ the F«$keral Reserve bank had no authority to accept such additional security since it did not constitute paper eligible for discount; and .that the complainants had been damaged as a result of the Reserve bank's unlawful action. It was held that the fact that the paper takelf a£} additional security was ineligible for discount did not preclude its being! taken as collateral; that Regulation A of the Federal Reserve Board expressly authorized Federal Reserve banks to take as security collateral of any nature, including paper ineligible for discount; and that, whatever the power of the Reserve bank with respect to the taking of such collateral, no one could complain of such action except the Government itself. Lucas v. Federal Reserve Bank of Richmond, 50 Fed. (2d) 617 (CCA, 4th, 1932). 1932 BULLETIN 452. NOTE.1—See also 13.833. For other points decided in the above case, see also 13.864. 13.864. Requirement of additional collateral as violation of Reserve bank's agreement to furnish additional accommodations.— In 1923, the assets of a State bank were taken over by a national bank at the instance of the defendant Federal Reserve Bank of Richmond, the officeflNflf which promised to extend to the national bank "such additional accommodation in the way of discounts as would be necessary to meet | the additional burden" thus assumed by it. Notwithstanding the agre< ment, the Federal Reserve bank shortly thereafter required the natiorn bank to put up additional collateral to secure its indebtedness to-the Reserve bank and again required additional collateral in 1925. In 1R2P, a neUf national bank was organized to take over the assets and assume the Utilities of the first national bank, but the new bank became insolvent a few months later and was placed in the hands of a receiver. Stockholders and creditors of the failed national banks brought tijpib a g a i n ^ t h e Federal Reserve bank, alleging that the Federal Reservl requiring additional collateral, had violated its agreement ai complainants had suffered damages as a result. It was helj that the alleged agreement was not sufficiently definite a binding contract and that, even if such were the case, it did Ir that the agreement had been violated by the Reserve bant, ; it had extended to the national bank a substantial amount of credit Over a period of years. Judgment for the defendant fmv aftioed. Lucas v. Federal Reserve Bank of Richmond, 5( tyj iC.C.A. 4th, 1932). 1932 BULLETIN 452. See also 13.863. As to requirement of additional collatei n preferential transfer. «ee 1^-5242.200 f r "'25S). ±10 13.1205. Effect of Federal Reserve Act upon character of trade acceptances.—In a suit upon trade acceptances, it was contended that such acceptances were to be governed by the provisions of the Federal Reserve Act and not by the State law relating to ordinary drafts or bills of exchange and that they were, therefore, not within the rule that an ordinary draft may be signed by the acceptor before the name of the drawer is filled in, or that a drawer may be anyone whom the acceptor may accept as such. It was held, however, that there is nothing in section 13 of the Federal Reserve Act or in the regulations made thereunder by the Federal Reserve Board sufficient to change the character of trade acceptances as bills of exchange or to change the obligations arising therefrom, so far as the parties are concerned. Stafford v. Hill, 53 Calif. App. 337,200 Pac. 33 (1921). iff 13.2700. Primary liability of discounting member bank.—Where a member bank indorses discounted paper and deposits it with its Federal Reserve bank, the member bank by virtue of ffiat provision of section 13 which renders the indorsement of a member bank a waiver of demand, notice and protest, becomes primarily liable to the Federal Reserve bank and the latter bank may therefore base a claim upon such paper agamst the receiver of the member bank without proceeding against prior indorsers or makers. Federal Reservet Bank of Minneapolis v. First National Bank of Eureka, 277 Fed. 300 (D.C.S.D., 1921). 13.2720. Bonds deposited with Reserve bank as security for loan to member bank.—Plaintiff's decedent deposited flhain Liberty bonds with a national bank, receiving therefor a certificate of deposit providing for the payment of interest on the certificate and for the return of the bonds upon 30 days' notice. The certificate did not refer to particular bonds. The bank pledged the bonds with the Federal Reserve bank as collateral security for a loan. Plaintiff brought an action of detinue against the Federal Reserve bank for the recovery of the bonds, alleging that they had been deposited with the national bank for sawj|k?ping. It was held that the evidence did not sufficiently show that thefconds were deposited'-merely for safe-keeping; that even if such was the*ase, the Federal Reserve bank was a bona fide holder of the bonds in due course; and that therefore plaintiff could not recover. Bragg v. Federal Reserve Bank of Richmond, 164 Va. 30, 178 S.E. 680 (1935). li.3 13.2721. Knowledge of insolvency of discounting member bank as affecting.—Plaintiff drew a"clraft on the buyer of certain merchandise and deposited the same, with bill of lading attached, in a State bank for collection only. The State bank forwarded the draft to the defendant Federal Reserve bank for discount and the Federal Reserve bank credited the amount thereof to the State bank. Subsequently, the State bank was closed and the plaintiff httmgjit suit to recover the anjoujit of the draft from the Federal Reservet>fmk. It was held that the State bank had been insolvent for some time a^the time the draft wag received by it and that the officers of the bank knew of such insolvency; that the Federal Reserve bank also had knowledge of the State bank's insolvency; that the draft was never the property of the State bank and was discounted by the Federal Reserve bank with knowledge that such was the case; that therefore the Federal Reserve bank could not be regarded as a bona fide purchaser before maturity; and that the Federal Reserve bank, as a party to the fraud perpetrated by the State bank.upon the plaintiff, was liable for the amount of the draft. Accordingly, judgment for the plaintiff was affirmed. Federal Reserve Bon! of San Francisco v. Idaho Grimm Alfalfa S< <<} Growers Asso., 8 F e d . (2d) 922 (CCA. 9th, Mo), cert, den., 270 U. S. 646 (1926). 114 13.2722. Possession of note by payee held not to affect Reserve bank's status.—In a suit by a Federal Reserve bank upon a promissory note transferred to it, the maker contended that the plaintiff was not a holder in due course, and that since she, the maker, had executed the note as surety for her husband's debt, she was not liable. The trial court gave judgment for the defendant and plaintiff appealed. It was held that circumstantial evidence to the effect that the note was in the possession of the payee bank did not contradict or weaken direct and uncontradicted evidence to the effect that the payee held the note as agent for the Federal Reserve bank. Accordingly, it was held that the Federal Reserve bank was the holder of the note in due course and that therefore judgment for the defendant should be reversed. Federal Reserve Bank of Atlanta v. Haynie, 46 Ga. App. 522, 168 S.E. 112 (1933). 115 13.2740. Alleged payment to member bank as agent for Reserve bank.—defendants were liable on certain notes p»x$bl&, to a national bank. The notes, without the knowledge of the defe^ants, were discounted by the national bank with the Federal Reserw&bank of Philadelphia. Just prior to the failure of the national bank, an agent of the defendant appeared at the national bank for the purpose of redeeming the notes in question and received a receipt for payment although the notes, since they were pledged with the Federal Reserve bank, were not returned. Upon the insolvency of the national bank, the Federal Reserve bank bfbught suit upon the notes, and the defense was made that the notes had been paid to the national bank as agent of the plaintiff. It was held that the payee of negotiable paper, who has pledged it with another, is not the agent of tli^lt other for its collection; that there is no agency relationship between a Federal Reserve bank and its member banks except such as arises from contract; that, in the kbsence of specific authority to collect, a payee receiving money from the debtor accepts it as agent of the debtor and not of the holder; and that payment to the payee under such circumstances does not discharge the debt. It was held, therefore, that since the agency of the member bank for trie Federal Reverse bank was not proved, judgment for the defendant should be reversed. Federal Reserve Bank of Pkilade&phm v. Gettleman, 189 Atl. 86 (N. J. 1937). ±1'O 13.2741. Inference of agency of payee bank held unwarranted.— Defendant executed a note to a member bank which the latter bank discounted with its Federal Reserve bank. Shortly before the member bank closed its doors and before the note was due, defendant paid the.amount of the note to the member bank although with knowledge that the bank did not have the note in its possession. In an action by the Federal Reserve bank against the defendant, it was contended that the note had been paid to the member bank as agent of the plaintiff. It was held that there is no agency relationship betwceft a Federal Reserve bank and its member banks except such as arises from contract; and that, even though the Federal Reserve bank had, been accustomed to send to the member bank in question'for collection notes which that member bank had discounted or pledged to the Federal Reserve bank, this fact was not sufficient to justify an inference in the present case that the member bank acted as agent for the Federal Reserve bank in collecting payment on the note here involved. Judgment in the lower court for defendant was therefore reversed. Federal Reserve Bank of Richmond v. Kalin, 81 Fed. (2d) 1003 (CCA. 4th, 1936). ±17 13.2742. Submission to jury of question of agency of member bank to receive payment.—Plaintiff Federal Reserve bank brought suit against the maker and indorser of certain promissory notes given to a national bank and indorsed by that bank to the plaintiff as security for an indebtedness. Defendants contended that the notes in question had been paid to the national bank as the agent of the Reserve bank. The plaintiff objected to the submission of the question of agency to the jury on the ground that there was no evidence to authorize its submission. The objection was overruled and plaintiff appealed. It was held tha* a.t. testimony offered in the suit was sufficient to raise a reasonable inference that the national bank was acting as agent of the Federal Reserve bank in collecting notes which had been pledged with the latter bank and that therefore the court was justified in submitting the issue of agency to the jury. Accordingly judgment for the defendant was affirmed. Federal Reserve Bank of Dalles v. Hanna, 287 S.W. 274 (Tex. 1926). 118 13•2743• Failed Payee Bank as Agent of Reserve Bank for Collection.—The Atlantic City National Bank made a loan and discounted the resulting note with the Federal Reserve Bank. The maker paid the note to the national bank before maturity. The bank failed. The Federal Reserve Bank, which still held the note, sued the maker. The trial court submitted the case to the jury, and the jury decided for the defendant. The Court of Appeals affirmed on the basis of the evidence introduced by the defendant that the plaintiff had constituted the national bank its agent to receive payment, and on that ground distinguj.shed Federal Reserve Bank of Richmond v. Kalin (see par. 13.2?4-l)• Tedevbl Reserve..Bank of Philadelphia v. Ai^ar, 100 F. 2d 941; cert, den." 307 uTsI 631 (1939). r 119 13.2750. Unavailing against Reserve bank as holder in due course.—Certain notes executed by defendant to a member bank were transferred to the plaintiff Federal Reserve bank as collateral security for a loan by the plaintiff to the member bank. When the member bank closed its doors, there was a balance to the credit of the defendant in its account. In a suit by the Federal Reserve bank on the notes, the defendant filed a declaration in set-off. It was held, however, that the Federal Reserve bank was the holder in due course to the extent of its lien, and that therefore the defendant was not entitled to set off the amount of the deposit to its credit in the closed member bank as against the plaintiff Federal Reserve bank. Federal Reserve Bank of Boston v. Gray-United Stores, 194 N.E. 709 (Mass. 1935). 1 NOTE.—For a case involving substantially similar-facts and holding to the same effect, see Federal Reserve Bank of Richmond v.jSufty, 210 N.C. 59$, 1S8 S.E. 82 (1936). And see also digests of cases immediatei^Mrowing. As to Status of Reserve bank as holder in due course, see 13.2720 et seq. 120 13.2761. Defense of set-off properly stricken.—In a suit by a Federal Reserve bank upon certain promissory notes executed by the defendant and indorsed by a national bank to the plaintiff, it was alleged by the plaintiff that it was a holder in due course and for value. In his answer, defendant maintained that he had received no consideration for one of the notes in question and that he was entitled to a set-off or counterclaim with respect to the other note. Upon the motion of the plaintiff, these defenses were stricken from the answer; and defendant appealed. It was held that if the Federal Reserve bank was, as alleged in the complaint, a holder in due course, such defenses would be unavailable; and that therefore they were properly stricken from the answer as irrelevant and immaterial. Accordingly-,,.^^ order of the trial court granting the plaintiff's motion to strike 'was affirmed. Federal Reserve Bank uj Richmond v. Atmore, 200 N.C. 437, 157 S.E. 129 (1931). 121 13.2762. Set-off of defendant's deposit in discounting bank.— A depositor in a State bank, after its insolvency, brought action against the State Supervisor of Banks and the Federal Reserve Bank of San Francisco to obtain an off-set of the amount of his deposit in the failed bank against his note made to that back and subsequently purchased for value by the Federal Reserve bank1.1 The action was predicated upon the theory of the marshaling of assets. It was alleged that the Federal Reserve bank held a large amount of collateral in excels of the total indebtedness to it of the failed bank. It was held, ho4eVfer, that after the sale and delivery of the note to the Federal Reserve bank, the failed bank no longer had any interest in it as owner and that therefore the deposit liability of the failed bank to the plamtift could not be set off against such note in the hands of the Federal Reserve bank. Accordingly, the judgment of the trial court against" tl$nplaintiff was affirmed. Williams v. Duke, 125 Wash. 250, 215 Pac. 372 (1923). NOTE.—As to marshaling of assets, see also 13.2764. 13.2763. Set-off of equitable claim against discounting bank.— Defendant executed a note to a national ,|^nk, at r a-tate of interest greater than that allowed by law, and in order to evade the usuryjfaws the bank withheld $2,000 of the amount of the note from the maker with his acquiescence. The note was transferred to the plaintiff Federal "Reserve bank and in a suit thereon by the latter bank, defendant sought to offset the $2,000 which had been withheld by the national hank. The court held that the charging of usurious interest operated-la Wieit all right to interest on the note even in the hands of a holder in due fcburse; but that the equity of the maker against the nati k $2,000, while enforceable by the defendant against not enforceable against the Federal Reserve bank course. Accordingly, judgment for the plaintiff was affirmed. Federal Reserve Bank oj Richmond v. Jones, 205 N.C. 648, 172 S.E. 1815 (1934). 123 13.2764. Marshaling of assets.—Defendant executed a promissory note to a national bank with an agreement that any deposits in the bank to his credit at the maturity of the note should be applied tu its pj^tment. The note was indorsed by the bank to the Federal Reserys! fiarfk of St. Louis as partial security for its indebtedness to the Reserve bank. Upon the failure of the national bank, the Federal Reserve bank brought suit in law again-Uthe defendant on the note; and his defense was that his deposits in thejnational bank were more than sufficient to cover the note, that the Federal Reserve bank knew the defendant was entitled to the set-off, that the indebtedness of the nati^iaj^jnk to the Reserve bank was amply secured by other collateral %ga^j^(jw))ich no right of set-off existed, and that, therefore, the Resery^ajjk^iould be recjjqred to satisfy its claim out of such other collater^lj-gather than from the note executed by the defendant. It was held that because of the peculiar circumstances principles of equity and fair-dealing required the Reserve bank to resort first to the collateral against which no defenses existed against the failed national bank before resorting to the defendant's notes; that the principle of marshaling of assets was applicable %this case even though the Reserve bank was a bona fide holder for value of the note in question before its maturity, inasmuch as the Reserve bank knew of the defendant's right of set-off and was alleged to ha\£- misled the defendant as to the solvency of the national bank that was payee of the note. Accordingly, the judgment of the trial court fojkthe Federal Reserve bank was reversed and the cause remanded to the chancery court fur a new trial. DitworUi v. Federal Reserve Bank of 170 Miss. 373. 154 So. 535 (1934). NOTE.—See also 13.2762. 2 13.2765. Sufficiency of evidence of counterclaim.—In a suit by a Federal Reserve bank upon a promissory note, defendant alleged by way of defense that plaintiff had violated a verbal contract to pasture cattle on defendant's land and that as a result defendant was entitled to set up a counterclaim. Upon a trial of the issues before a jury, a verdict was rendered in the lower court for the defendant. On appeal, plaintiff alleged that the court had erred in overruling a motion for a directed verdict, in refusing to/giye instructions as to mitigation of damages, and in denying a motion for a new trial based upon newly discovered evidence. It was held thai the action of the plaintiff in introducing evidence in its behalf after itWr&otton for a directed verdict had been overruled constituted a waiver of the objestion; that the record disclosed substantial evidence to support the droages assessed by the jury; that the question of mitigation of damages had not been pleaded by plaintiff and that the trial court correctly refused the requested instruction on this subject; and that the action of the trial court in overruling a motion for a new trial was proper in view of the fact that the motion disclosed that attorneys for the plaintiff knew of such evidence prior to the trial. Accordingly, judgment for the defendant^was affirmed. Federal Reserve Bank of Dallas v. Upton, 34 N.M. 509, 285 Pac. 494 (1930). 105 13*2766. State Law as Precluding Set-off.—The Federal Reserve Bank sued on a note assigned to it by a national bank which had failed after the assignment. The defendant (Panama City, Flordda) sought to set off the amount of its deposit in the national bank« The court held that the Federal Reserve Bank should recover the amount of the note without set off, in accordance with Florida law. Panama City ve Federal Reserve Baric of Atlanta, 97 F. 2d 499 (1938), 13.2780. Failure to present note at bank where payable. — I n a suit by a Federal Reserve bank against the iwioWBof a promissory note which had been indorsed by a national bwilfl aW transferred to the Federal Reserve bahk- as collateral security for; an indebtedness owing byj(Jhe national bafifci to the Reserve bank, it was contended by the deieftdant that the'fteserve bank/fists, holder of the note, :htfd failed to present it for payment at the indtft^to's bank where it was payable and where the maker ha*Mu»tfs on depOBitfiufficient to pay it. The note sued on contained a pwtigfen to the effectftthat the maker waived protest, notice, and diligence in collecting. It was held, therefore, that the maker was bound by hi? waiver and that the circumstance that the Federal Reserve bank had knowledge of a depopftnolothe maker with the payee bank sufficient to meet the note at maturity did not impose a duty on the Reserve bank to present the note for payment. It was further held that the Reserve bank might enforce the note without waiting until it could be determined whether otifeJccolfofltefkl held by the Reserve bank was siAcient to pay the indebtiflllHlbidf stfie national bank. Sowell v. Federal Reserve Bank of Dallas, 2$frl&.8>&&- {192b). NOTE.—As to jurisdiction of the Federal court in the above case, see 4.300. 13.2790. Note given to accommodate bank official. —At t b $ request of the president of a member bank, the defendant gaV%>to the president his note of $6,000 in order to aid the president in averting the consequences of an over-loan by the bank to the president's own business. The defendant gave the note not for the purpose of deceiving the' bank examiner buti^jkh the intention that it should be regarded as a real asset of the bank until the president of the bank should be able to take it up. In such circumstances, the note was supported by good consideration, and the defendant was estopped to deny liability thereon in a suit by the Federal Reserve Bank of Richmond with which the note had been discounted by the member bank. Federal Reserve Bank of Richmond v. Crothers, 289 Fed. 777 (CCA. 4th, 1923). 13.2791. Tax anticipation notes issued by city and indorsed by member bank.—In order to pay its employees and meet other obligations, a city issued ilk tax anticipation notes payable to the order of the city treasurer; and the note was indorsed by a local national bank and transferred to the plaintiff Federal Reserve bank. Upon the failure of the national bank and suit brought upon the note by the Federal Reserve bank, the city contended that the note was nonnegotiable; that the city had loaned its credit to the local bank in order to enable it to n open in violation of State law; and that the bank had not properly kep bookkeeping accounts with respect to the transaction. It was held, however, that the note was clearly negotiable; that it was legally issued by the city for the legitimate purpose of carrying on its activities and not for the purpose of lending the city's credit to the national bank; and that the manner in which the bank had kept its bookkeeping accounts could not affect the validity of the sale of the note. Accordingly, the refusal of the lower court to give binding instructions for the plaintiff Federal Reserve bank was held to be error and the judgment below was reversed. Federal Reserve Bank of Philadelphia v. Ocean City, 84 Fed. (2d) 657 (CCA. 3d, 1936), cert, den., 299 U. S. 584. NOTE.—On retrial, the District Court refused a directed verdict for the Federal Reserve Bank; but on appeal to the Circuit Court of Appeals, the judgment of the District Court was reversed. 91 Fed. (2d) 635 (1937). *• \ O \ \ 139 13.2792. Invalidity of renewal note issued by city.—Where a note was given by a city to a bank for the purpose of renewing a note previously given for money borrowed to retire maturing municipal bonds, and where such renewal note was indorsed to a Federal Reserve bank which brought suit thereon, it was held that, although the city had no power to make negotiable paper good in the hands of a bona fide holder, nevertheless, such renewal note was enforceable by the Federal Reserve bank against the city and should have been admitted in evidence. Federal Reserve Bank oj Atlanta v. Panama City, 87 Fed. (2d) 677 (CCA. 5th, 1937). 130 INDUSTRIAL LOANS BY RboLuVE HANKS 131 13b.102. Discretionary Nature of Reserve Bankfs Authority to Make Leans.—Plaintiff sued uhe Reserve Bank (in a Federal District Court in Montana) for damages for refusing to make it a loan under sec. 13b of the Federal Reserve Act. The court dismissed the action on two grounds (1) the statute used the word "may" and, therefore, was permissive, and not mandatory, and (2) that the Reserve Bank was an inhabitant of Minnesota and could not be sued in another district without its consent, Billings Utility Company V. Federal Reserve Bank of Minneapolis. 40 F. bunp. 309 (,194177 13b.103* The plaintiff brought suit (in Minneapolis) against the Advisory Committee, the Board of Governors and the Federal Reserve Bank of Minneapolis for damages for refusal oy the Reserve Bank to make a loan, bein^ the same cause of action as in 40 F. bupp, 309 referred to above* The District Court held that the questions determined in the preceding case were res adjudicata, and held, further, that the Bank had not abused its discretion* The Court of Appeals affirmed, holding that the two questions decided by tne Montana Court were res adjudicata and that the statute was perinissive and not mandatory since it provided that the Reserve Bank "may" make loans in "exceptional circumstances" v»hen it appears "to the satisfaction of the Federal Reserve Bank" that the applicant was "unable to obtain requisite financial assistance on a reasonable basis from the usual sources." The court also held that there was no liability on the Reserve Bank because of the refusal of the officers of the Bank to make the loan, because the Federal Reserve Act contains no provision indicating that Congress contemplated that a Reserve Bank should be subject to damages for that reason, and where the officers have acted within the limitations of the statute, their conduct is not subject to judicial review*, Billings Utility Co. v. Advisory Coianittee, et alp. 46 F. Supp. 691, 135 F. 2d 1C8 U943)T~ 132 OPtM MARKcT OPERATIONS 133 14.100. Validity of operations designed to reduce brokers' loans. —In a suit to enjoin a Federal Reserve bank from engaging -in';-open market transactions, from raising the rediscount rates, and from declining to rediscount eligible paper, it was held that since the Federal Reserve Board, an indispensable party, had not been joined, the bill should be dismissed. (See 4.304.) As dictum, however, it was held th«t the Federal Reserve banks are specifically authorized to buy and sell in the open market, that the discretion of the Federal Reserve banks in determining whether to engage in open market operations is not subject to judicial review, and that if a Federal Reserve bank proceeds in good faith through open market operations and control of discount rates to bring about a reduction of brokers' loans, it commits no legal wrong. Raichle v. Federal Reserve Bank of New York, 34 Fed. (2d)'91O (CCA. 2d, 1929). . DISCOUNT RATES 14.501. Scope of Board's power as to discount rates.—The power of the Board with respect to discount rates is not merely a power to review and approve or disapprove. Because of the addition of the words "and determination," the Board has the right to pass upon and to decide and fix discount rates established from time to time by the Federal Reserve banks. This power is clear when the provisions of section 14 (d) of the Federal Reserve Act are considered in connection, with the power of the Board under section 11 of the Federal Reserve Act to supervise the business of the Federal Reserve banks and the provisions of section 12 of the Federal Reserve Act creating a Federal Advisory Council with authority to make recommendations in regard to discount rates. 32 Op. Atty.Gen. 81 (1919). NOTE.—As to change in law, see note to 14.500. 14.502. Judicial review of discount rates.—In a suit to enjoin a Federal Reserve bank from engaging in open-market operation^ from raising the rediscount rate, and from declining to rediscount eligible paper, it was held that since the Federal Reserve Board, an indispensable party, had not been joined, the bill should be dismissed. (See 4.304.) As dictum, however, it was held that the Federal Reserve banks are specifically authorized by law, subject to review and determination of the Federal Reserve Board, to establish from time to time rates of discount; that it is for each Federal Reserve bank, under the supervision of the Board, to determine what constitutes a reasonable rate of rediscount; that it would be unthinkable that open-market sales and discount rates be subject to judicial review; and that if a Federal Reserve bank proceeds in good faith through open-market operations and control of discount rates to bring about a reduction of brokers' loans, it commits no legal wrong. Raichle v. Federal Reserve Bank of New York, 34 Fed. (2d) 910 (C.C.A. 2d, 1929). O t FEDERAL RESERVE NOTES r 138 16.102. Use of penalty envelopes in shipping.—The language of this section imposes upon the Federal Reserve banks all expenses involved in the procurement, issuance, and retirement of Federal Reserve notes. Since the shipment of these notes to the subtreasury anc^Hfltimately to the bank applying for them, is necessarily a step precedent to their issuance, such expense is one incidental to the issuance of the notes and must be borne by the banks. Accordingly, Federal Reserve notes cannQt be sent through the mails under penalty envelopes or labels carrying, the frank of the Board. 30 Op. Atty. Gen. 456 (1915). 1915 BULLETIN 355. \OTE.—The subtreasuries were discontinued by Act of May 29. 1920 (41 Stat. 651). 13.9 FEDERAL RESERVE BANK 140 18.105. Federal Reserve bank notes as legal tender.—Federal serve bank notes and other notes constituting part of the common currency of the country are recognized as good tender for money ufttess specially objected to, and where such notes are tendered in payment of taxes, interest and penalties, and the tender is refused not because of the nature of the currency tendered but on some other ground, the defense of want of legal tender is without merit. MacLeod v. Hoover, 159 La. 244, 105 So. 305 (1925). NOTE.—As to what is now legal tender, see section 43(b)(l) of the Act of May 12, 1933. as amended (U.S. Code, title 31, sec. 821). 141 RESERVES OF MEMEBER BANKS 42 19.405. Meaning of "actual net balance."—A member bank's reserve balance is required to be an "actual net balance" equal fo the prescribed percentage of the amount of its deposits; and, so far as its balance is represented by uncollected checks on other banks it could not be considered as either actual or net. Accordingly, checks deposited by a national bank with the Federal Reserve bank for collection cannot be regarded as part of the national bank's reserve balance until after the expiration of the number «f days fixed by the time schedule contained in Regulation J for the collection of checks. Pascagoula National Bank V. Federal Reserve Bank of Atlanta, 3 Fed. (2d) 465; 11 Fed. (2d) 866, cert, den., 271::y.S. 685 (1926). 1925 BULLETIN 32, 100; 1926 BULLETIN 151,174. NOTE.—For complete statement of this case, see 13260. 19.502. Alleged improper imposition of penalties.—A n^jional bank took over the assets and assumed the liabilities of a State bank at the instance of the defendant Federal Reserve hani? whose officers-f^omised to extend to the national bank additional deco'niHibdatrans in the way of discount to meet the additional burden. Nb¥w?£fcstafldftig this agreement, the Reserve bank subsequently required th'e^ltatiohW'bank to deposit additional collateral to secure its indebtedness to the Reserve bank. Upon the failure of the national bank, its stockholders and creditors brought suit against the Federal Reserve bank for damages, alle,gr ing, among other things, that the act of the Federal Reserve bank in wrongfully requiring additional collateral resulted in the inability of the national bank to maintain required balances with the Reserve bank and the consequent assessment of penalties against the national bank; and that under these circumstances, the penalties were improperly assented and the Reserve bank should be required to account for them. It wa> held, however, that since the requirement of additional collateral was'not wrongful, there was no basis for the contention that the penalties for deficient, reserves were improj>erly assessed. Lucas v. Federal Reserve Bank of Richmond, 59 Fed. (2d) 617 ( C C A . 4th, 1932). 144 19.503. Penalty provisions as coercing collections by member banks through Federal Reserve banks.—In a suit by the owner of% check, uneollected because of the failure of the drawee bank, against the Federal Reserve bank through which the check had been collected, it was contended that if the terms of Regulation .1 and of the Federal Reserve bank's collection circular constituted a contract permitting the Federal Reserve bank to accept drafts in payment for checks, sueh contract1 lacked freedom of consent because the member bank with which the check had been deposited for collection was coerced .into accepting the contract and making collection through the Federal Reserve bank because of the provisions of section 19 of the Federal Reserve Act requiring member banks to maintain designated reserves and subjecting them to severe penalties for any impairment of that reserve. It was held, however, that those requirements, in the particular case, could not' be said to furnish the means by which the defendant Federal Reserve bank could or did coerce the member bank to make all collections through the Federal Reserve bank. Fergus Cotmty v. Federal Reserve Bank of Minneapolis, 75 Mont, 582, 244 Pac. 883 (1926). , NOTE.—For statement of facts in this case, see 13.542. 145 FOREIGN BANKING CORPORATIONS 146 25(a).100. Discretion of. Board in approving organization.—The relato'rs filed with the Federal tj^gserve Board articles of association and organization certificate for the formation of a foreign banking corporation under this .section. Although the papers conformed with the requirements of the statute, the Board nevertheless refused to approve the organization of the corporation on the ground that the relators did Dot possess the qualifications necessary to assure the financial soundness fcnd reliable and competent management of a foreign banking corporation. The relators thereupon petitioned for a writ of mandamus to compel the Board to issue a permit authorizing the corporation to do busines^nThp Court of Appeals of the District of Columbia held that the authority of thefBoard under this section to "approve" the articles of association and the organization certificate of a foreign banking corporation vested the Board with discretion the exercise of which could not be controlled by mandartius/Apfel v. Mellon, 33 Fed. (2d) 805 (App. D.C. 1929), cert. den., 280 U.S. 585 (1029). 1929 BULLETIN 508/741. m. : JURISDICTION OF SUITS; PROPERTY OF FOREIGN STATES. 148 25(b).100. Controversy originating prior to Banking Act of 1933. —A suit by a New York corporation against the Federal Reserve Bank of New York is within the jurisdiction of a Federal court in the 'State of New York by virtue of the provisions of section 25 (b) of the Federal Reserve Act, as added by the" Banking Act of June 16, 1933, where the suit was instituted after that date, notwithstanding the fa«t that the controversy in question arose prior thereto. Bickjord's Inc. v. Federal Reserve Bank of New York, 6 Fed. Supp. 928 (D.C.N.Y. 1934). NOTE.—For full statement of this case, see 13.264. . __—^ 25(b).101. Suits involving less than jurisdictional amount.—The pujfjgMjp of this section was to grant full right of recourse to the Fe.deral courte^rfco Federal Reserve banks which have become important agencies of trie Federal Government in its control of banking and currency. Accordingly, even though a suit by a Federal Reserve bank involves less than jurisdictional amount prescribed by section 24(1) of the Judicial Code (28 U.S.C.A., sec. 41(1)), such a suit, by virtue of this section, falls within the jurisdiction of a Federal district court. The fact that an action had previously been brought in a State court did not alter this result, &nce a nonsuit had been taken in that action. Federal Reserve Bank of Richmond v. Kalin, 77 Fed. (2d) 50 (CCA. 4th, 1935). /•— NOTE.—For subsequent proceedings in same case, see 81 Fed. (2d) 1003 (13.2741). For a case involving substantially similar facts and holding to the same effect,' see Federal Reserve Bank^f Philadelphia v. Krauss, U.S. Dist. Ct. for District of New Jersey, 1935 (unreportecf). 150 25(b )* 1029 Reserve Bank Acting as Fiscal Agent Dealing with SpanishGovernminent.—Plaintiffcued the Federal Reserve Bank, United States Lines Co., and the Superintendent of the United States Assay Office for damages allegedly arising out of the purchase by the United States Secretary of the Treasury of about six and a half million dollars worth of silver from certain persons purporting to act as the government of Spain; that government having later been deposed. The Federal Reserve Bank, in the transaction, had acted as fiscal agent of the United States, and as such had obtained the shipping documents so that the silver could be transported to the United States Assay Office, The first check in paynsnt of the silver vras drawn by the Federal Reserve Bank on the Treasurer of the United States. The court held that a certificate by the Spanish Ambassador to the United States to the effect that the Spanish Government, which purported to sell the silver, had acquired title thereto, could not be challenged in the courts of this country6 Accordingly the court said "The point nov/ before us now becomes a narrow one, indeed. It concerns only the form of the judgments to be entered, that is, whether a judgment in favor of the Reserve Bank should be based on its immunity from suit or on the merits«" The court held that the Reserve Bank was "an independent corporation which had obtained possession of the plaintiff's property end allegedly had wrongfully disposed of it o " Therefore, the bank was suable; however, judgment should be given in it3 favor on the merits. Banco de Lspana v * Federal Reserve Bank of New York, et al. t 114 F. 2d 438 (1940), NOTLC—Paragraphs 3 to 6, inclusive, of Sec. 25 (b). applicable to dealings vdth foreign states or their central banks, were added by the Act of April 7, 194125 (b ) „103o Reserve Bank's Dealings with Property of Foreign Central Bank,.—Under the third paragraph of section 25 (b) of the Federal Reserve Act, a Federal Reserve Bank is protected from liability in disposing of property received from or for the account of a foreign state or foreign central bank. If the authority of the party from whom the Federal Reserve Bank receives instructions for the transfer or payment of the property, is certified by the Secretary of State, The Opinion states that once a certificate is issued, it applies to any property received and held by the Bank while the certificate is in effect, irrespective of whether the certificate is issued before or after the property is received by the Federal Reserve Banko 40 OPo Atty, Gen, 400 (1945) 15.1 2i> (b)„104• Reserve Bank!s Right to Remove Case to United States District Court.—The plaintiff commenced suit against The Chase National Bank in the Supreme Court of the State of New York, alleging that Chase had improperly paid a check drawn on it by plaintiff. Chase impleaded the Federal Reserve Bank of New York, which had presented the check and received payment therefor; the Reserve Bank in turn impleaded the bank from which it had received the check for collection, and to which it had paid the proceeds. Pursuant to section 632 of Title 12 U.OoC. (section 15 of the Banking Act of 1933 )9 the Reserve Bank removed the suit to the United States District Court for the Southern District of New York approximately six months after it had been brought into the suit as a party. The plaintiff then moved the District Court to remand the suit to the state court, asserting (l) that section 632 authorized only the removal of suits arising out of transactions in international or foreign banking, and hence did not authorize the removal of this suit, which arose out of domestic banldng; and (2) if the section did authorize the removal of this suit, the removal had not been effected within the period prescribed by the general statute governing removals (U.S.C., Title 28, $ 1446 (b)), which requires the filing of the petition for removal within 20 days of the receipt of the initial pleading. In denying the motion to remand, the court held that section 632 applied to any civil suit to which a Federal Reserve Bank was a party, and that the provision of that section, that such a suit might be removed "at any time before the trial thereof", rather than the provisions of the general statute, governed a determination as to the timeliness of filing the petition for removal. Gilbert v. The Chase National Bank, et al», U. S. D. C. for the S. D. of N..T,, Civ, No, 70-130, Memorandum Opinion £19,659 (1951), not officially reported. TAXATION OF NATIONAL BANKS loo b9«S»5ei9.19torfI*Effect of section 7 of Federal Reserve Act.--The fcrotowiAns of section 5219, Revised Statutes, are not iqipliedly repeated by section 7 of the Federal Reserve Act relating to ftHw exemptidi '6? Federal Reserve banks from taxation; and accordingly in the assessment o$$afl#s upon a national bant, no exemption can be allowed the bank because of its ownership of stock in a Federal Reserve bank. First National Bank v. Burr, 246 Fed. 163 (S.D. Ohio, 1917), affirmed in First National Bank v. Beaman, 257 Fed. 729 (CCA. 6th, 1918). 1917 BULLETIN 955. NOTE—See also 7J203 (p. 12). 154 RECEIPT QF UNLAWFUL PREFERENCES BY FEDERAL RESERVE BANK. 55 RS-5242.100. Knowledge of insolvency on part of Federal Reserve bank.—The Federal Reserve Bank of Richmond, as collecting agent, forwarded to a national bank for collection certain checks drawn upon that bank. Some of the checks were paid by the national bank to a representative of the Federal Reserve bank, who, at that time, knew that the national bank was insolvent and that the national bank examiner had been called in to take over its affairs. Subsequently, the receiver brought suit against the Federal Reserve bank for the amount of the checks, claiming that their payment constituted an unlawful preference. The court sustained the receiver's claim on the ground that the Federal Reserve bank had full and complete knowledge of the insolvency of the national bank at the time payment was made to its representative and that the Reserve bank could not escape liability on the ground that it acted merely as agent in collecting the checks in question, since the relationship of principal aiftl agent in such a case does not relieve the agent where he has participated in committing the wrong. Judgment was accordingly rendered against the Federal Reserve bank but without prejudice to the right of that bank to obtain reimbursement from its depositing member banks. Vann v. Federal Reserve Bank of Richmond, 47 Fed. (2d) 786 (D.C.Va., 1929). 158 RS-5242.101. Participation by Reserve bank in receipt of preference,—Certain checks drawn on a national bank and deposited with the Federal Reserve Bank of Minneapolis for collection were forwarded to the drawee bank for payment. The latter bank sent to the FederalReserve bank in part payment thereof two drafts drawn on and payable to the Reserve bank. For the purpose of building up its reserve account with the Reserve bank in order to meet the drafts, the national bank also sent certain collection items and currency to the Reserve bank. Prior to these remittances, the directors of the national bank had passed a resolution calling for the suspension of the bank. The receiver of the national bank, after its insolvency, brought an action against the Reserve bank for the amount of the collection items and currency on the ground that they constituted unlawful preferences under section 5242 of the Revised Statutes. It was held that the passage of the resolution by the directors of the bank constituted an act of insolvency; and therefore the remittances to the Reserve bank should be regarded as having been made in contemplation of insolvency and as void within the statute. The court dismissed the contention that the checks sent by the Reserve bank to the national bank for collection became a trust fund, since all of such checks were drawn on the national bank and did not augment its assets. The court also dismissed the contention that the Reserve bank should be relieved of liability for the preference because it had acted merely as agent in forwarding the checks for collection and in receiving payment. On the contrary, it was held that the Reserve bank had participated, with full knowledge of all the essential facts, in violating the provisions of the statute, and the judgment of the lower court for the Reserve bank was therefore reversed. Hirning v. Federal Reserve Bank of Minneapolis, 52 Fed. (2d) 382 (CCA. 8th, 1931). ±5? RS-5242.102. Settlement of accounts with forwarding banks as relieving Reserve bank from liability.—A Federal Reserve bank presented certain checks, forwarded to it by its member banks for collection, to a nonmember drawee bank for payment and received drafts on another bank in remittance. These drafts were dishonored and the Reserve bank then procured cash from the drawee bank in part payment of such checks, having knowledge that the drawee was probably insolvent. The Reserve bank placed the proceeds in the accounts of its forwarding member banks. Subsequently, the drawee bank was declared a bankrupt and the trustees in bankruptcy sought to recover the moneys received by the Federal Reserve bank as a voidable preference. It was held that the Reserve bank had received such moneys as agent for collection and not as owner (citing Regulation J ) ; and that since it had settled with its principals (the forwarding banks) before the petition in bankruptcy was.filed, by placing the moneys in their deposit accounts, the money could not be recovered by the trustees in bankruptcy. Accordingly, judgment was rendered for the Federal Reserve bank. Carson v. Federal Reserve Bank of Xew York, 254 N. Y. 218, 172 N. E. 475 (1930). RS-5242.200. Requirement of additional collateral as constituting preferential transfer.—A national bank took over the assets and assumed the liabilities of a State bank, at the instance of the defendant Federal Reserve bank, whose officers promised to extend to the national bank additional accommodations in the way of discounts to meet the additional burden. Notwithstanding this agreement, the Federal Reserve bank shortly thereafter and again in 1925 required the national bank to deposit additional collateral to secure its indebtedness to the Reserve bank. Upon the failure of the national bank, its stockholders and creditors brought suit against the Federal Reserve bank for damages, claiming, among other things, that the act of the Federal Reserve bank in requiring additional collateiil constituted a preferential transfer to the Reserve bank in view of the fact that the latter bank, by reason of its access to examinations of the national bank, had a more intimate knowledge of the condition of the assets of the national bank than its own officers. It was held, however, that it had not been charged that the officers of the national bank knew it to be insolvent or that they had made the transfer in contemplation of insolvency; that the transfers were made to secure advances and not merely existing loans; and that the allegations of the bill amounted to no more than conclusions of the pleader inasmuch as they failed to allege facts from which the court could say that the transfers made in 1923 and 1925 were in contemplation of an, insolvency which occurred in 1929. Lucas v. Federal Reserve Bank of Richmond, 59 Fed. (2d) 617 (CCA. 4th, 1932). 159 CLAYTON ANTITRUST ACT Sec. 7 - Acquisitions of otock Sec. 8 - Interlocking Directorates 160 CA-7«100• Acquisition of Bank Stock by Holding Company.—In June 194S the Board of Governors issued a complaint against Transamerica Corporation, charging that the acquisition of certain banks in California, Oregon, Washington, Nevada, and Arizona by that corporation violated section 7 of the Clayton Antitrust Act. That section> enacted in 1914 and amended in certain particulars in 1950, prohibits any corporation from acquiring the stock of one or more corporations engaged in commerce where the effect may be substantially to lessen competition or to tend to create a monopoly. Authority to enforce compliance with this provision is vested in the Board of Governors where the statute is applicable to banks. Hearings were held in Washington, D. C , and in San Francisco^, California, over a period of several years and, after oral argument before the Board, the Board, on March 27, 1952, issued an order requiring Trensamerica to divest itself of the stock of 47 of the banks named in the Board's complaint. Transamerica Corporation petitioned the United States Court of Appeals for the Third Circuit to review the Board*s order. While the court decided that banks are within the purview of section 7, thus affirming the Board's jurisdiction in this field, it held that the Board's order was not supported by the findings which the Board had made* On November 30 ; 1953, the Supreme Court of the United States denied a petition for a writ of certiorari to review the decision of the Court of Appeals« On December U> 1953.-. the Board announced that it had decided that no further action would be taken in this proceeding* Transamerica Corporation v. Board of Governors, 206 F. 2d 163; cert, den. 346 U. S. 901 (1953*)e 2 O.I CA-7.101o Suit to Enjoin "Branching" of Banks Which Were Subject of Pending Antitrust Proceeding «>—While the Board was holding hearings on its complaint under section 7 of the Clayton Act (referred to in the preceding paragraph), Bank of America entered into arrangements for acquiring the assets of certain of the banks listed in the proceedingt Bank of America had obtained permits from the Comptroller to establish branches at the locations of these banks. The Board brought suit in the Court of Appeals to enjoin the transfer of the assets of the banks until the Board's proceeding could be concluded. The Board argued that the transfer would defeat the jurisdiction of the 3oard and of the court, because it would make it impossible for the Board to order Transamerica to divest itself of the stock of the banks, and would make it impossible for the court to review any order of the Board, The court decided that the position of the Board was correct, and granted the injunction. The Supreme Court denied certiorari. The transfer of assets was made after the injunction was issued, and the respondents were held in contempt, 184 F. 2d 319* Mr. Justice Burton of the Supreme Court, on June 17^ 1950^ denied an application for a stay. Subsequently, on August IS, 1950, the assets having been retransferred, the court entered an order purging respondents of contempt. Board of Governors v. Transamerica Corporation and Bank of America, 184 £'• 2d 311 j cert, den,, 340 J. S, 883 (195O1T 162 CA-8.100. Applicability to State member banks.—The provisions of this section apply to banks ''organized or operating under the laws of the United States" and do not therefore apply to State banks joining the Federal Reserve System, since it is clear from this section of the (jlayton Act and from section 9 of the Federal Reserve Act that such banks are subject only to the provisions of the latter section and to thos^fiovisiofts of the Federal Reserve Act which relate specifically to member banks. 31 Op. Atty. Gen. 153 (1917). 1917 BULLETIN 744. NOTE.,—Tin.- ruling appears to be obsolete since section 8 of the Clayton Act, as amended by the Banking Act of 1935, is now applicable to any member bank of the Federal Reserve System. As to meaning of phrase ''organized or operating under the laws of the United States," see also CA-8A.104. 163 INTERLOCKING RELSTIONS WITH SECURITY BA-32•110 Interpretation of "Primarily Engagedc"«—Pursuant to section 30 of the Banking Act of 1933, the Board, after a hearing, removed two directors of a national bank on the ground that they were violating section 32 of the Banking Act of 1933 which makes it unlawful for a director, officer or employee of a member bank to bs an officer, director, employee or partner of a firm "primarily engaged11 in underwriting or distributing securities. Respondents brought suit to review the action of the Board, the issue being whether the Board had correctly interpreted the words "primarily engaged11 as including a class of business which was one of the primary activities of the firm even though not its principal activity. The Supreme Court upheld the Board fs position* Board of Governors v, Amaw, at al.. 329 U, S. 441 (1947). r FOREIGN FUNDS CUNTROL .00 M-601» Blocked Accounts of Foreign Nationals0—The Reserve Bank, acting for the Secretary of the Treasury, advised the plaintiff and the bank where he kept his deposit that the Secertary of the Treasury had determined to "block" his account on the ground that he was a "national" of a foreign country within the meaning of the "freezing" regulations. Plaintiff filed suit to restrain the Federal Reserve Bank "either as agent or as principal" from interfering with his bank account* The court held (l) that the Secretary of the Treasury was an indispensable party, since the Reserve Bank was performing merely a ministerial function for him; and (2) that there was an administrative remedy under the regulations of the Secretary, which remedy plaintiff should have exhausted before coming into court. The court pointed out that only the Secretary could change the determination that plaintiff was a "national" of a foreign country and "unblock" his account, Hartaan v. Federal Reserve Bank of Philadelphia, 55 F e Supp. 801 (1944)* r 167 CERTIFYING CONVERSION RATES FOR FOREIGN CURRENCIES 168 Mo700* State Court Jurisdiction of Reserve Banks.—Plaintiff sought to compel the Federal Reserve Bank of New York to make a determination of the buying rate for cable transfers for Brazilian currency, pursuant to the U, S. Tariff Act of 1930, The proceedings v/ere dismissed on the ground that State courts have no jurisdiction to issue orders or directions to the Federal Reserve Bank in the performance of its statutory duty. The Court of Appeals affirmed, saying: "The Federal Reserve Bank is a Federal agency exercising powers conferred by Federal statute and performing duties imposed upon it by Federal statute in a field which, under the Constitution of the United States^ is within the sole and exclusive jurisdiction of the Federal Government.11 Armand achLioll, Inc»3 y0 Federal Reserve Bank of New York", 37 N.ii. 2d; 225 (1941 £ cert0 den. 315 U. S. 818o 1G9 M,701• Certification of Conversion Rates_ for Foreign Currency•— The plaintiff, in 1940, imported into the United States woolen fabrics exported from England. Payment was made with pounds sterling purchased in the New York market for cable transfer* In assessing the ad valorem duty on the goods3 the Collector of Customs converted the pounds sterling into dollars at the "official rate" of #4.035* Plaintiff claimed that the currency of his invoice should have been converted at the "free rate" of #3r475. He paid the higher rate, and filed a protest; the protest was sutained by the Customs Court; and the Court of Custom and Patent Appeals reversed. The Supreme Court granted certiorari* Both the "official to the Secretary of the New York, under section eral Reserve Bank filed curiae« rate" and the "free rate" had been certified Treasury by the Federal Reserve Bank of 522(c) of the Tariff Act of 1930, The Feda brief in the supreme Court, as amicus The Supreme Court held, consistently with the position taken by the Federal Reserve Bank in its brief, that section 522(c) did not require that the Federal Reserve Bank certify only one buying rate for a specified foreign currency; that, where dual buying rates have been certified, that rate should be used which is in fact applicable to the transaction; and that, since the pounds had been purchased at the "free rate", that rate should have been usedo The action of the Federal Reserve Bank, in certifying rates, was said by the Court to be " non-re viev;able"0 Barr Vo United States, 324 U. S. S3 (1945).