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X-6384 COPY JEDEHAi, RESERVE W3K OF ATLA3EA Law Department 422-430 Healey Bldg. Randolph & Parker General Counsel September 30, 1929. Mr. Walter Wyatt, General Counsel, Federal Reserve Board, Washington, D. C. Dear Mr. Wyatt: You will r e c a l l the case of the University of the : South against the Federal Reserve Bank of Atlanta. In that case the Federal Reserve Bank was sued upon the theory that i t had wrongfully f a i l e d to charge the reserve account of the national Bank of Franklin with the amount of an eight thousand dollar check which the drawee had paid prior to i t s closing. The actual f a c t s , as disclosed in the answer of the defendant* were that the check i t s e l f had "been returned "by the drawee dishonored. The complainant has recently f i l e d an amendment to the original h i l l , a sopy of which I hand you. herewith. The averments contained in the amendment amount almost to a charge that the Federal Reserve Bank and the President of the Frankl i n "bank conspired together to defraud the complainant. Therd i s , of course, no foundation in fact for these avennents, nor do I "believe that the Federal Reserve Bank can he held l i a b l e under the f a c t s upon any theory. The amendment to the h i l l would present nothing of p a r t i c u l a r interest were i t not for the attack upon the constit u t i o n a l i t y of the Federal Reserve Act, as set out i n Section IV. In the answer f i l e d by the defendant; a copy of which i s in your f i l e s , i t was asserted that the defendant took the check for collection Under the terms and conditions of Regulation J, and that, under such Regulation, the Federal Reserve Bank acted only as agent f o r the "bank from which the check was received - hence that there was no p r i v i t y of contract as "between the complainant ant}, the Federal Reserve Bank which would j u s t i f y a s u i t "brought by the former against the l a t t e r . The complainant i s seeking to avoid the force and e f f e c t of Regul a t i o n J "by the contention that the Regulation i s void "because X-6384 Mr.- f a l t e r Wyatt, -2- 9/30/29. •beyond the power of the Fdderal Reserve Board to promulgate it. The attack on the Act seems to "be so wholly untenable as to preclude the p o s s i b i l i t y of serious consideration "by the court. I have,, however, thought best to bring the matter to your a t t e n t i o n . With best regards, f am Very truly yours, (8) Bnc.- Btibt.. S. Parker.- X"*6384-a COPY UNIVERSITY OF THE SOUTH No. 39777, VS NASHVILLE BRANCH, FEDERAL RESERVE BANE OF ATLANTA : PART I I TO THE HONORABLE JAMES B. NEWMAN, CHANCELLOR, HOLDING PART I I OF THE CHANCERY COURT AT NASHVILLE: The AMENDED AND SUPPLEMENTAL BILL OF COMPLAINT of the UNIVERSITY OF THE SOUTH, a corporation, duly chartered and existing under the laws of Tennessee, with i t s situs a t Sewanee, Franklin County, Tennessee, AGAINST NASHVILLE BRANCH FEDERAL RESERVE BANC OF ATLANTA, a corporation, chartered and existing under the laws of the United States, having i t s principal o f f i c e at Nashville, Davidson County, Tennessee, and THOMAS B. JOHNSON, a c i t i z e n and resident of Williamson County, Tennessee. Complainant r e s p e c t f u l l y shows to the Court; I That heretofore, to wit on the 19th day of April, 1928., i t f i l e d i t s original b i l l herein against the defendant, Nashv i l l e Branch Federal Reserve Bank of Atlanta, seeking to hold said defendant liable., as transmitting agent of a certain Eight Thousand Dollar ($8,000,00) check owned by complainant, drawn on the National Bank of Franklin, Tennessee. (2) X-6334-a As. shown, in, said original t i l l , . said check was sent "by the Federal Reserve Bank, as agent of your complainant, the holder, directly to the drawee bank on October 5, 1926, and reached said, drawee "bank on October S, 1926, and was l i s t e d by said national Bank of Franklin as a cash item at tha close of business hours on said day, while saidNational Bank ofFrarikl i n was open and carrying on i t s business in the usual and customary manner. I t was f u r t h e r shown that the drawer of the check, at the time that same was given, had on deposit and to her credit more than Sight Thousand Dollars ($8,000.00), the amount of said check, and never gave any check on said account thereafter. I t was further shown that no protest of said check was made; nor was any notice of non-payment given on said date (October 6, 1926-, although such notice by wire i s imperatively required* in case of a l l items over $500, by the rules of the Federal Reserve Bank. Chat the National Bank of Franklin then had to i t s credit with the defendant Nashville Branch Federal Reserve Bank of Atlanta a large amount of cash - more than $20,000.00,, and much more than s u f f i c i e n t to pay said $8,000.00 check. I t was f u r t h e r shown that said National Bank of Frankl i n opened i t s door# for business in the usual way on the morning of October 7, 1926, but before the close of business hours pended payment, and closed i t s doors - said suspension being sus- (3) X-6384-a caused by the discovery of t h e f t s and defalcations on the part of B. B. Green, Cashier, and h i s sown, Bates L. Green, Assistant Cashier. I t was f u r t h e r alleged that on October 7, 1926, the day of said suspension, defendant Nashville Branch Federal Reserve Bank of Atlanta sent an employee and agent to Franklin, Tennessee, and although said $8,000 check had regularly gone through as a cash item, in the regular course of business, on October 6, 1926, without protest or wire, as required by the Federal Reserve rules where a check for over $500 i s not paid, said defendant, through i t s said agent and employee, brought the check back to Nashville, and t h e r e a f t e r returned the same to the Hamilton National Bank a t Chattanooga (by which i t had been sent to Nashville Federal Reserve Bank), which bank returned i t to the Bank of Sewanee (the bank of original deposit-, claiming that said check was unpaid for lack of s u f f i c i e n t funds. That on and prior to October 7, 1926, the said National Bank of Franklin (the drawee bank) was indebted to the defendant i n large amounts — some of them secured by notes or other coll a t e r a l ; and the purpose of said defendant in causing said $8,~ 000.00 check to be taken from the bank a f t e r i t had regularly gone through, on the preceding day, in due course of business, was to obtain for i t s e l f the benefit of said $8,000 a f t e r i t learned of the closing and possible insolvency of said Franklin Bank. I t was f u r t h e r charged that under the laws of Tennessee said defendant was the agent of complainant, and as such, acting U) X-6384-a i n a fiduciary capacity in collecting, said check; that as such agent i t could n o t lawfully talce a n y s t e p in "furtherance of i t s own i n t e r e s t , as opposed to the i n t e r e s t of i t s principal, the holder of the check. That in attempting to recall said $8,000 item, and charge the same tack a f t e r the check had "been put through in the otditiary course of "business, on the preceding day, said defendant was endeavoring to conserve for i t s e l f and apply to i t s own indebtedness the cash whioh i t held for the credit of the National Bank of Franklin; and complainant i s advised that this constituted a breach of t r u s t on the part of said defendant, and a violation of the duty owed "by the a gent to i t s principal, and that said defendant i s i n equity l i a b l e to account to complainant as the. holder of said check, in the sum of $8,000 with i n t e r e s t . The prayer of the original b i l l sought a decree in accordance with these allegations. Reference i s here made to aid b i l l for i t s contents. II Thereafter, on the 15th day of May, 1928, the defendant Federal Reserve Bank of Atlanta (Nashville Branch) f i l e d i t s answer, admitting certain allegations of the original b i l l , and denying others. I t was contended in said answer that under certain regulations of the Federal Reserve Board, exhibited therewith, i t was the right and duty of the; Federal Reserve Bank to send : said check directly to the drawee bank, notwithstanding the f a c t that there were other banks in the same town to which i t might have be^n sent f o r m l l e c t i p n . (5) X-6384-a That under said regulations the defendant Federal Reserve Bank was not the agent of the holder of the check, and not l i a b l e to him by reason of anything i t might do or • f a i l to do i n making said collection. I t was further contended, in said answer, that said defendant Federal Reserve Bark did not send an agent to Frankl i n on October 7, 1926, as charged in the b i l l , but on the contrary, that on the morning of October 7, 1926, said national Bank of Franklin sent a messenger to said respondent, with a l e t t e r signed by Mr. Thomas B. Johnson, President of the Nationa l Bank of Franklin, to which l e t t e r were attached the $8,000.00 check, now i n controversy, and several other small checks, which the l a t t e r stated were returned by the National Bank of Franklin to the Federal Reserve Bank of Atlanta because of i n s u f f i c i e n t funds standing to the credit of the drawers on the books of the National Bank of Franklin. Ill The alleged l e t t e r , above mentioned, was not exhibited with the answer, and complainant cannot say whether such l e t t e r e x i s t s , and whether any such course was pursued as stated in said answer. Complainant's information was, as stated i n the o r i g i n a l b i l l , that said Bank sent a messenger and withdrew said check* I f , however, i t shall appear that complainant was mis- taken i n i t s original allegation, and that the check was returned with the above mentioned notation, indicating that no funds were r i g h t f u l l y standing to the drawer's c r e d i t , when said check was presented, complainant charges that such a statement was absolutely X~6384-a f a l s e , and that each and every o f f i c i a l of said National Bank of Franklin, including i t s President, Thomas -B. Johnson, well knew that the Misses Claybrookej f o r many years residents of Williamson County, and ladies of the highest standing, would not give, and had not given, an $8,000.00 check without having the funds in tank to pay i t . And if any such statement was made, or any such l e t t e r written, by the said President, i t was a mere subterfuge and pretext for returning said check a f t e r the same had "been regularly put through on the preceding day, as hereinbefore set out. If therefore, i t shall develop on the taking of proof (the f a c t s being in the possession of defendant Federal Reserve Bank of Atlanta), that such were the f a c t s , complainant is advised that such conduct on the p a r t of the said Thomas B. Johnson constituted an unlawful and officious intermeddling, amounting to a conversion, and also was in law a fraud on the rights of complainant, render- ing the said Thomas B. Johnson personally l i a b l e to your complainant* IV Complainant i s f u r t h e r advised that the regulations made by the Federal Reserve Board, in substance attempting to declare (1) that the so-called New York rule shall apply in forwarding checks for collection, and (2) that checks may r i g h t f u l l y be sent to the drawee bank f a r collection, are urn constitutional, unlawful, and void, and cannot change the substantive law which has long prevailed i n this State to the contrary. Complainant i s advised and s t a t e s : (?) '!• X-6384-a That under a proper construction of the Act of Congress, creating the Federal Reserve Board, no such powers are conferred upon said "board, and the attempted change of the substantive law in the above particulars i s wholly unauthorized and "beyond the powers of said hoard. 2. That i f any such powers to change the substantive law are conferred on said board "by said Act, such attempted delegation of l e g i s l a t i v e power i s void and in c o n f l i c t with section 1, of A r t i c l e I of the Constitution of the United States, which provides t h a t : "All l e g i s l a t i v e powers herein granted shall be vested i n a Congress of the United States, which shall consist of a senate and house of representatives. * V. Complainant further charges that the said Federal Reserve Bank of Atlanta (Nashville Branch) was the agent of complainant in forwarding said check for collection, as hereinbefore set out, and that said defendant acted unlawfully and negligently i n forwarding said check -directly to the drawee . - .. . . bank, the said National Bank of Franklin. Complainant states that there were two other solvent banks i n the town of Franklin, Tennessee, when said check was so forwarded, to wit, the Williamson County Bank & Trust Company, and the Harpeth Bank; that i n each of said banks the active o f f i c i a l i n charge of business was intimately acquainted with the Misses Claybrooke, and knew, as did every one else in Frankl i n , that they were l&dies whose character and standing could not be impeached, and that neither of them would have given a check, JLO «*.' X-6364-a ~ < especially a check f o r this large an amount, without having funds in the "bank to meet the same; th&t no o f f i c i a l of the F i r s t Hational Bank of Franklin would have had the hardihood to claim that there were no funds in the drawer's name to pay said check, and that said check would have "been presented f o r payment during "business hours oil October 6th, 1926. * That i f said check had been so presented through one of the other "banks, the said Green, Cashier, and h i s sown, the Assistant Cashier, who were fraudulently manipulating the funds of the hank, as set out in the original "bill, would have l e t the check go through and "be paid out of the funds held "by the defendant Federal Reserve Bank to the credit of the F i r s t National Bank of Franklin, which were amply s u f f i c i e n t to pay this check and the other small items forwarded on October 6th by the defendant Federal Reserve Bank - for a r e f u s a l to pay a check of t h i s size, drawn by a lady well and favorably known in Franklin, Tennessee, would have at once precipitated a disclosure of the frauds and t h e f t s then Teeing perpetrated by the said Cashier and h i s son. • Complainant further states, on information and b e l i e f , that the said defendant and i t s Nashville o f f i c i a l s were well advised that the said National Bank of Franklin was in bad condition when said check was forwarded directly to it. Complainant is advised, and charges, that the said defendant, as agent of complainant,-acted negligently in forwarding sai.d check directly to the drawee bark, and t h a t such negligent conduct was a d i r e c t -cause of complainant' s loss, rendering said y« #>WyW -i.O 8 vt (9) Jf-6384-a agent l i a b l e for the amount of said check with i n t e r e s t . 71.' Complainant is further advised, and charges $ 1. That the defendant federal He serve Bank of Atlanta (Nashville Branch) acted negligently in forwarding this check directly to the drawee hank, and that by reason of such negli- gence a loss was i n f l i c t e d on complainaht, for which the said defendant, as i t s agent, must respond; and that said defendant i s not protected by said regulations of the. Federal Reserve Board hereinbefore mentioned, 2. If mistaken in t h i s , complainant i n s i s t s that said bank i s l i a b l e , under the theory set forth in the original b i l l , in that i t sent an agent to Franklin, and withdrew said check a f t e r i t had gone through the books of the Franklin Bank, and did t h i s f o r i t s own protection, i n violation of the confidential r e l a t i o n existing and of the duty owed by an agent to i t s principal. 3. That if mistaken i n t h i s , and if i t shall appear that the said Thomas B.» Johnson returned said check, under the circumstances hereinbefore set out, he thereby made himself l i a b l e to complainant for the amount of said check and i n t e r e s t . 4. That if i t shall appear from the proof that the said defendants acted in concert, to conserve and protect the i n t e r e s t s of either or both of them, a t the expense of complainant, the holder of the check, then that complainant be given a decree against said defendants j o i n t l y . (10) X-6384-a PREMISES CONSIIBBED, COMFLAIKOT PRAYS: 1. That those named in the caption as defendants bd made such, and that process and counterpart process issue, requiring them to answer said bill* but their answers under oath ate expressly Waived* 2* That complainant have a decree f o r the amount of said check and i n t e r e s t against the said defendant Federal Reserve Bank of Atlanta (Nashville Branch), or against the defendant Thomas B. Johnson, one or both as to the Court may seem equitable and proper under the law and under the f a c t s hereinbefore set out. 3. For such other, f u r t h e r and general r e l i e f as complainant in equity may be e n t i t l e d to ask. Solicitors for Complainant. I am surety f o r costs under the amended and supplemental b i l l . COPY
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