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X-6130 COPY IN THE DISTRICT COURT OF THE UNITED STATES i n and f o r THE EASTERN DISTRICT OF ILLINOIS I n E q u i t y Ho. J . F . JARVIS, e t a l . , Complainants, PPI7F TN SUPPORT 03 MCT101T TO DISMISS. v. OTTO K3PP, e t a l . , ) Defendants. ) STATEMENT OF FACTS AND PROCEEDINGS The o r i g i n a l p e t i t i o n i n t h i s c a s e was f i l e d i n t h e S t a t e C o u r t by the p r e s e n t p l a i n t i f f s , a group of d e p o s i t o r s of t h e Neoga N a t i o n a l Bank, a g a i n s t t h e o f f i c e r s and d i r e c t o r s of that tank. That p e t i t i o n was s u b s t a n t i a l ] y l i k e t h e amended p e t i t i o n now "before t h i s c o u r t , so f a r a s t h e a l l e g a t i o n s a s s e r t i n g l i a b i l i t y a g a i n s t t h e o f f i c e r s and d i r e c t o r s of t h e Neoga Bank a r e c o n c e r n e d . T h i s c a s e was, upon p e t i t i o n , r e - moved f r o m t h e S t a t e Court t o t h e U n i t e d S t a t e s D i s t r i c t C o u r t f o r t h e E a s t e r n D i v i s i o n of I l l i n o i s , a n d a f t e r removal t h e amended b i l l of c o m p l a i n t was f i l e d . I n t h e amended b i l l of c o m p l a i n t t h e F e d e r a l R e s e r v e Bank of Chicago was f o r t h e f i r s t t i m e made a p a r t y a n d t h e r e were a d d e d a l l e g a t i o n s which a t t e m p t e d t o a s s e r t l i a b i l i t y a g a i n s t t h e F e d e r a l R e s e r v e Bank of C h i c a g o . X-6130 The p r e s e n t h e a r i n g i s upon a m o t i o n of t h e F e d e r a l R e s e r v e Bank of Chicago t o d i W i s f e t h e amended b i l l of comp l a i n t as to i t , on two g r o u n d s : (1) Thh.t t h e amended b i l l of c o m p l a i n t f a i l s t o s t a t e a c a u s e of a c t i o n a g a i n s t t h e F e d e r a l H e s e r v e Bank of Chicago, and (2) That t h e r e i s a m i s j o i n d e r of c a u s e s of a c t i o n i n t h a t a n e n t i r e l y d i f f e r e n t c a u s e of a c t i o n i s s o u g h t t o "be s e t up "by t h e c o m p l a i n a n t s a g a i n s t t h e d i r e c t o r s a n d o f f i c e r s of t h e Neoga Bank from t h a t sought t o be s e t up a g a i n s t t h e F e d e r a l R e s e r v e Bank of Chicago. I n t h e amended b i l l of c o m p l a i n t , i t i s a l l e g e d t h a t t h e Eeoga N a t i o n a l Bank was i n c o r p o r a t e d i n 1905 w i t h a c a p i t a l of $ 2 5 , 0 0 0 . 0 0 , a n d c o n t i n u e d to do b u s i n e s s i n t h e V i l l a g e of Neoga u n t i l t h e 1 2 t h day of J a n u a r y , 1925, a t which t i m e i t s u s p e n d e d b u s i n e s s by d i r e c t i o n of a n a t i o n a l bank e x a m i n e r , a n d t h e C o m p t r o l l e r of t h e Currency a p p o i n t e d a R e c e i v e r f o r the bank. The o r i g i n a l R e c e i v e r , Mr. S h u b e r t , was s u c c e e d e d by Mr. H a r r y B. Marsh d u r i n g t h e y e a r 1927. Mr. Marsh, a s R e c e i v e r , i s made a p a r t y t o t h e amended b i l l . The d i r e c t o r a t e of t h e bank r e m a i n e d p r a c t i c a l l y u n c h a n g e d d u r i n g t h e t h r e e o r f o u r y e a r s p r e c e d i n g i t s s u s p e n s i o n and t h e n i n e d i r e c t o r s who a c t e d d u r i n g t h a t p e r i o d a r e a l l named p a r t i e s d e f e n d a n t w i t h t h e e x c e p t i o n of S t e p h e n B u r t o n . Mr. B u r t o n h a v i n g d i e d , h i s h e i r s a t l a w , t o whom h i s e s t a t e h a s b e e n d i s t r i b u t e d , a r e made p a r t i e s d e f e n d a n t by the b i l l . Judgment i s a s k e d a g a i n s t t h e i n d i v i d u a l d i r e c t o r s and o f f i c e r s on t h e a l l e g e d ground of X-6130 3 t h e i r c a r e l e s s a n d n e g l i g e n t management of t h e a f f a i r s of t h e t a n k , a n d Svlsb on t h e ground t h a t t h e y w r o n g f u l l y a n d u n l a w f u l l y a c c e p t e d d e p o s i t s from t h e p l a i n t i f f s when t h e y ( t h e d i r e c t o r s a n d o f f i c e r s ) knew or s h o u l d have known t h a t t h e Neoga N a t i o n a l Bank was i n s o l v e n t . The p r a y e r of t h e b i l l a s k s a s t o t h e d i r e c t o r s a n d officers, " t h a t t h e y a n d each of them he r e q u i r e d a n d c o m p e l l e d t h e r e b y t o a c c o u n t f o r a n d p a y over t o t h e c o m p l a i n a n t s a n d o t h e r d e p o s i t o r s of She Heoga n a t i o n a l Bank of Heoga, I l l i n o i s , such sums of money w i t h i n t e r e s t t h e r e o n a s h a v e b e e n l o s t t o t h e c o m p l a i n a n t s a n d e a c h of them and o t h e r d e p o s i t o r s of s a i d bank, by, t h r o u g h o r on a c c o u n t of t h e i r w r o n g f u l a n d u n l a w f u l a c t s a f o r e s a i d ; a n d t h a t t h e y a n d e a c h of them be r e q u i r e d t o r e i m b u r s e t h e comp l a i n a n t s a n d each of them f o r a l l l o s s e s o c c a s i o n e d t o t h e c o m p l a i n a n t s o r e i t h e r of them by t h e mismanagement of s a i d bank o r by t h e i r n e g l e c t or f a i l u r e t o d i s c h a r g e t h e i r d u t i e s a s o f f i c e r s o r d i r e c t o r s of s a i d The Heoga N a t i o n a l Bank, and t h a t t h e y be r e q u i r e d a s t r u s t e e s f o r t h e c o m p l a i n a n t s a n d e a c h of them t o a c c o u n t f o r a n d p a y o v e r t o t h e c o m p l a i n a n t s a n d e a c h of them t h e f u n d s a n d d e p o s i t s a f o r e s a i d of t h e c o m p l a i n a n t s a n d e a c h of them l o s t t h r o u g h a n d by t h e w r o n g f u l a n d u n l a w f u l a c t s of s a i d d e f e n d a n t s who were d i r e c t o r s of s a i d The Neoga N a t i o n a l Bank of Neoga, I l l i n o i s , a s h e r e i n b e f o r e s o t forth;" The p r a y e r f o r judgment a g a i n s t t h e F e d e r a l R e s e r v e Bank of Chicago i s i n t h e s e words, • " T h a t y o u r o r a t o r s may h a v e a d e c r e e a g a i n s t t h e d e f e n d a n t , TEHERAL RESERVE BANK OF CHICAGO, r e q u i r i n g i t t o a c c o u n t t o t h e R e c e i v e r of The Neoga N a t i o n a l Bank of Neoga, I l l i n o i s , f o r such sums of money w i t h i n t e r e s t t h e r e o n a s have b e e n l o s t t o t h e c o m p l a i n a n t s a n d each of them a n d o t h e r d e p o s i t o r s of s a i d bank, b y , t h r o u g h o r on a c c o u n t of t h o s e w r o n g f u l a n d u n l a w f u l a c t s as aforesaid," X-6130 4 An e x a m i n a t i o n of t h e amended "bill d i s c l o s e s V a r i o u s a l l e g a t i o n s , which w i l l "be l a t e r c o n s i d e r e d i n d e t a i l , charg- i n g t h a t t h e r e was by law a duty upon t h e F e d e r a l R e s e r v e Bank of Chicago t o examine t h e Neoga N a t i o n a l Bank, a n d t h a t i f such e x a m i n a t i o n s h a d "been made, t h e F e d e r a l R e s e r v e Bank of Chicago would h a v e d i s c o v e r e d t h e a l l e g e d m i s c o n d u c t of t h e d i r e c t o r s a n d o f f i c e r s of t h e Neoga N a t i o n a l Bank and t h e i n s o l v e n c y of t h e "bank; b u t i t i s not a l l e g e d t h a t t h e F e d e r a l Reserve. Bank of Chicago c o u l d h a v e t a k e n any d i s c i p l i n a r y a c t i o n a s a c o n s e q u e n c e of s u c h d i s c o v e r y on i t s p a r t . I t w i l l h e r e a f t e r "be shown t h a t t h e F e d e r a l R e s e r v e Bank of Chicago owed no such d u t y t o t h e d e p o s i t o r s of t h e Neoga N a t i o n a l Bank* a n d t h a t no " w r o n g f u l a n d u n l a w f u l a c t s " &re i n f a c t w e l l c h a r g e d a g a i n s t i t i n t h e amended " b i l l . A p a r t , however, from t h e a l l e g a t i o n s which t h u s s e e k t o c h a r g e n e g l i g e n c e a g a i n s t t h e F e d e r a l R e s e r v e Bank, t h e h i l l does c l a i m a r i g h t , on t h e p a r t of t h e p e t i t i o n e r s , to r e l i e f g r o w i n g o u t of t h e f a c t t h a t u p o n s u s p e n s i o n of "business "by t h e Neoga Bank u n d e r t h e o r d e r s of t h e C o m p t r o l l e r of t h e C u r r e n c y , t h e F e d e r a l R e s e r v e Bank of Chicago a p p r o p r i a t e d t h e s t o c k i n t e r e s t of t h e Neoga N a t i o n a l Bank in- t h e F e d e r a l R e s e r v e Bank of Chicago of t h e v a l u e of $1,000*00, c r e d i t i n g i t s v a l u e u p o n t h e i n d e b t e d n e s s of t h e Neoga N a t i o n a l Bank t o t h e F e d e r a l R e s e r v e Bank of Chicago; and f u r t h e r s e t o f f a g a i n s t t h a t i n d e b t e d n e s s t h e d e p o s i t s of t h e Neoga n a t i o n a l Bank i n t h e F e d e r a l R e s e r v e Bank of Chicago to t h e c r e d i t 'of t h e r e s e r v e X-6130 f u n d ; a n d f u r t h e r u s e d t h e c o l l a t e r a l of t h e Neoga N a t i o n a l Bank t o t h e e x t e n t n e c e s s a r y t o p a y t h e r e s i d u e of t h e i n d e b t edness, From the f o r e g o i n g i t i s c l e a r t h a t t h e c a u s e s of a c t i o n s o u g h t t o be s e t up a g a i n s t t h e F e d e r a l R e s e r v e Bank of Chicago h a v e t o do: f i r s t , w i t h t h e a l l e g e d d u t y of t h e F e d e r a l R e s e r v e Bank of. Chicago to examine t h e a f f a i r s a n d d i s c i p l i n e t h e o f f i c e r s of t h e Ueoga n a t i o n a l Bank; and second- w i t h t h e a c t i o n of t h e Chicago F e d e r a l R e s e r v e Bank, a f t e r t n e s u s p e n s i o n of t h e Neoga Bank, i n t h e a p p l i c a t i o n of r e s o u r c e s of t h e Ueoga Bank i n i t s h a n d s 8 so f a r a s t h e y were n e c c s s a r y , t o t h e payment of t h e i n d e b t e d n e s s of t h a t member bank t o i t , Neither of t h o s e a l l e g e d c a u s e s of a c t i o n grow o u t o f , o r a r c i n any way a s s o c i a t e d w i t h , t h e a l l e g e d n e g l i g e n c e a n d m i s c o n d u c t of t h e d i r e c t o r s a n d o f f i c e r s of t h e Ueoga Bank. The c a u s e s of a c t i o n a t t e m p t e d t o be a s s e r t e d a g a i n s t t h e F e d e r a l R e s e r v e Bank of Chicago bo bh r e s t u p o n t h e d u t i e s imposed u p o n a n d t h e r i g h t s g i v e n t o F e d e r a l r e s e r v e banks by law. These d u t i e s a n d r i g h t s c a n be d o t e r a i n e d o n l y by a n e x a m i n a t i o n of t h e F e d e r a l R e s e r v e A c t , w h i c h , of c o u r s e , i s t o bo i n t e r p r e t e d a s a whole a n d so c o n s t r u e d a s t o a c c o m p l i s h t h e g r o a t p u b l i c p u r p o s e s f o r which i t was p a s s e d , THE FEDERAL RESERVE SYSTEM: F e d e r a l R e s e r v e Banks a n d Member Banks, The F e d e r a l R e s e r v e Act was a p p r o v e d by t h e P r e s i d e n t on X-6130 6 t h e 23rd. day of December* 1 9 1 3 . I j s t i t l e i s as follows: "An Act t o p r o v i d e f o r t h e e s t a b l i s h m e n t of F e d e r a l R e s e r v e Banks, t o f u r n i s h a n e l a s t i c c u r r e n c y , t o af f d r d means of r e d i s c o u n t i n g commercial p a p e r ; t o e s t a b l i s h a more e f f e c t i v e s u p e r v i s i o n of b a n k i n g i n t h e U n i t e d S t a t e s , a n d f o r o t h e r p u r p o s e s . " ; (The F e d e r a l R e s e r v e A c t , 38 S t a t . 3 6 8 ; Comp. S t a t . An. 1916, S e c . 9799; 39 S t a t . 792; 4 0 S t a t . 238; i s b e s t f o u n d i n U . S . C . A . , T i t l e 12, S e c . 221 e t s e q . ) P r i o r t o t h e p a s sage of t h e F e d e r a l R e s e r v e A c t , n a t i o n a l b a n k s were i n c o r p o r a t e d a n d g o v e r n e d u n d e r t h e N a t i o n a l Bank Act p a s s e d a t t h e c l o s e of t h e C i v i l War. The c h a r a c t e r i s t i c o f t h e N a t i o n a l Bank Act was t h a t i t p r o v i d e d f o r t h e i s s u a n c e of n a t i o n a l bank n o t e s a s t h e p r i n c i p a l r e l i a n c e of t h e c o u n t r y f o r c u r r e n c y , a n d b a s e d t h e amount of s u c h n o t e s a t any t i m e p o s s i b l e u p o n t h e amount o f bonds of t h e F e d e r a l Government outstanding. The d e b t of t h e N a t i o n a l Government by r e a s o n of war e x p e n d i t u r e s was v e r y l a r g e and f o r seme y e a r s Government bonds c o u l d be b o u g h t "by n a t i o n a l b a n k s a t so f a v o r a b l e a r a t e a s t o e n a b l e them t o s u p p l y a d e q u a t e l y t h e c o u n t r y ' s n e e d s f o r cufroncy. As t h e n a t i o n a l d e b t began t o be p a i d o f f , however, t h e b a s i s f o r c u r r e n c y i s s u e d was c o n s t a n t l y n a r r o w e d . Mean- w h i l e , w i t h t h e c o m m e r c i a l , i n d u s t r i a l and a g r i c u l t u r a l development of t h e c o u n t r y , t h e n e e d f o r c u r r e n c y i n c r e a s e d * The consequence,-, of t h i s was t h a t t h e c u r r e n c y of t h e c o u n t r y became r i g i d and. i n e l a s t i c , and t h e demand f o r c u r r e n c y e x c e s s i v e and f l u c t u a t i n g , u n t i l f i n a l l y the c o u n t r y reached t h e s i t u a t i o n where i n d u s t r i a l a n d commercial p r o s p e r i t y c r e a t e d a c e r t a i n t y of c u r r e n c y s t r i n g e n c y w i t h r e s u l t i n g - X-6130 7 panic. A f u r t h e r c a u s e of p a n i c s , c r i s e s and. d e p r e s s i o n s a r o s e f r o m t h e f a c t t h a t "by t h e N a t i o n a l Bank A c t , n a t i o n a l "banks were r e q u i r e d t o m a i n t a i n r e s e r v e s "based upon s t i p u l a t e d p e r c e n t a g e s of t h e i r d e p o s i t l i a b i l i t i e s . These r e s e r v e s were r e q u i r e d t o "be d e p o s i t e d i n o t h e r "banks i n r e s e r v e and c e n t r a l r e s e r v e c i t i e s , a n d i n t h e c o u r s e of t i m e , t h e p r a c t i c e grew up of c o n c e n t r a t i n g n a t i o n a l "bank r e s e r v e d e p o s i t s i n g r e a t m e t r o p o l i t a n "banking c e n t e r s where employment was f o u n d f o r s u r p l u s f u n d s "by l o a n s f o r s p e c u l a t i v e purposes. When s t r i n g e n c i e s a r o s e a n d d e p o s i t o r s "began t o w i t h d r a w t h e i r d e p o s i t s , "banks were o b l i g e d to c a l l i n t h e i r reserves. As t h e s e c a l l s i n c r e a s e d , t h e y a c c u m u l a t e d p r e s s u r e on t h e g r e a t m e t r o p o l i t a n banks c a u s i n g r a p i d l y r i s i n g r a t e s f o r c a l l money, dumping of s e c u r i t i e s i n s t o c k m a r k e t s , w i t h c o n s e q u e n t f a l l i n g p r i c e s , and, a l l t o o o f t e n , commercial a n d "bank f a i l u r e s , which q u i c k l y e n l a r g e d a r e l a t i v e l y l o c a l "bank s c a r e i n t o a g e n e r a l j , a n i c . The v e r y n a t u r e of t h e f i n a n c i a l s y s t e m of t h e c o u n t r y , t h e r e f o r e , was such t h a t p a n i c s were i n e v i t a b l e a n d t h e f r e q u e n c y a n d s e v e r i t y of t h e i r o c c u r r e n c e i n c r e a s e d w i t h t h e development and e x p a n s i o n of t h e c o u n t r y ' s b u s i n e s s . To meet t h i s s i t u a t i o n Congress p a s s e d t h e s o - c a l l e d A l d r i c h V r e e l a n d Act of May 30, 1908, which sought t o l e n d e l a s t i c i t y t o t h e c u r r e n c y by a u t h o r i z i n g t h e i s s u a n c e : of c u r r e n c y b a s e d - -j X-6130 8 upon commercial p a p e r by the a s s o c i a t i o n of "banks known a s t h e H a t i o n a l Currency A s s o c i a t i o n . This Act was t e m p o r a r y i n c h a r a c t e r and p u r p o s e , one s e c t i o n of i t a u t h o r i z i n g t h e a p p o i n t m e n t of a n a t i o n a l Monetary Commission t o s t u d y t h e p r o b l e m a n d s u g g e s t more f u n d a m e n t a l and p e r m a n e n t r e l i e f * The r e p o r t of t h e N a t i o n a l Monetary Commission made c l e a r t h e e v i l s t o "be c u r e d : namely, t h e i n e l a s t i c i t y of the c u r r e n c y a n d t h e l a c k of r e a l r e s e r v e s a v a i l a b l e t o meet a n d r e l i e v e f i n a n c i a l uneasiness. The F e d e r a l R e s e r v e Act was drawn a n d p a s s e d t o c u r e these e v i l s . The t i t l e of the Act q u o t e d above shows t h a t i t s p r i m a r y p u r p o s e s h a d t o do w i t h t h e e s t a b l i s h m e n t of r e a l r e s e r v e s i n F e d e r a l r e s e r v e "banks a n d a u t h o r i z a t i o n of an e l a s t i c currency» The t i t l e f u r t h e r shows t h a t t h e Act aimed a t a more e f f e c t i v e s u p e r v i s i o n of "banking i n t h e U n i t e d States. T h i s , of c o u r s e , does not say a s u p e r v i s i o n of ""banks" "but a s u p e r v i s i o n of ""banking" a n d i t w i l l l a t e r "be made c l e a r t h a t t h e s u p e r v i s i o n i n q u e s t i o n h a d t o do w i t h "banking p r a c t i c e s n e c e s s a r y t o "be c o n t r o l l e d to a s s u r e t h e c h a r a c t e r of commercial p a p e r t o be u s e d a s a c u r r e n c y b a s i s , a n d w i t h r e s e r v e d e p o s i t s , which w e r e by t h e law r e q u i r e d t o be accumul a t e d i n F e d e r a l r e s e r v e b a n k s r a t h e r t h a n i n p r i v a t e banks a n d t h u s removed f r o m s p e c u l a t i v e engagement. An e x a m i n a t i o n of t h e F e d e r a l R e s e r v e Act shows t h a t X-6130 9 i t e s t a b l i s h e s a n a g e n c y of t h e Government f o r t h e accomp l i s h m e n t of p u b l i c p u r p o s e s . At t h e h e a d of t h e s y s t e m i s a n o f f i c i a l "board composed of o f f i c e r s a p p o i n t e d "by t h e P r e s i d e n t a n d c o n f i r m e d by t h e S e n a t e , l a v i n g no invesem0£$» i n t e r e s t i n any bank i n t h e s y s t e m , and e x e r c i s i n g p u b l i c powers. The F e d e r a l r e s d r v e b a n k s a s distingui8h"#& f r o m t h e F e d e r a l Reserve Board a r e r e g i o n a l . All n a t i o n a l banks i n e a c h d i s t r i c t a r e r e q u i r e d t o be ntetabers of t h e F e d e r a l r e s e r v e b a n k of thfe d i s t f i b t ttrid t o S u b s c r i b e i n a f i x e d p r o p o r t i o n to i t s c a p i t a l stock. E l i g i b l e s t a t e banks a n d t r u s t companies a r e i n v i t e d t o j o i n t h e System u n d e r a n e q u a l i t y of b u r d e n a n d of o p p o r t u n i t y w i t h t h e n a t i o n a l b a n k s , b u t t h e whole System i s a p u b l i c , o f f i c i a l t h i n g . The d i r e c t o r s of t h e F e d e r a l r e s e r v e b a n k s a r e of t h r e e c l a s s e s , t h e members of one c l a s s b e i n g a p p o i n t e d by t h e F e d e r a l R e s e r v e B o a r d . But t h e s t o c k h o l d i n g b a n k s a r e l i m i t e d t o an a c c u m u l a t i v e d i v i d e n d of 6$ on t h e p a i d i n c a p i t a l , and t h r o u g h o u t t h o e n t i r e Act i t i s c l e a r t h a t t h e F e d e r a l r e s e r v e b a n k s , a c t i n g u n d e r t h o d i r e c t i o n a n d c o n t r o l of t h e F e d e r a l R e s e r v e B o a r d , a r e a g e n c i e s of t h e F e d e r a l Government, e x e r c i s i n g g o v e r n m e n t a l power, e q u i p p e d w i t h t h e r i g h t t o a c q u i r e i n f o i m a t i o n w h e r e v e r n e c e s s a r y t o e n a b l e them t o e x e r c i s e t h a t power w i s e l y , a n d w i t h c e r t a i n d i s c i p l i n a r y power o v e r t h e m'dmbor banks, which, however, i s l i m i t e d to t h a t n e c e s s a r y to i n s u r e X-6130 10 p e r f o r m a n c e by t h e members of t h o s e o b l i g a t i o n s t o t h e system w h i c h a r e n e c e s s a r y t o c a r r y out t h e p u b l i c p u r p o s e s f o r which t h e b a n k s were o r g a n i z e d . There i s no s u g g e s t i o n a n y - where i n t h e a c t of any d u t y r u n n i n g f r o m F e d e r a l r e s e r v e b a n k s t o t h e s t o c k h o l d e r s a n d d e p o s i t o r s of member b a n k s . As a m a t t e r of f a c t , a t t h e time of t h e d e b a t e upon t h e F e d e r a l R e s e r v e A c t , a n amendment was r e j e c t e d by C o n g r e s s t o i n t r o duce what would i n e f f e c t have b e e n a g u a r a n t e e of d e p o s i t s t o member b a n k s , a n d t h e Act was l e f t w i t h o u t any such d i r e c t or e v e n a n a l o g o u s p r o v i s i o n . FUNCTIONS AFP POWERS OF FEDERAL RES3RVS BAMS From t h e f o r e g o i n g i t i s c l e a r t h a t F e d e r a l r e s e r v e banks a r e n o t p r i v a t e money making i n s t i t u t i o n s b u t a r e r a t h e r i n s t r u m e n t a l i t i e s of t h e F e d e r a l Government t h r o u g h w h i c h d e f i n i t e n a t i o n a l purposes are accomplished. Specific sections of t h e F e d e r a l R e s e r v e Act i l l u s t r a t e t h i s s t a t e m e n t . Thus U . S . C . A . , T i t l e 12, Ch. 3 , S e c . 248 e n u m e r a t e s t h e p o w e r s of t h e F e d e r a l R e s e r v e Board a n d e a c h of t h e s e powers i s shown t o h a v e a p u b l i c o b j e c t r e l a t e d t o t h e m a i n t e n a n c e of sound f i n a n c i a l c o n d i t i o n s throughout the country. S e c . 281 o t s e q . show t h e method of o r g a n i z i n g F e d e r a l reserve banks. S e c . 341 e n u m e r a t e s t h e powers of F e d e r a l r e s e r v e b a n k s , and i t i s h e r e s i g n i f i c a n t t o n o t e t h a t oven X-5130 11 F e d e r a l r e s e r v e banks may n o t t r a n s a c t b u s i n e s s u n t i l t h e y h a v e "been d u l y a u t h o r i z e d t h e r e t o "by t h e C o m p t r o l l e r of the Currency. The e x t e n s i o n of c r e d i t accommodations, t h e i s s u a n c e of F e d e r a l r e s e r v e n o t e s , and a p a r c o l l e c t i o n system f o r t h e g e n e r a l " b e n e f i t of t h e f i n a n c i a l system of t h e c o u n t r y a r e a l l shown i n t h e s u c c e e d i n g s e c t i o n s , and v e r y s t r i c t l i m i t a t i o n s a r e p r o v i d e d i n t h e s t a t u t e a s t o what F e d e r a l r e s e r v e n o t e s may "be a u t h o r i z e d t o "be i s s u e d , a n d how i s s u e d n o t e s s h a l l "be p r o t e c t e d "by g o l d d e p o s i t s i n t h e T r e a s u r y . 414). (Sec. I n l i k e manner, "beginning w i t h S e e . 451, t h e s u b j e c t of "bank r e s e r v e s i s f u l l y c o v e r e d . Throughout t h e s e s e c t i o n s i t w i l l "be f o u n d t h a t such s u p e r v i s i o n a r y power a s i s g i v e n t o t h e F e d e r a l r e s e r v e "bank over i t s members h a d t o do w i t h t h e p r o t e c t i o n of t h e r e s e r v e , or t h e s a f e g u a r d i n g of c u r r e n c y i s s u e d , o r o t h e r w i s e f u r t h e r i n g t h e g r e a t g e n e r a l p u r p o s e s of t h e F e d e r a l R e s e r v e Act i n t h e way of p r e v e n t i n g t h e d e v o t i o n of expanded c u r r e n c y f a c i l i t i e s t o s p e c u l a t i v e u s e s of t h e p r e j u d i c e of sound b u s i n e s s u n d e r t a k i n g s . Nowhere i n t h e s e s e c t i o n s i s any g e n e r a l or s p e c i f i c v i s i t o r i a l or d i s c i p l i n a r y power g i v e n t o F e d e r a l r e s e r v e banks over t h e i r members. A l l n a t i o n a l b a n k s a r e r e q u i r e d by t h i s Act t o b e members of F e d e r a l r e s e r v e b a n k s . a n a t i o n a l bank. The Heoga N a t i o n a l Bank was The b i l l of c o m p l a i n t a l l e g e s t h a t t h e Kcoga Bank was o r g a n i z e d i n 1905 a s a n a t i o n a l b a n k i n g a s s o c i a t i o n . I t was, t h e r e f o r e , o r g a n i z e d some y e a r s b e f o r e the e n a c t m e n t of t h e F e d e r a l R e s e r v e A c t . When the F e d e r a l R e s e r v e Act was p a s s e d , t h e r e was no c o n c u r r e n t r e p e a l of t h e e a r l i e r n a t i o n a l Bank A c t . The s y s t e m of n a t i o n a l t a n k s t h e n i n e x i s t e n c e was c o n t i n u e d . controlling, The method of o r g a n i z i n g , o p e r a t i n g , d i s c i p l i n i n g and d i s s o l v i n g n a t i o n a l b a n k s r e - mained unchanged. N a t i o n a l b a n k s wore t i e d i n t o t h e F e d e r a l R e s e r v e System i n d e f i n i t e ways f o r d e f i n i t e p u r p o s e s , b u t remained otherwise Bank A c t . It is, as they had been under the o l d National t h e r e f o r e , important to s t a t e b r i e f l y j u s t how n a t i o n a l b a n k s a r e o r g a n i z e d , d i s c i p l i n e d a n d c o n t r o l l e d . U . S . C . A . , T i t l e 12, Ch. 2 , b e g i n n i n g w i t h S e c . 2 1 (Rev. S t a t . 5133 e t s e q . ) deals with that subject. An examr- i n a t i o n of t h e s e s e c t i o n s shows t h a t t h e C o m p t r o l l e r of t h e C u r r e n c y , a c t i n g u n d e r t h e d i r e c t i o n of t h e S e c r e t a r y of t h e T r e a s u r y (Rev. S t a t . S e c . 324; U . S . C . A . , T i t l e 1 2 , Ch. 1 , S e c . 1 ) , i s t h e c e n t e r of a u t h o r i t y w i t h r e g a r d t o n a t i o n a l banks. They can be f o r m e d o n l y upon h i s a p p r o v a l a s p r o - v i d e d i n S e e s . 2 1 and 2 2 . He k e e p s t h e r e c o r d s of t h e i r o r g a n i z a t i o n a n d o n l y when h e h a s a p p r o v e d t h e s t e p s by which t h e y were o r g a n i z e d c a n t h e y b e g i n t o t r a n s a c t b u s i n e s s a s national banks. ( S e c . 26 and 2 7 ) . A l l changes i n t h e i r o r g a n i z a t i o n , l o c a t i o n or name must be f i r s t s u b m i t t e d t o a n d a p p r o v e d by t h o C o m p t r o l l e r . Consolidations and the . f __ X-6130 13 e s t a b l i s h m e n t and o p e r a t i o n of "branches a r e s u b j e c t t o t h e C o m p t r o l l e r ( s a p p r o v a l , and s t a t e "banks may "become n a t i o n a l "banks o n l y a f t e r h a v i n g s a t i s f i e d t h e C o m p t r o l l e r of t h e r c o m p l i a n c e w i t h t h e r e q u i r e m e n t s of t h e s t a t u t e s e The e n f o r c e m e n t of t h e N a t i o n a l Bank Act i s p l a c e d i n t h e h a n d s of t h e C o m p t r o l l e r by S e c . 93 (Rev. S t a t e 5239), a n d by Sec* 191 t h e C o m p t r o l l e r i s g i v e n a u t h o r i t y t o a p p o i n t R e c e i v e r s when i n h i s own sound d i s c r e t i o n h e h a s become s a t i s f i e d t h a t a n a t i o n a l bank i s i n s o l v e n t . In order t h a t t h e C o m p t r o l l e r may h a v e t h e i n f o r m a t i o n upon which t o b a s e t h i s v i s i t o r i a l and d i s c i p l i n a r y a c t i o n , i t i s provided i n U . S . C . A . Ch. 3, S e c . 481 (Rev. S t a t . 5240)t n The C o m p t r o l l e r of t h e C u r r e n c y , w i t h t h e a p p r o v a l of t h e S e c r e t a r y of t h e T r e a s u r y , s h a l l a p p o i n t e x a m i n e r s who s h a l l examine e v e r y member bank o t h e r t h a n t h o s e e x p r e s s l y e x c e p t e d by S e c . 330 of t h i s t i t l e , a t l e a s t t w i c e i n each c a l e n d a r y e a r a n d oftencr if necessary;" I t i s t h u s c l c a r t h a t a l l e x a m i n a t i o n s of n a t i o n a l banks t o d e t e c t and c o r r e c t n e g l i g e n c e or m i s c o n d u c t of t h e k i n d a l l e g e d i n b i l l of c o m p l a i n t a g a i n s t t h e o f f i c e r s a n d d i r e c t o r s of t h e Eeoga N a t i o n a l Bank i s committed t o t h e C o m p t r o l l e r of t h e C u r r en cy and n o t t h e F e d e r a l r e s e r v e bank o r Board# T h i s was t r u e b e f o r e t h e p a s s a g e of t h e F e d e r a l R e s e r v e Act a n d r e m a i n s t r u e now, A different situation e x i s t s w i t h r e g a r d t o s t a t e b a n k s , members of a F e d e r a l r e s e r v e / i .J X-6130 14 bank. We a r e n o t c o n c e r n e d w i t h them i n t h i s c a s e and. i t w i l l "be s u f f i c i e n t t o say t h a t s t a t e banks o b j e c t e d t o "being exam ine d "by n a t i o n a l "bank e x a m i n e r s a s t h e y were a l r e a d y s u b j e c t t o e x a m i n a t i o n by s t a t e bank e x a m i n e r s . A limited dis- c r e t i o n was, t h e r e f o r e , g i v e n t o t h e F e d e r a l r e s e r v e bank t o examine member s t a t e banks when f o r any r e a s o n t h e F e d e r a l r e s e r v e bank i n q u e s t i o n d e c l i n e d t o a c c e p t t h e r e s u l t of e x a m i n a t i o n s by s t a t e e x a m i n e r s . But w i t h r e g a r d t o n a t i o n a l banks t h e s t a t e m e n t above made i s t r u e . The e n t i r e power of e x a m i n a t i o n a n d d i s c i p l i n e over n a t i o n a l b a n k s r e m a i n s i n t h e C o m p t r o l l e r a s i t was b e f o r e t h e p a s s a g e of t h e F e d e r a l Reserve Act. C e r t a i n d i s c r e t i o n a r y a n d v o l u n t a r y r i g h t s of s u p p l e m e n t a l e x a m i n a t i o n a r e g i v e n t o t h e F e d e r a l r e s e r v e banks w i t h r e g a r d t o member n a t i o n a l banks f o r s p e c i f i c p u r p o s e s , b u t t h e y a r e not v i s i t o r i a l o r d i s c i p l i n a r y a n d t h e y impose no d u t y u p o n t h e F e d e r a l r e s e r v e b a n k s of t h e k i n d a l l e g e d i n t h e b i l l of c o m p l a i n t . With t h e s e g p n c r a l o b s e r v a t i o n s wo may now p r o c e e d t o examine t h e c a u s e s of a c t i o n a t t e m p t e d t o bo s e t up a g a i n s t t h e F e d e r a l R e s e r v e Bank of Chicago i n t h e b i l l of complaint i n t h i s case. I. THE A I M M D BILL DDES NOT STATS A CAUSE OF ACTION ACAIHST THE FEDERAL RESERVE BAITK OF CHICAGO. At t h e o u t s e t i t i s i m p o r t a n t t o s e p a r a t e t h e a l l o g a - t i o n s of t h e M i l of c o m p l a i n t i n t o two c l a s s e s : 1. Those which a l l e g e d a b r e a c h of d u t y growing out of t h e n e g l i g e n t o r c a r e l e s s f a i l u r e on t h e p a r t of t h e F e d e r a l R e s e r v e Bank of Chicago t o examine t h e Heoga Bank; a n d 2. Claims a s s e r t e d b e c a u s e of t h e a c t i o n t a k e n by t h e F e d e r a l R e s e r v e Bank of Chicago a f t e r t h e i n s o l v e n c y of t h e Heoga Bank. 1. A l l e g e d F a i l u r e of Duty of F e d e r a l R e s e r v e Bank o f C h i c a g o . F o r t h e c o n v e n i e n c e of t h e c o u r t , we s e t o u t h e r e s e r i a l l y a l l t h e a l l e g a t i o n s of t h e b i l l of c o m p l a i n t d e a l i n g w i t h t h e a l l e g e d f a i l u r e of t h e F e d e r a l R e s e r v e Bank of Chicago t o t a k e a c t i o n which i t i s a s s e r t e d i t was i t s d u t y t o t a k e f o r t h e p r o t e c t i o n of t h e c o m p l a i n a n t s . I n p a r a g r a p h 2, page 3, i t i s s a i d ; " * * * t h a t s a i d A c t s of Congress a l s o r e q u i r e d s a i d bank t o be a member of t h e F e d e r a l R e s e r v e Bank of Chicago a n d empowered s a i d F e d e r a l R e s e r v e Bank when e x t e n d i n g c r e d i t t o a member bank t o s u p e r v i s e a n d examine t h e b u s i n e s s of such member bank i n l i k e manner to t h e s u p e r v i s i o n a n d e x a m i n a t i o n e x e r c i s e d by t h e C o m p t r o l l e r of t h e C u r r e n c y ; " I n p a r a g r a p h 9, page 7, i t i s s a i d : " * * * s a i d d i r e c t o r s were c o n s t a n t l y r e q u i r e d t o make r e p o r t s of t h e f i n a n c i a l c o n d i t i o n of s a i d bank o v e r t h t i r i n d i v i d u a l s i g n a t u r e s t o t h e C o m p t r o l l e r of t h e C u r r e n c y a n d a l s o t o t h e F e d e r a l R e s e r v e Bank of Chioago." P a r a g r a p h 1 2 , p a g e 11, i n d e a l i n g w i t h t h e a l l e g e d n e g l e c t of d u t y o f t h e e x a m i n i n g committee of d i r e c t o r s of t h e Neoga N a t i o n a l Bank and r e c i t i n g t h e t h i n g s which s h o u l d h a v e p u t s a i d committee on n o t i c e , s a y s : " ***e.nd r e g a r d l e s s of t h e c o n s t a n t r e q u i r e m e n t s of t h e F e d e r a l R e s e r v e Bank o f Chicago t h a t c o l l a t e r a l of t h e f a c e v a l u e of more t h a n t w i c e t h e amount of t h e money l o a n e d t o t h e Neoga N a t i o n a l Bank s h o u l d he h e l d by s a i d F e d e r a l R e s e r v e Bank a n d r e g a r d l e s s of t h e f a c t t h a t the F e d e r a l R e s e r v e Bank was i n p o s s e s s i o n of s u b s t a n t i a l l y a l l of t h e v a l u a b l e a s s e t s of said bank." I n p a r a g r a p h 1 3 , p a g e 12, d e a l i n g w i t h r e q u i r e m e n t s imposed by t h e C o m p t r o l l e r of t h e C u r r e n c y a n d by n a t i o n a l bank e x a m i n e r s u n d e r h i s a u t h o r i t y t h a t t h o b o a r d of d i r e c t o r s improve Neoga B a n k ' s c o n d i t i o n ' o u t of t h e i r p r i v a t e f u n d s , i t is said: " • • • t h a t t h e F e d e r a l R e s e r v e Bank of Chicago f r o m whom t h e Neoga N a t i o n a l Bank h a d b o r r o w e d more t h a n $ 8 0 , 0 0 0 . 0 0 i n 1920 by r e d i s c o u n t i n g a l i k e amount of i t s n o t e s w i t h s a i d R e s e r v e Bank h a d b e e n c o n s t a n t l y a s k i n g demands d u r i n g a l l t h e y e a r s a f o r e s a i d on t h e s a i d The Neoga N a t i o n a l Bank to r e d u c e s a i d r e d i s c o u n t s a n d s a i d b o a r d of d i r e c t o r s h a d r e d u c e d s a i d r e d i s c o u n t s i n 1924 t o a p p r o x i m a t e l y $ 5 1 , 0 0 0 . 0 0 , t h a t s i n c e t h e y e a r 1921 t h e q u a l i t y a n d c h a r a c t e r of s a i d r e d i s c o u n t s mere f o u n d so u n s a t i s f a c t o r y a n d v a l u e l e s s t h a t s a i d F e d e r a l R e s e r v e Bank r e q u i r e d t h e s a i d b o a r d of d i r e c t o r s t o t u r n o v e r t o s a i d F e d e r a l R e s e r v e Bank a s c o l l a t e r a l f o r s a i d r e d i s c o u n t s a d d i t i o n a l s e c u r i t i e s or n o t e s i n approximately equal f a c e value to s a i d s e c u r ities. rediscounted; that the said rediscounts a n d c o l l a t e r a l i n c l u d e d s u b s t a n t i a l l y a l l of t h e n o t e s a n d s e c u r i t i e s of s a i d bank which were of any v a l u e ; t h a t t h e s a i d b o a r d of d i r e c t o r s b e i n g f u l l y aware t h a t t h e s a i d F e d e r a l R e s e r v e Bank h a d s u b s t a n t i a l l y a l l of i t s a s s e t s of any v a l u e i n i t s p o s s e s s i o n a n d knowing t h a t t h e v a u l t s of s a i d bank c o n t a i n e d no s e c u r i t i e s of any s u b s t a n t i a l a S-S1S J IV value and contained only funds r e c e n t l y d e p o s i t e d "by c u s t o m e r s of t h e "bank c o n t i n u e d t o k e e p s a i d bank open f o r " b u s i n e s s ; " I n p a r a g r a p h 14, on p a g e 13, i t i s s a i d t h a t t h e "board of d i r e c t o r s of t h e ITeoga Bank made f a l s e and m i s l e a d i n g r e p o r t s t o t h e C o m p t r o l l e r of t h e C u r r e n c y a n d c a u s e d them t o #• "be p u b l i s h e d i n The Neoga News, ii ***and t h a t "by r e a s o n of t h e f a l s e a n d m i s l e a d i n g c h a r a c t e r of s a i d r e p o r t s t h e C o m p t r o l l e r of t h e C u r r e n c y and t h e d e p o s i t o r s of s a i d The ITeoga n a t i o n a l Bank were n o t i n f o r m e d a s t o t h e a c t u a l c o n d i t i o n of s a i d "bank and f a i l e d t o t a k e s t e p s t o r e p a i r or p u t t h e t a n k i n l i q u i d a t i o n a t a much e a r l i e r d a t e "by r e a s o n of which t h e l o s s e s of s a i d "bank were f u r t h e r i n c r e a s e d . " P a r a g r a p h 16, on p a g e 14, i s i n f a l l a s f o l l o w s : " O r a t o r s f u r t h e r r e p r e s e n t t h a t The Neoga N a t i o n a l Bank was a member of t h e F e d e r a l R e s e r v e Bank of Chicago f r o m the o r g a n i z a t i o n of s a i d R e s e r v e Bank i n 1913; t h a t s a i d F e d e r a l R e s e r v e Bank was a c o r p o r a t i o n g o v e r n e d "by a B o a r d of D i r e c t o r s a n d t h e chairman of t h e B o a r d of D i r e c t o r s i s known a l s o a s • F e d e r a l R e s e r v e A g e n t 1 ; t h a t u n d e r t h e N a t i o n a l Banking Laws t h e s a i d F e d e r a l R e s e r v e Bank of Chicago was empowered t o r e d i s c o u n t b i l l s a n d n o t e s of member n a t i o n a l banks a n d whene v e r any member n a t i o n a l bank r e d i s c o u n t e d p a p e r w i t h t h e s a i d F e d e r a l R e s e r v e Bank i m m e d i a t e l y s a i d F e d e r a l R e s e r v e Bank h a d f u l l a n d c o m p l e t e a u t h o r i t y u n d e r s a i d b a n k i n g laws w i t h the a p p r o v a l of t h e s a i d F e d e r a l R e s e r v e Agent who was t h e n and t h e r e t h e c h a i r m a n of t h e Board of D i r e c t o r s of s a i d F e d e r a l R e s e r v e Bank t o make s p e c i a l e x a m i n a t i o n s of member banks r e d i s c o u n t i n g p a p e r w i t h s a i d F e d e r a l R e s e r v e Bank; t h a t The ITeoga N a t i o n a l Bank h a d b e e n r e d i s c o u n t i n g i t s paper with the Federal Reserve Bank of Chicago f o r some y e a r s and i n t h e 1920 by means of s a i d r e d i s c o u n t i n g h a d b o r r o w e d f r o m s a i d F e d e r a l R e s e r v e Bank more t h a n $ 8 0 , 0 0 0 . 0 0 ; t h a t t h e N a t i o n a l Banking Laws r e q u i r e d t h e F e d e r a l R e s e r v e Bank t o so c o n d u c t such s p e c i a l e x a m i n a t i o n s a s t o % X- 61GC 23 i n f o r m t h e F e d e r a l R e s e r v e Bank: of t h e c o n d i t i o n of i t s member "banks and. of t h e l i n e s of c r e d i t which were "being e x t e n d e d "by them; t h a t one of t h e o b j e c t s i n t h e e s t a b l i s h m e n t of t h e F e d e r a l R e s e r v e Bank System was t o e s t a b l i s h a more e f f e c t i v e s u p e r v i s i o n of t h e banks i n t h e U n i t e d S t a t e s ; t h a t i n t h e y e a r 1920 t h e s a i d F e d e r a l R e s e r v e Bank made a r e q u i r e m e n t of The ITeoga n a t i o n a l Bank t h a t i t r e d u c e i t s r e d i s c o u n t s w i t h t h e F e d e r a l R e s e r v e Bank and t h a t i t p u t up a s c o l l a t e r a l with said rediscountod paper other notes and s e c u r i t i e s of a p p r o x i m a t e l y t h e same f a c e v a l u e as s a i d rediscountod paper; t h a t the Federal Reserve Bank c o n t i n u e d t o r e d i s c o u n t t h e p a p e r of The Neoga N a t i o n a l Bank and i n l i k e manner a s a f o r e s a i d c o n t i n u e d t h e r e q u i r e m e n t of c o l l a t e r a l s e c u r i t y up t o t h e d a t e of c l o s i n g t h e s a i d The ITeoga n a t i o n a l Bank when t h e amount of s a i d l o a n t o The ITeoga n a t i o n a l Bank was a p p r o x i m a t e l y $ 5 1 , 0 0 0 . 0 0 and t h a t d u r i n g a l l t h i s p e r i o d t h e F e d e r a l R e s e r v e Bank was c o n t i n u o u s l y making c r i t i c i s m of t h e b a n k i n g methods of The ITeoga N a t i o n a l Bank a n d was c o n t i n u o u s l y c r i t i c i s i n g t h e c l a s s of p a p e r f u r n i s h e d i t f o r l o a n s by t h e F e d e r a l R e s e r v e Bank a n d a t t h e t i m e of c l o s i n g s a i d The ITeoga N a t i o n a l Bank t h e F e d e r a l R e s e r v e Bank h a d r e q u i r e d t h e d e p o s i t w i t h i t of more t h a n $130,000,,00 i n f a c e v a l u e of t h e n o t e s a n d p a p e r of The Neoga N a t i o n a l Bank t o s e c u r e i t s l o a n of $51, 0 0 0 , 0 0 and t h a t i n c o n s t a n t l y r e q u i r i n g s a i d a d d i t i o n a l c o l l a t e r a l s a i d F e d e r a l R e s e r v e Bank n o t i f i e d , t h e Board of D i r e c t o r s of The Neoga N a t i o n a l Bank of t h e w o r t h l e s s n o s s a n d u n s a t i s f a c t o r y n a t u r e of t h e n o t e s a n d p a p e r s of s a i d Neoga N a t i o n a l Bank and i n o r d e r to p r o p e r l y s e c u r e i t s e l f t h e F e d e r a l R e s e r v e Bank r e q u i r e d c o l l a t e r a l o r more t h a n d o u b l e t h e amount of t h e l o a n t o The ITeoga N a t i o n a l Bank b e c a u s e same were t o a l a r g e e x t e n t w o r t h l e s s a n d n o t p r o p e r l y s e c u r e d ; t h a t a t t h e t i m e of t h e c l o s i n g of t h e s a i d Neoga N a t i o n a l Bank i t h a d on d e p o s i t a s a r e s e r v e f u n d w i t h t h e F e d e r a l R e s e r v e Bank a p p r o x i m a t e l y $ 1 0 , 0 0 0 . 0 0 which was a p p r o x i m a t e l y a l l t h e a v a i l a b l e c a s h Tho Neoga N a t i o n a l Bank h a d a t t h a t time; t h a t during a l l the time a f o r e s a i d the F e d e r a l R e s e r v e Bank made no e x a m i n a t i o n a s r e q u i r e d "by law of Tho Neoga N a t i o n a l Bank so f a r a s y o u r o r a t o r s a r e a d v i s o d ; t h a t t h e F e d e r a l R e s e r v e Bank of Chicago b e i n g so o r g a n i z e d u n d e r t h e laws of t h e vJ X—6130 19 U n i t e d S t a t e s w i t h f u l l power t o examine member "banks a s a f o r e s a i d h a d a l s o t h e f u l l a n d f r e e a c c e s s t o a l l i n f o r m a t i o n a c q u i r e d "by t h e Compt r o l l e r of the C u r r e n c y and t h e n a t i o n a l Bank Examiners a s t o s a i d The Neoga N a t i o n a l Bank i n t h e t r a n s a c t i o n of i t s b u s i n e s s w i t h s a i d The E'soga n a t i o n a l Bank and was a l s o a u t h o r i z e d t o engage i n t h e p r i v a t e b a n k i n g b u s i n e s s of r e d i s c o u n t i n g p a p e r f o r i t s member b a n k s f o r p r o f i t a n d was t h e n and t h e r e a g o v e r n m e n t a l a g e n c y o r g a n i z e d f o r t h e p u r p o s e of s u p e r v i s i n g and imp r o v i n g t h e b a n k i n g f a c i l i t i e s of a l l i t s member b a n k s and f o r t h e p r o t e c t i o n of t h e p u b l i c ; t h a t by r e a s o n of t h e powers c o n f e r r e d upon s a i d R e s e r v e ' Bank a s a f o r e s a i d i t was t h e d u t y of s a i d R e s e r v e Bank t o know t h e a c t u a l c o n d i t i o n ' o f t h o a f f a i r s of s a i d Eha ITeoga n a t i o n a l Bank a n d i t was t h e n a n d t h e r e t h e d u t y of s a i d R e s e r v e Bank n o t t o p e r m i t t h e d e p o s i t o r s of s a i d The ITeoga n a t i o n a l Bank to s u f f e r l o s s by any a c t of s a i d F e d e r a l R e s e r v e Bank and i t became t h e r e f o r e a t r u s t e e f o r y o u r o r a t o r s when i t b e g a n a n d c o n t i n u e d t o r e d i s c o u n t t h e b i l l s and p a p e r s of The ITeoga N a t i o n a l Bank - s i n c e s a i d r e d i s c o u n t i n g m e r e l y i n c r e a s e d t h e i n d e b t e d n e s s of s a i d The ITeoga N a t i o n a l Bank; and t h a t i t r e d u c e d t h e a s s e t s t h e r e o f a n d t h e r e b y c a u s e d f u r t h e r l o s s t o y o u r o r a t o r s and t h a t i t was t h e d u t y of s a i d F e d e r a l R e s e r v e Bank t h e n and t h e r e h a v i n g f u l l power or s u p e r v i s i o n of The Neoga N a t i o n a l Bank to have made a n e x a m i n a t i o n of the s a i d Neoga N a t i o n a l Bank and t o have known of i t s i n s o l v e n c y b e f o r e i t d i s c o u n t e d such p a p e r s and t o have e i t h e r c a u s e d The Neoga N a t i o n a l Bank t o be c l o s e d or t o h a v e r e f u s e d t o make s a i d r e d i s c o u n t s and t h e r e b y p r e v e n t e d l o s s t o y e a r o r a t o r s ; a n d s a i d F e d e r a l R e s e r v e Bank would h a v e known oi t h e i n s o l v e n c y of s a i d Tho Neoga N a t i o n a l Bank i f i t h a d o x e r c i s e d o r d i n a r y c a r c i n t h o p e r f o r m a n c e of i t s d u t i e s t h e n and t h e r e owing t o y o u r orators." P a r a g r a p h 34, on p e g s 21, i s a s f o l l o w s : "And o r a t o r s f u r t h e r r e p r e s e n t t h a t t h e F e d e r a l R e s e r v e Bank of Chicago, by r e a s o n of t h e powers c o n f e r r e d upon i t by law, h a d f u l l and complete s u p e r v i s i o n of t h e a f f a i r s of s a i d The Neoga — X-S130 20 H a t i o n a l Bank s i n c e t h e y e a r 1921, and d u r i n g t h a t time was i n f o r m e d , or i n t h e e x e r c i s e of o r d i n a r y c a r e i n the p e r f o r m a n c e of i t s d u t i e s of s u p e r v i s i o n s h o u l d have b e e n i n f o r m e d of t h e a c t u a l f i n a n c i a l c o n d i t i o n of s a i d Bank a n d s h o u l d have a s c e r t a i n e d w h e t h e r s a i d Bank h a d s u s t a i n e d l o s s e s and was i n s o l v e n t , a n d s h o u l d h a v e a s c e r t a i n e d t h e n e g l i g e n c e of t h e D i r e c t o r s a n d o f f i c e r s of s a i d Bank i n a n d a h o u t t h e i r d u t i e s , and s h o u l d h a v e known t h a t s a i d Bank was t o t a l l y i n s o l v e n t on t h e f i r s t day of J a n u a r y , 1924 up t o t h e d a t e of i t s c l o s i n g a s a f o r e s a i d , a n d t h a t d u r i n g a l l the time of s a i d i n s o l v e n c y y o u r o r a t o r s and o t h e r c r e d i t o r s of s a i d Bank were making d e p o s i t s i n s a i d Bank, and s h o u l d have a s c e r t a i n e d t h a t s a i d D i r e c t o r s were f r a u d u l e n t l y h o l d i n g out s a i d Bank t o t h e p u b l i c a n d t o y o u r o r a t o r s a f t e r J a n u a r y 1, 1924, a s a f i n a n c i a l l y sound a n d s o l v e n t i n s t i t u t i o n , y e t s a i d F e d e r a l R e s e r v e Bank of Chicago h a v i n g such knowledge a s a f o r e s a i d , a n d "being i n f o r m e d , o r i n t h e e x e r c i s e of o r d i n a r y c a r e i n t h e p e r f o r m a n c e of i t s s a i d d u t i e s , b e i n g f u l l y a d v i s e d a s to t h e i n s o l v e n c y of s a i d Bank a n d of t h e n e g l i g e n t conduct of t h e o f f i c e r s a n d d i r e c t o r s of s a i d Bank, a p p r o v e d and c o n f i r m e d t h e k e e p i n g open of s a i d Bank a s a s o l v e n t a n d sound f i n a n c i a l i n s t i t u t i o n a s h e r e i n b e f o r e s e t f o r t h , and t h e r e b y a b e t t e d and a p p r o v e d t h e n e g l i g e n t a n d f r a u d u l e n t c o n d u c t of t h e o f f i c e r s a n d d i r e c t o r s of s a i d Bank i n k e e p i n g s a i d Bank open a n d i n a d d i t i o n t h e r e t o , s a i d F e d e r a l R e s e r v e Bank, knowing t h e i n s o l v e n t c o n d i t i o n of s a i d The ITeoga N a t i o n a l Bank and knowing t h a t s a i d Bank d i d n o t h a v e f u n d s of i t s own w i t h which t o r e d u c e i t s i n d e b t e d n e s s t o s a i d F e d e r a l R e s e r v e Bank w i t h o u t u s i n g t h o f u n d s d e p o s i t e d by y o u r o r a t o r s a n d o t h e r d e p o s i t o r s i n s a i d Bank i n t h e d a i l y t r a n s a c t i o n of t h e i r b u s i n e s s , r e q u i r e d s a i d The ITeoga N a t i o n a l Bank t o c o n t i n u e t o r e d u c e i t s i n d e b t e d n e s s t o s a i d R e s e r v e Bank by u s i n g t h e moneys d e p o s i t e d by y o u r o r S t o r s and o t h e r d e p o s i t o r s ' i n The Neoga N a t i o n a l Bank; t h a t by r e a s o n of t h e p o w e r s c o n f e r r e d by Law upon s a i d F e d e r a l R e s e r v e Bank u n d e r t h e f a c t s i n t h i s c a s e , t h e s a i d F e d e r a l R e s e r v e Bank became a n d was a t r u s t e e f o r t h e d e p o s i t o r s of The Nooga N a t i o n a l Bank, a n d J — X-6130 21 was "burdened u n d e r t h e law w i t h t h e d u t y of p r o t e c t i n g the d e p o s i t o r s of s a i d The Neoga N a t i o n a l Bank f r o m any l o s s due t o any a c t of s a i d F e d e r a l R e s e r v e Bank; a n d t h a t by r e a s o n of t h e s a i d F e d e r a l R e s e r v e Bank c o o p e r a t i n g w i t h t h e o f f i c e r s and d i r e c t o r s of s a i d Bank i n t h e i r n e g l i g e n t a n d f r a u d u l e n t c o n d u c t of s a i d Bank, y o u r o r a t o r s a n d o t h e r d e p o s i t o r s i n s a i d Bank have s u s t a i n e d l o s s e s i n e x c e s s of 40 p e r c e n t , of t h e d e p o s i t s made "by y o u r o r a t o r s a n d o t h e r d e p o s i t o r s i n s a i d Bank d u r i n g s a i d t i n e , which s a i d d e p o s i t s - of y o u r o r a t o r s i s s e t f o r t h i n P a r a g r a p h 22 h e r e o f . " Hie f o r e g o i n g a r e a l l of t h e p r o v i s i o n s i n t h s b i l l of c o m p l a i n t d e a l i n g w i t h t h e s u b j e c t of t h e a l l e g e d d u t i e s of t h e F e d e r a l R e s e r v e Bank t o t h e c o m p l a i n a n t s . Disregarding f o r t h e moment t h e a c t i o n of t h e F e d e r a l R e s e r v e Bank a f t e r t h e i n s o l v e n c y of t h e Neoga Bank, we now a s k : Do t h e f o r e g o i n g a l l e g a t i o n s c o n s t i t u t e a c a u s e of a c t i o n a g a i n s t t h e F e d e r a l R e s e r v e Bank of Chicago? R e s t a t i n g t h e e f f e c t of t h e f o r e g o i n g a v e r m e n t s , t h e y c h a r g e t h a t t h e F e d e r a l R e s e r v e Act r e q u i r e d t h e ETeoga n a t i o n a l Bank t o be a member of t h e F e d e r a l R e s e r v e Bank o f Chicago, when e x t e n d i n g c r e d i t t o t h e Neoga B a n k , t o s u p e r v i s e a n d examine i t s b u s i n e s s i n l i k e manner t o t h e s u p e r v i s i o n a n d e x a m i n a t i o n e x e r c i s e d by t h e C o m p t r o l l e r of t h e Currency. That t h e d i r e c t o r s of t h e Ueoga Bank were c o n s t a n t l y r e q u i r e d t o make r e p o r t s of i t s f i n a n c i a l c o n d i t i o n t o t h e C o m p t r o l l e r of t h e Currency and t o the F e d e r a l R e s e r v e Bank of C h i c a g o . That t h e F e d e r a l R e s e r v e Bank of Chicago r e d i s - j <y X-6130 22 c o u n t e d p a p e r of t h e Heoga n a t i o n a l Bank i n v a r y i n g amounts, demanded s e c u r i t y t h e r e f o r , c o m p l a i n e d of t h e q u a l i t y and c h a r a c t e r of t h e p a p e r t e n d e r e d by ITeoga Batik f o r r e d i s counting, and u l t i m a t e l y had i n i t s hands as s e c u r i t y f o r s u c h l o a n s s u b s t a n t i a l l y a l l of t h e a s s e t s of t h e Heoga Bank of any s u b s t a n t i a l v a l u e . That t h e d i r e c t o r s of t h e Heoga N a t i o n a l Bank made f a l s e and m i s l e a d i n g r e p o r t s of i t s c o n d i t i o n t o t h e C o m p t r o l l e r of t h e C u r r e n c y . That t h e F e d e r a l R e s e r v e Bank of Chicago h a d f u l l a n d c o m p l e t e a u t h o r ity, w i t h t h e a p p r o v a l of t h e F e d e r a l R e s e r v e A g e n t , t o make s p e c i a l e x a m i n a t i o n s of t h e Heoga Bank by r e a s o n of i t s d i s c o u n t of i t s p a p e r , b u t t h a t t h e F e d e r a l R e s e r v e Bank of Chicago c o n t i n u e d r e d i s c o u n t i n g Heoga Bank p a p e r a n d demanding s e c u r i t y f o r each r e d i s c o u n t i n g l o a n a n d a t t h e same t i m e c r i t i c i z e d t h e c l a s s of p a p e r t e n d e r e d , a n d so h a d knowledge t h a t t h e a f f a i r s of t h e Heoga n a t i o n a l Bank were i n d o u b t f u l condition. That h a d t h e F e d e r a l R e s e r v e Bank of Chicago made f u r t h e r e x a m i n a t i o n s , i t would have d i s c o v e r e d t h a t t h e d i r e c t o r s of Heoga Bank were f r a u d u l e n t l y h o l d i n g t h a t i n s t i t u t i o n out t o t h e c o m p l a i n a n t s a s a s o l v e n t i n s t i t u t i o n , b u t t h a t t h e F e d e r a l R e s e r v e Bank of Chicago b e i n g a d v i s e d of t h e i n s o l v e n c y of t h e Heoga Bank a n d of t h e n e g l i g e n t conduct of i t s o f f i c e r s and d i r e c t o r s approved and confirmed the keeping open of s a i d bank a s a s o l v e n t a n d sound f i n a n c i a l i n s t i t u t i o n X-6130 23 and. t h e r e b y a b e t t e d a n d a p p r o v e d t h e n e g l i g e n t a n d f r a u d u l e n t c o n d u c t of i t s o f f i c e r s a n d d i r e c t o r s . I t i s c l e a r t h a t t h e s e a v e r m e n t s do n o t s t a t e a cause of a c t i o n ' a g a i n s t t h e F e d e r a l R e s e r v e Bank of Chicago u t i l e s s i t was t h e d u t y of f e d e r a l R e s e r v e Banlc t o c a u s e e x a m i n a t i o n s of t h e a f f a i r s of Hsoga Batik, and, a s t h e r e s u l t of such e x a m i n a t i o n ^ to t a k e some a c t i o n upon a showing of i n s o l v e n c y , "but t h i s we h a v e shown i n t h e f o r e g o i n g not t o "be t r u e . The whole d u t y , and i n d e e d , t h e e x c l u s i v e power to make such e x a m i n a t i o n s a n d t a k e such d i s c i p l i n a r y a c t i o n w i t h r e g a r d t o t h e Neoga Bank i s by s t a t u t e imposed upon t h e C o m p t r o l l e r of the Currency. There were o n l y two ways i n w h i c h t h e ITeoga N a t i o n a l Banlc c o u l d have b e e n d e c l a r e d t o be i n s o l v e n t . They a r e b o t h s e t f o r t h i n U.SoC.A., T i t l e 12, S e c . 1 9 1 . They a r e t h a t any c r e d i t o r h a v i n g o b t a i n e d a judgment a g a i n s t t h e ITeoga Bank m i g h t make a p p l i c a t i o n t o t h e C o m p t r o l l e r of t h e C u r r e n c y , accompanying h i s a p p l i c a t i o n by a c e r t i f i e d copy .of t h e judgment showing i t t o h a v e r e m a i n e d u n s a t i s f i e d f o r t h i r t y days a n d upon such a p p l i c a t i o n t h e C o m p t r o l l e r w o u l d a p p o i n t a R e c e i v e r ; a n d t h e s e c o n d method would b e t h a t t h e C o m p t r o l l e r s h o u l d have h i m s e l f become s a t i s f i e d of t h e b a n k ' s i n s o l v e n c y a f t e r a n e x a m i n a t i o n of i t s a f f a i r s . I f t h e F e d e r a l R e s e r v e Bank of Chicago h a d made a n e x a m i n a t i o n o r h a d i n any o t h e r manner become s a t i s f i e d of t h e i n s o l v e n c y of t h e Neoga Bank, i t would h a v e h a d no r i g h t t o d e c l a r e t h a t f a c t o r t o make any a p p l i c a t i o n t o t h e Compt r o l l e r to declare i t without f i r s t having put i t s e l f into t h e eairle p o s i t i o n as kny o t h e r C r e d i t o r "by s e c u r i n g a judgment a g a i n s t t h e Neoga Bank a n d s e n d i n g a c e r t i f i e d copy of such u n s a t i s f i e d judgment t o t h e C o m p t r o l l e r w i t h i t s a p p l i c a t i o n . The F e d e r a l R e s e r v e Baric of Chicago h a d t h e r i g h t , u n d e r some c i r c u m s t a n c e s , t o make s u p p l e m e n t a l e x a m i n a t i o n s of t h e Neoga N a t i o n a l Bank f o r i t s own i n f o r m a t i o n i n t h e e x t e n s i o n of c r e d i t and f o r t h e p r o t e c t i o n b o t h of t h e p u b l i c i n t e r e s t a n d of t h e i n t e r e s t of the o t h e r member h a n k s i n t h e F e d e r a l R e s e r v e Bank of Chicago, "but i f i n t h e c o u r s e of s u c h e x a m i n a t i o n s i t h a d come t o t h e c o n c l u s i o n t h a t the Neoga N a t i o n a l Bank was i n s o l v e n t a n d h a d c a l l e d i t s "belief t o t h e a t t e n t i o n of t h e C o m p t r o l l e r of the C u r r e n c y a n d t h e Compt r o l l e r h a d come t o a d i f f e r e n t c o n c l u s i o n , t h e F e d e r a l Rouorve Bank of Chicago, l i k e a n y o t h e r i n d i v i d u a l , would h a v e "been f o r e c l o s e d a n d e s t o p p e d "by t h e o f f i c i a l d e t e r m i n a t i o n of t h e C o m p t r o l l e r of t h e C u r r e n c y t o whom a l o n e t h e power t o determine t h a t f a c t i s committed. As a m a t t e r of f a c t t h e t h e o r y of t h e a l l e g a t i o n s , which a r e now "being c o n s i d e r e d , i s a t o t a l m i s c o n c e p t i o n of t h e f u n c t i o n <f t h e F e d e r a l r e s e r v e "bank t o w a r d i t s member banks. The F e d e r a l R e s e r v e Act c r e a t e s t h e F e d e r a l R e s e r v e System t o be of a s s i s t a n c e t o member b a n k s , n o t so much f o r t h e b e n e f i t of t h e member b a n k s , a s f o r t h e b e n e f i t of t h e e n t i r e f i s c a l a n d f i n a n c i a l s i t u a t i o n i n t h e c o u n t r y , and p r a c t i c e u n d e r t h e F e d e r a l R e s e r v e Act shows t h a t t h i s p u r p o s e has from the f i r s t been u n d e r s t o o d and f o l l o w e d . Member b a n k s t e m p o r a r i l y i h t r o u b l e go t o t h e F e d e r a l r e s e r v e b a n k s t o a i d them t o t i d e o v e r t h e i r t e m p o r a r y d i f f i c u l t i e s a n d t h e F e d e r a l r e s e r v e bank b r i n g s t o t h e s u p p o r t of a n e m b a r r a s s e d member t h e a g g r e g a t e d s t r e n g t h of t h e D i s t r i c t . E v e ry c o n s i d e r a t i o n of wisdom a n d p o l i c y a p p r o v e s t h e a c t i o n of C o n g r e s s i n t h u s e x c e p t i n g t h e d i s c i p l i n a r y c o n t r o l of n a t i o n a l b a n k s from t h e F e d e r a l r e s e r v e b a n k s , whose d u t y i t i s t o p r e v e n t bank f a i l u r e s , n o t t o b r i n g them a b o u t , t o go p e r h a p s beyond t h e l e n g t h s of p r u d e n c e a n d f o r b e a r a n c e i n t h e a i d of weak members i n o r d e r , i f p o s s i b l e , t o a v e r t t h e n e c e s s i t y of u l t i m a t e failure. A l l t h e p r o v i s i o n s o f t h e F e d e r a l R e s e r v e Act i t s e l f show t h a t t h i s was t h e p u r p o s e of C o n g r e s s , b u t i n o r d e r t o l e a v e no doubt a b o u t i t , t h e F e d e r a l R e s e r v e Act i t s e l f c o n - t a i n s s p e c i f i c r e f e r e n c e s t o t h e o f f i c i a l e x a m i n a t i o n s of member b a n k s by t h e C o m p t r o l l e r . . Thus i n U.S..C.A. S e c . 482, t h e F e d e r a l R e s e r v e B o a r d i s g i v e n power, u p o n t h e recommend a t i o n o f t h e C o m p t r o l l e r of t h e C u r r e n c y , t o f i x t h e s a l a r i e s of b a n k e x a m i n e r s , b u t t h e i n i t i a t i v e h e r e l i e s w i t h t h e Comptroller. ; I n U . S , C , A . , S e c . 483, t h e power t o make s p e c i a l X-6130 26 e x a m i n a t i o n i s g i v e n t o t h e F e d e r a l r e s e r v e "banks, "but t h e s e s p e c i a l e x a m i n a t i o n s a r e , "by t h e l a n g u a g e of t h e s t a t u t e , in a d d i t i o n t o e x a m i n a t i o n s made a n d c o n d u c t e d "by t h e C o m p t r o l l e r of t h e C u r r e n c y a n d t h e F e d e r a l r e s e r v e bank may n o t make these special examinations without f i r s t having the approval of t h e F e d e r a l r e s e r v e a g e n t o r t h e F e d e r a l R e s e r v e B o a r d , a n d t h e n , i h o r d e r t o p r e v e n t any p o s s i b l e m i s c o n s t r u c t i o n , U . S . C . A . S e c . 484 p r o v i d e s t h a t no bank s h a l l h a v e any v i s i t o r i a l powers o t h e r t h a n such a s a r e a u t h o r i z e d by law o r v e s t e d i n t h e c o u r t s , or s h a l l b e , o r h a v e b e e n , e x o r c i s e d by e i t h e r House of Congress or any committee t h e r e o f . To e s t a b l i s h a c a u s e of a c t i o n a g a i n s t t h e F e d e r a l R e s e r v e Bank of Chicago i n t h i s b e h a l f , i t would be n e c e s s a r y t o show t h a t t h e F e d e r a l R e s e r v e Bank was u n d e r a d u t y t o t h e c o m p l a i n a n t s which i t h a d n e g l i g e n t l y f a i l e d t o p e r f o r m . There b e i n g no such d u t y , t h e r e can be no s u c h d e l i c t a s i s alleged.. 2. The A c t i o n of F e d e r a l R e s e r v e Bank of Chicago A f t e r t h e I n s o l v e n c y of t h e ITeoga n a t i o n a l Bank. The a l l e g a t i o n s i n t h e p e t i t i o n w i t h r e g a r d t o t h e c o n d u c t of t h e F e d e r a l R e s e r v e Bank of Chicago a f t e r the i n s o l v e n c y of t h e ITeoga Bank m a n i f e s t l y h a v e n o t h i n g t o do w i t h t h e w r o n g f u l a c t s and n e g l e c t s a l l e g e d a g a i n s t t h e d i r e c t o r s and o f f i c e r s of t h e ITeoga Bank. The a l l e g a t i o n s i n X-6130 27 question are as follows; P a r a g r a p h s 18 and. 19 of t h e " b i l l , p a g e 17, a r e a s follows: " O r a t o r s f u r t h e r r e p r e s e n t t h a t when The Neoga n a t i o n a l Bank c l o s e d i t s doors on J a n u a r y 12, 1925, t h e s a i d F e d e r a l R e s e r v e Bank t o o k unto i t s e l f a l l the r e d i s c o u n t s and c o l l a t e r a l on d e p o s i t w i t h i t amounting t o a p p r o x i m a t e l y $ 1 2 0 , 0 0 0 and t h e r e s e r v e f u n d o n d e p o s i t w i t h i t amounting to approximately $10,000 and the stock i n t h e s a i d F e d e r a l R e s e r v e Bank of t h e a p p r o x i m a t e v a l u e of $1000.00 and k e p t and p a i d i t s e l f i n f u l l t h e r e f r o m and t u r n e d t h e "balance of s a i d c o l l a t e r a l a n d r e d i s c o u n t s over t o t h e R e c e i v e r t h e r e b y making i t s e l f a p r e f e r r e d c r e d i t o r of The Neoga N a t i o n a l Bank; t h a t t h e t r a n s f e r s of t h e n o t e s a n d " b i l l s of The 'Neoga N a t i o n a l Bank t o t h e s a i d F e d e r a l R e s e r v e Bank were a l l made a f t e r t h e s a i d Neoga N a t i o n a l Bank "became i n s o l v e n t a n d a f t e r such i n s o l v e n c y would h a v e become known t o t h e F e d e r a l R e s e r v e Bank i f i t h a d u s e d o r d i n a r y c a r e i n a n d a b o u t t h e p e r f o r m a n c e of i t s d u t i e s owing t o t h e p u b l i c a n d t h a t u n d e r t h e F e d e r a l Banking Laws such t r a n s f e r s were u t t e r l y n u l l a n d v o i d a s a g a i n s t y o u r o r a t o r s and t h a t t h e F e d e r a l R e s e r v e Bank s h o u l d be r e q u i r e d t o t u r n over to the Receiver a l l the f u n d s , n o t e s a n d b i l l s i n i t s h a n d s on J a n u a r y 12, 1925, a n d s h o u l d bo p u t on t h e same b a s i s a s any o t h e r c r e d i t o r of s a i d Bank; a n d t h a t b e i n g so a d v i s e d a s t o t h e c o n d i t i o n s of t h e a f f a i r s of The Neoga N a t i o n a l Bank t h e s a i d F e d e r a l R e s e r v e Bank of Chicago, connived, consented and cooperated w i t h t h e d i r e c t o r s a n d o f f i c e r s of The Neoga N a t i o n a l Bank t h e r e b y p e r m i t t i n g t h e m a n i p u l a t i o n of t h e d e p o s i t s of s a i d Bank, t h e management a n d c o n t r o l of s a i d bank t o t h e i n j u r y a n d damage of y o u r o r a t o r s a n d t h e r e b y committed a f r a u d upon y o u r o r a t o r s and o t h e r d e p o s i t o r s . "19. Orators f u r t h e r r e p r e s e n t t h a t a t t h e t i m e of c l o s i n g s a i d Bank y o u r o r a t o r s and o t h e r d e p o s i t o r s h a d on d e p o s i t a p p r o x i m a t e l y $ 1 1 6 , 3 8 1 . 4 6 ; t h a t t h e l o a n s and d i s c o u n t s owned by s a i d Bank h a d a f a c e v a l u e of $ 1 7 0 , 6 5 5 . 8 8 a n d o v e r - d r a f t s amounting to $1881.45 and had o t h e r a s s e t s amounting to X-6130 28 $ 3 8 , 4 3 0 . 7 9 which s h o u l d have b e e n a p p l i e d t o t h e payment of your o r a t o r s ; t h a t t h e s a i d D i r e c t o r s p e r m i t t e d t h e F e d e r a l R e s e r v e Bank t o p a y i t s e l f i n f u l l t h e sim of a p p r o x i m a t e l y $ 5 1 , 0 0 0 out of s a i d a s s e t s a s a p r e f e r r e d c r e d i t o r of s a i d Bank; t h a t the s a i d F e d e r a l R e s e r v e Bank h a v i n g f u l l knowledge of t h e s i t u a t i o n a n d of t h e a f f a i r s of The Neoga N a t i o n a l Bank u n d e r t h e N a t i o n a l Banking Laws h a d no a u t h o r i t y o r r i g h t t o make i t s e l f a p r e f e r r e d c r e d i t o r , y e t t h e R e c e i v e r of s a i d Bank and t h e D i r e c t o r s s t o o d by a n d a b e t t e d t h e s a i d F e d e r a l R e s e r v e Bank i n t a k i n g a d v a n t a g e of i t s own wrong and p e r m i t t i n g i t t o be p a i d i n f u l l a n d d e p r i v i n g y o u r o r a t o r s and o t h e r d e p o s i t o r s of s a i d Bank of a f a i r , j u s t a n d e q u a l d i s t r i b u t i o n of t h e a s s e t s of s a i d Bank a n d t h a t i n e q u i t y a n d i n good c o n s c i e n c e t h e F e d e r a l R e s e r v e Bank of Chicago s h o u l d be c o m p e l l e d a s a t r u s t e e u n d e r the c i r c u m s t a n c e s t o p a y o v e r to t h e R e c e i v e r of s a i d Bank t h e s a i d sum of a p p r o x i m a t e l y $ 5 1 , 0 0 0 a n d s h o u l d b e made amen,e b i o t o t h o law a s o t h o r c r e d i t o r s of s a i d Bank a n d t h a t t h e s a i d D i r e c t o r s of s a i d Bank s h o u l d be r e q u i r e d t o make good t o y o u r o r a t o r s and o t h e r d e p o s i t o r s t h e i r p r o r a t a s h a r e of s a i d $ 5 1 , 0 0 0 . " The n e t e f f e c t of t h e s e a v e r m e n t s i s t h a t a f t e r t h e ITeoga N a t i o n a l Bank c l o s e d i t s d o o r s , t h r o u g h t h e a c t i o n of t h e C o m p t r o l l e r , t h e F e d e r a l R e s e r v e Bank of Chicago a p p r o p r i a t e d t h e s t o c k of the Neoga Bank i n t h e Chicago Bank o f t h e v a l u e of $ 1 0 0 0 . 0 0 , t h e r e s e r v e f u n d of t h e Neoga Bank a m o u n t i n g t o $ 1 0 , 0 0 0 . 0 0 a n d so much a s was n e c e s s a r y of t h e c o l l a t e r a l i n i t s hands securing r e d i s c o u n t s to pay the debts of t h e Neoga Bank t o t h e F e d e r a l R e s e r v e Bank, a n d r e t u r n e d t h e b a l a n c e i n i t s h a n d s t o t h e R e c e i v e r of t h o Neoga Bank. Tho a l l e g a t i o n s t h a t t h o F e d e r a l R e s e r v e Bank of Chicago X-6130 29 c o n n i v e d , consented, a n d c o o p e r a t e d w i t h t h e d i r e c t o r s a n d o f f i c e r s of t h e Heogd. Sank t o s e c u r e a p r e f e r e h . c e i s , of c o u r s e , a c o n c l u s i o n of law f l a t l y a t v a r i a n c e w i t h t h e f a c t s pleaded* The fedelre.X .Bes.ferye Bank of Chicago was n o t , a n d d i d n o t "become, a p r e f e r r e d c r e d i t o r . I t was and r e m a i n e d a secured creditor* I t i s not a l l e g e d i n t h e t i l l of c o m p l a i n t , a n d c o u l d n o t h a v e b e e n , t h a t t h e F e d e r a l R e s e r v e Bank of Chicago s e c u r e d any of t h e r e s o u r c e s of t h e Ueoga N a t i o n a l Bank a s an unlawful preference. A l l t h e a s s e t s of t h e Heoga Bank i n i t s h a n d s came i n t o i t s p o s s e s s i o n i n due c o u r s e f o r v a l u e r e c e i v e d and pursuant to law. Thus t h e $ 1 0 0 0 . 0 0 i n v e s t e d i n t h e c a p i t a l s t o c k of t h e F e d e r a l R e s e r v e Bank of Chicago was a n i n v e s t m e n t r e q u i r e d t o be made by a member b a n k , t h e r e s e r v e f u n d s of t h e Neoga n a t i o n a l Bank were d e p o s i t s r e q u i r e d to be made by law f o r s p e c i f i c p u r p o s e s a n d t o be a d m i n i s t e r e d i n f u r t h e r a n c e of t h o s e p u r p o s e s . The s e c u r i t i e s f o r l o a n s s i m i l a r l y were r e q u i r e d t o b e e x a c t e d by t h e F e d e r a l R e s e r v e B o a r d of Chicago by t h e law which a u t h o r i z e d t h o s e l o a n s . The a p p l i c a t i o n by t h e F e d e r a l R e s e r v e Bank of Chicago of t h e a s s e t s of t h e Heoga Bank i n i t s h a n d s t o t h e payment of t h e d e b t s due t o i t was n e c e s s a r y c a r r y o u t t h e p u r p o s e of t h e F e d e r a l R e s e r v e System. I f t h e F e d e r a l R e s e r v e Bank of Chicago h a d r e t u r n e d a l l t h e s e a s s e t s t o t h e R e c e i v e r and h a d -iU X-S130 30 "become m e r e l y a g e n e r a l c r e d i t o r of t h e Neoga Bank, t h e l o s s s u s t a i n e d would h a v e t e e n a l o s s t o t h e o t h e r member "banks of t h e F e d e r a l R e s e j ^ e Bank of Chicago, s i n c e a l l t h e r e s o u r c e s of t h e F e d e r a l R e s e r v e Bank of Chicago b e l o n g e d t o t h e member "banks and a r e made up of t h e i r i n v e s t m e n t s i n i t s c a p i t a l stock and t h e i r reserve d e p o s i t s . The p l a i n p u r p o s e of t h e F e d e r a l R e s e r v e Act i s t o a c c u m u l a t e t h e s e r e s o u r c e s of t h e members t o make them a v a i l a b l e t o t h e members u n d e r c o n d i t i o n s of s a f e t y a n d s e c u r i t y . I f t h e F e d e r a l r e s e r v e b a n k s were r e q u i r e d t o s u s t a i n l o s s e s i n t h e s e r e s o u r c e s i n t h e manner s u g g e s t e d by t h e b i l l of c o m p l a i n t , t h e n i n s t e a d of b e i n g a s o u r c e of s t r e n g t h t o t h e f i n a n c i a l s t r u c t u r e of t h e c o u n t r y , t h e F e d e r a l r e s e r v e b a n k s would be a s o u r c e of w e a k n e s s , a s e v e r y s u c h l o s s would p r o t a n t o a f f e c t t h e s t r e n g t h of a l l member b a n k s a n d t h u s s p r e a d t h e c o n s e q u e n c e s o f l o c a l l o s s t h r o u g h o u t t h e whole s t r u c t u r e . T h i s i d e a was s u g g e s t e d t o t h e C o n g r e s s i n t h e amendment p r o p o s i n g a g u a r a n t e e of d e p o s i t s i n member banks t h r o u g h t h e F e d e r a l r e s e r v e banks b u t was r e j e c t e d a s b e i n g a t v a r i a n c e w i t h the p u r p o s e o f t h e F e d e r a l Reserve System. D e a l i n g s p e c i f i c a l l y w i t h t h e t h r e e i t e m s of a s s e t s of t h e Neoga N a t i o n a l Bank, we t a k e up f i r s t : F e d e r a l R e s e r v e Bank of Chicago was E n t i t l e d to Appropriate the Stock I n t e r e s t of t h e Neoga Bank. x_> ^ X-C150 31 S e c t i o n 6 of t h e F e d e r a l lie s e r v e Act ( U . S . C . A . , T i t l e 12, Ch, 3, S e c . 288) p r o v i d e s : " I f any member "bank s h a l l "be d e c l a r e d i n s o l v e n t and a Receiver a p p o i n t e d t h e r e f o r , t h e s t o c k h e l d by i t i n s a i d f e d e r a l r e s e r v e bank s h a l l be c a n c e l l e d w i t h o u t i m p a i r m e n t of i t s l i a b i l i t y , a n d a l l c a s h p a i d s u b s c r i p t i o n s on s a i d s t o c k , w i t h o n e - h a l f of one p e r centum p e r month f r o m t h o p e r i o d of l a s t d i v i d e n d , n o t t o e x c e e d t h e book v a l u e t h e r e o f , s h a l l be f i r s t a p p l i e d t o a l l d e b t s of t h o i n s o l v e n t member bank t o t h e F e d e r a l r e s e r v e bank a n d t h o b a l a n c e , i f a n y , s h a l l b e p a i d t o t h e R e c e i v e r of t h e i n s o l v e n t b a n k . " I t w i l l be o b s e r v e d t h a t i n t h e f o r e g o i n g q u o t a t i o n from the s t a t u t e , t h i s a p p l i c a t i o n of p a i d s u b s c r i p t i o n s t o c a p i t a l s t o c k i s made mandatory by t h e u s e o f t h e word " s h a l l " . The Supreme C o u r t of t h e U n i t e d S t a t e s i n F a r m e r s & M e r c h a n t s Bank of Monroe v . F e d e r a l R e s e r v e Bank of Richmond, 262. U . S . 649, s a y s , a t p a g e 663; 11 T h i s s t a t u t e a p p e a r s t o h a v e b e e n drawn w i t h g r o a t c a r e . Throughout t h o Act t h e d i s t i n c t i o n i s c l e a r l y made b e t w e e n what tho B o a r d a n d t h e r e s e r v e b a n k s ' s h a l l ' do a n d what t h e y 'may' d o . " The s u b s c r i p t i o n s t o t h o c a p i t a l s t o c k of t h e F e d e r a l r e s e r v e b a n k s by n a t i o n a l banks a r e made m a n d a t o r y by t h o F e d e r a l R e s e r v e A c t ( U . S . C . A . T i t l e 1 2 , Ch. 3, S e c . 2 8 2 ) a n d t h e amount i s f i x e d a t a sum e q u a l t o s i x p e r centum of t h e p a i d up c a p i t a l s t o c k and s u r p l u s of e a c h member. I n view of t h e s e r e q u i r e m e n t s of t h e F e d e r a l R e s e r v e A c t , t h e X-613C 32 F e d e r a l R e s e r v e Bank of Chicago h a d no a l t e r n a t i v e a n d t h e c o m p l a i n a n t s must "be h e l d to have d e a l t w i t h t h e lleoga Bank w i t h knowledge of i t s i n v e s t m e n t i n t h e c a p i t a l s t o c k of t h e F e d e r a l R e s e r v e Bank of Chicago, a n d t h e p r e f e r e n c e c r e a t e d by law i n f a v o r of t h e F e d e r a l R e s e r v e Bank of Chicago t o t h e e x t e n t of any i n d e b t e d n e s s t o i t "by t h e Ueoga N a t i o n a l Bank. The F e d e r a l E n t i t l e d to Fund of t h e due I t f r o m R e s e r v e Bank of Chicago was S e t Off A g a i n s t t h e R e s e r v e Neoga Bank a n y I n d e b t e d n e s s t h a t Bank. The s e c o n d a s s e t i t e m of the Neoga N a t i o n a l Bank a s to which c o m p l a i n a n t s c o m p l a i n h a d t o do w i t h " t h e r e s e r v e f u n d on d e p o s i t w i t h the F e d e r a l R e s e r v e Bank of Chicago a m o u n t i n g to approximately $10,000.00." R e s e r v e f u n d s i n F e d e r a l r e s e r v e banks d e p o s i t e d u n d e r S e c t i o n 19 of t h e F e d e r a l R e s e r v e Act ( U . S . C . A . Ch. 3 , S e c . 462) c o n s t i t u t e a c r e d i t b a l a n c e . The member bank d e p o s i t s c h e c k s a n d o t h e r i t e m s w i t h t h e F e d e r a l r e s e r v e bank d a i l y t o t h e c r e d i t of t h i s a c c o u n t a n d draws i t s own c h e c k s on i t s b a l a n c e i n t h e t r a n s a c t i o n of i t s d a i l y b u s i n e s s * By s t a t u t e ( U . S . C . A . Ch. 3 , S e c . 464) t h i s b a l a n c e i s made s u b j o c t t o b e c h e c k e d a g a i n s t and w i t h d r a w n by t h e mombor bank f o r t h o p u r p o s e of m e e t i n g e x i s t i n g l i a b i l i t i e s . I t was, t h e r e f o r e , l i k e a n o r d i n a r y a c c o u n t m a i n t a i n e d i n a bank by a d e p o s i t o r . Heoga Bank ttdtxld ha,ve drawn a check upon i t any day t o p a y a n y i n d e b t e d n e s s f r o m i t t o t h e F e d e r a l R e s e r v e Bank of Chicago a n d , on t h e d e c l a r a t i o n o f t h e i n s o l v e n c y of Neoga Bank, t h i s f u n d i n t h e h a n d s of F e d e r a l R e s e r v e Bank of Chicago was s u b j e c t t o a n o r d i n a r y "banker's l i e n t o he s e t o f f a g a i n s t any i n d e b t e d n e s s f r o m t h e Heoga Bank t o i t . The law i s e n t i r e l y w e l l s e t t l e d t h a t a "bank u p o n t h e i n s o l v e n c y of i t s d e p o s i t o r may a p p l y t h a "balances r e m a i n i n g on d e p o s i t i n open a c c o u n t s i n payment of o b l i g a t i o n s duo i t f r o m s u c h depositor. A F e d e r a l r e s e r v e bank i s i n e f f e c t a b a n k e r ' s bank a n d t h e r e l a t i o n s h i p between i t a n d i t s members i s i n many r e s p e c t s s i m i l a r t o t h e r e l a t i o n e x i s t i n g b e t w e e n a n o r d i n a r y bank and i n d i v i d u a l d e p o s i t o r s . The r u l e w i t h r e g a r d t o b a n k e r ' s l i e n s , more p r o p e r l y a r i g h t of s e t - o f f , i s n o t p e c u l i a r t o b a n k s b u t i s a n o u t g r o w t h of the g e n e r a l d o c t r i n e of s e t - o f f a n d h a s b e e n r e p e a t e d l y r e c o g n i z e d by t h e S t a t e a n d F e d e r a l c o u r t s a l i k e b o t h where t h e d e p o s i t o r was a n a i n d i v i d u a l a n d where t h e d e p o s i t o r w a s / b a n k . S c o t t v . A r m s t r o n g , 146 U . S . 4 9 9 . S t u d l e y v . B o y l s t o n Bank, 329 U . S . 5 2 3 . The l a t t e r of t h e s e c a s e s a r o s e i n a b a n k r u p t c y p r o c e e d i n g , b u t t h e Supreme Court s p e c i f i c a l l y r e c o g n i z e d t h a t t h o r i g h t was n o t c r e a t e d by t h e B a n k r u p t c y A c t , b u t was a n o u t g r o w t h of s e t - o f f . (See p a g e 5 2 8 ) . A s i m i l a r c a s e , F e d e r a l R e s e r v e Bank of M i n n e a p o l i s v . F i r s t N a t i o n a l Bank of E u r e k a , 377 Fed, 300 ( 1 9 2 1 ) , a r o s e f r o m t h e c l o s i n g of a n a t i o n a l "bank "by t h e C o m p t r o l l e r of t h e Currency. A R e c e i v e r h a d "been a p p o i n t e d a n d t h e F e d e r a l R e s e r v e Bank i n s i s t e d upon i t s r i g h t t o c a n c e l t h e member's s t o c k a n d a p p l y t h a t a n d t h e r e s e r v e d e p o s i t of t h e mbaber bank t o t h e payment of t h e member "bank's o b l i g a t i o n s . These o b l i g a t i o n s a r o s e by t h e e n d o r s e m e n t of p a p u r of t h e member bank f o r r e d i s c o u n t . I t was c o n t a n d a d on b e h a l f of t h e R e - c e i v e r t h a t t h e F e d e r a l R e s e r v e Bank must f i r s t e x h a u s t t h e makers of the p a p e r and a s s e r t only a secondary l i a b i l i t y a g a i n s t t h e member b a n k . The c o u r t , however, h o l d t h a t t h e o b j e c t of t h e F e d e r a l R e s e r v e Act was a t a l l h a z a r d s t o s e c u r o t h e F e d e r a l r e s e r v e b a n k s a n d t h a t endorsement f o r r e d i s c o u n t by a member bank c o n s t i t u t e d a p r i m a r y l i a b i l i t y a n d a p p r o v e d t h e a c t i o n of t h e F e d e r a l R e s e r v e Bank i n a p p l y i n g t h e r e s e r v e b a l a n c e a n d t h e p r o c e e d s of t h e member's s t o c k i m m e d i a t e l y a n d w i t h o u t f i r s t e x h a u s t i n g t h e makers of t h e p a p e r . On page 302 t h e c o u r t s a y s : " I f t h e p u r p o s e a n d i n t e n t of t h e s t a t u t e s a n d r u l e s and r e g u l a t i o n s above r e f e r r e d to are to be recognized, i t i s the e v i d e n t i n t e n t and purpose t o p r o t e c t t h e bank i n i t s s e r v i c e , a n d t h e advancement of f u n d s t o member b a n k s , a n d u p o n t h e r e c e i p t of t h e n o t e s of t h e bank and c o l l a t e r a l n o t e s w i t h the endorsement of t h e bank.". X-6130 35 The c o u r t h e r e r e c o g n i z e s t h e d i s t i n c t i o n which we have p o i n t e d out above. The f u n c t i o n of F e d e r a l r e s e r v e "banks i s t o a i d , n u r s e and, i f p o s s i b l e , s a v e member b a n k s . E v e r y s a f e g u a r d i s thrown a r o u n d t h e i r p e r f o r m a n c e function. of t h i s I t i s n o t r e q u i r e d t o be p e r f o r m e d a t t h e h a z a r d of i t s own r e s o u r c e s , which a r e , a f t e r a l l , i t s o t h e r member b a n k s . disciplinary function. t h e r e s o u r c e s of I t h a s no g e n e r a l v i s i t o r i a l o r P e r c o n t r a , the v i s i t o r i a l a n d d i s - c i p l i n a r y power of t h e Government i s v e s t e d i n t h e C o m p t r o l l e r of t h e C u r r e n c y a n d i n him a l o n e . F e d e r a l H e s e r v e Bank of Chicago Was E n t i t l e d t o R e t a i n a n d Apply t h e C o l l a t e r a l Which I t Had R e c e i v e d f o r R e d i s c o u n t i n g of P a p e r , The 1 8 t h and 1 9 t h p a r a g r a p h s of t h e amended b i l l a l l e g e r e p e a t e d l y t h a t t h e F e d e r a l R e s e r v e Bank h a s made i t s e l f a preferred creditor. Che f a c t s a l l e g e d by t h e b i l l , however, a r e t h a t t h e F e d e r a l R e s e r v e Bank was a s e c u r e d c r e d i t o r a s t o t h e c o l l a t e r a l demanded and r e c e i v e d by i t t o p r o t e c t l o a n s made t o t h e Neoga Bank. P a r a g r a p h 18 of t h e amended b i l l a l l e g e s t h a t t h e F e d e r a l R e s e r v e Bank, a f t e r s a t i s f y i n g t h e i n d e b t e d n e s s t o i t of Neoga Bank, t u r n e d - t h e b a l a n c e of t h e c o l l a t e r a l a n d r e d i s c o u n t s o v e r t o t h e R e c e i v e r of t h e Neoga Bank. The m a t t e r of r e d i s c o u n t s i s c o v e r e d i n S e c t i o n 13 of t h e F e d e r a l R e s e r v e Act ( I L S . C . A . Ch. 3* S e c . 343) which provides: "Upon the indorsement;; of any of i t s member banks, which s h a l l "bo deemed a waiver of demand, notice, and p r o t e s t by such bank a s to i t s own indorsement ex-* c l u s i v e l y , any Federal reserve "bank may discount notes, d r a f t s , and b i l l s of exchange, a r i s i n g out of a c t u a l commercial tra n s a cti o n s ; that i s , notes,, d r a f t s , and b i l l s of exchange i s s u e d or drawn f o r a g r i c u l t u r a l , i n d u s t r i a l . , or commercial purposes, or the proceeds of which have been Used, or are to be used, f o r such purposes, the Federal Reserve Board to have "the r i g h t to determine or d e f i n e the character of the paper thus e l i g i b l e f o r discount, w i t h i n the meaning of t h i s chapter." By the p r o v i s i o n s of S e c t i o n s 344 and 346, a d d i t i o n a l a u t h o r i t y i s g i v e n t o discount other forms of paper, i n c l u d i n g acceptances, and by S e c t i o n 34?, i t i s provided: "Any Federal reserve bank may make advances to i t s member banks on t h e i r promissory notes f o r a p e r i o d not exceeding f i f t e e n days a t r a t e s to be e s t a b l i s h e d by such Federal reserve banks, s u b j e c t to the review and determination of the Federal Reserve Board,, provided such promissory notes are secured by such n o t e s , d r a f t s , b i l l s of exchange# or bankers 1 a c c e p t ances a s are e l i g i b l e f o r rediscount or f o r purchase by Federal reserve banks under t h e p r o v i s i o n s of t h i s chapter, or by the d e p o s i t or pledge of bonds or notes of the United States." L i m i t a t i o n s are imposed upon t h i s power by S e c t i o n 352 and p r o v i s i o n i s made f o r the r e g u l a t i o n of the r e d i s count r a t e from time to time. This l a t t e r i s one of the v i t a l powers i n the Federal Reserve Act. Through i t the Government c o n t r o l s the tendency to s p e c u l a t i o n and r e g u l a t e s i n t h e p u b l i c i n t e r e s t t h e a v a i l a b i l i t y of l o a n money. I t i s very important, f u r t h e r , to note t h a t the p r o v i s i o n of e l a s t i c i t y i n t h e c u r r e n c y was one of t h e g r e a t o b j e c t s i n t h e F e d e r a l Reserve Act, and t h a t t h i s object • was a c c o m p l i s h e d by t h e a u t h o r i z a t i o n of F e d e r a l r e s e r v e n o t e s . These n o t e s c o n s t i t u t e now a l a r g e p a r t of our c u r r e n c y * They a r e p r o t e c t e d by t h e d e p o s i t w i t h t h e F e d e r a l r e s e r v e a g e n t a s c o l l a t e r a l s e c u r i t y of p a p e r r e d i s c o u n t e d by t h e F e d e r a l r e s e r v e b a n k s , so t h a t i t i s of the v e r y h i g h e s t i m p o r t a n c e t h a t r e d i s c o u n t e d p a p e r s h o u l d be f u l l y p r o t e c t e d by the most adequate security# I n S e c t i o n 16 of t h e F e d e r a l R e s e r v e Act ( U . S . C . A . , Ch. 3, S e e . 412) i t i s p r o v i d e d ; "Any F e d o t a l r b s e r v e bank: may melco a p p l i c a t i o n W ihS l o c a l f e d e r a l r e s e r v e a g e n t f o r such amount of t h e F e d e r a l r e s e r v e n o t e s h e r e i n b e f o r e p r o v i d e d f o r a s i t may r e q u i r e . Such a p p l i c a t i o n s h a l l be accompanied with a tender to the l o c a l Federal r e s e r v e a g e n t of c o l l a t e r a l i n amount e q u a l t o t h e sum of t h e F e d e r a l r e s e r v e n o t e s t h u s a p p l i e d f o r a n d i s s u e d p u r s u a n t t o such a p p l i c a t i o n . ********The s a i d F e d e r a l R e s e r v e Board may a t any t i m e c a l l upon a F e d e r a l r e s e r v e bank f o r a d d i t i o n a l s e c u r i t y to p r o t e c t the Federal r e s e r v e notes i s s u e d to i t . " I t was, t h e r e f o r e , n o t o n l y t h e r i g h t , b u t t h e p l a i n d u t y , u n d e r t h i s s t a t u t e of t h e F e d e r a l Rosorve Bank of Chicago t o demand, r e c e i v e and h o l d c o l l a t e r a l , which, i n i t s j u d g n e n t , f u l l y p r o t e c t e d r e d i s c o u n t e d p a p e r of Neoga n a t i o n a l X-6130 38 Bank. E e s u l t a n t l y F e d e r a l r e s e r v e n o t e s "based, upon t h e r e d i s - c o u n t p a p e r h a v e e n t e r e d i n t o t h e g e n e r a l c u r r e n c y of t h e c o u n t r y a n d t h e s o l v e n c y of r e d i s c o u n t e d p a p e r i s t h e "basis upon which F e d e r a l r e s e r v e c u r r e n c y r e s t s . I t t h u s a p p e a r s t h a t i n a l l t h r e e of t h e m a t t e r s comp l a i n e d o f , t h e F e d e r a l R e s e r v e Bank of Chicago a c t e d w i t h i n t h e p l a i n l a n g u a g e o r n e c e s s i t i e s of t h e s t a t u t e . The Neoga n a t i o n a l Bank s e c u r e d v a l u e r e c e i v e d f o r a l l of i t s a s s e t s i n t h e h a n d s of t h e F e d e r a l R e s e r v e Bank of Chicago a n d t h o s e a s s e t s were a p p l i e d i n a c c o r d a n c e w i t h t h e o b l i g a t i o n s of t h e Neoga N a t i o n a l Bank, a l l of which were c r e a t e d "by law a n d w e r e , t h e r e f o r e , known t o d e p o s i t o r s i n t h e Neoga Bank. I n t h e f o r e g o i n g we h a v e d e m o n s t r a t e d t h a t t h e F e d e r a l R e s e r v e Bank of Chicago was g u i l t y of no "breach of d u t y t o w a r d t h e c o m p l a i n a n t s , "bat, on t h e c o n t r a r y , a c t e d i n a c c o r d a n c e w i t h t h e law i n a l l r e s p e c t s . It is, therefore, respectfully s u b m i t t e d t h a t t h e amended b i l l does not s t a t e a c a u s e of a c t i o n a g a i n s t t h e F e d e r a l R e s e r v e Bank of C h i c a g o . X-613Q 39 II. THERE IS A MISJOINDER OF CAUSES OF ACTION IN THE AMENDED BILL We h a v e shown i n t h e f o r e g o i n g p a g e s t h a t no c a u s e of a c t i o n i s s t a t e d i n t h e amended b i l l a g a i n s t the F e d e r a l R e s e r v e Bank of Chicago, "but, a p a r t f r o m t h o s e q u e s t i o n s , we s u b m i t t h a t t h e r e i s a n improper j o i n d e r of t h e c a u s e s of a c t i o n a g a i n s t t h e o f f i c e r s a n d d i r e c t o r s of t h e Neoga Bank on t h e one h a n d a n d t h o s e s u p p o s e d t o e x i s t a g a i n s t t h e F e d e r a l R e s e r v e Bank of Chicago on t h e o t h e r . We h a v e s e e n t h a t t h e b i l l a s s e r t s t h e l i a b i l i t y of t h e F e d e r a l R e s e r v e Bank of Chicago upon two d i s t i n c t t h e o r i e s which we h a v e d i s c u s s e d i n d e t a i l . These a r e ; 1. That t h e r e was a b r e a c h of d u t y g r o w i n g o u t of t h e n e g l i g e n t or c a r e l e s s f a i l u r e on t h e p a r t of t h e F e d e r a l R e s e r v e Bank of Chicago to examine t h e Neoga Bank. 2. That t h e F e d e r a l R e s e r v e Bank of g u i l t y of some wrong, b e c a u s e of t a k e n by i t a f t e r t h e i n s o l v e n c y bank i n a p p r o p r i a t i n g the a s s e t s Chicago was the action of t h e Neoga in i t s hands. On t h e o t h e r h a n d , t h e r e a r e two d i s t i n c t c a u s e s of a c t i o n s t a t e d a g a i n s t t h e o f f i c e r s a n d d i r e c t o r s of t h e Neoga Bank, which may be b r i e f l y summarized a s f o l l o w s : . 1. The n e g l i g e n t a d m i n i s t r a t i o n of t h e a f f a i r s of t h e bank by t h e d i r e c t o r s c a u s e d t h e bank t o b e come i n s o l v e n t a n d t h e p l a i n t i f f s w i l l l o s e a p a r t of t h e i r d e p o s i t s . . 2. The Neoga Bank was k e p t open and r e c e i v e d d e p o s i t s from p l a i n t i f f s a f t e r the d i r e c t o r s 33 X-6130 40 knew, o r s h o u l d have known, t h a t the bank was insolvent. B e a r i n g i n mind t h e d i s t i n c t c h a r a c t e r of t h e f o u r c l a i m s made by t h e amended b i l l , l e t u s examine t h e s t a n d a r d s w h i c h h a v e b e e n e s t a b l i s h e d by t h e F e d e r a l C o u r t s f o r d e t e r m i n i n g q u e s t i o n s of m i s j o i n d e r o r o u l t i f a r i o u s n e s s . Since F e b r u a r y 1 , 1913, t h e new e q u i t y r u l e s a d o p t e d by the Supreme C o u r t h a v e c o n t r o l l e d t h e p r a c t i c e on t h e e q u i t y s i d e of the Federal Court. R u l e 26 d e a l s s p e c i f i c a l l y w i t h j o i n d e r of c a u s e s of a c t i o n and r e a d s a s f o l l o w s : "Rule 3 6 . J o i n d e r of Causes of A c t i o n . The p l a i n t i f f may j o i n i n one b i l l a s many causes of a c t i o n , cognizable i n e q u i t y , a s he may have a g a i n s t t h e d e f e n d a n t . But when t h e r e a r e more t h a n one p l a i n t i f f , t h e c a u s e s of a c t i o n j o i n e d must b e j o i n t , a n d i f t h e r e b e more t h a n one d e f e n d a n t t h e l i a b i l i t y must be one a s s e r t e d a g a i n s t a l l of t h e m a t e r i a l d e f e n d a n t s , o r s u f f i c i e n t g r o u n d s must a p p e a r f o r u n i t i n g t h e c a u s e s of a c t i o n i n o r d e r t o p r o m o t e t h e c o n v e n i e n t a d m i n i s t r a t i o n of j u s t i c e . I f i t a p p e a r t h a t any s u c h c a u s e s of a c t i o n cannot be c o n v e n i e n t l y d i s p o s e d of t o g e t h e r , t h e c o u r t may o r d e r s e p a r a t e trials." T h i s r u l e , a l t h o u g h i t h a d no p r o t o t y p e i n t h e e a r l i e r r u l e s o f t h e Supreme C o u r t , d i d n o t e s t a b l i s h a new s t a n d a r d f o r d e t e r m i n i n g q u e s t i o n s of m i s j o i n d e r o r m u l t i f a r i o u s n e s s , b u t was r a t h e r a c r y s t a l i z a t i o n of t h o s e r u l e s o r c r i t e r i a which h a d b e e n d e v e l o p e d a n d a p p l i e d o v e r a l o n g p e r i o d of t i m e by t h e F e d e r a l c o u r t s . Thus, i n Low v . McMaster, 255 F e d . 235, 236, t h e c o u r t r e c o g n i z e d t h a t t h e r u l e d i d not X-6130 41 e s t a b l i s h a new b a s i s a n d h e l d t h a t i t d i d n o t p r o h i b i t any j o i n d e r of c a u s e s of a c t i o n which was p e r m i s s i b l e b e f o r e i t s passage. I n view of t h i s h o l d i n g , i t w i l l be i n t e r e s t i n g t o examine c a s e s d e c i d e d b e f o r e a s w e l l a s a f t e r t h e p r o m u l g a t i o n of R u l e 2 6 . Almost h a l f a c e n t u r y a g o , t h e Supreme C o u r t , s p e a k i n g t h r o u g h Mr. J u s t i c e M i l l e r , d e f i n e d m u l t i f a r i o u s n e s s i n a n o p i n i o n which h a s b e e n f r e q u e n t l y c i t e d and q u o t e d s i n c e t h a t time. Walker v . Powers, 104 U. S . ( 1 4 O t t o ) , 2 4 5 . The Court s a i d , p a g e 2 5 1 : "By m u l t i f a r i o u s n e s s ' i s meant the i m p r o p e r l y j o i n i n g i n one b i l l d i s t i n c t a n d i n d e p e n d e n t m a t t e r s , a n d t h e r e b y c o n f o u n d i n g them; a s , f o r example, t h e u n i t i n g i n one b i l l of s e v e r a l m a t t e r s , p e r f e c t l y d i s t i n c t and u n c o n n e c t e d , a g a i n s t one d e f e n d a n t o r t h e demand of s e v e r a l m a t t e r s of a d i s t i n c t a n d i n d e p e n d e n t n a t u r e a g a i n s t s e v e r a l d e f e n d a n t s i n t h e same b i l l . * S t o r y , E q . P I . , s e c t . 2 7 1 . I n D a n i e l l ' s Chancery P r a c t i c e , 335, i t i s saicd i n e x p l a n a t i o n of t h i s t h a t ' i t may be t h a t the p l a i n t i f f s a n d d e f e n d a n t s a r e p a r t i e s t o t h e whole of t h e t r a n s a c t i o n s which f o r m t h e s u b j e c t of t h e s u i t , a n d , n e v e r t h e l e s s , t h o s e t r a n s a c t i o n s may be so d i s s i m i l a r t h a t t h e c o u r t w i l l n o t a l l o w them t o b e j o i n e d t o g e t h e r , but w i l l require d i s t i n c t records.'" The C i r c u i t C o u r t of A p p e a l s f o r t h i s c i r c u i t h a s h a d o c c a s i o n t o p a s s upon a q u e s t i o n of m i s j o i n d e r i n a s i t u a t i o n which was i n many r e s p e c t s s i m i l a r to t h a t now b e f o r e t h e court. I n Watson v . U. S. Sugar R e f i n e r y , 68 F e d . 769 (C.C.A. 7 t h C i r c u i t 1 8 9 5 ) . t h e b i l l a s k e d f o r d i s s o l u t i o n of a c o r p o r a t i o n and an a c c o u n t i n g upon v a r i o u s grounds and a l s o s o u g h t t o r e c o v e r judgment a g a i n s t c e r t a i n i n d i v i d u a l d e f e n d a n t s on t h e g r o u n d t h a t c o m p l a i n a n t h a d "been i n d u c e d "by f a l s e r e p r e s e n t a t i o n s to purchase stock i n the c o r p o r a t i o n . The c o u r t h e l d t h a t t h e r e was a m i s j o i n d e r of t h e c a u s e s of a c t i o n and t h a t t h e c a u s e of a c t i o n a g a i n s t t h e c o r p o r a t i o n was e n t i r e l y d i s t i n c t f r o m t h a t a l l e g e d a g a i n s t t h e i n d i v i d u a l s f o r f a l s e r e p r e s e n t a t i o n s and s a i d (page 772): " I f t h e a p p e l l a n t was i n d u c e d "by f a l s e r e p r e s e n t a t i o n s t o make a l o s i n g i n v e s t m e n t i n t h e c o r p o r a t e s t o c k , h i s remedy i s a t law a g a i n s t t h o s e who d e c e i v e d him, a n d n o t a g a i n s t t h e corporation. * * * * * Unless, therefore, the averments in r e s p e c t to the d e c e i t p r a c t i c e d u p o n him h e r e j e c t e d a s m e a n i n g l e s s or s u p e r fluous , the b i l l i s c l e a r l y m u l t i f a r i o u s , not only "because i t j o i n s d i s t i n c t and i n d e p e n d e n t m a t t e r s , b u t "because i t s e e k s t o e n f o r c e d i f f e r e n t remedies a g a i n s t d i s t i n c t p a r t i e s not j o i n t l y l i a b l e or i n t e r e s t e d . " The r u l e l a i d down i n t h e Sugar R e f i n e r y Company c a s e by t h e C i r c u i t Court of A p p e a l s f o r t h i s c i r c u i t h a s b e e n r e c o g n i z e d by t h e c o u r t s of a p p e a l s i n o t h e r c i r c u i t s a n d h a s b e e n a p p l i e d s i n c e t h e a d o p t i o n of t h e new e q u i t y r u l e s . . Watson v . H u n t i n g t o n , 215 F e d . 472, C. C. A. 2nd C i r c u i t . (1914). The d e c i s i o n of t h e c o u r t i s shown by t h e s y l l a b u s : "A b i l l by s t o c k h o l d e r s of a c o r p o r a t i o n t o r e c o v e r damages f r o m t h e d e f e n d a n t on t h e g r o u n d of h i s f r a u d u l e n t a c t s a s a n o f f i c e r of t h e c o r p o r a t i o n by w h i c h , a s a l l e g e d , c e r t a i n of t h e c o m p l a i n a n t s were i n d u c e d t o p u r c h a s e t h e i r s t o c k , a n d o t h e r s , who h a d p r e v i o u s l y p u r c h a s e d , were o t h e r w i s e i n j u r e d , i s b a d f o r m u l t i f a r i o u s n e s s ; t h e r i g h t t o r e l i e f of t h e two g r o u p s b e i n g b a s e d on a d i f f e r e n t s t a t e of f a c t s . " O X-6130 43 Backus v . B r o o k s , 195 F e d . 452, C.C.A. 2 n d Circuit, (1912)^~ The d e c i s i o n , of t h e C o u r t i s shown "by t h e s y l l a b u s : "A b i l l i n e q u i t y which s t a t e s a c a u s e of a c t i o n i n "behalf of i n d i v i d u a l c o m p l a i n a n t s "based on t h e f r a u d u l e n t conduct of m a j o r i t y s t o c k h o l d e r s t o w a r d the m i n o r i t y , a n d w h i c h a s s e r t s t h e r i g h t of s t o c k h o l d e r s t o f o l l o w c o r p o r a t e p r o p e r t y conveyed i n f r a u d , a n d w h i c h s t a t e s a c a u s e of a c t i o n i n f a v o r of a c o r p o r a t i o n , a s c o m p l a i n a n t , f o r "breach of c o n t r a c t "by defendant c o r p o r a t i o n and i n d i v i d u a l defendants f o r t h e p u r c h a s e of a r t i c l e s , i s m u l t i f a r i o u s f o r m i s j o i n d e r of c a u s e s of a c t i o n . " P r i c e v . Union Land Co. 187 F e d . 886. C. C. A. 8th C i r c u i t (1911). The d e c i s i o n of t h e c o u r t i s shown "by t h e s y l l a b u s : "A r i g h t t o m a i n t a i n a s u i t a g a i n s t t h e o f f i c e r s of a c o r p o r a t i o n f o r f r a u d u l e n t m i s a p p r o p r i a t i o n of i t s p r o p e r t y i s a r i g h t of t h e c o r p o r a t i o n , a n d s t o c k h o l d e r s s u i n g i n such r i g h t c a n n o t j o i n t h e r e w i t h a c a u s e of a c t i o n f o r f r a u d a n d d e c e i t p r a c t i c e d on them when t h e y p u r c h a s e d t h e i r s t o c k which i s p e r s o n a l # " The c o u r t s a i d , p a g e 8 8 9 : "But r u n n i n g t h r o u g h t h e " b i l l i s a n a t t e m p t e d a s s e r t i o n of a c a u s e of a c t i o n a g a i n s t t h e i n d i v i d u a l d e f e n d a n t s n o t f o r t h e u s e and "benef i t of t h e F u e l Company "but e x c l u s i v e l y a f f e c t ing the complainants as i n d i v i d u a l s . I t i s f o r f r a u d a n d d e c e i t p r a c t i c e d upon them i n t h e o r i g i n a l s a l e and p u r c h a s e of t h e s t o c k which t h e y h o l d . C l e a r l y such a c a u s e of a c t i o n h a s no p l a c e i n a s t o c k h o l d e r s ' s u i t "brought f o r t h e " b e n e f i t of t h e c o r p o r a t i o n . 'A r i g h t t o m a i n t a i n a s u i t a g a i n s t t h e o f f i c e r s of a c o r p o r a t i o n f o r f r a u d u l e n t m i s a p p r o p r i a t i o n of i t s p r o p e r t y i s a r i g h t of t h e c o r p o r a t i o n . • P o r t e r v . S a t i n , 149 U. S . 473, 4 7 8 , 1 3 S u p . C t . 1008, 37 L . E d . 8 1 5 . A r i g h t of a s t o c k h o l d e r t o suo f o r f r a u d a n d d o c o i t p r a c t i c e d upon him whon h e p u r c h a s e d s t o c k i s a personal one." "i X-5130 44 I n view of S a l e 26 a n d t h e f o r e g o i n g a u t h o r i t i e s , it a p p e a r s t h a t t h e r e a r e t h r e e d i s t i n c t r e a s o n s why a b i l l may "be m u l t i f a r i o u s . 1. M i s j o i n d e r of p a r t i e s p l a i n t i f f . 2. M i s j o i n d e r of p a r t i e s d e f e n d a n t . 3. M i s j o i n d e r of c a u s e s of a c t i o n . The p r e s e n t b i l l i s o b j e c t i o n a b l e upon a l l t h r e e of t h e s e g r o u n d s , a n d we w i l l examine i t s e p a r a t e l y w i t h r o s p e c t to o a c h . 1. MISJOINDER 0 ? PASTIES PLAINTIFF: As t o t h e j o i n d e r of p a r t i e s p l a i n t i f f , R u l e 26 provides: "Bat when t h e r e a r e more t h a n one p l a i n t i f f t h e c a u s e s of a c t i o n j o i n e d must be j o i n t . " The s e c o n d c a u s e of a c t i o n which t h e w i l l a l l e g e s a g a i n s t t h e o f f i c e r s a n d d i r e c t o r s of t h e Ueoga b a n k ( i . e . , the wrongful r e c e i p t of d e p o s i t s a f t e r i n s o l v e n c y ) , i s c l e a r l y one i n which the p l a i n t i f f s a r e suing i n t h e i r individual c a p a c i t i e s . In- deed, t h e r e a r e a c t u a l l y a s many c a u s e s of a c t i o n a g a i n s t t h e i n d i v i d u a l d i r e c t o r s of t h e Neoga bank a s t h e r e a r e p l a i n t i f f s . I t i s e v i d e n t t h a t t h e a c c e p t a n c e of d e p o s i t s by t h e d i r e c t o r s f r o m t h e v a r i o u s p l a i n t i f f s when t h e Hooga b a n k was i n s o l v e n t was n o t a n i n j u r y t o t h e c o r p o r a t i o n , tho Hooga b a n k , b u t was o n l y an. i n j u r y t o t h e i n d i v i d u a l d e p o s i t o r s whoso monoy was wrongfully accepted. 1 " X-6130 45 C a s s i d y v . Uhlmann, 170 N. Y. 505, 63 E . 554 I t i s p o s s i b l e that the f i r s t claim attempted to be a s s e r t e d a g a i n s t the Federal Reserve Bank of Chicago ( i . e . , the breach of duty to examine and superintend the ITeoga bank) i s a l s o an i n d i v i d u a l claim of the v a r i o u s d e p o s i t o r s . We have p o i n t e d out that the Federal Reserve Bank had no such duty as i s claimed by the amended b i l l , but i f t h e r e wore such a duty, we could not determine the p a r t y a g g r i e v e d by a broach t h e r e o f without knowing whether the duty was owing t o the ITeoga bank or the d e p o s i t o r s of such bank or the p u b l i c a t large* On the other hand, the f i r s t claim a g a i n s t the o f f i c e r s and d i r e c t o r s of the ITeoga bank ( i . e . , f o r n e g l i g e n c e ) , and the second claim a g a i n s t the Federal Reserve Bank ( i . e . , for a p p r o p r i a t i n g the s e c u r i t y i n i t s p o s s e s s i o n a f t e r the r e c e i v e r s h i p ) , are undoubtedly r i g h t s which were v e s t e d i n the corpor a t i o n and which the Receiver could have a s s o r t e d . The p l a i n t i f f s 1 only r i g h t t o sue, t h e r e f o r e , must depend upon the f a c t that they have made a demand upon the R e c e i v e r to commence s u i t and t h a t he has r e f u s e d . Thus, we have the p l a i n t i f f s as to a t l e a s t one cause of a c t i o n suing i n t h e i r i n d i v i d u a l c a p a c i t i e s and i n a t l e a s t two other causes of a c t i o n suing merely i n t h e i r r e p r e s e n t a t i v e c a p a c i t i e s , because the d i r e c t o r s or the r e c e i v e r who should compel a c t i o n by the corporation have f a i l e d to a c t . The s i t u a t i o n thus p r e s e n t e d i s w i t h i n the r u l e l a i d down i n Watson v . Huntington. Backus v . Brooks **? -t x-eiso 46 a n d P r i c e v . Union Land. C o . , c i t e d , a b o v e . 2. MISJOINDER OF PARTIES nmiTOAICT: As to t h e m i s j o i n d e r of p a r t i e s d e f e n d a n t , Rule 26 s a y s : " I f t h e r e be more t h a n one d e f e n d a n t , t h e l i a b i l i t y mast be one a s s e r t e d a g a i n s t a l l of the m a t e r i a l defendants." The mere s t a t e m e n t of t h i s r u l e a n d t h e e n u m e r a t i o n of t h e v a r i o u s c a u s e s of a c t i o n i n c l u d e d i n t h e b i l l makes i t clear that there is a misjoinder. The F e d e r a l R e s e r v e Bank of Chicago i s n o t , of c o u r s e , j o i n t l y l i a b l e w i t h t h e d i r e c t o r s , e i t h e r b e c a u s e of t h e d i r e c t o r s ' n e g l i g e n c e o r b e c a u s e d e p o s i t s were w r o n g f u l l y r e c e i v e d a f t e r t h e i n s o l v e n c y of t h e Neoga b a n k , a n d , on t h e o t h e r h a n d , t h e o f f i c e r s a n d d i r e c t o r s of t h e Neoga bank a r e n o t l i a b l e , a i t h o r f o r t h e b r e a c h of t h e s u p p o s e d d u t y of t h e F e d e r a l R e s e r v e Bank t o examine a n d s u p e r i n t e n d t h e Neoga b a n k or f o r t h e a p p r o p r i a t i o n of t h e s e c u r i t y by t h e F e d e r a l R e s e r v e Bank a f t e r t h e r o c o i v o r s h i p . There a r e , t o bo s u r e , some a l l e g a t i o n s i n t h e n i n e t e e n t h p a r a g r a p h of t h e amended b i l l which s u g g e s t t h a t t h e d i r e c t o r s and o f f i c e r s c o n n i v e d a n d c o o p e r a t e d w i t h t h e F e d e r a l R e s e r v e Bank i n a p p r o p r i a t i n g t h e s e c u r i t y i n q u e s t i o n , b u t inasmuch a s t h i s was n o t done u n t i l a f t e r t h e r e c e i v e r s h i p , i t must b e c l e a r t h a t t h e s e a l l e g a t i o n s which a r e m e r e l y i n t h e form of conclusions a r e e n t i r e l y i n c o n s i s t e n t with the s p e c i f i c f a c t s a l l e g e d "by t h e c o m p l a i n a n t . <r* " v - X-6130 47 3, MISJOINDER 0? CAUSES OF ACTION: R a l e 26 c o n t a i n s a n a d d i t i o n a l p r o v i s i o n which may j u s t i f y a j o i n d e r of d e f e n d a n t s which would o t h e r w i s e "be improper. I t reads: " o r s u f f i c i e n t grounds must a p p e a r f o r u n i t i n g t h e c a u s e s of a c t i o n i n o r d e r t o promote t h e c o n v e n i e n t a d m i n i s t r a t i o n of j u s t i c e . " What a r e t h e grounds which "must a p p e a r " t o j u s t i f y the joinder? She c r i t e r i o n which h a d boon e s t a b l i s h e d by t h e F e d e r a l C o u r t s p r i o r t o t h e a d o p t i o n of Rule 26 and which h a s been a p p l i e d c o n s t a n t l y since t h a t time, i s t h a t t h e r e a r e s u c h g r o u n d s f o r u n i t i n g c a u s e s of a c t i o n o n l y when t h e r e i s such i d e n t i f y of i s s u e s e i t h e r of f a c t o r of law w h i c h w i l l be d e c i s i v e of the v a r i o u s c a u s e s of a c t i o n , t h a t t h e c o n v e n i e n c e of t h e p a r t i e s a n d of t h e c o u r t w i l l be s e r v e d by d e t e r m i n i n g t h o s e i s s u e s a t one time r a t h e r t h a n i n d i s t i n c t t r i a l s . is, It t h e r e f o r e , n e c e s s a r y t o c o n s i d e r t h i s p a r t of t h e r u l e i n c o n n e c t i o n w i t h t h e d i s c u s s i o n of m i s j o i n d e r of c a u s e s of action. As s t a t e d by t h e Supreme Court i n Walker v . Powers ( s u p r a , p a g e 4 1 ) , m u l t i f a r i o u s n e s s means: "The u n i t i n g i n one b i l l of s e v e r a l m a t t e r s , p e r f e c t l y d i s t i n c t a n d u n c o n n e c t e d , a g a i n s t one d e f e n d a n t , o r t h e demand of s e v e r a l m a t t e r s of a d i s t i n c t and independent n a t u r e a g a i n s t s e v e r a l d e f e n d a n t s i n t h e same b i l l . " B e a r i n g i n mind t h i s r u l e , we c a n most e f f e c t i v e l y d e m o n s t r a t e t h e f u t i l i t y of c o n s o l i d a t i n g i n one c a s e t h e c l a i m s a g a i n s t t h e F e d e r a l R e s e r v e Bank of Chicago a n d t h e jC-6130 48 c l a i m s a g a i n s t t h e d i r e c t o r s of t h e ITeoga Bank "by e n u m e r a t i n g t h e i s s u e s which a r e i n v o l v e d i n each c a s e a n d t h u s d e t e r m i n i n g w h a t , i f a n y , common p o i n t s of l i t i g a t i o n t h e r e a r e i n t h e two c a s e s . The c a s e a g a i n s t t h e F e d e r a l R e s e r v e Bank of Chicago, i f t h e r e i s a c a s e , i n v o l v e s the f o l l o w i n g q u e s t i o n s : 1. The r i g h t o f a F e d e r a l r e s e r v e "bank t o c a n c e l t h e s t o c k of a n i n s o l v e n t member t a n k and a p p l y t h e v a l u e t h e r e o f t o t h e d e b t s of t h e i n s o l v e n t member bank t o t h e F e d e r a l R e s e r v e Bank, a s p r o v i d e d f o r i n U. S . - C . A. T i t l e 12, s e c t i o n 288. 2. The r i g h t of a F e d e r a l r e s e r v e bank t o a s s e r t a l i e n o r s e t - o f f on t h e r e s e r v e d e p o s i t of a n i n s o l v e n t member bank. 3. The r i g h t of a F e d e r a l r e s e r v e bank t o a p p l y t h e d i s c o u n t e d paper and c o l l a t e r a l r e c e i v e d from an i n s o l v e n t member bank i n payment of t h e o b l i g a t i o n s of t h e member b a n k w h i c h such p a p e r was g i v e n to s e c u r e , 4. Whether t h e F e d e r a l R e s e r v e Bank h a d any a c t u a l knowledge of t h e c o n d i t i o n of t h e Heoga Bank. 5. Whether t h e F e d e r a l R e s e r v e Bank was c h a r g e a b l e a s a m a t t e r of law w i t h n o t i c e of t h e c o n d i t i o n o f such b a n k . 6. W h e t h e r , i f t h e F e d e r a l R e s e r v e Bank h a d knowledge e i t h e r a s a m a t t e r of f a c t o r a s a m a t t e r of l a w , such k n o w l . edge makes any d i f f e r e n c e i n t h e l i a b i l i t y of such F e d e r a l £ <3 ~>r' X-6130 49 R e s e r v e Bank. 7. Whether t h e p l a i n t i f f s i n t h i s c a s e , a s d e p o s i t o r s , a c t u a l l y s u f f e r e d any damage t h r o u g h d e a l i n g s b e t w e e n t h e Heoga bank a n d t h e F e d e r a l R e s e r v e Bank. 8. What, if a n y , d u t i e s a F e d e r a l r e s e r v e "bank owes t o t h e d e p o s i t o r s of member banks t o p r o t e c t such d e p o s i t o r s a g a i n s t m i s f e a s a n c e , m a l f e a s a n c e o r n o n f e a s a n c e of t h e d i r e c t o r s a n d o f f i c e r s of such member baiikt 9» I f t h e r e i s such a d u t y , w h e t h e r t h e r e was any f a i l u r e oti t h e p a r t of t h e F e d e r a l R e s e r v e Batik t o p e r f o r m th&t d u t y i n t h e p r e e e i i t c&ee, 10. I f t h e r e was s u c h a d u t y a n d a f a i l u r e t o p e r f o r m i t , w h e t h e r t h e Heoga Bank, or i t s d e p o s i t o r s , s u f f e r e d any damage of w h i c h such f a i l u r e was t h e p r o x i m a t e c a u s e . I t i s c l e a r t h a t no one of t h e s e i s s u e s i s a t a l l m a t e r i a l i n d e t e r m i n i n g t h e l i a b i l i t y of t h e d i r e c t o r s a n d o f f i c e r s of t h o Heoga Bank t o t h e p l a i n t i f f s i n t h e p r e s e n t case. On tho o t h o r h a n d , t h e c a s e a g a i n s t t h o d i r e c t o r s of t h e Heoga Bank i n v o l v e s , among o t h e r s , t h o f o l l o w i n g questions: 1. The knowledge o r l a c k of knowledge of each of t h o n i n e d i r e c t o r s a s to t h e c o n d i t i o n of t h e Heoga Bank a t v a r i o u s t i m e s f r o m 1921 t o J a n u a r y 1 9 2 5 . 3. The p a r t i c i p a t i o n o r l a c k of p a r t i c i p a t i o n i n t h e • rt, ' X-61%0 50 a f f a i r s of t h e Heoga Bank of e a c h of t h e nine, d i r e c t o r s , 3. The e x t e n t t o which t h e d i r e c t o r s , a s a m a t t e r of l a w , a r e c h a r g e a b l e w i t h knowledge of t h e a f f a i r s of t h e "bank. 4. Whether t h e d i r e c t o r s k e p t t h e a f f a i r s and books of t h e "bank i n such c o n d i t i o n t h a t t h e y c o u l d e a s i l y a s c e r t a i n i t s condition. 5. Whether f a i l u r e t o k e e p t h e a f f a i r s arid "books of t h e "bank i n s u c h c o n d i t i o n t h a t t h e d i r e c t o r s c o u l d "be e a s i l y a d v i s e d of i t s s o l v e n c y o r i n s o l v e n c y , amounted t o n e g l i g e n c e on t h e p a r t of t h e o f f i c e r s o r d i r e c t o r s . 6. Whether v a r i o u s l o a n s mado "by t h e "bank a n d a p p r o v e d by t h e d i r e c t o r s were improper b e c a u s e of t h e i n a d e q u a c y of t h e s e c u r i t y r e c e i v e d by t h e b a n k . 7. Whether v a r i o u s l o a n s made by t h e bank a n d a p p r o v - ed by t h e d i r e c t o r s were improper b e c a u s e of t h e c h a r a c t e r of t h e i n d i v i d u a l s who mado t h o l o a n s . 8. Whether e x e o s s i v o l o a n s were made t o p a r t i c u l a r p e o p l e i n view of t h e s i z e of t h e bank, t h e f u n d s a v a i l a b l e f o r l o a n s a n d t h e r e s p o n s i b i l i t y of t h e b o r r o w e r . 9. Whether f a l s e r e p o r t s , a s a l l e g e d i n t h e amended b i l l , were made b y t h e d i r e c t o r s and r e s u l t e d i n m i s l e a d i n g t h e d e p o s i t o r s a n d tho C o m p t r o l l e r of t h e C u r r e n c y . 10. Any o t h e r f a c t s a n d c i r c u m s t a n c e s w h a t s o e v e r w h i c h may t e n d t o show t h e n e g l i g e n t management of t h o a f f a i r s of t h e bank by i t s o f f i c e r s a n d d i r e c t o r s # » •" v> X-6130 51 11. Whether t h e Heoga Bank was i n s o l v e n t when d e p o s i t s were r e c e i v e d f r o m t h e v a r i o u s p l a i n t i f f s . 12. Whether e a c h o r any of t h e d i r e c t o r s a c t e d im- p r o p e r l y i n view of h i s knowledge, a c t u a l o r c o n s t r u c t i v e , of t h e a f f a i r s of t h e h a n k , i n c o n t i n u i n g t o o p e r a t e t h e "bank a n d r e c e i v e d e p o s i t s during the y e a r 1924. We submit t h a t no one of tiiese issues is at a l l materi- a l i n d e t e r m i n i n g t h e l i a b i l i t y of t h e F e d e r a l R e s e r v e Bank t o the p l a i n t i f f s i n the present c a s e . I t i s s u b m i t t e d , i n view of t h e f o r e g o i n g e n u m e r a t i o n , t h a t t h e u n i t i n g of tBae c a u s e s of a c t i o n a g a i n s t t h e d i r e c t o r s on t h e one h a n d a n d t h e F e d e r a l R e s e r v e Bank on t h e o t h e r w o u l d n o t s e r v e t o p r o m o t e t h e c o n v e n i e n t a d m i n i s t r a t i o n of j u s t i c e , b u t would b e a s e r i o u s i n c o n v e n i e n c e t o t h e c o u r t a n d t h e p a r t i e s c o n c e r n e d i n d i s p o s i n g of t h e s e v e r a l e n t i r e l y d i s t i n c t c o n t r o v e r s i e s a t t e m p t e d t o b e s e t f o r t h i n t h e amended b i l l . CONCLUSION The f u n d a m e n t of t h e p l a i n t i f f s ' c l a i m i s t h e m i s c o n d u c t a n d n e g l i g e n c e of t h e o f f i c e r s of t h e Neoga Bank. T h e i r wrongful a c t s a r e a l l e g e d to have i n j u r e d t h e p l a i n t i f f s i n two d i s t i n c t ways: 1. The n e g l i g e n t management by t h e d e f e n d a n t d i r e c - t o r s c a u s e d t h o i n s o l v e n c y of t h e bank and t h e c o n s e q u e n t l o s s to the depositors. w X-6130 52 2. The d e f e n d a n t d i r e c t o r s w r o n g f u l l y c o n t i n u e d t o o p e r a t e t h e "bank and a c c e p t d e p o s i t s f r o m t h e p l a i n t i f f s a f t e r t h e y knew o r s h o u l d h a v e known t h a t t h e "bank was i n s o l v e n t . I t must "be c l e a r t h a t t h e F e d e r a l R e s e r v e Bank of Chicago was n o t i n any way i n v o l v e d i n e i t h e r of t h e s e "breaches of d u t y t o w a r d t h e p l a i n t i f f s a n d t h e r e a r e no f a c t s a l l e g e d i n t h e amended b i l l showing t h a t t h e F e d e r a l R e s e r v e Bank was involved i n the s l i g h t e s t degree. The c l a i m s which a r e made a g a i n s t t h e F e d e r a l R e s e r v e Bank i t s e l f a r e u n f o u n d e d i n law, c o n t r a r y t o t h e e x p r e s s p r o v i s i o n s of t h e F e d e r a l R e s e r v e Act and t h e d e c i s i o n s of. the Courts t h e r e u n d e r , and the motion of t h e d e f e n d a n t s h o u l d bo g r a n t e d b o t h on t h e g r o u n d t h a t no c a u s e of a c t i o n i s s t a t e d a g a i n s t t h e F e d e r a l R e s e r v e Bank of Chicago a n d on t h e g r o u n d t h a t t h e r e i s a m i s j o i n d e r of t h e c a u s e s of a c t i o n s e t f o r t h i n t h e amended b i l l . Respectfully submitted, Attorney f o r Federal Reserve Bank of C h i c a g o . of Counsel
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