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FEDERAL RESERVE BOARD
WASHINGTON
ADDRESS OFFICIAL CORRESPONDENCE TO
THE FEDERAL RESERVE: BOARD
x-6264
Dear Sir:
As I wired you last night, the Federal Reserve Board has
directed oe to arrange a conference of counsel of all Federal
reserve barik:s to be held in Washington concurrently with the
forthcoming Governors i Conference, which will be held in
"v?ashington commencing on Monday morning, koril 1. For reasons
which will hereinafter be ex:)lained, it is important that our
conference begin as early as possible on 1Eonday morning and I
sugc;est thvt we all try to meet in my office at nine o 1 clock ..
The purpose of this conference is to consider the various
questions dealt with in lvir. Ueland's memorandum of January 8
(X-S226-b), which I sent you under date of January 30, dealing
with the policy to be pursued b;r the Federal reserve banks in
asserting rights on behalf of depositors of unremitted for
transit items against receivers of insolvent ·,11e1::ber banks in
the light of recent court decisions. The feeling here is that
counsel for all of the Federal reserve banks ou~~ht to endeavor
to agree upon a uniform policy to be recommended to the Conference of Governors, with a view of having such recommenda,tions
considered immediately by the Conference of Governors wh~le
counsel for the various banks are still in Washington and
available for consultation either with their respective
governors or with the Governors' Conference as a whole.
There are enclosed for your information in this conne,~tion
copies of letters received from Messrs. Stroud, AE,new, Parl\:er,
Wallace, and 1J~cConkey, commenting upon ~lir. Ueland• s memorandum.
As soon as I receive comments from other counsel, I shall fhrnish you with copies of same.
Vthile it is true, as pointed out by Mr. Wallace, that
certa..in of the cases giving rise to this discussion are stiU
in the process of appeal, it is believed that an early consiLderation of this subject by counsel may lead to the adoption of
~olicies and possibly of amendments to Regulation J, the check
collection circulars of the Federal reserve barucs, and the forms
used by the Federal reserve banks in connection with the piLedge
of collateral which will be calculated to minimize the co:Q.fusion,
X-6264
-21 i tigation, and possible loss to Federal reserve banks which
mi(ht otherwise result from recent court decisions such as
those in the case of Early v. Federal Reserve Earik of Richmond and 1.. idland National :Banlc and Trust Company v. First
State ]ank of Sioux Falls.
In this connection, I believe trat it would be advisable
for each of us to consider in advanco of the conference the
advisability of:
(1) Amending Re~ulation J so as to provide expressly
that the reserve balance either shall, or shall not, be
available for the purpose of collecting unremitted for cash
letters on insolvent member banks;
(2) Inserting similar express provisions in the check
collection circulars of the various ]'ederal reserve banlcs;
(3) Amending the forms used by the Federal reserve
baru<s covering the pledge of collateral so as to provide
e~~ressly either that such collateral shall, or shall not,
be available for use by the Federe..l reserve bank for the
same purpose; and
(4) Amending Subdivision 4 of Section V of Regulation
J so as to eliminate therefrom the words, "Or at the option
of such Federal reserve bank to authorize such Federal reserve bank to charge their reserve accounts or clearing
accounts".
In connection with the last suggestion, it is important
to note that all of the Federal reserve banks are now collectin€; checks on the remittance system, the Federal reserve
banks of Richmond and Philadelphia having recently changed
frolli the system of collecting checks by charging same to the
reserve accounts of the drawee banks as a normal method of
collection.
If any of the counsel believe that amendments such as
~hose outlined above are advisable, it would be very helpful
if, in advance of the conference, they would prepare drafts
of such aruendments as they consider appropriate. It would
also be helpful if any counsel having very definite and well
crystallized views as to the policy which the Federal reserve
banks should adopt in connection with this problem would prepare drafts of resolutions recommending such policies to the
Governors' Conference.
In order to leave as much th4e as possible for the consideration of this subject by the Conference of Governors
before that conference adjourns on April 3, the Conference of
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Counsel should endeavor, if possible, to forrculate its recommendations on the questions raised by llr. Ueland's memorandum
by l,:onday night, .April l, and transmit sa;'ne to the Governors 1
Conference on Tuesday morning. We can then proceed to the
consideration of other matters until such time as the Governors• Conference may call upon us for consultation.
It is quite possible t:b.at sor,le of the counsel will have
other to~ics which they would like to have considered during
the ccnference; and it would be conducive to more thorough
consideration ~f such· topics could be suggested in· advance,
a fonual program arranged, and all of the counsel notified
in tir;;e to enable them to study such additional topics in
ac1vance of the conference. Hence, the last sugcestion contained in my telegram of March 12.
I regret exceedingly that circumstances prevented me
from wiring all of the counsel in advance anJ obtaininf,
sugsestions as to the dates most convenient to all parties
for this conference. The Federal Reserve Eoard had already
fixed the date of the Governors' Conference before I was
able to get them to tru<e this matter up for consideration;
and, Y·hen the subject of a conference of counsel was taken
up, Governor Young felt very strongly that it should be held
concurrently with the Governors' Conference.
I sincerely bope that you can attend our forthcoming
conference and that you will not hesitate to call upon me if
there is anything I can do to be of assistance to you.
Yours very trulyp
Walter 'Nyatt,
General Counsel.
Enclosures
X-G264-a
Law Office Of
LOCKE, LOCKE, ST:?.OUD & RANDOLPH,
American 3xchange Building,
DALLAS, TEXAS .
February 11, 1929.
Mr. Walter Wyatt,
General Counsel,
Federal Reserve Board,
~ashington,
D. C.
Dear Mr. Wyatt:
We have read with interest the mer;;;orandum of ;,:r~ Sigurd Ueland
to the Federal Reserve ]ank of Minneapolis, dated Januar~r 14:, 1929.
We think that the questions of policy raised in this me~orandum are
of vital importance to the Federal heserve System. In view of the fact that
our ideas with reference to the pro~oer policy of federal reserve banks in
exercising their check clearing and collection functions are different from
those expressed in Mr. Ueland's memorandum, we are giving you hereafter avery
complete state~ent of our views on the questions of policy raised.
FEJERAL RESERV':E ACT AND REGULATIONS
OF FEDERAL RESERVE BOARD.
It seems to us that any question of policy in connection with the
collection of checks by federal reserve banks must be determined in the light
of the Federal Reserve Act and regulations of the Federal Reserve Board made
pursuant tbereto.
Under the terms of Section 13, any federal reserve bank may receive
from any of its !";:embers de-posits of checks and drafts :payable upon presentation
and, also, for collection maturing notes and bills. It may receive from other
federal reserve banks solely for the purpose of exchange or collection, checks
and drafts payable upon :presentation within its district, and it may receive
from non-member banks and trust companies, under certain conditions, solely
for the purposp of exChange and collection, notes and drafts payable upon
presentation or maturing notes and bills.
Section 16 provides that federal reserve banks shall receive certain
checks for deposit from member banks and federal reserve banks and authorizes
the Federal Reserve Board to make and promulgate from time to time regulations
requiring federal reserve banks to exercise the functions of a clearing house
for its member banks.
While Section 13 authorizes federal reserve banks to accept deposits
ef checks from its member banks and Section 16 provides that they shall receive
X-6264-a
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certain checks for deposit, it is a fact, which we think cannot be contradicted,
that in no instance has a federal reserve bank, within recent years at least,
accepted checks from merr:ber ban.l.cs in all practical respects for any other purpose
whatsoever than that of collection. We thiru{ no federal reserve batik would wish
to depart from such policy.
The authority for re~ulation J, as we view the law, proceeds from
Section 15 of the Federal Reserve Act. The policy of the Federal Reserve Board,
as it has existed continuously since the institution of the check clearing and
collection functions, is expressed in regulation J as follows:
Tl'1e Federal Reserve Board, desiring· to afford, both to the
public a~d to the various ~anks of the country, a direct, expeditious
and economical system of check collection and settler,:ent of balances,
has arranged to have each federal reserve bank exercise the functions
of a clearing house and collect checks for such of its member banks as
desire to avail themselves of its privileges, etc. 11
11
The functions
is undoubtedly intended
This intention uyon the
in sub-paragraph (1) of
of a clearing house, as comnonly understood, and as
in regulation J, is to present checks ·for payment.
part of the Federal Reserve Board is further emphasized
Section V, in which it is stated:
11 A federal reserve bank will act only as agent of the bank from
which it receives such checks, etc. 11
In other words, as we view the Federal Reserve Act and the regulations
of the Federal Reserve Board made pursuant thereto, in handling cheCks a federal
reserve bank acts purely and simply as a collection agent. To this extent, we
think there is no disagreement.
Thus we think that in determining policies to be followed by a federal
reserve bank we should always have in mind the fact that the federal reserve bank
is discharging the functions of a clearing house and acting purely in the capacity
of an agent for collection.
BE SERVE BALANCE.
In determining the policy which a federal reserve bank should follow
with respect to the uses of the reserve balance of a member bank, it is importc;.,nt
to consider the nature of reserve balances and how the same are treated by the
Federal Reserve Act and the regulations of the Federal Reserve Board.
As we understand, it has for many years been considered
proper that a bank should retain, in cash or its equivalent, such
of all of its liabilities as, in the ordinary course, it could be
need in meeting·the demands that might be made at any one time by
creditors.
prudent a;.1d
a percentage
expected to
all of its
The fund so maintained is designated 11 Eeserves • 11
The amount maintained, insofar as banks that are now members of the
Federal Reserve system is concerned, was formerly very much larger than the amount
required under the terms of the Federal Reserve Act. It was felt at the time
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X-6264--'-a
the Federal Reserve Act \vas passed that the reserves could be materia.lliY reduhed because of the bon6cntratio;l brought about throug4 the establishment
of, federal reser'\1-e banks, The practice upon the part of banks to ca:rry
secondary re~ervl~st coiisisting or-securities that can be readily converted
into money; 1 t9 meet unusual or unexpected demands contributed to the reduction of the amount of :tes,erves. The so-called sec0ndary reserves are
under the full control of the member bank.
Prior to the establishment of federal reserve banks, the commercial
banks of the country were permitted to carry their reserves partly in the form
of cash in their vaults and partly with other banks of their own choosing,
provided such other banks had been designated as proper reserve agents.
Upon the establishment of the Federal Reserve Bank, however, all
reserves were required to be carried with the Federal Reserve Bank of which
a commercial bank was a stockholder, thus making it mandatory that the reserves
be concentrated in the Federal Reserve Batik rather than to be carried in the
vaults of the coroL~ercial banks or with agents of the bank's selection.
If we have the correct understanding of the nature of reserves and
of changes brought about through the enactment of the Federal Reserve A~t.
then it would seem to fo11ow that, reserves being intended as a protect~on
agai;lst all liabilities of a member bank and being by law concentrated in
federal reserve banks, the federal reserve banks are to some extent, insofar
as the reserve is concerned, a trustee for all creditors, rather than fqr
thos~ creditors only who seek to effect collection of their indebtedness through
the ~dium of the federal reserve bank.
That the reserves of a member bank are intended as a protectiqn for
all Uabili ties of a member bank, rather than a fund set up in the federal re-
serv!'l bank to use in effecting collection of checks, is, we think supported by
an ajlalysis of the Federal Reserve Act and regulations of the Federal Reserve
Board. In this connection, we call attention to the following points:
1. Under the terms of the Federal Reserve Act, the amount of
reserves which a bank is required to carry is determined by the amount
of demand and time deposits of the'bank. Had the reserve been con$idered a fund out of whiCh federal reserve banks might collect checks sent
them for collection, it would appear that the amount of this fund ~;~hould
have been calculated in some proportion to the average amount ofch~cks
, which the f~eral reserve bank had outstanding for. collection.
2. We jind the following provision in Section 19 of the Federal
·Reserve Act:
''The required balance carried by a member bank
with a federal reserve bank may, under the regulations and subject to such penal ties as may be prescribed by the Federal Reserve Board, be checked against and withdrawn by such member
barik for t~, purpose of meeting existing liabilities; Provided,
however, ~at no bank shall at any time make new loans or shall
pay anydivfdends unless and until the total balan.;e required by
law is fully restored. 11
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X-6264-a
Referring to regulation D of the Federal. Reserve Board, the first
· thing we notice is the provision contained in section 3 (c) which
prohibits checks deposited by a member barut from being counted as a
part of the bank• s reserves until such tir.1e as may be provided in
the ap?ropriate time schedule referred to in section 4 of regulation
J. The effect of this provision, as we understand it, is to prohibit
federal reserve banks from accepting deposits of ehecks for immediate
credit as might b0 conttmplated by sections 13 and 16 of the Federal
Reserve Act, and we believe that this practice has been upheld by the
Federal Courts in the case of( Pascagoula national Bank v. Federal
Reserve Bank of Atlanta, et al, 11 Fed. (2d) 866.
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In section 4 of regulation D, we find the following language:
11 Inasmuch as it is essential. that the lar; with respect to
the l!laintenai.'lce by member banlts of the required minimum reserve
balances be strictly complied with, the Federal Reserve Board,
under authority vested in it by section 19 of the Federal Reserve·
Act, hereby prescribes the following .rules governing penalties for
deficiencies in reserves:"
Then follow some rather drastic penalties for a bank failing to maintain its reserves intact, s-q.ch provisions consisting of (a) Penalties
to be assessed against the bank; (b) Instructions to Federal Reserve
Agents to take matter up with the bank; and {c) Provisions for a :;>regressive penalty.
Section 5 of this regulation calls attention to the fact
that it is unlawful for any member bank to pay dividends or make any
loans while its reserve is deficient.
All of these provisions of the act and regulations point towards an
intention of Congress and the Federal Reserve Board to require banks to maintain
reserves for the very purpose for which reserves were maintained prior to the
enactment of the Federal R~~erve Act and not to cause member banks to create a
fund out of which the federal reserve bank might effect collection of checks
sent it for that purpose. In other words, the collection of checks is incident
to the maintenance of reserves rather than the maintenance of reserves being
incident to the collection of checks.
We think this view is further supported by the discussions in Congress
preceding and le~ding to the enactment of the Federal Reserve Act.
If such is the p~licy of the Federal Reserve Board and of Congress
with respect to reserves, then certainly the policy is, to some extent at least,
defeated by the arbitrary appropriation and use by federal reserve banks of the
reserve balances as a fund charged primarily with the payment ofch:Ocks.
Nor do we think the argument advanced on page seven of ~r. Ueland's
memorandum, with reference to non-member clearing oanks is at all persuasive
against the view hereinabove expressed because of the fact that a non-member
clearing bank is limited by law tom doing any character of business whatsoever with the federal reserve bank except that of clearing checks. The deposit
required of the non-member clearing bank is not, insofar as the Federal Reserve
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r:,:,;'::J::.. ~:'
Act is concerned, a reserve of any kind or character, whereas the deposits of
a member bank are purely and wholly reserves.
Sumro.arizing, - it is our opinion that the reserves maintained in the
federal reserve bank by a member bar~ are intended (a) from the origination of
the practice of carrying reserves; (b) the Federal Reserve ~ct; and (c) the
regulations of the Federal Reserve :Board, as a fund intended for use by the
member bank in meeti
demands that mi t be made upon it at a!_l1 one time for
a
o 1 ts liabi i ti , and not a fund which should be used by the federal reserve bank, simply because it might have the power to do so, for the protection
of the particular creditors of the member bank which might see fit to use the
federal reserve bank as their agency for collection.
CAPITAL STOCK SUBSCRIPTIONS.
Section 6 of the Federal Reserve Act gives s~ecific directions as to
what shall be done with the stock of a member bank which shall have been declared
insolvent. The substance of this section is that the cash paid subscri:s>tions on
said stoCk, together with the accumulated dividend, shall be first applied to all
debts of the insolvent member bank to the federal reserve bank and the balance,
if any, shall be paid to the receiver of the insolvent bank. Certainly, in a
broad sense, if not in a narrow and technical one, claims existing against drawee
banks on account of checks which a federal reserve. bank has handled purely as agent for someone else cannot be said to be a debt due the tederal reserve bank.
And, therefore, we think that it clearly was not the intent of the Federal Reserve
Act to use the capital stock subscription of a member bank as a fund from which
checks might be collected.
COLLATERAL.
We find no provision in the Federal Reserve Act for a federal reserve
batik takinG collateral for any,purpose other than as sedurity for member banks'
15-qay promissory notes. We think that undoubtedly, under section 4-Seventh,
as foll·ows:
11 To exercise by its board of directors, or duly authorized officars
or agents, all powers specifically granted by the provisions of this act
and such incidental powers as shall be necessarr to car!Y on the business
of banking within the limitations prescribed by this act, 11
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a federal r~<serve bank has ample power to require collateral from a member bank
to secure bo•th rediscounted notes and member bank promissory notes. We also
think that ~nder special and peculiar circumstances, there would be no doubt
but that Ull~er this provision a federal reserve bank would have the right to
require collateral to secure transit items forwarded for collection. We dm bt,
however, the necessity for collateral generally in order to carry on the business
of banking, within the limitations prescribed by the act governing the check
clearing and cQllection functions of the federal reserve bank, because we believe,
as hereinafter outlined, that the proper course to pursue is to use ordinary
care in collect~ng checks at the time the collection is undertaken, rather than
to set up avenues of protection to be resorted to at a later date.
-
COTJR1' DECISIONS.
We observe, and to some extent are familiar with, the cases referred to
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c~ r·~·
(,'-
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in Mr. Ueland's memoran.d:tim. We ¢lo not in the least disagree with the effect of
the decisions in these cases; At the outset! hbwever; we Wish to !MkEi this
observ~ti0!). 1 - ths.t, while these cases are undoubtedly :9recedents, we question
the pr~nciples Whidh they attempt to assert.
_
We make this observation because we wish to ap9roach these questions
from the standpoint of principle, rather than precedent, that is, not what we
can do but what we should do.
It must be borne in mind that the twelve federal reserve banks have
heretofore been, and in the future will be, to a much greater extent required
to litigate cases of this character in many jurisdictions. It is not unlikely
that every appellate court of each state in the Union, as well as of the United
States, may have occasion to pass upon some phase of the questions involved.
It would be practically impossible to present the same questions, under the
different conditions that would necessarily exist, to such a large number of
courts without obtaining conflicting precedents. Therefore, we feel that, due
to the fact that precedents are suCh a guiding factor in court decisions, the
Federal Reserve system as a whole should be highly interes+.ed and guard with the
greatest care the precedents which are established.
Furthennore, with our complex and varied judicial procedure, we think
it fairly easy to establish most any sort of a precedent. To illustrate what
we mean, without intending in the least to be offensive, if we were involved here
in litigation affecting some point set out in ~ft. Ueland's memorandum and in
such case should have opposed to us counsel with no familiarity with check collections and with no ability as a lawyer, we might obtain one precedent; whereas,
in the same case, with competent and well informed opposition an entirely different outcome might easily result.
Therefore, in our opinion, we cannot lean too strongly, in determining
these questions of policy, upon precedents which have heretofore been established,
and for these reasons we will not attempt in this communication to state our
opinions with reference to what should orShould not have been the result of the
particular cases mentioned.
VIEWPOINT.
.
We recall the old geometrical expression, that in order to arrive at
a proper perspective it is first necessary to establish a viewpoint. This is
the ~ortant principle involved here. If we can establish as a policy the
proper vie~oint, then we feel sure that the perspective, that is, the subordizt.ate '!¥-_ es. ions of policy, will necessarily be uniform and correct. At the
present tife t appears to us that there is, generally speaking, two viewpoints
from which; th~se
questions
are approached;
'
.
FIRST: In discharging the check clearing and collection functions
a federal reserve bank shall act as agent only, employing those means
for presenting and collecting checks which are the normal, natural and
accepted means afforded by the commercial structure of the country.
SECOND: In discharging their check clearing and collection functions
a federal reserve bank shall act as agent, employing those means for
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X-6254-a
presenting and collecting checks which are the normal, ~tural and
accepted means afforded by the commercial structure of the country,
and, in _addition, shall t~e ever~ other means available py virtue
of the ryeculiar nature of federal reserve banks andjinvolving unusual, uncomn:on and extraordinary practices not expected, required
nor undertaken by a person act_ing in the ca-;?aci ty of agent only.
Those banks having
checks somewhat as follows;
authorized to send checks to
circular states just how the
briefly may be summarized as
&}·J.::: -·11
~.J••.}JL
the first viewpoint approach the collection of
A circular is sent to every bank or other person
a federal reserve bank for collection. This
federal reserve bank will collect checks and
follows:
(1) We will use ordinary care under all circumstances i-n presenting
your check for payment.
(2) Ordinarily we will present your check direct to the bank on which
it is drawn, because we feel that this is the most direct and expeditious
mann~r of collecting checks.
(3) W.e will take a bank draft from the drawee bank in payment of these
checks because you must realize that under the accepted practices of this
country funds are transferred from one point to another throu@:l the medium
of checks and because we have no me~ns of presenting all of the checks sent
to us, other than those affOrded by the commercial structure of the country,
no·tably the postoffices.
(4) !t would not be practical for us to employ any means of. collection
other than the po!3toffice, except in unusUa.l cases where we will exercise
ordinary care under the special circumstances surrounding the collection.
(5) You do not have to send us your checks for collection. !f our
methods of collecting checks is not suitable to you, you may employ other
age:n.ts.
(6) In the event we have used ordinary care under the circumstances
to collect your check and fail to do so, you must look elsewhere than to
us to recover your loss.
::Sa11ks having the second viewpoint, say by their circulars to member
banks substantially that stated above but, in addition, and contrary to the nor-'mal, ·natural and accepted practices of an agent only, they undertake to resort
to unusual pr~f:tices in the following respects, i f riot others:
(1) ]y appropriating the reserve account of the member bank to which
checks have been sent for·. collection.
(2)
Ey attempting to use capital stock refund due the insolvent member
bank.
(3) ::Sy seeking to apply collateral given by the member bank primarily
to secure loans made to it by the federal reserve bank in the discharge of
an entirely distinct function from that of collecting checks.
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Banks having tho first viewpoint, in the event the drawee bank
fails before rerr.i t t ing for checks tra.nsi!li t ted to it for collect ion, find
themselves in this situation: The only parties that can complain are the
parties from whom they receive Checks. If such parties do complain, but
one question arises and that is z Did the f'edlral reser\l'e 'l?ank exercise
ordinary care in ptesenting the checks fer :payr;:;.ent? Tl:iiel questioii ca.h ·
alw9¥s be O.e~ided in favor of the federal reserve bru1k. provided that bank
has taken p~ins to exercise ordinary care under the circumstances at the
time the collection is underta1:en.
Ba.nks having the second viewpoint, find themselves involved in
frequently, not only with the persons sendinc the checks for
collection 'but with receivers of insolvent banks. This is but natural
because federal reserve banks following such practice encourage their
endorsers to foel that they should not, under any circumstances, sustain
loss; and likewise they necessarily find themselves in conflict with the
office of the comptroller of the currency and receivers of insolvent banks.
because it is their dutf to see that the funds of the insolvent bank are
applied pro rata to all creditors and are not used to the preference of one
over another.
liti~tion
a
It is not hard to understand how ·a bank with the last mentioned
viewpoint can frequently find itself "to some extent on the horns of a dilennna11
because 11 if the surplus is paid over to your endorser~:~ of the transit items your
bank may be liable to the ,receiver ana if surrendered to the receiver there
might possibly be liability to your endorsers." We cannot help but feel that
~he federal reserve bank makes the dilemma by the course of conduct which it
has chosen to follow and, in this connection, we wish to state that we are in ·
entire accord with the thought expressed in paragraph numbered four on the last
page of Mr. Wyatt• s letter to Mr • .A. Ueland, of date January 26, 1929.
CONSIDERATIPN OF FUNCTIONS AND RESPOlffiiBILITIES OF
FEDm'RAL RESERVE BANKS OTHER THAlT THOSE OF
COLLECTnTG CHECKS.
Every federal reserve barik operating in a district that has exp~rienced
a large number of bank failures (and bank failures are the cause of our considering any of the questions of policy involved)'ha.ve found themselves confronted
with a situation similar, to the following:
A me~ber bank is in a rather strained and extended condition.
This condition has been known by the federal reserve bank for sometime.
It finally works ihelf to more or less of a crisis. The bank's reserve
balance is very pru.ch depleted,. if not exhausted. The bank has sent in,
and the federal jese:rve bank is considering, an offering for rediscount,
sent for the purpose of restoring the bank's reserve. At the same time
and on the very day that this offering is being considered, cash items
have been received drawn against this member, aggregating as much, or
more, than the offering and required reserve balance.
Under such conditions, the reserve bank is confronted generally with
two questions;
I.
Are ,e going to rediscount the offering?
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rr. What steps are we going to tru(e
l~oking
towards the proper
discharge of our duty in the colledtioh of these checks?
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Those banks having the first viewpoint tnerttioMd above will
decide these questions somewhat along the following lines!
I. Insofar as the rediscount offering is concerned the questions
that will be considered will be-
(a) Are the notes offered for rediscount acceptable from a
credit standpoint?
(b)
credit?
!oes the bank's conditien justify the extension of the
(c) Does the situation of the member bank, as we know it to
be, justify us in expecting, if the loan is made, that the bank
will be assisted in restoring itself to a sound and safe condition?
II,
bank
Insofar as the collection of the cash letter is concerned, this
the question somewhat as follows:
ap~roaches
(a) Does the knowledge which we have of the bank's condition
justify us in sending the checks direct by mail?
(b) What course of collection should we follow in order to
discharge our duty to the holders of these checks to use ordinary
care in their collection?
Thus the two questions are decided upon their merits, having in mind
the distinct functions which a federal reserve bank is discharging.
Banks having the second viewpoint must necessarily, in order to be
logical, approach the two questions somewhat in this manner:
I. Insofar as the rediscount offering is concerned they must take
into consideration:
(a) The matters outlined under I (a); I (b) and
pages 11 and 12 hereof.
I (c) on
(b) And in addition, they must necessarily have in mind
at
the
time the rediscount is made, if it is made, the fact
,,
that the cash letter is to go forward and, therefore, they
must necessarily think of the collateral which they are
taking to secure the advances made the bank in the light of
subsequent indebtedness that might be created by virtue of
the outgoing cash letter and, hence, the member bank is to
this extent penalized in its rediscount operations; and
(c) Th~ offering has been made to restore the reserve
balance and that the reserve balance is treated as a fund
to protect the cash letter. Therefore, assuming that the
-9-
notes are perfectly good but that the member bank's condition
generally would not justify the federal reserve bank in extending the credit, would not the federal reserve bank find
itself again in a dilemma, that is, should it discount the
notes and build up the reserve balance to protect the endorsers of the cheCks or should it refuse to· discount the
notes because such action is to the best interest of the
member bank concerned.
~;~_5.:<~~
II. In as far as the collection of the cash letter is concerned, they must necessarily take into consideration:
(a) The matter referred to under II (a) and II (b) on
page 12 hereof; and
(b) In the event the checks are not actually paid by
the bank to which they are sent, will the reserve balance
of such bank be sufficient to protect our endorsers?
(c) If the reserve balance is not sufficient, will the
sum in it plus the collateral which we are holding, including
the capital stock refund, be sufficient?
If these questions are decided in the affirmative, will such bank use ordinary
care in presenting the checks for collection or will it be prone to rely upon
the protection which it has in the forms above outlined, rather than to use
ordinary care in the presentation of the checks. If it fails to use ordinary
care and thus rer1ders itself 1 iable, what assurance does it have that the reserve
balance will not be withdrawn before it can be used by the federal reserve'bank
and, also, what assurance does the federal reserve bank have that the collateral
in its hands, after the failure of the member bank, will be worth as much as had
been counted on?
DUTY OF THE FEDERAL RESERVE :BANKS TO TB:B: COMMUNITY IN WHICH U"'SOLVENT BAlJKS ARE LOCATED AND
TO THE CREDITORS OF SUCH INSOLVE1!T BA.N.KS.
:Because of the confidential relationship existing between federal
reserve banks and their members and because of the fact that the great
majority of member banks, that is, national banks, are compelled to retain
their membership in the Federal Reserve system in order to keep their charters
and because of the peculiar nature and functions of federal reserve banks, we
feel that each federal reserve bank owes a duty to the community in which an
insolvent bank: is located and to the creditors of such insolvent bank.
·.
·~
'
~
Funl~ermore,
.
if there is anythin~ in our thought that insofar as
reserves are · ;ncerned. federal reserve banks a.re to some extent trustees for
all creditors of any narticular bank maintaining such reserve, then we think
it necessary follows that a federal reserve bank is charged, to some extent
at least, with the same resl)onsibility as that of the comotroller of the
currency in seeing that, in the event of insolvency, these reserves are a'Op),ied pro rata to all creditors rather than tc the select few who might have
happened to choose the federal reserve bank as their agency through which to
effect collection of their indebtedness.
-10-
:X-6264-a
in
by a federal r~serve bank
it$~~[5
dealings with member banks. will put a federal resetV"e bank on
.
ridtice lni tia.l~y that extraordinary steps might be required in order tb
e~~rdtse. or.dihliry care in the collection of checks~
This cannot be helped
a~d., to\ ~h,18 extent, we thi~· it proper for a federal reserve bank to use
it.~ ~pni'idential information. To go further and to set up avenues of
,
ptet'et!me:nt for those creditors selecting the federal reserve bank as the~r
1,
~gen~y for collecting thei: debts would, in our opinion, be a failure to
disc~rge the proper funct1ons of a federal reserve bank.
.
. It is true.that knowledge gained
conf~dential
In the event any question of preference should arise, we would
prefer to let it arise from some voluntary act of the member bank, rather
than from some arbitrary action of the federal reserve bank.
DOES THE FEDERAL RESERVE :BANK BEST SERVE ITS
ENDORSERS ::SY FOLLOWING THE POLICY OF APPLYING
RESERVE :BALANCES, COLLATERAL AND CAPITAL STOCK
REEm"DS TO CLAIMS ARISING ::SY FAILURE OF THE
DRAWEE BAllK TO Rnf.IT FOR TRANSIT SIDTDINGS.
We are familiar with the fact that many decisions hold, in effect,
that Y~here checks are sent to the dra'wee bank and are by that bank received,
stamped paid and charged to the accam.nt of the drawer, the drawer is dis9harged
from liability by such action.
··-
In our opinion, however, these decisions are unsound and while we
1DUSt admit that, at the present time, ·they express generally the law in most
jurisdictions, nevertheless, having the convictions we do, we cannot help but
feel that when properly presented this question will be decided otherwise.
-vre. base this feeling upon the fact that the mere stamping of a check paid and
chaX~ing it to the accotint of a person does not ·in any manner constitute payment
nor does it in anywise conform to the definition of payment which is generally
and ~niformally laid down ~y practically all courts dealing with the question
of p~ent in other cases.
Assuming that a federal reserve bank should follow the policies
in Mr. Ueland's memorandum and the reserve balance, collateral and
capital stock refund is not sufficient to pay the entire amount of the transit
send;lngs involved, then :nedessarily the amount on hand must be pro rated. In
such event, it occurs to us that necessarily the drawer would be ·discharged and
the payee or his endorser would be required to look elsewhere than to the drawer
I
for ~he recovery of the amount unpaid.
su~sted
TO this extent, we feel that to pursue. the policies recoimJlended by
Mr. tfeland would be a detriment rather than a help.
·
In this connection, we feel that the questions which we are now considering lf'Ould become academic ~hould the various states of the Union be prev~iled
upon to pass a proper statutory enactment to the effect that where the payee or
his endorser of a check uses ordinary cate and the usual and customary ~ans of
collection, 'the drawer of the check is not discharged regardless of whether the
checl:t 'ili question has been stamped paid ~d ·charged to his account, unless the
· drawee bank has actually paid the check.
-n-
X-6264-a
CONCLUSION~
For the reasons herein stated, it is our op1n1on that federal reserve
banks should, in discharging their check collection functions, ad..>iere strictly
to the idea that they are acting as Ment only and that in discharging such
duty they will use ordinary care, under .all circumstances, to collect checks
sent them for collection, employing those means for presentation and collection
Which are the normal, natural and accepted means afforded by the commercial
structure of the country, but that they shall not undertake unusual, uncommon
and extraordinary practices not expected, required nor undertaken by a person
acting in the ca~acity of agent only.
We think it very important that uniformity exist throughout the
entire Federal Reserve System as to the policies herein referred to, so that
federal reserve banks in one district shall not establish precedents embarrassing
to federal reserve banks in other districts. We feel this so strongly that we
would be glad to recommend to the Federal Reserve :Bank of :callas that they make
their practices conform to those practices favored by the majority of the federal
reserve banks.
Yours very truly,
(S)
EBS:lm
Locke, Locke, Stroud & Randolph.
X-6264-b
FEDERAL RESERVE :B.ANX
C)p:ri
"'"""-y ,·
OF SAN FRANCISCO
February 5, 1929.
Walter Wyatt, Esq.,
General Counsel,
1ederal Reserve Board,
Washington, D. c.
Dear Mr. Wyatt:
I acknowledge your
draft of memorandum prepared
to be pursued by the Federal
serve balances; also copy of
Ueland's opinion.
-~,
letter of January 30, 1929, transmitting the
by :Mr. Sigurd Ueland with respect to the policy
Reserve Bank of Minneapolis in relation to reyour letter of January 26 corrnnenting on JY.r.
I can say without reserve that I agree entirely with the conclusions
which you have reached and in the expression of policy contained in your letter.
I ha;ve felt from the beginning that the Midland National Eank case was bad law
and would result in the creation of situations embarrassing to the Federal reserve barucs. The adoption in toto of the theory of that case by Mr. Sigurd
Ueland, and presumably by his father, makes the situation still more difficult.
.,While, like you, I have the utmost respect for Judge Uelandts legal ability, as
well as that of his son, I cannot but feel that these gentlemen have accorded
the decisions to which they refer greater weight than that to which they are
entitled and have given the principles announced therein broader application
than is deserved. Personally I feel that if the Federal Reserve Eank of
Minneapolis were to adopt and put into effect the recommendations contained
in Mr. Sig1p.'d Ueland's memorandum, a situation would be created fraught with
·grave danger to all Federal reserve banks. Even though the conclusions reached
Were justified under the decisions of the Supreme Co1,ll't. of Minnesota and tho
United States District Court in the Eureka case ta premise which I do not
at all concede), the adoption of those co~a.lu.sions as a basis of future policy
on the part of the Federal Reserve Bank of Minneapolis would undoubtedly arise
to confront all other Federal reserve bankseven tho~ such other Federal
re,erve banks followed entirely different ~ethods of procedure. In other words,
if 'the Fedsral Reserve Eank of Minneapolis· alone, or perhaps in concert with
th• Federal Reserve Bank of Richmond, is to adopt the policy of treating reserve
balances and funds created from the caneellation of capital stock as trust
funds primarily or secondarily for the payment of obligations arising from unremitted cash letters, all other Federal reserve banks will ultimately have to
adopt the same policy or be confronted with vexatious and expensive litigation
~ngendered by following a different policy.
It has always been the endeavor of the Federal Reserve Bank of San
Francisco, and I believe of most of the other Federal reserve banks, to maintain
a strict agency relationship in the handling of caSh items. Once the theory of
X-6264-b
-2agency is departed from in the slightest degree, there is no way of ~-;telling
to what extent member banks and non ·mGmber cl'earing banks may be able to
hold the Federal reS8t'Y<:; 'o.s.nk r8sponsi'ble for the· fate of unpaid cash items.
t therefore consider a:r..;y- cleparture from such agency relationship or any
affinission, express or lmplied, that such relationship does not continue,
extremely dangerous.
l;:r. Ueland refers to the recent amendment of Regulation J elimina.ting
therefrom that provision to the effect that any Federal reserve bank may reserve
the right to charge checks to the reserve account or clearing acc,JUnt of a bank
at any time when in any particular case the Federal reserve bank deems it
necessary to do .so, and expresses the opinion the.t this amendment does not show
an intention that the reserve balance is not intended to remain available for
the p~Aent of unpaid cash items after notice of suspension. I think this
conclusion is incorrect. Harking back to the discussion which took place at
our last conference in Washington, I am strongly of the opinion that it was for
the purpose of removing any question as to the right of a Federal reserve bank
to treat a reserve balance as a trust fund for the benefit of the owners of
et;LSh items, that we recommended the elimination of this clause, and l am equally
firm in the opinion that this was· the purpose of the Federal Reserve :Board in
causing this elimination.
.. ,'- ·
I believe the entire tmttterof the treatrn.ent of reserve balances and
the rights of forwarding banks in relation thereto should receive early and
'-thcrough treatment and I agree with. you that as a preliminary to any action on
the part of the Fede.ral Reserve :Board, it would be well to hold a conference
of counsel at Washington for the purpose of a thorough discussion.
·
I should be glad to attend such a conference at any time that may
be selected. Personally I should prefer that if a meeting is held i t 'ee set
for the month of April, as engagements here would make it difficult for me
to be present during either March or May.
I have thoroughly discussed tlle matters referred to herein with the
executive officers of this bank. Governor Calkins suggests that if a conference
is held, it might be well to arrange to have ll.r. :Baker pre~ent.
Yours very truly,
(S)
Albert C. A._<2;new,
Counsel.
2 :::-:q
X-6264-c u •.
FED:i!!EU\L RES::JlRVE :BANK
OF ATLANTA
February 5, 1929.
Mr. Walter Wyatt, General Counseli
Federal Reserve :Board,
'v1ashingtori., D. C~
Dear Mr. Wyatt 2
I have tead with interest y0ur letter of January
fi~, with which there was enclosed a
copy of a letter written to you by Judge Ueland ·:.and llir.
Sigurd Ueland, as well as a copy of the memorandum :prepared ·
by Mr~ Sigurd Ueland and a copy of your letter to Judge
Ueland - all having reference to the policy to be :pursued
by the Federal Rese.rve :Bapk of Minneapolis in asserting
rights against receivers of insolvent member banks on behalf of the.owne~s of unremitted for transit items.
26, addressed to my
In obedience to your request, I am·herein expressing my views on the questions discussed in the above
mentioned correspondence and memoranda. In considering
the matter I have, of course, been mindf.ul of the weight
which should be given anY opi~ion representing the matured
judgment of the Messrs. Ueland. I am, however, constrained
to disagree with these Gentlemen in the conclusions which
they have reached. 1q opinion accords with your own.
It seems to me that we should not lose sight of
certain fundamental propositions which, but for the recent
decision in the case of the Federal Reserve :Bank of Richmond
~Earley,. Receiver, might well have been regardedas elementary,· and which are not necessarily foreclosed by that
case:
1.
2.
Whenever a .receiver is appointed, whether
in bankruptcy, by a cour.t of equity or by
other authority, bank balances to the credit
of the insolvent automatically become not
withdrawable :upon his. check, but may be withdrawn only: by such receiver, acting pursuant
to the general or statuto~y authority vested
in him. Whether ~uch result is brought
about by a etatute, such as the :Bankruptcy Act,
or upon gene,~ equitable principles seems
to be immaterial.
The reserve account of a member bank, as well
' as the clea.rixig account of a non...member clear-
260
X-6264-c
Mr. Walter Wyatt,
2/5/29.
ing bank, may, fot the purposes of this discussion, be regarded as nothing more nor less
than a "cheeking account"', subject to the s~e
legal principles as would apply to a deposit
account maintained tinder ordinary banking
usages by a depositor in a commercial bank.
3.
The Federal nes~rve Bank handles cash items
'only as agent for 'banks forwarding the same
to it for colle~tion, or, at least, if such is
not the stattis 6f the FederBl Reserve Banks,
quoad.s~ch checks, Regulation J fails of its
intended pm"pose in this regard.
4.
Fedetal Reserve Banks do :not take such ehecks
and draft·s on general deposit and thereby become the owners thereof. and, unless they
stand in the relation of owners to such checks,
it is difficult to see upon what rule they
would be justified in off-setting checks, for
which remittances have not been received,
against reserve balances or in applying collateral in their hands for the protection of
the same, in the absence, at least, of an
express agreement authorizing a:ny such procedure.
5.
The underlying purpose of Regulation J and of
the cognate collection circulars of the various
Reserve Banks was to relieve the banks of the
duty or obligation to do precisely the things
which it is now suggested should be done.
........... \.
I realize that, since the decision in the Earley
case, any opinion nnist be given dubitante. I cannot, however,
believe that the Earley case will finally stand as the last
word on the subject, and I am, furthermore, hopeful that, in
any event, the holding of that case would not, in subsequent
litigation, be extended beyond the parti.cular facts which were
there involved. In so far as concerns the banks using the
so-called 11 remi tt~nce" system in collecting cash letters, the
·.case would not, necessarily, be conclusive. The Richmond
bank, under its own collection circular, had adopted the practice of charging cash letters to reserve accounts at the expiration of a specified transit Ume, and the Court seems to have
predicated its opinion very largely upon this practice.
The banks using the remittance system customarily
receive returns on cash letters in the shape of checks drawn
X-626~ .~ i
Mr. i7alter Wyatt,
-3-
2/5/29.
upon the reserve balances of the rcmi tting banks or in acceptable and immediately available exehange. It would
clearly seem that after a member b8J'1.k has been closed the
Federal Reserve !3ank could not thereafter pay a draft drawn
upon itself by the closed member, even though the same had
been mailad 1prior to suspension of bus,iness. The banks
using the remittance system sometimes accept in payment of
cash letters express written authorizations to charge reserve
accounts with the amount of the same. I see no difference
in legal affect (in so far as concerrls the questibns now under discussion) between a check drawn upon the re~orve account of a member and its Written authorization to charge its
reserve accdunt With a. specified amom1t; and, if the authorization to cl1arge be not received until after the closing
of the bank, the situation is exactly the same, in my opinion,
as if remittance had been attempted by draft.
Prior to the recent revision of Regulation J, the
Atlanta bank, and perhaps others using the remittance system,
reserved the right in their check collection circulars to
charge cash letters to reserve account whenever returns thereem were not received when, in the light of railway mail schedules and ordinary experience, they should have been in hand.
It was intended, however, by such stipulation ::J.erely to -provide a method for forcing payment as against slow remitting
banks. It was not the intention to provide such method for
enforcing payment after a member bank had been closed; nor do
I believe that a general reservation in the check collection
circular of the tenor indicated would alter or vary the
fundamental propositions outlined above.
It is generally recognized that it is unjust and
inequitable for a drawee bank to pay and discharge tho checks
of its customers and then fail to remit therefor, but I do
not believe that the Federal Reserve Banks should undertake
to correct this injustice by adopting a policy which might,
in effect, force them to protect all checks sent to them for
collection for which remittances had not been received and
which could not be returned to their endorsers.
In the first place, in every instance where a
Federal Reserve Bank might hold a reserve balance or collateral in suf~icient amount, it would almost be compelled
to protect unremitted for items, even at its own expense.
Mr. Ueland, in his memorandum, states that collateral securities and reserve balances could legally be appropriated, first,
in satisfaction of obligations due to the Reserve Bank by
the closed member.
Theoretically, this may be true, although I am not so certain about the proposition as is Mr.
Ueland. Practically.speaking, however, any Reserve Barik
which protected itself primarily and its endorsers of transit items secondarily, would be subjected to criticism which
~b:.:;_
-4Mr. Walter Wyatt,
would certainly prove embarrassing. My own opinion is that,
in uractice, the policy advocated by Judge Ueland, even
i f legally permissible, would result in a prior, or at least
pro rata, pa~nent by the Reserve Banks of such transit items
in any case where payment could be effected out of the reserve balance or general collateral in its hands.
In the second place, it is most important, in my
opinion, that nothing be done to affect the strict agency
telationship touching collections which should be maintained
by the Federal ~eserve Banks. The volume of checks passing through the Federal Reserve system is enormous and will
inevitably increase from year to year. iVhile no one questions the utility of the Federal Reserve Bank collection
system, nor begrUdges the expense entailed ther.eby, the Reserve Banks should not be burdened with responsibilities
beyond those which inhere in the p:roper discharge of their
duties as agen·ts~ For its own negligence, a Federal Reserve :Bank should pa:if, but for the ht:igligence or defaults
of others it shoula not be held iiable• It seems to me
that anything which tends to superimpose upon a pure agency
status an indicia of ownership, with respect to the subject
matter of the agency, is a step in the wrong direction.
The tendency, at least, of the plan proposed for the Minneapolis District would b'e to make a Federal Reserve Bank responsible for items entrusted to it for collection, even
though the failure to secure returns thereon, in actually
collected funds, may not have been due to any negligence
or fault on its part. There is no.more reason to require
a Federal Reserve Bank to pay a check out of a reserve account (or charge the same with the amount thereof) after
the insolvency of the drawer than to expect'an ordinary
commercial bank to make payment under similar circumstances;
and, unless remittance in actually available funds has been
received, a mere collection agent should not be held responsible.
I shall not attempt to discuss at any length the
cases cited in t4r. Ueland's memorandum. I have not read
th, unreported case of Keyes, Receiver, !! Federal Reserve
~ of Minneapolis.
The pertinent holding of Federal
Reserve Bank l l First N§;tional Bank of Eureka, which I have
not read for some time, was, as I recall it, based on the
theory that the reserve account of a member was a clearing
fund through which "balances" in favor of the Reserve Ba."lk
might be extinguished just as such balances are wiped out
in the operation of a clearing house. This theory is certainly incompatible with the rationale of Regulation J.
The recent case of Storing, Receiver
~First
X-6254-c
Mr. Walter Wyatt,
-s-
2/5/29.
National Bank of Minneauolis; which has been the subject
mat-ter of prior correspondence bet~veen us, seems clearly
distinguishable. In the Storing case the Court vras careful to point out that items which were received for collection by the First National Bank from its own custouers 11 vtere
credited to the accounts of the res~ective custo~ers on the
books of defendant", i.e. the Minneapolis Bank. At the
tir:.1e, therefore, when they were forwarded to the North
Dakota Bank (which subsequently became insolvent) the same
had been placed oh general deposit with the Minneapolis bank
and were treated by the Court as being the property of that
bank. The Court also held that the "·accounts of the two
banks with each other constituted mutual accounts", for.
which reason a right of off-set existed. The distingu,ishing elements in the Storing case emphasize the dangers of
undertrucing to apply the doctrine of that case to the check
collection functions of the Reserve :Banlr~s. To make the·
Storing case applicable, the relation between a Reserve Bank
and its members might have to be regarded as that of banks
maintaining 11 mutuc.l accounts" - certainly the Reserve Bank
would necessarily have to be conceded to be (prima facie
at least) the owner of all checks in its hands for collection, despite the contrary declaration of Regulation J.
The legal complications which might ensue readily suggest
themselves.
No specific comment is made upon the case of Midland
National Bank, etc. vs State Bank of Sioux Falls, et al, for
the reason that this letter is written in an attempt to show
the unsoundness of its holdings.
There are one or two other considerations which, in
my opinion, might be urged on the negative side of the questions raised, but I hesitate to burden the deb~te with any
further comment, particularly since your lettE:Jr to Judge Ueland
of January 26 really needs no supplementing.
With
b~st
personal regards, ! am
Sincerely yours,
(S)
RSP/w.
Robt. S. Parker.
FEDZRAL RsSBRVE B.A!JK
X-6264-d
'"
2 ~--~
U'-··
CF !UCHM01"D
February 5, 1929.
Federal Reserve Board,
Washington, D. C.
Attention:
Iv~:r.
Walter Wyatt, General Counsel.
Dear 1vir • Wyatt :
I read with mtlch interest the interesting and helpful
memorandum prepared by Hr. Sigurd Ueland. I am personally much
gratified by the knowledge that I do not stand alone in my view
With respect to the soundness of the decision of the Circuit
Court of Ap-s>eals in Farmers• and Merchants National Bank of Lake
City v. Federal Reserve Bank of Richmond.
The proposition for a conference of Counsel of the
Federal Reserve barucs always carries such pleasant suggestions
that I am never exactly opposed to such a conf~rence, but in
thinking over the matter it appears to me that very little in
the way of definite action could be taken by such a conference
at the present time. The Lake City case cannot be regarded as
a final decision because it may be reviewed by certiorari. The
case of Storing v. First National Bank, 28 Fed. (2nd) 587, is
in the same situation. The case of Midland National Bank and
Trust Company v. First State Bank is a final decision by a State
court but rests upon the terms of e particular contract, which
terms are not identical with the ·terms of the circular or collateral agreement used by any Federal Reserve bank. The decisions
in all of these cases are constructions of contracts except that
part of the Lake City case which deals with the• surrender value of
the stock held by a member bank in a Federal Reserve bank. The
circulars used by the-respective Federal Reserve banks are not
uniform, and therefore if the object of the conference is to
discuss past transac.tions, it seems to me that we should merely
be in the position of attempting to forecast decisions upon our
respective circulars in the light of decided cases which are
still subject to reversal.
If the conference is to concern itself with future
transaptions, it appears to me that we shall be greatly handicap~ed
by the fact that the decisions which at present fonn the last known
statement of the law are subject to reversal and may be modified
or distinguished in the cases which are now pending in ·the Atlanta
and San Francisco Districts. We therefore would meet with no
positive assurance of what the law now is upon the contracts which
are at present in force, and could not even u~e an intelligent
guess at what the courts may decide with respect to contracts which
might hereafter be drawn. It therefore seems to me that a conference
-2-
X-6264-d
held after a fina1 decision in the Lake City case, and perhaps
after a decision in the cases effecting the Federal Reserve
Ba1~cs of Atlanta and stin Francisco, would be much more profitable than one held at the present time.
In addition to the above, it seems to me that the
main source of our difficulties at present lie in a difference
of view with respect to policy. There are three funds whiCh
might ~ossibly be made applicable to the protection of cash
letters. These are: (1) The reserve balance; (2) The
collateral; (3) The surrender value of the stoCk.
I am, of course, persuaded that the decision of
Judge Parker in the Lake City case is the correct interpretation of the contract existing between the Federal Reserve
Bank of Richmond and its member banks, but I believe that all
of us would concede that he is at least correct when he says
that the question depends upon the construction of the .circular.
It should be fairly easy to prepare a circular which wo~d make
it clear that any reserve balance apparently due to a failed
bank at the time of its failure should be applied to any unpaid
cash letters regardless of whether or not the remittance system
or charge system was used by a particular Federal Reserve bank.
It r:ould certainly be easy to provide by express words in the
circular and Regulation that the reserve balance should not be
chargeable with cash letters unless specific authority to make
the charge was received and the charge made against an available
balance sufficient to cover the letters before the failure.
The right of the Federal Reserve bank to hold the
collateral is likewise merelya matter of contract. There can
be no doubt that the Federal Reserve bank might make a contract
under which the collateral was applicable to cash letters even
though the Reserve bank had the right to charge these cash
letters back to the depositors. In other words, the Federal
Reserve bank might, by express contract, take and hold the
collateral for the benefit of its depositors as well as for its
9wn benefit and could provide that its own claims upon rediscounts
and other matters should be preferred over the claims of persons
interested in the caSh letters so far as the collateral was
cOn\.erne d,
The application of the surrender value of the s took
depends upon the construction of the Federal Reserve Act and no
contract which could be made would alter the status of the surrender
value. I am incli.ned to accept the decision in the Lake City Case
as final upon this latter point, even though it appears to be contrary
to Federal Reserve Bank v. First National Ba~, 277 Fed. 300; but,
26()
-3-
X-6264-d
in any event, whether the Lake City case is on this point
sound or not, nothing which could be inserted in the Regulations of the Board or in any circular would change the ultimate
result.
It seems to me, therefore, that inasmuch as the present
situation arises out of the possible differences in the interpretation of the circulars of various Federal Reserve banks, that
there are three possible courses which may be adopted in the future.
All of the Federal Reserve banks may elect or be required
by the Federal Reserve Board to adopt a uniform policy under which
the reserve balances and the collateral will be applicable to cash
letters; or the banks 1nay elect or be required to adopt a policy
under which neither of these funds can be ap?lied to unpaid cash
letters; or each bank may e.dopt one policy or the other as its
own judgment d~termines. It is obvious that the decision upon
these courses of action involves questions ·of policy rather than
questions of law. If the :Board intends to require e.ll banks to
adopt a uniform policy upon the points mentioned, then it should
be fairly easy for you, with such assistance as Counsel for the
Federal Reserve banks could give you, to prepare a regulation
which would clearly and equivocably state the policy adopted. ,
If the Board does not wish to require a uniform policy, then
obviously the officers of each bank must determine for themselves
the course which they will follow•
It therefore appears~to me that very little could be
accomplished by a conference of Counsel until the Board, which
I assume would desire to confer with the Governors of the banks,
had Ir.ade a definite decision with respect to the questions of
policy involved. When this decision was made, it then seems to
me that a conference of Counsel would be most helpful as a means
of embodying the decision in clear .and unambiguous words.
With best personal regards, I remain,
Very truly yours,
(S)
MGW L
M. G. Wallace,
Counsel.
X-526·4-e
F~DERAL.RESERVE
PAHK
OF
S T.
·L 0 U I S
February 20, 1929.
lJr. Walter Wyatt, General Counsel,
Federal Reserve :Soard,
Washington, D. C.
Dear
:.:r. Vlyat t:-
Since writing to you on February 2, 1929, I have gone
more carefully into the cases referred to in the correspondence
passins between you and Judge Ueland relative to the LeP,al Ri~ts
and corresponding obligations of Federal ReGerve :Same~ in their
Cleariztg House operations with }!ational :Bank Receivership~.
In the case of THOS. A.:ElARLY, Reed ver of the FAR1:ERS &
ME:..'tCHA.l!TS NATIONAL BAlJK of LAKE CITY, S. C.
vs. the FEDERAL
RESERV:S :SM'lK OF RI&11Mm!D (hereinafter referred to as. the EARLY
case) the Court/oefore it two separate causes of action- (1) the recovery of the deposit account standing on the books of the
Federal Reserve Bank - (2) - the surrender value of the stock in
the Federal Reserve :Bank and counter claim filed by the Reserve
Batik on the unremitted for cash letters.
The District Court, after referring to the Regulation
and Circular letter, found in favor of EARLY on both counts,
"The charges made on account of the outstanding
cash letters against the insolvent bank, I do not regard
as proper allowances or deductions. The right of the
Reserve Bank to make the charges terminated with the
insolvency of the member. ba1'lk.• " **** "The counter-claim
of defendant is based on items in transit that were being
handled by the Reserve :Sank for collection. They were
received for deferred credit, under regulations and check
collection circulars which provide that the Reserve !Sank
will act only as agent for the batik ~·m which it receives
such checks.. The items cannot be regarled as the property
of the Reserve :Sank. The circumstances shown in respect
to the counter... claim make it clearly apparent that the
claims upon which the suit is brought, and the claim set
out by defendant in its counter-claim, do not arise between
the parties in the same capacity. 11
On appeal, the Circuit Court affirmed the ruling of the District
Court as to the second cause of a.ction:
X-6264-e
"On the second question, we do not think that the 268
Reserve :Bank has the right to set off the balance ci'J.e by
the insolvent bank on the checks against its ~ock liaoility.
The Reserve Bank was not the owner of these checks.· it
was merely a:h agent for collection; and although it
credited thein to the accounts of th~ forWarding banks; · ·
this was upon agreement that they might be charged back
if not collected,· and the second 1ot of checks has bee,n
charged back. The stock: liability is a. liab11i tr er.eated
by statute which provides that i t ilfihall be first ap-;>ii~d
to all debts of the insolvent member bank to the Federal
Reserve Earik, and the balance, if any, shall be paid to
the receiver of the insolvent bank. 11 12 U.S. c. A. 288.
It is ·perfectly clear that the liability of the insolvent
member ba.nlc for these checks is a liability.owing to the
owners of the checks in which the Reserve Bank is not
interest8d except as collection agent, and is not 11 a d.ebt
of the insolvent member bank to the Federal Reserve Bank"
within the meaning of the statute.
Even in the absence of a statutory direction as to
how the liability should be applied, a set off. ·of checks
held for collection ag,ainst such a liability would not be
allowed, for the reason that demands to be set off against
each other w~st be mutual, that is they must be due to
and from the same parties and in the same capacity•"
The Circuit Court reversed the ruling of the District Court
as to the first count:
liThe checks were forwarded by the Reserve Bank to
the insolvent bank under an agreement that they should
be charged against its account at the expiration of
three ~s. unless returned immediately. They were so
sent because the owners for ·Whom the Reserve Bank was
acting as' agent had consented to the arranfement. As a
substitute for the right to have them presented through
another bank and collected in cash, the owners had agreed
that they be sent direct to the drawee unde·r the agreement
that if not promptly returned they be charged against the
drawee.' s reserve balance .. When, therefore, they were
accepted bz the drawee, the owners had the right to demand
that they be cha.r~d against the drawee's account and
that the balance in·th&t account be aP?lied
the Reserve
Bank to their pe,yment. Tr.e only question that can arise
is when does this right of the cwners of the cbecks pecome
fixed so as to constitute it a charge upon the reserve
balance. We think: that it' beco!lles so fixed when the drawee
bank either unequivocally acceits the checks, as in this case,
or.by failing to return them promptlY becomes chargeable
with them under the terms Qf ths agreement. " *****•
And this right, we think •. depends not upon the theory that
the Reserve Bank is the owner of the checks or that it has
tha:right o£ set off 1;1.gainst the insolvent bank; but upon
oy
',·:.1
-3C)"li'
the fact that the· contr3.Ct of the parties has created an ,<.tb~J
equitable charge upon the reserve account of tLe drawee bank
and that such agreement.oper.ates as an equitable assignment
of so much thereof as may be necessary to ~ay the checks when
they are unequivocally accepted by the drawee. Under familiar
principles of equity, such an equitable charge upon a fund
arises in favor of a party when he becomes entitled to have
his claim paid from that fund.n
It is apparent that the Circuit Court in arriving at the
conclusion was governed by the Richmond circular and Reb"Ulations in
force at the'time, and the Richmond bank's method of operating under
the 'Time Schedule Charge Account' exclusively - rather than under the
'remittance method' used irrmost of the other Reserve Eanks. Based on
the ~articular method in use by the Richmond bank the reasoning is logical,
and, I beli.eve the conclusions reached are sound and will be upheld by
the Supreme Court.
Turning our attention now to the cases of KEYES, Receiver of
the FIRST 1-!ATIOfrAL :B.A.l'tK of CIJ\J.1KSFIELD vs. the FEDE!W:. RESERVE BA11K of
Mnr:.1llAPQLIS - not officially reported (hereinafter referred to as the
CLARXSFIELD case)
The FEDERAL RESERVE BAl..lK of MUTh~OLIS vs. KEYES, Receiver
of the FIRST 1-!A.TlOlTAL B.A.BK of EUREKA, 277 Fed. 300, and (hereinafter
referred to as the EUREKA ca~e); and, '
The MIDLUm NATIOliAL BAlm: of MnU'!EAPOLIS vs. the FIRST STATE
BA~~ OF SIOUX FALLS, 222 N.W. 274, and (hereinafter referred to as
the M!D!JUTD :BANK and STA.'l!E BANK.)
In the CLARXSFIELD case the reserve batik had forwarded to the
Clarksfield bank tfor collection and credit' a cash letter containing a
number of items. The items were collected and cre~t given to the
Federal Resex-ve :Bank on the books of the Clarksfield bank on the 18th af
September - the day they were collected - and, before the Clark~field bank
was closed on that date and its affairs were taken over by the Receiver,
Keyes. At the time credit was given on the 18th, the balances of the
Clarksfield batik in the Federal Reserve :Bank were ample to sustain the
credit.. This ba.lance was later augmented by the proceeds from the
cancelled stock in the Federal Reserve Bank. A£ter using so much of the
augmented balances as were necessary to reimburse the Federal Reserve
:Bank for certain forged notes it held under rediscount from the Clarksfield
bank the remaini.Dg aUfP1ented balances were applied on the outstanding
cash letters.
It is apparent from the fact that the Clarksfield barik gave the
Reserve B~~ credit on its books for the ~ds collected on the day the
collections were made, an~, from the underscored lines in Paragraph 3
of the Minneapolis circul~ then in force, that the Minneapolis bank
(like the Richinond b~nk) w~s operating under the "Time Schedule Charge
Account" method exclusively:
"Checks received by the Federal .Reserve :Bank, drawn on its
member banks, will be forwarded direct to such member banks,
'll-"'.1~-.1
,:.,. t '\.}
-4-
X-62b4-e
and will be charged to their accounts on the date which,
under usual conditions, adviqe of payment may be eXpected.
Member banks should credit ail re.mi ttances received froin
the Federal Reserve Bank upo~ day of recei~t, advising .
the Federal Reserve Bank, .an~ should not remit their drafts
in payment. Member banks are. required by the Federal Reserve Board to provide funds ~o cover at par all checks
received from, or for the acc9unt of, their Federal Reserve
Bank. 11
The Court, after quoting the :E\egulations and Reserve Bank
Circular relative to collections, says: ·.
11 It is not ( 1 not' evidently a typographical error)
apparent that upon the clearance being h~d between the
Clarksfield banks, defendant had the r1ght to a credit
with the First llTational· Bank of Clarksfield for this amount
and to cr.arge the same to the a.Acount of said bank, that_
credit was given but the charge' 'Was not made. It seems to
me that Defendant then had a ~1ght of action against that
bank for that amount in its own name and in its own right, 11
and, if this is true it is clea.r ~. has had that right
every since, and, therefore, ha's ~e right of
11 Tf..at the rights, of t:Q.e parties became
setoff." ****
fixed as of the time of the closing of the bank ***
SCOTT vs. ARmTSBURG.
At that t.};ine the Reserve Bank
had a right of action against the Clarksfield insolvent bank
for the amount of the checks whether or not they were only
received by it as an agent for collection and conditional
credit and whether or not the endorsemnts thereon were
restricted or unrestricted.M
If the Minneapolis bank was operating exclusively under the
Time Schedule Charge Account" -as is apparent - the conclusions reached
by the Circuit Court in the EARLY case would apply, and, while District
Judge !~orris arrives at the same conclusion over a different route, it
would ap~ear that if the Minnesota Statutes referred to give the agent
the right to maintain the suit, then the reasoning used is sound and
the reGul t justified.
11
In the EUREKA bank case, the Eureka bank, at the time it closed,
under rediscount with the Reserve Bank a nurnber of notes, and, just
p~ior to closing it had collected a number of items forwarded to it by the
Reserve bank for collect ion, and, attempted to remit by draft, uncollectibl~ 1
because of the faUure of the Eureka bank. Two questions were before
'·
the Court: (1st) - did the Reserve bank have to exhaust all means to
collect from the makers of the notes before it was entitled to prove its
claim against the trUst and receive dividends? - (2nd) - Could the Reserve
bank apply the balances it held as a set-off against the unpaid remitta~ce
draft?
~d
The Court, after commenting upon the purpose of the Federal
Reserve Act, answers the 1st question by holding that the EDr~ bank
.oNe
-5-
pap.
,., . t. 1,
X-6254-e~
.;.!_
was prllnarily liable
redisdounied
and claim could be filed
against the trust just as if .the insolvent bank had been the maker instead
of the end.brseh .Answering the 2nd question, the Court, after quoting
the foliowing from Regulation
•J•
"Member and clearing member banks will be required by the
Federal Reserve Board to provide funds to cover a.t par all
checks received from or for the account of the Federal Reserve :Sank."
Says - at page 304:
"From· the time of .the :promulgation of this rule, the credit
of a member bank with its Federal Reserve bank was rightfully
treated by the' rese~ve bank as a fund to cover all checks
received from or for its account by a member bank" ******
11 Immediately upon the refusal of the drawee bank to pay the
remittance draft, the sum became a primary obligation of
Defendant· to the Plaintiff, whi9h constitutes a valid claim
against the Receiver."
·
In this case, the Federal Reserve :Bank of Minneapolis seems
to have been operating under the •remittance' instead. of the "Time
Schedule Charge Account" pla.p and used in the CLA.RKSFIELD case,
nevertheless, the Court holds that under the terms of the Reserve Act
and the Regulations issued thereunder the Reserve bank had the right to
mi:tke the charge against the balances of the EUREKA. bank.
In the case of the MIDLAND BANK vs. the STATE BANK, the Midland
barik was the correspondent of the State :Bank - loaned. it money and.
rediscounted paper for it.
The State bank had given the Mid.land bank
a pleage agreement whereby it was agreed that all securities deposited.
under the pledge, or, held by the Midland bank in any way, as well as the
balances of the State bank, should be held by the Midland bank as
security for any liability of the State bank to the Midland bank then
existing or the;reafter contracted~ The Midland bank was using the
State bank as' its collection agent to collect all ite~s payable in· the
territory of the State bank.
Under this arranganent, it forwarded to the State bank for rollection and remittance a number of checks payable in the vicinity of the
State bank. The State bank collected the i tems 1 and, attempted to
remit the funds so collected by draft on the Midland bankand in its
favor, and, failed before the draft reached the Midland bank. The
State bank had no funds with the Midland 'bank to pay the drafts and the
drafts were dishonored. The checks in ~estion had been deposited
by the depositors with the understandi.ng that they would be immediately
credited to the depositor's account but the depositors could not withdraw
them until paid, and, if not paid, they would be charged back against
the depositor.
·
..
upon suit to foreclose on the collateral and apply the proceeds
towards the payment of the uncollected ~emittance draft an objection was
made that since the checks had been depo.si ted with the Midland bank,
under an agreement with the deposit.ors that if not paid they could be.
X-6264-.a
'l"""!n
((;, ( (-~',;
charged back to the depositors• account. The Midland.bank was neither
the ow!ler nor under aey legal liability to the owners; consequently,
could not ap;>ly the proceeds derived :from the sale of the collateral to
p~ing the uhcoliected remittance draft.
The Court, in passing upon
this claim, says:
"Whatever the rights between the ,deposi,tors iuld .the Plaintiff
mav be or would be if the plaihtif£ ha~ not charged back the
credits, the right of the plaintiff to foreclose the collateral
and ap~ly on the unpaid collection is clear••••Lmmediately upon
the failure of the Sioux Falls bank to !>BY, the plaintiff had a
cause of action against it for the· amount which it had collected
and did not pay. It had the legal title, so to speak, to dishonored .drafts drawn by the Sioux Falls bank. Whatever right
it had arose upon the failure of the bank to remit what it
received, and its righ~ was protected by the security of the
pledge agreement. 11
11 The contention that the plaintiff, having charged back
the credits against its customers cannot apply the collateral
in discharge of the obligation arising from the default
of the Sioux Falls bank, is without merit."
In the MIDLAND bank·case there was neither circular nor
Regulation governing this transaction. There was no contract between
the MIDLAl'!D bank and the STATE bank similar to the contract between
the RICID.'i:CJ)!D bank and the LAKE CITY bank, of which u:BLY was Receiver,
authorizing the items to be charged against the collecting bank's account,.
and, which contract the Court, in the EARLY case, heln ran to the
benefit of and was enforcible on behalf of the owners of the items
involved.
The Court, however, held that, notwithstanding the
MIDLAND bank had the express right to charge the 1tams back to the
·depositors, the 'S'M.TE bank had actually colle.cted the· funds, .released
the drawers of the separate items, and, had attempted to remit by
uncollectible draft; that the MIDLA.ND bank: had the legal title to the
dishonored draft which draft constituted an indebtedness to the MIDLAliD
bank covered by the pledge agreement and collectible out of the
collateral.
It is hard to follow the reasoning in this case in establishing
the right unless the Court was of the opinion· that the MIJLA11D bank .:..
by accepting the draft instead of money - had become liable to the owners
of the ite~s for the loss occasioned by accepting the draft instead of
money in p~ent, and, being so liable, had the legal right to . the
draft, .~d, right to a set off against the securities held under the
pledge ~greement.
I cannot believe that under the Federal Reserve Banks' clearing
the MIDLA11D bank opinion would apply. The debt is not one,
owing to the Federal Reserve bank.. The agency is made so plain that
no Court· would hold the right to exist unless the express right is.
reserved in the pledge agreement to hold the excess collateral for the
benefit;of the owners.
opera.tiQ~s
What effect will the ruling in these cases have on Regulation, 1J 1
as amended, effective February 1, 1929?
~':<·.''*':_
' ' t''
.' '
,~
C)t--/0
~It)
X-6264-e
.
J
believe that the answer to this- <aU.estion aeperld(.upon whether
Jade±- . Re~erve. Ba'.tllts follow the 11 fime SchedUle- Charge ,AccoUl'lt 11 method
in use br ~d.cr.r~mnd_ when the EARLY case a.t61iej . S.n~; by- :Minfte$.pol:!.~' Whe'
the ctA:eKSFt~t~n M.se arose, or, whether they follbw the •Ooilectlon and
Remittancai pl~n !n use in the other F~deral Reserve~.
~he
The Federal Reserve Bank: of St. Louis has never considered
that the 'at any time f charge account clause affonifld any practical
protecticn. It was only intended as a weapon to enforce prompt remittance and useless for the reason that whenever a member bank re.ached a
condition that the weapon had to be used it was then too late to accomplish tbe intented purpose.
The Federal Reserve Bank of St.Louis·has gone on the theory
that the member bank in the first instance could pay in cash, or,
•
remit by draft acceptable to the reserve bank; t!:'B.t a draft on a corresponq..ent collectable on the day of receipt was acceptable; that a draft ·
against the member bllnk• s balances (if thetba.lances justified the charge)
was acceptable; that a telegraphic order o~.~ ..m~mber bank: to charge
its balances (if sufficient) with the sum cd'rf'le~d in the particular ('·
inst~ice had the _same force and effect as a draft against sufficient
balances; that whether the remittance was made by draft against the member
bank• s balances or by an order directing the charge against member banks
balances, the only option the Reserve bank: had was to reject the draft
or the order when the member banks' balancee were not sufficient to withstand the charge.
If this is the correct interpretation of the amended: Regulation,
it would follow that Federal Reserve :Banks ·will have to d:i,scontinue the
exclusive "Time Schedule Charge Account" method and we will not be bothereq
further by the ruling in the EA.RLY case.
·
If, on the other hand, the tat the option of such Federal Reservf.
:sank: to authorize such Federal Reserve bank: tp. charge their reserve accounj"
- which was left in the amendment, - is susceptillle to an interpretation .,
that the amended Regulation gives to the Federal Reserve bank the option _;
to obtain-from member banks blanket authority to charge the member banks' ;
accounts with the funds collected, and, the Federal Reserve :Bank, exercis- .
ing this option, has obtained the blanket authority, then the Federal Reserve Bank would be in just the same posi t_ion wj_ th reference to its ~ights
and obligations as· the Richmond bank wa.s in, under the rule in tl~.e Jl.A.RLY
case before the amendment was maae; and, further, if the amended aegulatio~
is s~sceptible to this interpretation, might it no~ be plausibly argued
'
With .sufficient force to ·gain the ··ear of .the Court that since the Regula- '
tio~ gives·to the Federal Reserve bank the option to require the ~thoriza"'
tion to charge the member ba.nks t balances wi·th the collections, i t is liabl,e
_to ~e owner if. in a particular in~tance .it could have. protected the owner'"t·y
obta~ning the authority and did not do so:
THEREFORE, woul,d it not be
better for the several F.ederal ·Deserve :Sanks to get together on Br Unifol"!Jl
Methoa, and adopt eit~er the "Time· Schedule ~rge Accou.rit" method arui' reinstate the· or~giil&l Regb.l-.tion ... or, adopt the ncollection and I\emi ttance'l,
meth.od exclusively,: a.ocepting in payment money, draft on its correspondent-.l
(collectible onw of receipt), draft against sufficient bal~ces in the
-8-
X-6264-e
2 ~-1.-'V
1
'::t
Reserve batik, or a telegraphic or written order to charge the account
when the balances justified th& charge.
If the 'Collection and Remittance' method was adopted,
would it not be better to leave the "at the option of such Federal
Reserve :Bank" out of the amendment entirely and have the amendment
read:
"Checks received by a Federal Reserve Bank on its member
or non-member clearing banks will ordinarily be forwarded
or presented direct to such banks, and, such batiks will
be required to remit or pay for them at par in cash
or bank draft acceptable to the collecting Federal
Reserve :Batik." ·
•
Then to have the reserve bank circular provide that a draft
against a correspondent bank is acceptable within the meaning of
Regulation 'J' when it can be collected in money upo~ the day of receipt;
that a draft against the reserve accoun.t of the member bank or the clearing account of the non-member bank is acceptable within the meaning of this
.Regulation when the books of the Federal Reserve Bank show sufficient ·
' funds in the account to jus.tify the payment of the draft; that a
telegraphic order from the member or non-memb~r clearing bank to charge
its account with the collection will be 'treated the same as a draft
on its account.
My personal views are that, in the event the EARLY decision is
affirmed and any of the banks continue to qperate under the 11 Charge Account"
instead of the "Collection and Remittance" method, we will be heading
for trouble. Especially will this be true if the decision in the MIDLAND
bank case is sound law.
:Based on the 14 years' Clearing House operations, our observation
in the 8th District Shows that in practically every member batik failure,
the reserves, stock cancellation proceeds, and all 'We can collect on col- .
lateral held under our Collateral Pledge Agreement, are rately sufficient
to more than take care of the insolvent bank's rediscount liability to the
Federal Reserve :Bank, and,. if the right to c~ge the reserves, stock
cancellation funds, and,. proceeds received from the~sale of the collateral
held under the Collateral. Pledge Agreement, are chargeable with the payment
of unremitted for cash letters, there will not be sufficient funds to pay
·both.
How would"the allocation of such funds be made as between the
debt due to the bank on rediscount operations and the debt due the batik,
as ag~nt, for the owne.rs of the unremitted for collection items?
·
Courts do not look with favor upon the transactionsof an agent
holding a fund as security for a debt due· the agent· indi vidu.ally" and, a
debt due him in his agency relation, preferring himself to the disadvantage
of the. person f.or whom he is acting as agent. ·
It is true that provision might be made in the pledge agreement
to the effect that the proceeds deriTed from tho Collateral Pledge should
-9-
first be applied to the rediscount and over-draft obligations, and, so
much of the remainder (if any) as was necessary be applied towards paying
outstanding unremitted for cash lett~rs. The Pledge Agreement would
probably solve the question of the allocation of the pledge funds, but,
the same question would arise covering the reserve balances and
the stock cancellation funds as between the discount indebtedness and
the indebtedness on unremitted for cash letters.
We are familiar with the different holdings of the Courts
on Commercial Law questions prior to the adoption of the Uniform
Negotiable Instruments Act and the chaotic condition incident thereto,
and, with how much assurance we can now advise a client as to his
rights and corresponding obligations in Commercial Law matters.
We know from practical experience how hard it has been to get
the Courts to recognize that the rights and corresponding obligations of
Federal Reserve Banks operating under the Federal Reserve Board's
Regulations and the Federal Reserve Banks~ circulars, are different
from the rights and corresponding obligations of Commercial bank's
operating under the Negotiable Instrument Act.
Now that we have been able (in a limited degree) to gain
the recogni ti.on of the distinction between a Commercial :Bank's rights
and obligations under the Negotiable Instruments Law and the Federal
Reserve Banks' rights and obligations under the Federal Reserve Board's
Regulations and ba,nk:s circulars, we ought not to confuse the situation
further by having two reserve banks, operating under the same Regulations
and practically the same circular letter, operate under such entirely
different methods as to enable the Courts in one District to rule one
way and the Courts in another District to rule directly to the contrary
on the same Regulations and Circular Letter.
It would therefore seem that a uniformity of action by the
Federal Reserve Banks is highly desirable and you might say necessary
if we would adopt the safest course.
Very truly yours,
(S)
Jas. G. McConkey,
Counsel.
x-622s
JanuB.ry 26, 1929.
Honorable A. Ueland,
401 Uew York Life Bldg.,
Minneapolis, Minnesota.
Dear Jud€;e Ueland:
I have received :,.·our letter of January 14 and have
read vvi th much interest the enclosed mer.:orandum addresr.ed by
Mr. Sigurd Ueland to the Federal Reserve Bank of Minneapolis
with regard to the :policy to be followed by that bank in asserting rights on behalf .of depositors of unremitted for transit
items against receivers of insolvent member banks.
You suggest that this raises a question of :policy
which is of interest not only to the Federal Reserve: Bank of Minneapolis but to the other Federal reserve banks, and request an
informal and entirely unofficial expression of my views!
I agree with you that the questions raised in this
memorandum are of interest to the entire Federal reserve system;
.and, inasmuch as they vi tally affect the understanding arrived
at between counsel for all the Federal reserve banks and the
office of the.Comptroller of the Currency during the conference
of counsel held on July 13, 1925, I telegraphed for your :permission
to send copies of this memorandum to counsel for all Federal reserve banks. Having recei,ved your consent, I am sending copies of
this memorandum to counsel for all Federal reserve banks and
am requesting an expression of their views. I am omitting from
the copy which I am sending them, ·however, subdivicio~s 5 and 6 of
the memorandum, which :pertain solely to the peculiur [ituation of
the Federal Reserve Bank of Minneapolis and which you do not desire
to have circulated. Of course, I shall respect the confidential
nature of this memorandum and not disclose the co~1.tents of the same
to anyone in the office of the Comptroller of the Currency.
In view of the importance o:f the questions raised by
this IDf'morandlun and ·in view of the changed situation re·sul ting from
the covxt decisions discussed therein, I. believe that it would be
well t~ have a conference of counsel of all Federal reserve banks
in Washington some time in the near future to discuss this entire
subject, endeavor to reach an agreement among ourselves, and then
discuss the subject with tha Comptroller of the ·Currency in an
effort. \o reach an agree;nent with that office. I have not yet been
authorizt':d by the Federal R~cerve :Board to call such a conference,
()lA'!!-"' I
X-6226 N ~ i"
-2but expect to take the ~tter up with Governor Young ih the near
future and I shall appreciate an expresM.on, of your vie.ws as to
the adyisability of calling such a conference.
I am so greatly pressed for time that I cannot at this
moment give you a full statement of my views with regar~ to the
matters discussed in your memorandum. EY offhand views, however,
based upon only a hasty consideration of the s•.1bject, may be stated
briefly as follows:·
•
(1) With all due respect, I disagree with all three of the
legal conclusionc stated on page 8 of the memorGllldum. In doing so
I recognize that the decision of the Circuit Court of Appeals in the
Early case ari.d t:. . e decisions in the casetl of Keyes v. Federal Reserve
Bank of Minneapolis and Federal Reserve :Bank of Minneapolis v. First
National :Bank of Eureka apparently sustain your views on the first
point. The Early case, however, will be taken to the Supreme Court
o'f the United States, and I believe the decision of the Circuit Court
of Appeals will be reversed. Even if the Supreme Court does not re~
verse the Circuit Court of Appeals, I think the decision in the Early
case is distinguishable from any case ,arising in a district where
checks are· collected on the re-mi tta.nce basis instead of the charge
basis; because the Circuit Court of. Appeals based its decision so
largely upon the fact that the normal course ofbusiness of the Federal Reserve Bank of Richmond was to collect checks by charging same
to the reserve account of a drawee, and the banks which deposited
such check.s with the Federal Reserve Bank of Richmond did so in reliance upon the belief that they would be collected by charging them
to the reserve accounts of the drawee banks. The Circuit Court of
Appeals sustained the District Court on the question of the ·use of
the proceeds of the canceled Federal reserve bank stock, holding that,
under the specific provisions of the Federal Reserve Act, the proceeds
of this stock could not be used to pay the cash letters. On the
question of the .application of the collateral, I believe the decision
in the Midland National Bank case is clearly wrong and is also dis.:..
tingu.ishable from the case of a Federal reserve ba.nk collecting checks
under Regulation J, which specifically pro·.,.id.es that the Federal
reserve bank shall act only as agent and that, 11 The·Eml()unt of any
check for which payment is actually and finally· collected funds
is not re~eived shall be charged back to the forwardi:ng bank,
regardless of whether or not the check itself can be returned".
'"'\
(2) I agree with you that, in the present state· of the
law, it is unsafe for a Fed.eral reserve bank 'to release to the receiver the reserve acc.ount and probably the collateral, but not
the proceeds of. the c~mce],ed stock, without first obtaining a release of liability from the depositors of its uncollected cash
items drawn· on the insolvent bank or a court order instructing the
Federal reserv.e bank to ·release such assets to the receiver.
(3) I believe that, if your vi~ws of the law as expressed
on page 8 of the memorandum are upheld by the courts, there is
""3grave danger that the eoul·ts will hold that~ having the right to
a:p:9ly the reserve account, the proceeds of the canceled stock and
the collateral to the collection of outstanding unremitted for cash
letters, the Federal res13r.va bank has the duty to do so and cannot,
as an agent have. any interest adver&e to its principal, utilize
these assets to protect itself against.losse3 on rediscounts. I
have no positive view that the courts should reach this conclusion,
but· I feel that there is d.an~r that they may do so.
(4) I believe, therefore, that, in order to avoid placing
the Federal reserve banks on the horns of the dilemma pointed out by
Mr. Sigurd Ueland at the bottom of :page 9, the Federal reserv~ banks
should, as a 1Uc'1tt.er of policy, not insist upon the right to collect
cash letters out of the reserve accounts, the proceeds of the canceled
stock, or the collate~l, put, on the contrary, should do everything
in their power to C:l.ivest themselves of this right and the corresponding
~poasibili ty of :a duty to exercise it'. ·
( 5) I believe this is especialJ,.y important in view of the ·
fact that, if the courts shoald hold tna~ the Federal reserve banks
have such a <iuty and must exercise it, .it would seriously interfere
with the freedom · of the. Federal reserve banks in extending a~d through
rediscounts or loans to e. member _bank in a badly extended condition.
By taking additional collateral they can often extend financial assistance and _sOIDEitimes prevent the insolvency of a member bank; but would
hesitate t~. grant additional credH without taking additional collateral,.
· If the courts hold that the collateral must first ~e applied to the
collection of unremitted for cash letters, the possibility of extending such aid will be greatly curtailed, 'because the additional collateral
will not afford the same protection to the Federal reserve bank as it
has in the past.
( 6) I also disagree with the view expressed at the top of
page 7 that the ~ecent E\I"'lendLlent to Regulation J was not intended to
prevent the reserve balance from being available to pay unremitted for
cash let'ters after notice of suspension. On the contrary, that was
the sole purpose of the amendment.
, I have the· greatest respect fo;r your op~n~ons and those
of Ur. Sigurd Ueland; and it. is with LIU.ch· .regret that I disagree
to ouch a large extent with t~e ·views expressed in the _memorandum.
I could not, however, conscientiously ·refra.in from expressing my
disa.e;reemell\..t when tou requ.ested an informal' expression of my view!?.
Vii th kindest personal teijards and all best wishes for }loth
you and Mr. Si~~rd Veland, I
am
.
C()-rdially
.
you~s.
Walter Wyatt,
General· Counsel.
r-.rw:.vdb
X-6226-a
FEDERAL RESERVE E.fJ.lK .
Mil~TEAPOLIS
OF
• January 14, 1929.
Walter Wyatt, Esq., .
Counsel Federal Reserve Board,
Washington. D. C~
Dear Er • Wyatt :
We are taking the
liber~y
of enclosing copy of a rather
lengthy communication from us to the Federal Reserve Bar.k of
Minneapolis, dealing with a que.stion of policy which it seems to
us is of inte;rest not only to the JJiinnea:polis bank but to the.
other Federal Reserve Eanks.
You are familiar with the questions
discussed in this communication and i f you feel so inclined we
.
would very much appreciate having
an expression of your views •.
.
We
wo~d
understand, of course, that any such expression of views
would be entirely unofficial.
We do not know how the Minneapolis bank will deal with
.this problem.
If the bank should adopt our recom:.endations i t ·
occurs. to us it might be advisable to have a discussion of the
whole subject with representatives of.the Comptroller's office.
If this were don$,, we believe your good o·ff.ices might prove in-
valuable in
bring~ng
We
sho~ld
about an·understanding.
be glad to have you show the enclosed opinion
to Governor Young or any member of the Board, but of course we
would not want it submitted to the Comptroller's office in its
present form.
Yours very truly,
SU;:ME
(S)
A.• Ueland
Sigurd Ue-land
280
X-6226-b
January 8, 1929.
Harry Yaeger,
Deputy Govsrnor.•
The tecent decision of the Supretne Court J-f Minnesota in ihe
case of Mtd;l.and tational :Ba.nl·~ & Trust Cotnpany vs. :First State Bank of
siobx
ralis et ~1. has ~gain bruught
has repeatedly vexed
·~he
to
the fore the question which
Federal Reserve :Sank of Minneapolis.
That
question has various phases, but broadly it may be stated thus:
Vhat is to be the policy of the Federal Reserve Bank
of Minneapolis with respect to asserting rights on behalf
of its depositors of unremitted for transi.t items against
receivers of insolvent member banks?
The failure to answer this question correctly involves·
the possibility of so much future trouble, litigation and liability
that we have deemed it wise to reconsider i t in all its aspects at
the present time.
On account of your interest in and famdliarity
with the subject, .we wilJ. deal with it at some length, without making
much of an attempt at condensation.
1·.·
A mem,er bank closes and your bank has an. unremitted for
transit letter
ad,dreE~sed
to that bank outstanding.
returned .with the items unpaid. and protested.
no problem.
In t:r.at case there is
The items are simply charged back to your endorsers.
such a. case, with rare exceptions, the closed
on the items.
The let tor may be
ba1~
In
never became liable
-2-
X-6226-b
:But S"ll.J;Jooe tl"·,e drar1ee bank hss charged u:· the cht;;lcks to
respective drawers and has attempted to
otbe rwise.
ro:~.it
to y01.:tr
by draft or
In such a case your ba:n.:: has so:n0times ch.::i.rg.:>d up the draft
to the reserve account of
tr...o
member bank, a:ft0r notice of its suspension.
More often the credits t;ivGn for the i terns d.epositGd.
charged back tc thG respective depositors.
bank has
bank
tb~
ro$que~.:ted
\"T.l th
you have been
Where '.,hi,._, has been done, y0ur
authority from each clepcsitor to file a P,;oneral claim
in the receivership of the closei ballk as the depo':;itor 1 s
the understandin:"; 11 that the depositor
11
at~ent 11
and
would not look to" your bank
l1
11
11
wi th
except
for such dividends a's it might recei ve 11 on account of the O.epositor 1 s i terns.
In a typical ce.se some of the depositors of the checks represented by the
dishonored remittance draft have authorized your bank to file a clain on
the.ir behalf and others
have preferred to file their own claims.
Ac~ordingly
the amount of the transit claims filed by your bank has, in most case::;, bflen
less than the
a.e:·.~regate
amount of the unremitted for items.
In some cases the closed bank is liable to your bank on rediscounts
or bills payable.
The closed bank has stock in your bank; i t may have a
reserva ·oalance to its credit, and i t may have de:9osi ted collateral securities
under a collateral a.graement almost identical in terms with the one involved
in the Midland National Ba."'lk case.
Hence, the general question under con-
sideration may "t'e subdivided as follows:.
(1)
Are you entitled to charge reffiittance drafts to the reserve
account after notice of the suspension of the remitting bank?
(2)
Are you evtitled to hold the proc.eeds of the cancelled
Federal Reserve bank stock for the benefit of depositors of
unremitted for transit
items~
--3-
(3)
X-6226-b
.Are you entitled to hold the collateral securities and
the proceeds thereof for the same purpose?
(4)
If the preceding three questions are answered in the
affirmative, is there a conelative duty to your depocitor!:l
to assert these rights in their favor?
2.
In the Midland l{ational 13ank case the court held that collateral
securities heid pursuant to a collater&l agreement in the form used by
your bank cduia bE1 held ~s securi t~ for dishonored rem:l. ttance drafts notwithstanding the fact that the items att&lpted to be rcmi tted for by such
.
drafts had been deposited for conditional credit and subject to the right
to charge back if not collected, and notwithstanding the fact that such
checks had actually been charged back to the depositors after notice of
the suspension.
The view of the court was that the collection of checks
creates a liability on the part of the collecting bank to the forwardiig
bank; that such a liability is within the terms of the collateral agreement,
and that it is no business of the collecting bank or its receiver that the
fo:z:_warding bank may stand in a relation of trust to its depositors, or that
the latter may be the parties beneficially interested.
If the Midland decision is good law, as we think it is, then in
every case where your bank holds a collateral agreement you are entitled
to
ho~d
or foreclose on excess collateral from a closed national bank until
your claim on account of unremitted for transit items has been paid in full.
We limit this conclusion to national banks because there are statutes in
.certain of the states of the ninth district, .notably North Dakota and Minnesota, which
mi&~t
affect the result in the case of member state banks.
; . 2 c~t·_.
x-6226-b
'-."'14")
-4-
As the' decision of the state
c~urt
would not be cvntrolling in
cases in the federal courts, we will considor
bri~fly
the releV&1t decisions
of the latter.
In the case of Eeyes, as Receiver of the First N<1.tinnal Bank of
Clarkfield v. Federal Reserve Bank of Minneapolis, the United States District
Court for this district decided in 1918 that the reserve account was available
by way of setoff to pay Unramitted for tranait items the credits for which
had been charged back to its depositors ·oy the Federal Reserve Bank e.fter
notice of suspension.·
In Federal Reserve Bank of l·':~nnea:_polis v. Fir.st lTe.tional Bank of
Eureka (2?7
Fed~
300) it was held by the United States District Court for
• South DakOta that the
~eserve
account and also the ptoceeds of the cancelled
stock could be applied towards the liquidation of a dishonored draft sent in
attempted remi tta~ce of a tra.imi t iette:r·.
IIi the case of Thos. llai"ly• Receiver oi' the t&·mers and Merchants
Nationai Bank of take ~:i. ~y
v~ l\ldettai Reserve
Bank of Richmond, the United
States District Ct>urt for South Carolina has rendered a decision aga,inst
the Federal .Reserve Bank of Richmond and has held that the latter was not
entitled to use a reserve balance to pay unremitted for cheCks.
we know_ no written opinion was filed by the court.
So far as
The Richmond bank's method
of collecting transit letters .was by charging the reserve account in accordance with a time schedule.
We doubt, however, whether this could distinguiSh
·the case from the Clarkfield e.nd Eureka cases and it seems to us that there
is a conflict.
An appeal to the United States Circuit Court of Appeals for
the Fourth Circuit is pending.
We have read the briGfs on both sides and it
is not unlikely that there will be a reversal.
Federal district courta will usually follow the decision of circuit
-5-
x.:..6226-b
Q~"l/f
courts of appeals for other circuits even though inconsistent with theif""\::1'::.:
own previous holdings.
Foster on Federal Practice, #375.
Ih re Baird, 154 red. 215.
Warren Bros. Co. v. Evans, 234 Fed. 65~.
Vacuum Cleaner Co• v •. Thompson Mnfg. Co• 238 Fed• 239&
However, the decision of tho Circuit Court of
Apput:t~s
in the Richmond case
would not be follovred heb~ i±' ih co:hfU ct with p~iridi:(lles J.aid down by the
Circuit Court of Appeals for this cii'cu:i.t (.the Sth) •
That
coul't in the recent
case of Storing, as Receiver of the Merchants National Bank of Mandan vs.
First National Bank of Minneapolis hGld that the First National J3a.nk of
Minneapolis had the right to hold a deposit bala:nce agai:nst the receiver of
a na.tional batik to reimbUl·se itself for a transit letter where the remittance
draft in attempted payment thereof was received after notice of suspension.
This case was submitted in such a way that the point that the depositors of
the Fir.st National Bank were the beneficial owners of the claim against the
insolvent bank was probably not before the court.
The receiver, howeve-r, is
attempting to make this point in his petition for reargument which is still
pending. On this point Judge Cant, the trial judge, sai4 in his opinion:
11
No matter what the relation of the two banks here in
ques.tion may have been with their
re~pective
patrons on and
prior to December 21, 1923, the banks themselves were dealing
11
,,·,with each other as principals.
In any litigation between your bank and a receiver of a national
bank it ·is probable that the receiver could eith6r bring the action in or
remove it to the federal court.
See Studeoaker Corporation va. First National Bank,
10 Fed. (2nd) 590.
X-E'2~~G-b
-6-
.
o', ,.-.
~t"J~)
.All we can say at •?rEsent about the la1;· in t':e federal c,;ur'cs
is that the decision of the lower court in thE: Richmond. case raises doubt
as to what will be the ultimate answer to qu.:::stions (l) (2) a.nd (3) put above.
3.
The Federal Reserve Boa.rd has rCJCantl;.r a.rnendt:;d paragraph ( 4) of
Section V of Regulation J by eliminating the clause I
"any Fed\:lra.l reserve
bank may resdrve the right in its check-collecticn circular to charge such
items (checks) to the reserve account or rlearing account of any such bank
at any time when in any particular case the Federal reserve bank deems it
necessary to do
so~"·
This amendment becomes ef±'ective February 1, 1929.
tlle ri&;ht indiea.ted has been reRerved by yonr bank in your checkcollection circulars since August 1, 1924.
Such reservation certainly
strengthens the clatm of your nank to apply the reserve balance against
unremitted for transit letters.
The reason for amending Regulation J was doubtless the feeling
that if the Federal reserve barurs had the right to utilize reserve balances
for the payment of check collections, there might be a correlative duty to
the prejudice of their
~wn
claims
banks maintaining the balances.
April ll, 1928.
~n
rediscounts, and notes of the member
See letter of A. Ueland to Gov. Geery dated
The comptroller's office will undoubtedly contend that this
amendment of Regulation J shows an intention that the reserve balance is no
longer to be available to pay unremitted for transit letters after notice of
suspensioti.
In our opinion this was not the purpose or sffect of the amend-
ment.
The pledge agreement form used by your bank provides that your
•
bank "shall also have a lien upon an,y balance of tre deposit account 11 of the
member bank "existing from time to time · *
**
for any liability'' of the
X-622&~ ~
... 7..,
member bank to your bank
construction given in
~he
11
'2bf>
now existing or hereafter contracted."
Under the
Miqland National Bank case this is ari express
agreement that the reserve shall be available to pay unremittet for chelks.
The reser-t.re balance of a member bank is a.lso 1 1n a. sense, a
clearing balance.
As to !ibn-member clead.hg bahks ths Fed.etal lteserve Act,
:fri3i provides that such 'banks ttiust Ina.:l.ntaixi "~ 'ba.iance sufficient to offset
the items in hansh
fbrliie:t counsei
heid. for
its account by the Federal reserve bank."
A
of the Federal Reserve :Board has ruled that this phrase
IIi tems in transi t 11 refers to checks drawn upon the non-member clearing bank
and forwarded to it for collection by the Federal Reserve Bank.
Reserve Bulletin, Vol. 3, p. 617.
Federal
If this view is correct, then there is
clear intention shown on the part of Congress that the credit balance of a
non-J;letnber clearing bank shall stand as security for clearing balances against
it.
While not expressed in the Act itself it is persuasive to us that Cong-
ress intended the same as to reserve balances.
We will summarize our own views upon the questions under consider8"
tion as follows:
1.
Where a member bank or a non-member clearing bank fails-
to return or to remit for transit letters, you are entitled to
charge the amount thereof to the reserve or clearing account even
though the remittance draft be received after notice of suspension.
2.
Where a member bank fails to return or
letters, ypu are entitled to use
thE~
rem~t
for transit
procaeds of the cancelled
Federal Reserve bank ·dock to reimburse your depositors of the
items in such letters even though such items have been charged
back to
3.
s~ch
depositors •
•
Where a member national bank fails to return or remit
X-6226-b
-8for transit letters, and. your ba;'ik: holds collateral securities
pursuant to t"tte usual form of, collateral
agre~-nent
you are
entitled to hold this collateral or its proceeds tc r'"iml:lurse
your depositors of the i t8ms in suet letters,
We reserve our
orlinion as far a::; collateral securi tiGs deposited by 1oomoer
state bariks io cunc0rned.
With the decisions in t'lle scmmvhat muddled COlidi tioil ';JOinted out
abv"te, ·a lef.S;,;,l opinion is o::Uy what the law s:1ould: be; we c£n
what the law will be.
.
onl~~
12,1:·.esc
While we have always been able to maintain the fore-
going views in litigation up to the pi·esent time, decisions in other litigation may prove controlling against them.
However, we do not believe that even though
th~
Circuit Court of
Appeals should af:f'ii'IIl the lower court in the Richw.ond case that woUld
necessarily require us to revise our opinion as to the rights of your barik
in another circuit.
Such an affirmance would only have the effect of !!laking
your rights and obligations more doubtful than they are at present.
4.
The next question to be considered is whether th?- rule in the
Midland National Bank case, the rule we are contending for, has as a corollary
the requirement that the pledgee bank must share pro rata in the collateral
securities with its depositgrs of unremitted for checks.
In our opinion this
does not fo:Uow and we feel confident that .Your collate:.:·al securities may be
appropriated
fi~st
to the promis&ory notes and notes rediscounted by the insol-
vent member barik.
See U. S. Natl. Barik v. Westervelt, 55 Nebr. 424.
Freeman & Shaw v.• Citizens Natl. Bank, ?8 Iowa 150.
;
:~
C":-"~
.....
~-")
,c:~i:.'Jc-'
X-6286-b
-9-
T'i..:.e next question is whether, assuming your 'bank has the rights
herein indicated., there is not also a corresponding a.uty to utilize the
balance in the reserve account, proceeds of cancelled Federal reserve stock,
and excesP collateral for the benefit of your depositors of unremitted for
checks?
In other words is your bank liable1 as for a breach of trust. in
cases whero it has surrender~d reserve balahces or excess collateral to a
reciever of a suspended member bank?
On this point Sigurd Ueland in his
memorandum to you dated June 20, 1928 (First National Bank of Colman) said:
11 In
other words the Federal Reserve Bank
some extent on the horns ef a dilemma.
***
finds itself to
If the surplus is paid over
to your endorsers of the transit items your bank may be liable to
the receiver; if surrendered to the receiver there might possibly
be liability to your endorsers.
11
':i:'b.ere may be a question whether your bank is not under
some moral duty to its depositors to protect ihem as far as possible.
Especially in cases where an attempt was made to remit by draft on
the reserve acoount, it seems unfair that the balance in that account should be returned to the receiver rather than used for the
purpose intended by the officials of the suspended bank."
We are firmly of the opinion that if there is any obligation in this
situation to either the receiver or
Y~ur d.eposit~rs
checks, it is emphatically to the latter.
of unremitted for
In the light of the Midland National
Bank decision it is certain that your bank cannot continue surrendering excess
collateral to receivers without incurring a certain amount of unpopularity
With the better posted among such depositors.
Our recommendations are as follows:
.,_
X-6226-b
-11-
1.
That all settlements alre['dy made or agreed upon between
your barik and the
comptroller•~
office or a receiver, including all of
the so-called 11 0swego agreements" enterAd into, be allowed to stand.
2.
That hereafter no reserve balance, proceeds of cancelled
stock, or excess collateral held under a collateral agreement btJ surrendered
to a receiver until all transit claims filed 'hy
~rou.r
barik have be.en paid or
until a court of last resort has so c.rdereG..
3,
That your form of collat9ral agreement be
amend~d
so as to
state expressly that your barik has a prior lien on the reserve balance
an~
collateral securities for the note, rediscount and overdraft indebtedness
and a secondary lien for liability resulting from unremitted for transit
and collection letters.
(N. B. Some special consideration would have to
be given to the case of member state bariks in this connection.)
4.
That the comptroller be advised of this change of policy and
the reasons therefor, and that negotiations be opened looking toward a
speedy determination of the quostions involved by the Circuit Court of
Appeals of this circuit.
Counsel.
Assistant Counsel.
@FedFRASER