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Copy L-30 April 12, 1933 Parker Atlanta Heferring your wire A p r i l 11 I have every confidence i n your a b i l i t y to handle Gate City Case a s well a s i t can "be handled b y any one and see no need f o r immediate conference. I f you so desire., however, I s h a l l be glad t o confer with you any time or to review your proposed answer and w r i t e you any suggestions t h a t occur to me. In view of understanding a r r i v e d a t during Conference of Counsel June 1930, t h a t any case involving v a l i d i t y of r e v i s e d Begulation J should be considered of System importance, I am sending copies of our correspondence to Counsel f o r a l l Federal reserve banks and i n v i t i n g t h e i r views a s to what s t e p s should be taken to p r o t e c t System i n t e r e s t s . Suggest you send Counsel a l l other Federal reserve banks copies of p l a i n t i f f ' s p l e a d i n g a s soon a s p o s s i b l e . Please advise whether you de-sire to a s s o c i a t e System Counsel and a l s o whether i t would be p o s s i b l e to o b t a i n extension of time f o r f i l i n g answer i n view of g r e a t p r e s s u r e of o t h e r m a t t e r s . WYATT Copy TELEGRAM L-30 PEDEEAL RESERVE SYSTEM (Leased Wire Service) Received a t Washington, D. C. 113finr A t l a n t a 310p Apr 11 Wyatt Washn Gate City Cotton M i l l s , has "brought s u i t a g a i n s t r e s e r v e t a n k in s t a t e court here "based upon check seven thousand and odd d o l l a r s involved i n c l o s i n g of East Tennessee National Bank is Knoxville. This/matter concerning which I have "been w r i t i n g you. Shall immediately prepare answer. "by May f i r s t . Case must "be answered In view of shortness of time do you t h i n k I should come to Washington f o r conference or s h a l l we undertake to handle m a t t e r "by correspondence. Parker. 419p L-30-l) COLQUITT, PARKER, TROUTMAN & ARKWRIGHT ATTORNEYS AT LAW Suite 1607 William-Oliver Bldg. ATLANTA, GA. A p r i l 10, 1933. Mr. Walter Wyatt, General Counsel, Federal Reserve Board, Washington, D. C. Dear Walter: In r e : East Tennessee National Bank, Knoxville. Tennessee (Closed). I r e g r e t to advise you t h a t a s u i t d i r e c t l y involving Regulation J w i l l probably be i n s t i t u t e d s h o r t l y a g a i n s t the Federal Reserve Bank of A t l a n t a . As I wrote you s e v e r a l weeks s i n c e , the aggregate of checks drawn on the East Tennessee National Bank and involved in the c l o s i n g of t h a t bank was very c o n s i d e r a b l e . I am enclosing a copy of a l e t t e r which I have j u s t received from Mr. Winfield P . Jones, a lawyer of t h i s Bar, which s e t s out h i s c o n t e n t i o n s . In the f o u r t h paragraph of Mr. J o n e s ' l e t t e r he makes r e f e r e n c e to a d r a f t of the Knoxville Bank being "in the hands of the r e s e r v e branch p r i o r to the f o r m e r ' s suspension." I d o n ' t know j u s t what he means by t h i s s t a t e m e n t . As a m a t t e r of f a c t , the Nashville Branch d i d not receive a remittance d r a f t p r i o r to suspension. On the day the Knoxville "Bank f a i l e d to open the Branch received an a u t h o r i z a t i o n to charge i t s reserve a c c o u n t . J u s t a s soon a s s u i t i s f i l e d I w i l l advise you. Very t r u l y y o u r s , (S) Robt. S. P a r k e r . Xr-30—C WINFIELD PAYNE JONES, Trust Co. of Georgia B l d g . , A t l a n t a , Ga. April 8th, 1933. Mr. Robt. S. P a r k e r , William-Oliver Building, A t l a n t a , Georgia. Dear Bob: He: East Tennessee National Bank Knoxville. Tennessee (61osed) Replying to yours of the 3rd i n s t . , I am c o n s t r a i n e d to advise t h a t I have found nothing to contravene the d o c t r i n e of the Malloy case (264 U. S. 160) t h a t , in the absence of c o n t r a c t , the c o l l e c t i n g bank, forwarding the check f o r c o l l e c t i o n to the drawee, must secure cash f o r or the r e t u r n of the check. I t i s , of course, true t h a t a g e n e r a l , e s t a b l i s h e d , uniform and c e r t a i n custom ( T r a n s c o n t i n e n t a l &c Co. v . Federal Bank (Minn.) 61 A. L. R. 478) or a c o n t r o l l i n g S t a t e s t a t u t e (Chi. &c Co. v . Federal Bank, (Utah) 61 A. L. R. 456; Hicks Co. v. Bank, (4rk) 61 A. L. R. 482 (n) may modify the r u l e ; but such custom i s not e s t a b l i s h e d by a r e g u l a t i o n , e s p e c i a l l y one t h a t leaves i t o p t i o n a l with the c o l l e c t i n g bank whether i t t a k e s cash or check (Malloy, s u p r a . ) . In the Tennessee case, handled by you and Ed. J . Smith (with whom, by the way, I was graduated a t Georgetown i n 1903) the p o i n t was made t h a t the Regulation r e l i e d upon by the bank could not contravene the r u l e of law a p p l i c a b l e i n Tennessee, and, while a p p e l l a n t ' s p o s i t i o n i s t h i s Regard was b u t t r e s s e d by a u t h o r i t y , the Court did not p a s s upon the question but decided the case on o t h e r i s s u e s . ( L & B v . Bank (Tenn.) 10 S. W. (2d) 683). Nor am I a t a l l c l e a r t h a t , i n view of the f a c t t h a t the Knqxville b a n k ' s d r a f t was in the hands of the r e s e r v e branch p r i o r to the f o r m e r ' s suspension, the Courts w i l l quibble over the a p p l i c a t i o n of the r u l e t h a t the law takes no account of the f r a c t i o n s of a day ( i n r e : Gu.be lman, 10 F (2d) 926). Had the Knoxville d r a f t been upon some o t h e r bank than your c l i e n t ' s branch, the r u l e might have some a p p l i c a t i o n (Pascagoula Bk v . Bank 11 F. (2d) 866, c e r t , d e n ' d i n 271 U. S. 685), but the f i c t i o n w i l l be disregarded where, a s h e r e , i t s a p p l i c a t i o n would d e f e a t the a c complished s e g r e g a t i o n (In r e : Bugleman, I d . 930), L-30-c Be t h i s a s i t may, there can be l i t t l e doubt a s to the r e s e r v e "bank's negligence i n forwarding the check d i r e c t l y to a bank, whose unsound condition was or should have been known to i t , a s we b e l i e v e i s r e a d i l y e s t a b l i s h a b l e ( C a p i t a l &c Co. v . Bank 3 P (2d) 614) and, consequently, under the circumstances no course i s open to me except to advise s u i t a g a i n s t your c l i e n t . Yours s i n c e r e l y , (Signed) WR%. Copy: Gate City Cotton M i l l s . Winfield P . J o n e s . L-30-d COLQUITT, PARKER, TROUTMM & ARKWRIGHT ATTORNEYS AT LAW Suite 1607 William-Oliver Bldg. ATLANTA, GA. February 20, 1933. Mr. Walter Vfyatt, General Counsel, Federal Reserve Board, Washington, D. 0. Dear Mr. Iftratt: In r e : East Tennessee National Bank, Knoxville. Tennessee. I thank you f o r yours of February 1 7 t h . I am g l a d to note therefrom t h a t the m a t t e r has been taken up i n f o r m a l l y with the C o m p t r o l l e r ' s o f f i c e and t h a t the Receiver w i l l be a d vised not to do anything which would intimate t h a t the Federal Reserve Bank i s under any l i a b i l i t y f o r the checks which were involved i n the c l o s i n g of the East Tennessee National Bank. As I s t a t e d in my l e t t e r of February 13th, I do not know whether the Receiver has been i n f a c t making such remarks. I r e c e i v e d t h i s morning a l e t t e r from one Louis Silverman, a commission merchant of New York, and, by h i s l e t t e r head, an "Importer of Notions and N o v e l t i e s , " who complains of the handling of a small check and s t a t e s t h a t i f he cannot obtain from the Reserve Bank " t h i s money by r e t u r n m a i l , we w i l l have to b r i n g t h i s m a t t e r to the a t t e n t i o n of the Senior U. S. Senator of New York and ask him to p r o t e c t our i n t e r e s t s . " While I r a t h e r suspect t h a t I w i l l be a b l e to s l e e p d e s p i t e the f a c t t h a t the Senior Senator i s on my t r a i l , I am mentioning Mr. Silverman's l e t t e r s i n c e i t i s t y p i c a l of the p e r s i s t e n c e with which the Reserve Bank i s being besought to charge the unpaid cash l e t t e r s a g a i n s t the r e s e r v e account. With p e r s o n a l r e g a r d s , I am Sincerely yours, RSP/w Copy t o : (S) Robt. S. P a r k e r . Mr. W. S. McLarin, J r . , A s s ' t Deputy Governor, A t l a n t a , Georgia. 489 L-30-e February 17, 1933. Mr. Robert S. P a r k e r , 1607 William-Oliver Building, A t l a n t a , Georgia. Dear Mr. P a r k e r ; I have received and read w i t h much i n t e r e s t your l e t t e r of February 13, 1933, with r e g a r d to the complaints being made because of the handling of items drawn on the East Tennessee National Bank of Knoxville, Tennessee, and involved in the c l o s i n g of t h a t bank. The l e t t e r you wrote Mr. P e t r e e under date of February 13, 1933 i s a very e x c e l l e n t l e t t e r and I am g l a d to l e a r n from the f o o t n o t e to your l e t t e r of February 15, t h a t Governor Black has received a l e t t e r from Mr. P e t r e e apologizing f o r h i s remarks. In accordance with the suggestion contained in the t h i r d paragraph of your l e t t e r to me, I am bringing t h i s matter i n f o r m a l l y to the a t t e n t i o n of Mr, Await and Mr. Fouts and I s i n c e r e l y hope t h a t they w i l l c o r r e c t any erroneous impressions which the r e c e i v e r may have and w i l l caution him a g a i n s t e x p r e s s ing any opinion regarding the r e s p e c t i v e r i g h t s of the Federal reserve bank and the owners of the items in q u e s t i o n . I s i n c e r e l y hope t h a t the c l e a r explanations of the law and r e g u l a t i o n s contained i n the l e t t e r s which you a r e w r i t i n g to the owners of the items involved and t h e i r a t t o r n e y s w i l l avoid any l i t i g a t i o n i n t h i s m a t t e r ; b u t , i f s u i t i s brought, I s h a l l a p p r e c i a t e i t i f you w i l l keep me advised of a l l developments. With k i n d e s t personal regards and a l l b e s t wishes, I am WW gc Cordially yours, (S) Walter Wyatt, General Counsel. L—30—f COLQUITT, PARKER, TROUTMAN & ARKE7RIGHT ATTORNEYS AT LAW Suite 1607 William-Oliver Bldg. ATLANTA, OA. February 15, 1933. Mr. Walter Wyatt, General Counsel, Federal Reserve Board, Washington, D. C. Dear Mr. Wyatt: In r e ; East Tennessee N a t i o n a l Bank, Kfaoxville. Tennessee. The complaints made, "because of the handling of items drawn on the East Tennessee National Bank and involved in the c l o s ing of t h a t bank, a r e m u l t i p l y i n g and I am having to w r i t e many l e t t e r s with r e f e r e n c e t h e r e t o . Today I received a l e t t e r from the Anderson-Dulin-Varnell Company of Knoxville, which s e t s up the usual contentions but goes f u r t h e r and c h a r a c t e r i z e s the a t t i t u d e of the Federal Reserve Bank as being outrageous, e t c . I am e n c l o s i n g a copy of my r e p l y to t h a t l e t t e r , a s well as a copy of the l e t t e r addressed to my f i r m , which cont a i n s the charges of u n f a i r conduct. I have been t o l d t h a t , f o r a time a t l e a s t , the Receiver took the p o s i t i o n t h a t these cash l e t t e r s had been p a i d and should be charged by the Reserve Bank to the reserve account of the closed member bank. I do not know whether or not the Receiver made any such statements and I have not wanted to take up the m a t t e r formally with the Compt r o l l e r ' s o f f i c e . The Receiver i s said to be a very competent man and i t would seem u n l i k e l y t h a t he should so f a r mistake the law, the Regulation of the Federal Reserve Board and the general p r a c t i c e of the Comptroller's o f f i c e as to encourage claims of the c h a r a c t e r which a r e being made. I t might not be amiss f o r you, however, to mention the m a t t e r i n f o r m a l l y e i t h e r to Mr. Await or to Mr. Barse, with a suggestion t h a t they w r i t e the Receiver (Jay M. Riley) c a l l i n g h i s a t t e n t i o n to the demands t h a t a r e being made on the Federal Reserve Bank and r e q u e s t i n g him to make p l a i n the f a c t t h a t , i n the opinion of the Comptroller of the Currency, the Federal Reserve Bank 441 L-30-f COLQUITT, PARKER, TROUIMM & .1RKWRIGHT CONTINUATION SHEET Mr. Walter ffyatt - #2» 2-15-33, would not be a u t h o r i z e d to charge any such items a g a i n s t t h e reserve account a f t e r n o t i c e of suspension. There i s so much money involved, the p r o s p e c t s of dividends from the l i q u i d a t i o n of the East Tennessee Bank a r e so remote and the n e c e s s i t i e s of b u s i n e s s are so p r e s s i n g t h a t I am apprehensive of l i t i g a t i o n , although we a r e doing everything p o s s i b l e to make d e t a i l e d explanations to everyone and a r e working along o t h e r l i n e s to avoid such l i t i g a t i o n . I r e p l i e d a t such length to the Ande r s on-Dulin-Varne11 Company f o r the reason t h a t Mr. Anderson, of t h a t Company, was a d i r e c t o r of the East Tennessee National Bank and i s a very i n f l u e n t i a l man in Knoxville. Mr. Black has w r i t t e n Mr. Anderson a p e r s o n a l l e t t e r , asking him to review the f i l e , p a r t i c u l a r l y because of the charges made by one of the o f f i c e r s of h i s Company, Mr. Black adding t h a t he f e l t t h a t Mr. Anderson would regard such charges as being u n j u s t i f i e d . Very t r u l y yours, (S) Robt. S. P a r k e r . RSP/w. P. S.: Since the above l e t t e r was d i c t a t e d , Gov. Black has received a l e t t e r from Mr. L. H. P e t r e e , Vice-President of the Ande r s o n-Du.1 in-Varne 11 Company, apologizing f o r h i s remarks and s t a t i n g t h a t he gave vent to h i s f e e l i n g s because of the f a c t t h a t he had been almost "snowed under" with l e t t e r s and telegrams demanding t h a t he send d u p l i c a t e s f o r the checks of h i s Company which had been paid and c a n c e l l e d on the l a s t day the East Tennessee Bank was open f o r b u s i n e s s . ESP Ir-30-g COLQUITT, PARKER, TROUTMAN & ARKWRIG-HT ATTORNEYS AT LAW Suite 1607 William-Oliver Bldg. ATLANTA February 13, 1933. Mr. L. H. P e t r e e , V i c e - P r e s i d e n t , Anderson-Dulin-Varnell Co., Knoxville, Tennessee. Dear Mr. P e t r e e : In r e : East Tennessee N a t ' l Bank of Knoxville. Tennessee, I have your l e t t e r of February 11th, w r i t t e n with f u r t h e r r e f e r e n c e to checks of your Company, aggregating some $7,000, which were involved in the closing of the East Tennessee National Bank. Having h e r e t o f o r e s t a t e d the p o s i t i o n Reserve Bank, I would not burden you with f u r t h e r about the m a t t e r i f i t were not apparent t h a t you misapprehension as to s e v e r a l important phases of of the Federal correspondence a r e under a the s i t u a t i o n . So f a r as concern the l e g a l questions involved, I might s t a t e t h a t a number of c o u r t s , both State and F e d e r a l , including the Sup^eiie Court of the United S t a t e s , have upheld, as b i n d i n g , the Regulations of the Federal Reserve Board touching the c o l l e c t i o n of cheeks. Some f i v e or six years ago the L & IT Railroad Company brought s u i t a g a i n s t the Federal Reserve Bank of A t l a n t a , Nashv i l l e Branch, i n the Chancery Court a t N a s h v i l l e , based upon cont e n t i o n s very s i m i l a r to those you are now u r g i n g . The s p e c i f i c p o i n t s were made, (a) t h a t the Federal Reserve Bank had no r i g h t to send an item f o r c o l l e c t i o n to the bank on which i t was drawn, and (b) t h a t i t was not a u t h o r i z e d to accept i n payment f o r such item anything except cash. The Chancellor a t Nashville considered the case thoroughly and had no h e s i t a n c y in o v e r r u l i n g both contentions and in holding expressly t h a t Regulation J was binding upon a l l p a r t i e s , because i t had the f o r c e and e f f e c t of law and was s u f f i c i e n t to c o n s t i t u t e a c o n t r a c t between t h e L-30-g Mr. Zi. H. P e t r e e — ^3. 2—13—33• p a r t i e s to the t r a n s a c t i o n . The case was a f t e r w a r d s heard i n the Supreme Court of Tennessee and the d e c i s i o n of the court below was a f f i r m e d , although the higher court based i t s d e c i s i o n upon the p r o p o s i t i o n t h a t no damage bad been shown which could be the b a s i s of a recovery upon any t h e o r y . A determination of the o t h e r questions which were involved was held to be unnecessary. That case was one of the e a r l i e r cases and since t h a t time the Regulation has been upheld by a number of c o u r t s . I r e g r e t t h a t you regard the p o s i t i o n of the f e d e r a l Reserve Bank a s being "outrageous." f e e l i n g sure t h a t you would not hold t h i s opinion, whatever may be your views a s to what the law i s , or should be, i f you understood the r e a l reasons f o r the Regulation, I want to consider the whole m a t t e r w i t h you i n some detail. In the f i r s t p l a c e , you seem to t h i n k t h a t the Regulat i o n was framed p r i m a r i l y f o r the p r o t e c t i o n of f e d e r a l Reserve Banks. Such i s not the c a s e . The paramount reason was t o place a l l g e n e r a l c r e d i t o r s of a f a i l e d n a t i o n a l bank upon the same b a s i s and, i n b r i n g i n g about t h i s r e s u l t , the Comptroller of the Currency was p r i m a r i l y i n t e r e s t e d . To i l l u s t r a t e what I mean; suppose t h a t checks drawn on a n a t i o n a l bank reach i t j u s t b e f o r e suspension. These checks are p a i d , c a n c e l l e d and charged to the accounts of the drawers. The drawers a r e r e l e a s e d , j u s t a s in your case your company has no f u r t h e r l i a b i l i t y on i t s checks which have been p a i d . The bank, however, c l o s e s b e f o r e remittance has been made f o r the checks. The owners of the items have claims a g a i n s t the closed bank. Hundreds or thousands of d e p o s i t o r s a l s o hold claims a g a i n s t the bank. Were the f e d e r a l Reserve Bank to be permitted to reimburse the h o l d e r s of such checks out of the balance maintained by the closed bank with the Reserve Bank, the r e s u l t could only be to work a p r e f e r e n c e i n f a v o r of a c e r t a i n c l a s s of c r e d i t o r s and to d e p l e t e a fund which should, under the p r i n c i p l e s of the National Banking Act, be a v a i l a b l e f o r the b e n e f i t of a l l c r e d i t o r s . The f a c t t h a t the Reserve Bank i t s e l f may have a p r i o r r i g h t to u t i l i z e the balance toward the l i q u i d a t i o n of the indebtedness to i t of the closed member bank i s immaterial, s i n c e , always t h e o r e t i c a l l y and very o f t e n i n a c t u a l experience, such u t i l i z a t i o n of the balance r e s u l t s i n an e a r l i e r "redemption" by the r e c e i v e r of c o l l a t e r a l s h e l d by the Reserve Bank, which redeemed c o l l a t e r a l s a r e , of course, then a v a i l a b l e f o r general c r e d i t o r s . You have seen the c u r r e n t Check C o l l e c t i o n C i r c u l a r of the f e d e r a l Reserve Bank, which embodies c e r t a i n p o r t i o n s of 444 L-30~g Mr. L. .5. P e t r e e - #3. 2-13-33. Regulation J of the Federal Reserve Board. Some years ago the Federal Reserve Bank of Richmond had in i t s Check Collection Circular a p r o v i s i o n to the e f f e c t t h a t i t might charge the amount of a cash l e t t e r to the account of a member hank a t any time. A n a t i o n a l bank i n South Carolina f a i l e d . A f t e r suspension the Federal Reserve Bank of Richmond charged an o u t s t a n d i n g , unpaid cash l e t t e r a g a i n s t the member's account - j u s t what you trant the A t l a n t a Bank to do now. The Comptroller of the Currency, a d m i n i s t e r i n g the a f f a i r s of t h e n a t i o n a l bank, o b j e c t e d to t h i s charge and "brought s u i t a g a i n s t the Federal Reserve Bank of Richmond. The Federal Reserve Bank, basing i t s contention upon the p a r t i c u l a r p r o v i s i o n s of i t s own C i r c u l a r , urged t h a t i t had the r i g h t to make the charge even a f t e r n o t i c e of suspension. The case was f i n a l l y determined, f a v o r a b l y to the contentions of the Reserve Bank, by the Supreme Court of the United S t a t e s (Early v . Federal Reserve Bank of Richmond) and the decision of the court was put upon the p r o p o s i t i o n t h a t the Regulation was c o n t r o l l i n g , had the f o r c e and e f f e c t of a binding o b l i g a t i o n , and t h a t , under i t s express p r o v i s i o n s , the Federal Reserve Bank of Richmond had the r i g h t to do what i t had done, and what i t could not have done but f o r the Regulation. A f t e r t h i s d e c i s i o n Regulation J was r e v i s e d f o r the primary purpose, a s s t a t e d , of preventing the p r e f e r r i n g of one c r e d i t o r over a n o t h e r , such p r e f e r e n c e being contrary to the National Banking Act. I r e a l i z e , of course, t h a t many t h o u g h t f u l men agree with your opinion t h a t i t would be f a i r and e q u i t a b l e (using the word " e q u i t a b l e " i n i t s broad s i g n i f i c a n c e ) f o r a p r e f e r e n t i a l s t a t u s to be accorded claims based upon checks sent to a bank s h o r t l y b e f o r e i t s suspension f o r payment and remittance, canc e l l e d and p a i d upon r e c e i p t and not covered by any remittance in a v a i l a b l e f u n d s . A number of S t a t e s , including Georgia and Alabama in t h i s Federal Reserve D i s t r i c t , have provided f o r such p r e f e r e n t i a l s t a t u s by s t a t u t e , and other S t a t e s , f o r example, V i r g i n i a , Missouri and F l o r i d a , have recognized the r i g h t to a p r e f e r e n c e upon common law p r i n c i p l e s . By "preference" I mean, •f course, t h a t the r e c e i v e r i s authorized by law to pay such claims p r i o r to the claims of o t h e r g e n e r a l or unsecured c r e d i t o r s . I t has been uniformly h e l d , however, t h a t such s t a t u t e s and such d e c i s i o n s have no a p p l i c a t i o n to the l i q u i d a t i o n of n a t i o n a l banks. The l i q u i d a t i o n of such t a n k s i s governed by an Act of Congress, which provides f o r s t r i c t pro r a t a payment of g e n e r a l c r e d i t o r s of a l l c l a s s e s . The Federal c o u r t s , which have j u r i s d i c t i o n over causes involving the winding up of the a f f a i r s of n a t i o n a l banks, have held u n i f o r m l y , and in a long l i n e of cases (with but one 445 L—30—g Mr. L. H. P e t r e e - #4. 3-13-33. e x c e p t i o n ) , t h a t no p r e f e r e n c e i s to be accorded a c r e d i t o r s t a n d ing in the same s i t u a t i o n as the holders or owners of your checks. We cannot, however, talce i n t o account what some may t h i n k the law should "be. The m a t t e r of any change in the c o n t r o l l i n g s t a t u t e law can only "be addressed to Congress. I t i s a g e n e r a l r a l e of law t h a t a f t e r bankruptcy no check of the bankrupt can be honored by the bank upon which i t i s drawn. The Regulation of the Federal Reserve Board i s merely in accordance w i t h t h i s g e n e r a l r u l e of law. In the i n s t a n t case, however, we d i d not even have a check of the East Tennessee n a t i o n a l Bank. On January 20th, a f t e r suspension, we r e c e i v e d what was merely an a u t h o r i z a t i o n to charge the account of the East Tennessee Bank with the outstanding cash l e t t e r . You must remember a l s o t h a t the Federal Reserve Bank took your checks from o t h e r banks merely f o r c o l l e c t i o n and only as agent f o r the banks from which the checks were r e c e i v e d . We had no g e n e r a l a u t h o r i t y , by c o n t r a c t , by Regulation or under the law, to charge the checks a g a i n s t the account of the Knoxville bank. Any a u t h o r i z a t i o n in t h a t regard had to be s p e c i f i c a l l y given by the Knoxville bank, and no such a u t h o r i z a t i o n had been given p r i o r to suspension. In the absence of an agreement i t would be m a n i f e s t l y improper f o r the d e p o s i t l i a b i l i t y of the Reserve Bank in f a v o r of the Knoxville Bank to be charged with the amount of checks, drawn on the Knoxville Bank, which the Federal Reserve Bank had held merely a s an agent f o r c o l l e c t i o n . Such claims a r e not mutual and could not be, in law, the s u b j e c t m a t t e r of s e t - o f f . Commercial banks may, of course, f u n c t i o n somewhat differently. You r e f e r i n your l e t t e r to the American N a t i o n a l Bank of N a s h v i l l e . This bank sent items drawn on the Knoxville bank d i r e c t to the l a t t e r . They were not c o l l e c t e d through the Federal Reserve Bank* If the American National Bank e f f e c t e d c o l l e c t i o n of i t s items drawn on the Knoxville "bank, t h i s was doubtless due to r e c i p r o c a l banking r e l a t i o n s between those two banks. I am not undertaking to s t a t e the exact f a c t s , because I do not know a l l of the f a c t s . I do know, however, t h a t the American N a t i o n a l Bank sent i t s items d i r e c t to Knoxville f o r payment and c r e d i t to the Nashville bank. There could be no r e c i p r o c a l banking r e l a t i o n s between the Reserve Bank and the L—30—g Mr. L. H. Petpee - #5. 2-13-33. Knoxville "bank. The l a t t e r , under the law, was r e q u i r e d to maint a i n an account with the former, but the Reserve Bank could n o t , even had i t so d e s i r e d , have maintained an account w i t h the Knoxv i l l e bank, and, furthermore, the Reserve Bank could have done nothing except, a s a g e n t , to undertake the c o l l e c t i o n of checks pursuant t o the terms and p r o v i s i o n s of the Regulation. I want to assure you, furthermore, t h a t the Federal Reserve Bank has never taken a p o s i t i o n which i s i n c o n s i s t e n t w i t h t h a t which i s now being s e t o u t . You r e f e r to the case of the Holston Union National Bank. I happen to remember the f a c t s i n volved t h e r e . A l l checks which were i n the same s i t u a t i o n a s your items now a r e were t r e a t e d j u s t as your items a r e now being t r e a t e d , namely, a s being checks f o r which no remittance was r e ceived p r i o r to the c l o s i n g of the drawee. In the case of the Holston Union Bank (as was a l s o t r u e in the East Tennessee closing) c e r t a i n items r e s t e d on a d i f f e r e n t b a s i s a s to payment. The Holston Union Bank and s e v e r a l of i t s correspondents had, by a g r e e ment and with the permission of the Federal Reserve Bank, e f f e c t e d what i s known as an "Immediate Debit" arrangement. That i s to say, the Holston Union Bank had agreed t h a t when the Federal Reserve Bank received checks, drawn by such correspondent banks on the Holston Union Bank and s e n t to the Reserve Bank i n payment of the cash l e t t e r s of such correspondents, these checks could be immediately charged by the Reserve Bank a g a i n s t the account of the Holston Union bank. In o t h e r words, by agreement, checks drawn on the Holston Union Bank were t r e a t e d j u s t a s i f they had been drawn on the account maintained by the Holston Union Bank with the Reserve Bank. Certain of these immediate d e b i t checks were received by the Reserve Bank while the Holston Union Bank was open. They were charged to the account of the Holston Union Bank and then sent forward to the drawee f o r i n s p e c t i o n . At the time they reached the Holston Union Bank (the drawee) t h a t bank had closed. The Receiver of the Holston Union Bank took the p o s i t i o n t h a t the checks should not be regarded as paid d e s p i t e the arrangement f o r immediate d e b i t . A f t e r the lapse of s e v e r a l weeks, or p o s s i b l y of a month or so, the Compt r o l l e r of the Currency agreed t h a t the checks might be regarded a s paid. You w i l l , of course, see the d i f f e r e n c e between the Holston Union case and your case. In the former the charge had been a c t u a l l y made a g a i n s t the account of the Holston Union Bank while t h a t bank was open, and t h a t charge, with the a s s e n t of the L-30-g Mr. I . H. P e t r e e - #6. 2-13-33. Comptroller, was allowed to s t a n d . In your case no charge had been made to the account of the East Tennessee National Bank b e f o r e suspension. In the Holston Union s i t u a t i o n the Federal Reserve Bank never a t any time contended t h a t the charge to the account of the Holston Union Bank of the "Immediate Debit" checks should be r e v e r s e d , I r e p e a t what was said in my former l e t t e r , namely, t h a t there i s no way i n which we can accede to your r e q u e s t t h a t items drawn by you on the East Tennessee National Bank be charged a g a i n s t the account of t h a t bank maintained with the Federal Reserve Bank. I have, however, wanted to p r e s e n t the whole s i t u a t i o n i n d e t a i l , since nothing could be f a r t h e r from the f a c t than t h a t the Federal Reserve Bank i s a t t e m p t i n g to "grab" a n y t h i n g . All i t i s trying to do i s to l i v e up to the Regulations of the Federal Reserve Board and to conform to p r i n c i p l e s of a p p l i c a b l e law a s construed by the courts. You may be sure t h a t i f we were even to "undertake to do what you ask u s to do, the Comptroller of the Currency would take s t e p s to prevent i t ; i f we "paid" your items we would be met by the demand of the Receiver t h a t we account to him f o r the amount thereof. Very t r u l y yours, Robt. S. P a r k e r . RSP/w. L-30-h AEDERS0IT-IIULIIT-ViXEEE3LL-G0., KNOXVILLE, MHESSEB. February 11, 1933. C o l q u i t t , P a r k e r , Troutman & Arkwiright, Attorneys, Suite 1607 William-Oliver 31dg., A t l a n t a , Georgia. Gentlemen: Replying to your l e t t e r of February 10, we have hundred of checks involved, which, in the aggregate, amount to over $7,000.00. With the d e c i s i o n s i n our c o u r t s a b s o l u t e l y on a l l f o u r s i n our f a v o r , would i t not seem absurd f o r u s to y i e l d to the p o s i t i o n your c l i e n t has taken, and take upon ourselves such an u n j u s t burden? I , a mere layman, should not presume to argue such a m a t t e r with learned lawyers; but your reasoning i s not convincing. We must see whether our s t a t u t e s w i l l p r e v a i l I r e p e a t t h a t we do not understand the Federal Reserve Bank to have any powers in Tennessee beyond those granted by our S t a t e . Even i f i t were a p a r t of the executive branch of the National Government, we should be unable to a c cord any j u d i c i a l a u t h o r i t y to i t s r u l e s and r e g u l a t i o n s . We a r e , t h e r e f o r e , not convinced t h a t i t s r e g u l a t i o n s have the f o r c e and e f f e c t of law, as you s u g g e s t . We b e l i e v e the Federal c o u r t s have repeatedly ruled t h a t way. Our p o s i t i o n has already been recognized in two i n s t a n c e s , but the checks involved may have been sent through the American National Bank of N a s h v i l l e . A f i r m i n Lynchburg Va. and one i n S h e l b y v i l l e , Term, have r e p o r t e d t h e i r claims paid in f u l l . Their checks were paid and canceled h e r e , on January 17, j u s t a s most of those handled by the Federal Reserve Bank were. Payment of these checks was, a t f i r s t , d e c l i n e d on the same i d e n t i c a l grounds. When the Holston-Union National f a i l e d h e r e , over two y e a r s ago, the same c o n t r o v e r s i e s a r o s e , not only with r e s p e c t to t h a t bank, but to some o t h e r s in nearby towns. Those who r e f u s e d to pay again had t h e i r checks honored by the Federal Reserve a t N a s h v i l l e , through which they had been handled i n a s i m i l a r manner. L-30-h -2- As we "understand i t , the East Tennessee National Bank had ample funds deposited with the Federal Reserve to pay a l l items received from i t . We have, a l s o , been advised "by men who a r e in p o s i t i o n to know (and who a r e not i n any way connected w i t h the d e f u n c t bank) t h a t loans made by the Federal Reserve to the East Tennessee National a r e w e l l secured". The a c t i o n of the Federal Reserve Bank i s w e l l understood, but we t h i n k i t s attempt to grab funds belonging to correspondent banks, r e p r e s e n t i n g c o l l e c t i o n s i t had made a s t h e i r a g e n t ; and, thereby, t r y i n g to shunt the burden on merchants, who are s t r u g g l i n g a s we are today, i s o u t rageous and c a l c u l a t e d to break down what l i t t l e power or r e s i s t a n c e may y e t be l e f t in us to combat the p e r i l s of the day. There can be no j u s t i f i c a t i o n f o r such a c t i o n , and c e r t a i n l y i t should not be expected of the Federal Reserve Bank, i f i t has the s l i g h t e s t i n t e r e s t in the welfare of our c i t i z e n r y . We s h a l l pay none of the checks again u n t i l our c o u r t s have r u l e d t h a t the Nashville Branch i s not l i a b l e and t h a t we must s u s t a i n an u n j u s t and unwarranted l o s s of the amount. And o t h e r l o c a l f i r m s have advised me t h a t t h e i r a t t i t u d e i s the same. Yours very t r u l y , (Signed) L. H. P e t r e e , Vice-President. LHP.M. 4 L-30-i February 6, 1933. Mr. Robert S. P a r k e r , 1507 William-Oliver B u i l d i n g , A t l a n t a , Georgia. Dear Mr. P a r k e r : I have received and read vrith much i n t e r e s t your l e t t e r of February 3 , 1933, with regard t o the p o s s i b i l i t y t h a t t h e American National Bank of N a s h v i l l e , Tennessee, may b r i n g s u i t a g a i n s t the Federal Reserve Bank of A t l a n t a t o c o l l e c t the amount of two d r a f t s drawn by the American National Bank on t h e East Tennessee National Bank of Knoxville, Tennessee, and forwarded to the Federal r e s e r v e bank f o r c o l l e c t i o n but which were not c o l l e c t e d because of the f a i l u r e of the East Tennessee National Bank. I hope t h a t t h e l e t t e r which you wrote t o Mr. Frank A. Berry, Counsel of the American National Bank of N a s h v i l l e on February 2, 1933, r e g a r d i n g t h i s matter w i l l convince him t h a t t h e American N a t i o n a l Bank has no v a l i d claim a g a i n s t the Fede r a l r e s e r v e bank and, t h e r e f o r e , I am not a d v i s i n g counsel f o r the other Federal r e s e r v e banks of t h i s s i t u a t i o n pending f u r t h e r developments. I understand, however, t h a t you w i l l keep me a d - v i s e d of a l l f u r t h e r developments and I agree with your view t h a t , i f s u i t i s i n s t i t u t e d , the case w i l l involve questions of v i t a l i n t e r e s t t o a l l Federal r e s e r v e banks. 451 L-30-i Mr. Robert S. P a r k e r . -2- I t appears t h a t you have sent Mr. Berry a copy of the check c o l l e c t i o n c i r c u l a r of the Federal Reserve Bank: of A t l a n t a , which quotes Section V of Regulation J , "but i t does not appear t h a t you have sent him a complete copy of Regulation J . Permit me t o suggest, t h e r e f o r e , t h a t , i f you have any f u r t h e r correspondence with Mr. Berry about t h i s subj e c t , i t might be a d v i s a b l e f o r you to send him a complete copy of Regulation J and i n v i t e h i s a t t e n t i o n to the p r o v i s i o n s of Section IV as well as t o the p r o v i s i o n s of Section V. The p r o - v i s i o n s of Section IV may help him to understand t h e s i g n i f i c a n c e of " d e f e r r e d c r e d i t s " . I t might a l s o be a d v i s a b l e t o p o i n t out to him t h e exact changes made i n Section V - e s p e c i a l l y t h e i n s e r t i o n of the l a s t sentence of subsection ( 7 ) , - i n order t o get away from the d o c t r i n e of t h e Early Case. Thanking you f o r your courtesy i n informing me so promptly of t h e developments i n t h i s c a s e , and w i t h a l l b e s t wishes, I am, Cordially y o u r s , Walter wyatt General Counsel 452 COPY L-30-j COLQUITT, PARKER, TROUTMAH & ARKWRIGHT Attorneys a t Law S u i t e 1607 William-Oliver Bldg. A t l a n t a , Ga. February 3, 1933. Mr. Walter % r a t t , General Counsel, Federal Reserve Board, Washington, D. C. Dear Walter: In r e : East Tennessee n a t i o n a l Ban;, Knoxville, Tennessee. As s t a t e d to you i n t h e course of our telephone conv e r s a t i o n of a day or two s i n c e , cash items t o t a l i n g approximately $300,000.00 were involved i n the c l o s i n g of the above mentioned "bank. These items were enclosed i n two cash l e t t e r s , sent "by the N a s h v i l l e Branch to Knoxville on January 16th and January 17th, r e s p e c t i v e l y . January 19th (Lee's b i r t h d a y ) was a l e g a l h o lid a y i n both Tennessee and Georgia. The Knoxville baric f a i l e d to open f o r business on the morning of the 20th. On t h a t day, and i n r e g u l a r r o u t i n e , t a k i n g the holiday i n t o a c count, the Branch received i n N a s h v i l l e a t the opening of "business a u t h o r i z a t i o n s t o charge the r e s e r v e account of the Knoxville "bank with t h e amount of these two c a s h l e t t e r s . These a u t h o r i z a t i o n s were, of course, not honored. For some time p r i o r to the c l o s i n g of the East Tennessee National Bank the American National Bank of N a s h v i l l e had c o l l e c t e d items drawn on the Knoxville bank i n the f o l l o w i n g way: I t would send a l l of i t s items on Knoxville d i r e c t to the East Tennessee Bank, which "bank would, upon r e c e i p t , give the American Bank c r e d i t f o r a l l of such items as i t p a i d . contemporaneously with the forwarding of the items t o K n o x v i l l e , t h e American Bank would deposit i n the N a s h v i l l e Branch of the Reserve Bank a d r a f t f o r the f u l l amount of such i t e m s . I n other words, t h e r e were r e c i p r o c a l "banking r e l a t i o n s between t h e N a s h v i l l e Bank and the Knoxville Bank, but the former immediately checked a g a i n s t the items which i t forwarded t o Knoxville, d e p o s i t i n g i t s check or d r a f t f o r c o l l e c t i o n i n t h e N a s h v i l l e Branch of the Reserve Bank. N a t u r a l l y , upon the suspension of the Knoxville hank, we "charged "back" to endorsers t h e items which were i n the unpaid cash l e t t e r s . Among t h e s e items were two d r a f t s 453 L-30-j COLQUITT, PARKER, TROUTMAN & ARK1RIG-HT Continuation Sheet Mr. Walter W a t t - #2« 2-3-33. drawn by the American National Bank upon the l a s t Tennessee National Bank a g g r e g a t i n g a s u b s t a n t i a l amount. When the American National Bank attempted to charge back t o i t s own d e p o s i t o r s items which i t had taken on deposit or f o r c o l l e c t i o n , they were met with r e f u s a l s to acquiesce i n such charges and, i n view of t h e circumstances r e c i t e d above, i t would seem t h a t t h e N a s h v i l l e "bank had, i n f a c t , no r i g h t t o charge back t h e i t e m s . I t had taken these items e i t h e r on d e p o s i t or f o r c o l l e c t i o n and had e l e c t e d t o take i n payment a c r e d i t i n i t s own f a v o r on. t h e books of the Knoxvilie "batik. I am, of course, not t a k i n g i n t o account any e q u i t i e s which might e x i s t between those two banks by reason of the condition of the Knoxville bank a t the time i t gave t h e Knoxville bank c r e d i t . At any r a t e , because of i t s i n a b i l i t y t o recoup i t s own l o s s e s from i t s own d e p o s i t o r s , the American National Bank s t a t e s t h a t i t may be f o r c e d t o b r i n g s u i t a g a i n s t t h e Federal Reserve Bank i n an e f f o r t to f o r c e the charging a g a i n s t t h e r e s e r v e balance of the Knoxville bank of t h e two cash l e t t e r s . The s i t u a t i o n was, f o r a time a t l e a s t , complicated by reason of t h e f a c t t h a t the Receiver s t a t e d t o a number of persons i n t e r e s t e d i n the items t h a t t h e Federal Reserve Bank had been p a i d f o r t h e two cash l e t t e r s . He a p p a r e n t l y based t h i s statement upon the f a c t t h a t t h e Knoxville ban): had, a t the time i t paid the i t e m s , enclosed with our cash l e t t e r s , " c r e d i t e d " t h e account of t h e Reserve Bank on i t s own books. Of course t h i s " c r e d i t " was a mere bookkeeping e n t r y ; made f o r accounting purposes of t h e East Tennessee Bank and f o r i t s own convenience. I do not see how i t could p o s s i b l y be s a i d t h a t t h e r e were r e c i p r o c a l banking r e l a t i o n s between the F e d e r a l Reserve Bank and the East Tennessee Bank simply because the l a t t e r had, without t h e knowledge or consent of the former, e l e c t e d t o e n t e r a c r e d i t i n f a v o r of t h e Reserve Bank on i t s books. I n view of t h e l a r g e amount involved, l i t i g a t i o n may r e s u l t . I know very well p e r s o n a l l y Mr. Frank Berry of t h e N a s h v i l l e Bar, who i s counsel f o r t h e American N a t i o n a l Bank. I have w r i t t e n him a l l of t h e f a c t s very f u l l y i n t h e hope t h a t l i t i g a t i o n w i l l thereby be a v e r t e d . For your i n formation I am sending you a copy of the l e t t e r which I have w r i t t e n Mr. B e r r y . If a s u i t i s brought, i t w i l l , of c o u r s e , c o n t a i n a d i r e c t challenge of the v a l i d i t y of Regulation J . 454 L-30-j < COLQUITT, PAHKSH, TROUTMAH & ABKWHIGHT Continuation Sheet Mr. Walter W a t t - #3. 1^3-33, I s h a l l , of course, keep you advised a s t o any developments. With p e r s o n a l r e g a r d s , I am Very t r u l y y o u r s , (Signed) Bobt. S. P a r k e r . 455 COPY L-30-k COLQUITT, PARKER, TEODTIM & ARKWRIG-HT Attorneys a t Law S u i t e 1607 William-Oliver Bldg. ATLANTA February 2, 1933. Mr. Frank A. B e r r y , 1000 American T r u s t Building, N a s h v i l l e , Tennessee. Dear Frank: In r e : Bast Tennessee National Bank, Knoxville, Tennessee. In my l e t t e r of Tuesday I simply s e t out the formal f a c t s with r e f e r e n c e to the handling by the F e d e r a l Reserve Bank of t h e items which were enclosed with t h e cash l e t t e r s of January 16th and 17th, sent by the N a s h v i l l e Branch to the Knoxville bank, I understood, of course, a t t h e time t h a t l e t t e r was w r i t t e n , t h a t the only items forwarded by the Branch, i n which your bank was i n t e r e s t e d , were d r a f t s drawn by your bank upon t h e Knoxville bank. My l e t t e r was s e n t i n response t o your r e q u e s t t h a t you have i n f o r m a t i o n t o f u r n i s h your own customers and I did n o t , t h e r e f o r e , go i n t o t h e d e t a i l s of your t r a n s a c t i o n s with t h e East Tennessee Bank. ' Gov. Black i s today i n r e c e i p t of a l e t t e r from Mr. Williamson, of the American National Bank, i n which he r e f e r s to t h e f a c t t h a t t h e Bast Tennessee bank had c r e d i t e d t h e Reserve Bank, on i t s own books, with the amounts of the two cash l e t t e r s . Mr. Williamson seemed to be under t h e impression t h a t t h e r e was some s o r t of r e c i p r o c a l banking r e l a t i o n s between the Reserve Bank and t h e Bast Tennessee Bank. Sueh, however, was not t h e case. A F e d e r a l Reserve Bank i s permitted t o handle checks f o r c o l l e c t i o n only f o r the account of i t s member banks, other Federal Reserve Banks and the United S t a t e s , and c o l l e c t i o n s can be e f f e c t e d only upon the terms and under t h e c o n d i t i o n s l a i d down i n Regulation J of t h e Federal Reserve Board, the p e r t i n e n t p a r t s of which a r e embodied i n the Check C o l l e c t i o n C i r c u l a r of t h e Federal Reserve Bank, a copy of which was sent to you on Tuesday. You have d o u b t l e s s noted therefrom t h a t any checks forwarded f o r c o l l e c t i o n a r e sent upon t h e c o n d i t i o n t h a t r e - *»**##" ' •••- ft*,'-*.. .. s 456 Mr. Frank A. Berry - #g» 2-3-33. m i t t a n c e must "be made t h e r e f o r upon r e c e i p t i n some a c c e p t a b l e medium. There i s never any understanding t h a t t h e Federal Reserve Bank i s t o he " c r e d i t e d " with t h e amount of a cash l e t t e r on t h e "books of the r e m i t t i n g "bank. The Federal Reserve Bank could not l a w f u l l y maintain a balance of any kind with any commercial bank even i f i t d e s i r e d so to do. Any " c r e d i t " i n f a v o r of t h e Reserve Bank on t h e books of the East Tennessee Bank was merely f o r t h e accounting purposes of t h e l a s t Tennessee Bank and i n order t h a t i t might keep informed as t o the s t a t u s of i t s r e s e r v e b a l a n c e . The Regulations a r e to t h e e f f e c t , and. the p r a c t i c e i s , t h a t banks, to which cash l e t t e r s a r e s e n t , must remit w i t h i n t h e s p e c i f i e d t r a n s i t time, which, i n t h e o r y , and i n p r a c t i c a l l y a l l i n s t a n c e s a c t u a l l y , i s t h e time necessary f o r t h e c o l l e c t i o n to be completed. You mentioned something cm Tuesday about the f a c t t h a t , upon t h e r e c e i p t of items f o r c o l l e c t i o n , t h e bank forwarding such items i s g i v e n d e f e r r e d c r e d i t t h e r e f o r . A word of explanation a s to what i s meant by 11 d e f e r r e d c r e d i t " may be h e l p f u l « Under t h e law, each member bank must m a i n t a i n with i t s Federal Reserve Bank a balance i n c o l l e c t e d f u n d s , t h e amount of which i s confuted upon s p e c i f i e d percentages of t h e time and demairL d e p o s i t s of the member. The balance i n c o l l e c t e d funds mentioned i s c a l l e d the " r e s e r v e b a l a n c e , " There i s no s i g n i f i c a n c e to t h e word " r e s e r v e " except t h a t such balance i s supposed t o be i n t h e amount of the r e s e r v e r e q u i r e d t o be maintained under the p r o v i s i o n s of t h e Federal Reserve Act. To a l l i n t e n t s and purposes , t h e r e s e r v e account does not d i f f e r from an ordinary checking account, maintained by y. d e p o s i t o r i n a commercial bank. I have s e v e r a l -times mentioned t h e f a c t t h a t the r e s e r v e balance must be made up of c o l l e c t e d f u n d f . By t h a t I mean, of course, made up of cash or cash i t e m s , t h e proceeds of which have a c t u a l l y been r e a l i z e d on. When a check i s deposited with a Federal Reserve Bank and can be immediately c o l l e c t e d ( i . e . on the day of r e c e i p t ) , i t i s t r e a t e d a s cash. When the item deposited i s drawn on a "time p o i n t " or cannot be made immediately a v a i l a b l e a s cash f o r any other r e a s o n , i t i s termed a " d e f e r r e d i t e m . " M a n i f e s t l y , seme record must be kept of d e f e r r e d items and, a c c o r d i n g l y , they a r e posted t o the c r e d i t of t h e depositing!banks and a r e said t o be to t h e c r e d i t of the d e p o s i t o r s i n " d e f e r r e d a c c o u n t s . " A c t u a l l y , howe v e r , t h e items a r e merely i n t r a n s i t f o r c o l l e c t i o n and a r e not a v a i l a b l e f o r withdrawal or f o r r e s e r v e purposes. They a r e not t o the " c r e d i t " of t h e d e p o s i t i n g bank a t a l l except i n t h e sense : 457 Ir*30~k Mr. Frank A. Berry - #3* 2-2-33. t h a t they have "been received by t h e Federal Reserve Bank f o r c o l l e c t i o n and a r e "being c o l l e c t e d i n r e g u l a r r o u t i n e . I t i s obvious t h a t i t would r e q u i r e an enormous amount of work to t r a n s f e r each d e f e r r e d item to the r e s e r v e account of a member bank upon t h e day of a c t u a l c o l l e c t i o n , a s c e r t a i n e d a f t e r i n v e s t i g a t i o n . Accordingly, the whole country i s d i v i d e d i n t o zones, a s , f o r example, one-day, two-day and t h r e e - d a y zones, e t c . , and a c i t y or town i s spoken of as being on a one, two or t h r e e , e t c . day b a s i s . The zones a r e l a i d out so as to r e f l e c t the a c t u a l time r e q u i r e d i n p r a c t i c a l l y a l l of the cases f o r f i n a l c o l l e c t i o n . At t h e e x p i r a t i o n of the t r a n s i t time f i x e d by the Time Schedule f o r a p a r t i c u l a r i t e m , i t i s a u t o m a t i c a l l y t r a n s f e r r e d to t h e r e s e r v e account, whether or not i t has a c t u a l l y been c o l l e c t e d . I f c o l l e c t i o n i s not f i n a l l y e f f e c t e d , then the item i s ''Charged bank." The r e s u l t i s t h a t the banks r e c e i v e c r e d i t i n t h e i r r e s e r v e accounts f o r items of d e f e r r e d a v a i l a b i l i t y w i t h i n t h e time i n which such items should be a c t u a l l y c o l l e c t e d , although, in. i s o l a t e d i n s t a n c e s , c o l l e c t i o n may be i n f a c t completed b e f o r e or a f t e r the e x p i r a t i o n of the p e r i o d s p e c i f i e d i n t h e Time Schedule. Applying the p r a c t i c e to your c a s e , t h e d r a f t s which your bank drew on t h e East Tennessee Bank were posted i n the d e f e r r e d account, but they had not become a v a i l a b l e t o your bank f o r withdrawal or f o r any other purpos e a t t h e time of t h e suspens i o n of t h e drawee. You w i l l f i n d t h i s question of d e f e r r e d a v a i l a b i l i t y f u l l y d i s c u s s e d and t h e ' p r a c t i c e .iudi c i a l l y upheld i n Pascagoula National Bank v . Federal]' Reserve Bank, 3 Fed. (2) 465, and Same v . Same, 11 Fed. (2) 866. X|n t h i s case a p p l i c a t i o n was made t o the Supreme Court f o r a w r i t of c e r t i o r a r i , and the w r i t was denied. Under a l l t h e circumstances aid i n view of the g e n e r a l law and of t h e Regulations of t h e Federal Reserve Board, I do not see how t h e F e d e r a l Reserve Bank could l e g a l l y charge t h e amount of t h e d r a f t s of your bank a g a i n s t t h e r e s e r v e balance which r e mained i n i t s hands a t t h e time of the F a s t Tennessee Bank's c l o s i n g . The Federal Reserve Bank simply h e l d two d r a f t s f o r c o l l e c t i o n and i t had been unable to e f f e c t c o l l e c t i o n p r i o r t o the suspension of t h e drawee. Again, we h e l d t h e d r a f t s merely a s an agent f o r c o l l e c t i o n . I do not b e l i e v e t h a t , even i n t h e absence of t h e Regulation, we could o f f s e t demands held by the 458 L-30-k Mr. Frank A. Berry - #4. 2-3-33. Reserve Bank I n a f i d u c i a r y c a p a c i t y a g a i n s t a d e p o s i t l i a b i l i t y of t h e F e d e r a l Beserve Bank t o t h e drawee of t h e d r a f t s . You can be c e r t a i n t h a t the East Tennessee Bank d i d not pay the Federal Reserve Bank t h e amount of e i t h e r cash l e t t e r p r i o r to c l o s i n g . Any e n t r y made upon i t s books, shoeing a p u r p o r t e d c r e d i t i n f a v o r of t h e Federal Reserve Bank, was a mere e n t r y f o r t h e convenience of the East Tennessee Bank. The requirement imposed on t h a t bank by t h e Regulations and by the l e t t e r t r a n s m i t t i n g the items f o r c o l l e c t i o n , was t o remit t h e r e f o r . The d i r e c t i o n was not t o give the Federal Reserve Bank c r e d i t and, a s s t a t e d , n e i t h e r t h e East Tennessee Bank nor the Reserve Bank had the r i g h t , by c o n t r a c t or otherrd.se, to vary or a l t e r t h i s r e q u i r e m e n t . In i n v e s t i g a t i n g the question you r i l l d o u b t l e s s f i n d the case of Early v . F e d e r a l Reserve Bank of Richmond, decided s e v e r a l y e a r s s i n c e by, the United S t a t e s Supreme Court. The f a c t s i n t h a t case were t h a t , a f t e r the c l o s i n g of a n a t i o n a l bank i n South C a r o l i n a , t h e Federal Reserve Bank of Richmond charged an o u t s t a n d i n g and unpaid cash l e t t e r t o t h e r e s e r v e account of t h e closed bank. The r i g h t of the Reserve Bank to make t h i s charge a f t e r suspension was challenged by t h e Comptroller of t h e Currency and t h e Receiver brought s u i t a g a i n s t t h e Reserve Bank. I t appeared i n t h a t case t h a t t h e Richmond bank had r e s e r v e d i n i t s Check C o l l e c t i o n C i r c u l a r (pursuant to permission accorded by the then c u r r e n t Regulation of the F e d e r a l Reserve Board) the r i g h t to charge t o the r e s e r v e account of i t s members a t any time t h e amount of an o u t s t a n d i n g cash l e t t e r . The court h e l d t h a t , under t h i s C i r c u l a r , which was a c o n t r a c t binding a l l p a r t i e s , t h e Federal Reserve Bank could have charged the cash l e t t e r a g a i n s t t h e r e s e r v e account of the member p r i o r to suspension and hence t h a t t h e a c t u a l e n t r y would be p e r m i t t e d even a f t e r n o t i c e of suspension. S h o r t l y a f t e r t h i s d e c i s i o n was handed down, the Regulations of t h e Federal Reserve Board were r e v i s e d with t h e express purpose of p r e c l u d i n g the p o s s i b i l i t y of making charges t o r e s e r v e accounts a f t e r n o t i c e of suspension. I n other words, t h e r e v i s i o n of t h e Regulation was f o r the e x p l i c i t purpose of p r e v e n t i n g , i n f u t u r e c a s e s , the a p p l i c a t i o n of t h e holding i n the E a r l y d e c i s i o n . Among other reasons why i t w&s deemed d e s i r a b l e to adopt the p r e s e n t Regulation was t h a t a c o n t r a r y p r a c t i c e would work a p r e f e r e n c e of c e r t a i n c r e d i t o r s over o t h e r s . The C o m p t r o l l e r ' s o f f i c e wished t o see adopted a p r a c t i c e under which the r e s e r v e account of a c l o s e d n a t i o n a l 459 L-30-K Mr. Frank A- Berry - #5. 3-3-33. "batik would be a v a i l a b l e as a general a s s e t of the t r u s t and not be u t i l i z e d f o r the payment of the claims of a few p e r s o n s , based upon unremitted for cash l e t t e r s . Of course, i n cases where the closed member bank i s indebted t o the Federal Reserve Bank, t h e r e s e r v e balance i s a p p l i e d toward the l i q u i d a t i o n of t h a t i n d e b t e d ness , but the r e s u l t I s f o r the b e n e f i t ( a c t u a l or t h e o r e t i c a l ) of a l l c r e d i t o r s , s i n c e the a p p l i c a t i o n of the r e s e r v e balances to such indebtedness e f f e c t s , always i n theory and o f t e n i n a c t u a l e x p e r i e n c e , the e a r l i e r r e l e a s e of the equity i n t h e c o l l a t e r a l s h e l d under pledge by the Reserve Bank. I have perhaps gone i n t o t h i s matter i n unnecessary d e t a i l and have s t a t e d a good many t h i n g s which you loiow a l r e a d y , but I have wanted t o make the p o s i t i o n of the Reserve Bank perfectly plain. In your telephone conversation with me you r e f e r r e d t o t h e f a c t t h a t a few of t h e checks drawn on t h e East Sennessee Bank and sent t o t h e Federal Reserve Bank under what i s known a s the "immediate d e b i t " p l a n , were p a i d by charging t h e same to the r e s e r v e account of t h e East Tennessee Bank, n o t w i t h s t a n d i n g t h e f a c t t h a t the checks themselves a c t u a l l y reached the drawee a f t e r i t had c l o s e d . The immediate d e b i t arrangement r e f e r r e d t o was embodied i n a c o n t r a c t , a copy of which i s enclosed f o r your i n formation. You w i l l n o t e t h a t , under the p r o v i s i o n s of t h i s c o n t r a c t , the checks of one of t h e c o n t r a c t i n g p a r t i e s , drawn on t h e East Tennessee Bank, another of t h e c o n t r a c t i n g p a r t i e s , were, t o a l l i n t e n t s and purposes (at l e a s t so f a r as concerned t h e i r immediate a v a i l a b i l i t y ) , the same as i f they had been drawn on t h e r e s e r v e account of t h e East Tennessee Bank. In other words, t h e East Tennessee Bank had given consent i n advance t h a t when t h e checks of p a r t i c u l a r banks, drawn upon i t , were d e p o s i t e d w i t h t h e F e d e r a l Reserve Bank, they could be immediately charged t o t h e r e s e r v e account of the drawee and then forwarded t o t h e drawee i n order t h a t they might be charged to t h e accounts upon which thqy were dra^n. These arrangements were entered i n t o merely f o r the accommodation of t h e East Tennessee Bank and c e r t a i n of i t s correspondents, t h e former deeming i t to be f o r i t s b e s t i n t e r e s t s t h a t checks drawn upon i t by those correspondents should have t h e same a v a i l a b i l i t y as i f such checks had been drawn upon 460 L-30-k Mr. Frank A. Berry - #6. 3-2-33. "banks i n ITashville. Of course, however, the checks were charged to the r e s e r v e account of t h e Bast Tennessee Bank p r i o r t o n o t i c e of suspension. The p r a c t i c e was, t h e r e f o r e , not i n c o n s i s t e n t with the Regulations of the Federal Reserve Board and t h e same p r i v i l e g e was accorded t o other banks besides t h e East Tennessee n a t i o n a l Bank and i t s correspondents. The question of whether or not t h e charge a g a i n s t the r e s e r v e account , under such c i r cumstances, should s t a n d , m s s e t t l e d i n a case a r i s i n g out of the c l o s i n g of the Fourth National Bank of Macon, Georgia, (Pearson, r e c e i v e r , v . National Bank), decided by the C i r c u i t Court of Appeals f o r tho F i f t h C i r c u i t some t h r e e or f o u r y e a r s ago. The opinion of the court i s , however, so "sketchy™ a s to be almost u n i n t e l l i g i b l e t o one u n f a m i l i a r with t h e f a c t s i n the r e c o r d . I add f o r your personal i n f o r m a t i o n , t h a t t h e balance t o the c r e d i t of t h e East Tennessee Bank i n i t s r e s e r v e account, a s of the time of c l o s i n g , was somewhat i n excess of t h e aggregate of t h e two o u t s t a n d i n g cash l e t t e r s . The exact f i g u r e s can be f u r n i s h e d , .but, o r d i n a r i l y , information as to t h e a f f a i r s of a closed bank i s g i v e n out by the Receiver. With p e r s o n a l r e g a r d s , I am Sincerely yours, Robt. S. P a r k e r . End.
@FedFRASER