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1-32 A p r i l 14, 1933. Mr. Sigurd Ueland, 800 S e c u r i t y Building, Minneapolis, Minnesota. Dear Sigurd: Tremendous p r e s s u r e of urgent business growing out of the r e c e n t "banking c r i s i s has prevented me from r e p l y i n g more promptly to your l e t t e r of March 3, 1933, i n c l o s i n g N f o r my information copies of three opinions which you had rendered to the Federal Reserve Bank of Minneapolis d e a l i n g with the s u b j e c t of bank h o l i d a y s . I have j u s t now found an opportunity to read these opinions; and I f i n d them very i n t e r e s t i n g , although I am not prepared to agree w i t h a l l of the conc l u s i o n s which you have expressed. With r e f e r e n c e to the q u e s t i o n of the r i g h t of a Federal reserve bank to d e a l with a bank which has gone on a holiday or has otherwise suspended business temporarily b u t which has been p e r m i t t e d by the supervisory a u t h o r i t i e s to resume the t r a n s a c t i o n of a nonnal banking b u s i n e s s , I note t h a t you made no r e f e r e n c e to the d e c i s i o n of the C i r c u i t Court of Appeals i n the case of Lucas e t a l v . Federal Reserve B»nV of Richmond, wherein i t seems to me t h a t the Court i n timated very s t r o n g l y t h a t , i f the Comptroller of the Currency p e r m i t s a n a t i o n a l bank to remain open and continue to t r a n s a c t i t s normal b u s i n e s s , the Federal r e s e r v e bank i s j u s t i f i e d i n assuming t h a t i t i s a solvent bank and i n d e a l i n g w i t h i t a s such. L-32 Mr. Sigurd Ueland. In the l i g h t of the events which have t r a n s p i r e d sinc e your opinions were rendered, and e s p e c i a l l y in view of the u n precedented emergency s i t u a t i o n c o n f r o n t i n g our banking system, I am i n c l i n e d to "believe t h a t the c o u r t s w i l l "be disposed to go a s f a r a s p o s s i b l e i n upholding the v a l i d i t y of t r a n s a c t i o n s entered i n t o in good f a i t h by the Federal r e s e r v e banks i n order to meet the emergency, e s p e c i a l l y where the Federal reserve banks a c t e d reasonably and no g r e a t i n j u s t i c e r e s u l t e d . In o t h e r words I t h i n k a l o t of new case law w i l l grow out of the r e c e n t banking emergency and t h a t i t i s impossible to p r e d i c t what the c o u r t s w i l l hold were the r e s p e c t i v e r i g h t s of various p a r t i e s i n the l i g h t of the unprecedented s i t u a t i o n t h a t faced the country d u r ing the f i r s t t h r e e months of t h i s y e a r . I am sending copies of your opinions to Counsel f o r a l l of the o t h e r Federal reserve banks and I am sure t h a t they w i l l read them with much i n t e r e s t . T r u s t i n g t h a t your F a t h e r 1 s h e a l t h has m a t e r i a l l y improved and w i t h k i n d e s t p e r s o n a l regards to you both, I am, Cordially yours, ffW/omc (S) Walter Wyatt General Counsel Copy L-32-a UELAED & UBLAND Attorneys and Counselors 800 Security Building Minneapolis March 3, 1933. Walter Wyatt, E s q . , Counsel Federal Reserve Board, Washington, D. C. Dear W a l t e r : I enclose copies of three opinions I have given the Federal Reserve Bank of Minneapolis d e a l i n g with the s u b j e c t of "bank h o l i d a y s " . I have not forwarded copies of these opinions to the counsel f o r the Federal r e s e r v e "banks or to the Acting Comptroller of the Currency, because I am not sure t h a t you agree with the views expressed i n these opinions and would not wish to d i s t r i b u t e the same except with your a p p r o v a l . I f you wish to send out copies, I have no o b j e c t i o n whatever. Owing to the i l l n e s s of ay f a t h e r , we a r e deprived of the b e n e f i t of h i s opinion during t h i s vexatious p e r i o d . Very s i n c e r e l y yours, (Signed) Sigurd Ueland SU*MS. 468 .Spfflr 1-32-1) February 24, 1933. Federal Heserve Bank of Minneapolis. We have considered the question of ""bank h o l i d a y s " i n our opinions to you dated December 1, 1932 and January 20, 1933. In these opinions we only considered questions a r i s i n g while a bank i s e n j o y i n g a "holiday"; we did not consider questions p r e - sented a f t e r such a bank has resumed ordinary banking b u s i n e s s . In our e a r l i e r opinions we came to the conclusion t h a t f o r a n a t i o n a l bank to d e c l a r e a "bank h o l i d a y " was an insolvency" w i t h i n the meaning of the n a t i o n a l Bank Act. "act of The N a t i o n a l Bank Act p r o v i d e s : "All t r a n s f e r s of the n o t e s , bonds, b i l l s of e x change, or o t h e r evidences of debt owing to any n a t i o n a l banking a s s o c i a t i o n , or of d e p o s i t s to i t s c r e d i t * * * made a f t e r the commission of an a c t of insolvency * * * made w i t h a view to p r e vent the a p p l i c a t i o n of i t s a s s e t s i n the manner p r e s c r i b e d by t h i s c h a p t e r , or with a view to the p r e f e r e n c e of one c r e d i t o r to a n o t h e r , except i n the payment of i t s c i r c u l a t i n g n o t e s , s h a l l be u t t e r l y n u l l and v o i d * * United S t a t e s Code, T i t l e 12, Sec. 91. Taking c o l l a t e r a l f o r a p r e s e n t loan of money i s not a p r e f e r e n c e i n bankruptcy and the c r e d i t o r i s allowed to e n f o r c e the s e c u r i t y a g a i n s t the t r u s t e e i n bankruptcy of t h e borrower, even though the borrower was known to be i n s o l v e n t a t the time the loan was made. We understand t h a t the lower f e d e r a l c o u r t s have a r r i v e d a t a s i m i l a r r e s u l t i n cases of loans made on c o l l a t e r a l L- 32-1) Federal Reserve Bank - #2 to i n s o l v e n t n a t i o n a l banks. However, under the National Bank Act not only t r a n s f e r s p r e f e r r i n g one c r e d i t o r over another a r e v o i d ; t r a n s f e r s a f t e r a n a t i o n a l "bank has committed an a c t of insolvency a r e void i f '•made with a view to prevent the a p p l i c a t i o n of i t s a s s e t s i n the manner p r e s c r i b e d by t h i s chapter". The a p p l i c a t i o n of a s s e t s here r e f e r r e d to i s a r a t a b l e d i s t r i b u t i o n among a l l the c r e d i t o r s of the Bank. Where a loan i s made to a n a t i o n a l bank the purpose of the borrower i s u s u a l l y , i f not always, to use the proceeds to pay off c e r t a i n d e p o s i t o r s or o t h e r c r e d i t o r s of the bank. This being so, i t seems to us t h a t the Supreme Court might hold a pledge of c o l l a t e r a l to secure a loan to a n a t i o n a l bank, made a f t e r the commission of an a c t of insolvency, to be ' b i t t e r l y n u l l and v o i d " . In the case of Hirning v s . Federal He serve Bank of Minneapolis, 52 Fed. (2d) 382, the United S t a t e s C i r c u i t Court of J p p e a l s f o r t h i s C i r c u i t held t h a t a person d e a l i n g w i t h a n a t i o n a l bank a f t e r an a c t of insolvency i s l i a b l e i f such person p a r t i c i p a t e s i n t r a n s a c t i o n s which r e s u l t i n o t h e r c r e d i t o r s r e ceiving a preference. I f your Bank should lend money to a n a t i o n a l bank knowing t h a t i t had committed an a c t of insolvency, and knowing or having good reason to suspect t h a t the proceeds of the loan would be used to p r e f e r c e r t a i n c r e d i t o r s of the n a t i o n a l bank, we do not f e e l a t a l l c o n f i d e n t t h a t your Bank would 470 L-32-b f e d e r a l Reserve Bank - #3 be able to hold and enforce the c o l l a t e r a l given f o r such loan* The next question i s *» when a bank has committed an a c t of insolvency, how long does t h a t f a c t operate as a danger s i g n a l to a l l who do b u s i n e s s with the bank? Neither the s t a t u t e s nor the d e c i s i o n s seem to throw much l i g h t on t h i s q u e s t i o n . Certain- l y the a c t of insolvency can be cured by the r e s t o r a t i o n of the •bank to a c t u a l solvency. But the s i t u a t i o n you w i l l be c o n f r o n t e d with i s one where there has been an a c t of insolvency by a bank which subsequently resumes doing b u s i n e s s , b u t remains i n f a c t i n solvent, In t h i s s i t u a t i o n the f a c t t h a t the banking a u t h o r i t i e s have f a i l e d to perform t h e i r duty and appoint a r e c e i v e r f o r t h e bank would h a r d l y c o n s t i t u t e a s h i e l d behind which o t h e r s could hide. On the o t h e r hand the c o u r t s would h a r d l y a s s e r t t h a t a t r a n s f e r was " u t t e r l y n u l l and v o i d " because of an a c t of insolvency ten years p r i o r t h e r e t o . I t i s a question of degree where no d e - f i n i t e boundary l i n e can be drawn. In the e a r l i e r s t a g e s , however, a f t e r an a c t of insolvency has been committed we t h i n k you cannot d e a l with the bank i n question without considerable r i s k u n t i l i t has been examined by the proper banking a u t h o r i t i e s and found to be in a solvent c o n d i t i o n . In conclusion, we t h i n k t h a t where a bank has gone on a "holiday" and then resumes the t r a n s a c t i o n of g e n e r a l banking b u s i n e s s , being i n f a c t . i n s o l v e n t , and the banking o f f i c i a l s shut t h e i r eyes to the s i t u a t i o n , you i n c u r considerable r i s k of l e g a l l i a b i l - 471 L—32—b f e d e r a l Reserve Bank - #4 ity; (1) i f you forward checks drawn on such "bank d i r e c t to i t f o r payment; (2) i f you pay d r a f t s drawn by such bank on i t s r e s e r v e account with your bank; or (3) f o r such bank, i f you make new loans or d i s c o u n t s ( i n the case of d r a f t s drawn on the r e s e r v e account you a r e c o n f r o n t e d with a r e a l dilemma because you may i n c u r l i a b i l i t y by r e f u s i n g to pay such d r a f t s , i f the member bank i s in f a c t s o l v e n t . ) As we i n d i c a t e d in our e a r l i e r opinions, t h e r e may be l e s s r i s k i n cases (2) and (3) where you a r e d e a l i n g w i t h a s t a t e bank organized i n a s t a t e in your d i s t r i c t , o t h e r than Michigan, than i n the case of a n a t i o n a l bank. Whether you should assume any or a l l of these r i s k s or whether you should take the p o s i t i o n t h a t these banks coming out of the "holiday" condition should f i r s t have t h e i r solvency passed upon by those o f f i c i a l s who were charged by law with t h i s duty, a r e q u e s t i o n s of p o l i c y outside of our j u r i s d i c t i o n . TJELAND & U5LAMD, ar sums. ; 472 L—33—c January 30, 1933 Mr. A. B. Larson, Assistant Cashier. Answering your memorandum dated January 18, 1933 with r e f e r e n c e t o so c a l l e d t a n k h o l i d a y s . Where the banking a u t h o r - i t i e s permit such an anomalous, i f not i l l e g a l , s i t u a t i o n to e x i s t , i t c r e a t e s a very embarrassing s i t u a t i o n f o r your bank. I should t h i n k t h a t i n such i n s t a n c e of a member n a t i o n a l bank, o r a member s t a t e bank l o c a t e d i n Michigan, which goes on a "holiday", your bank should immediately n o t i f y such member t h a t you w i l l not honor d r a f t s on the reserve account and your bank should f u r t h e r ask f o r i n s t r u c t i o n s a s to c o l l e c t i o n s . I t h i n k bonds can s a f e l y be surrendered to the bank i t s e l f but not to o t h e r s . Indeed I see no reason why currency payments might not be made to the bank i t s e l f , or why moneys i n the r e s e r v e account might not be paid to the bank i t s e l f by means of your b a n k ' s d r a f t or c a s h i e r ' s check. In such a case I see no reason why l i a b i l i t y should a t t a c h to your bank under the p r e f e r e n c e s t a t u t e (U.S.C. t i t l e 12, s e c . 91 i n the case of n a t i o n a l banks) u n l e s s your bank in some way i s a p a r t y to a •plan whereby some c r e d i t o r or c r e d i t o r s of the member bank a r e to receive a •preference. I f your bank should i s s u e i t s c a s h i e r ' s check to the member bank and i t should make a p r e f e r e n t i a l t r a n s f e r Ir-32-^C Mr. Larson - #2 of the same which should subsequently be h e l d v o i d , your bank, i f i t had p a i d the check, could, I assume, f a l l "back on your e n d o r s e r . The reason why your hank cannot s a f e l y pay d r a f t s on the r e s e r v e account i s "because i n t h a t case you a r e p u t on n o t i c e t h a t the hank, which has committed an a c t of insolvency, i s t r a n s f e r r i n g f u n d s , presumably to c r e d i t o r s . In the case of payments made t o the bank i t s e l f no p r e f e r e n c e would r e s u l t by reason of such payments, b u t could a r i s e only by reason of some subsequent d i s p o s i t i o n made of the money by the r e c i p i e n t bank. In view of the f a c t t h a t the s i t u a t i o n i s loaded w i t h dynamite, i t would seem a wise p o l i c y to keep t r a n s a c t i o n s w i t h a bank i n t h i s moribund c o n d i t i o n t o a minimum. UELAND & UELA2TD su/m 474 L-32-d December 1, 1932. Mr. Harry Yaeger, Deputy Governor, Federal Reserve Bank of Minneapolis. In your memorandum dated November 29, 1932, you i n q u i r e a s to the d u t i e s and l i a b i l i t i e s of the Federal Reserve Bank of Minneapolis with r e s p e c t to banks in the Ninth Federal Reserve D i s t r i c t which have declared what i s termed "a bank h o l i d a y " , Our understanding i s t h a t during a c e r t a i n period one or more banks in a town endeavor to get t h e i r d e p o s i t o r s to agree to extend the time of payment of a given percentage of t h e i r d e p o s i t s or to r e l e a s e such given percentage e n t i r e l y or look only to c e r t a i n charged off a s s e t s f o r the payment of the same. Daring such period the banks a r e not open f o r ordinary b u s i n e s s and do not permit withdrawals through the t e l l e r ' s window. We assume i n what f o l - lows t h a t the f a c t t h a t the h olida y has been d e c l a r e d i s known to the o f f i c e r s of your bank. In our opinion i f your bank continues to forward checks drawn on a bank which i s enjoying a "holiday" d i r e c t l y to such bank f o r payment and remittance by i t , your bank may incur l i a b i l i t y i f l o s s thereby r e s u l t s . When a bank d e c l a r e s a h o l i d a y i t i s tantamount to an admission t h a t the bank i s i n an i n solvent c o n d i t i o n . Forwarding to a bank known to be i n a weakened c o n d i t i o n , i n our opinion, i s negligence, and n e i t h e r Regulation J of the Federal Reserve Board, your 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 , the s t a t u t e governing bank c o l l e c t i o n s i n Minnesota L~32~d ' 47 Harry Yaeger. « #2 (Mason's S t a t u t e s , Sec. 7233-1), nor the Uniform Bank C o l l e c t i o n Code which i s in f o r c e i n Michigan and Wisconsin, exempts a c o l l e c t i n g hank from l i a b i l i t y f o r l o s s due to n e g l i g e n c e . The next question to be considered i s whither when the bank d e c l a r i n g a h o l i d a y i s a member bank, your bank should cont i n u e to honor d r a f t s on the r e s e r v e account or permit the t r a n s f e r of r e s e r v e "balances by o t h e r methods. The National Bank Act provides t h a t " a l l t r a n s f e r s * * * of deposits" to the c r e d i t of a n a t i o n a l hanking a s s o c i a t i o n and 11 " a l l payments of money to i t s c r e d i t o r s "made a f t e r the commission of an a c t of insolvency, or in contemplation t h e r e o f , made With a view other, * * * Sec* 91. * * * to the p r e f e r e n c e of one c r e d i t o r to a n - s h a l l be u t t e r l y n u l l and void". U. S . C., T i t l e 12, In our opinion when a n a t i o n a l bank ceases t o pay i t s d e p o s i t o r s i n the usual course of b u s i n e s s , t h a t i s an " a c t of i n solvency" Within the meaning of the s t a t u t e . * Market National Bank v. P a c i f i c National Bank, 30 Hun. 50, A f f . 93 N. Y. 648; F i r s t National Bank of O r t o n v i l l e v. Andresen, 57 Fed. (2d) 17 (C. C. A. 8 ) . Accordingly i n the case of a n a t i o n a l bank we do not see how your bank can s a f e l y continue t o honor d r a f t s a f t e r knowledge received by the o f f i c e r s of your bank t h a t the n a t i o n a l bank in q u e s t i o n has d e c l a r e d a h o l i d a y . i n the Such d r a f t s and other t r a n s f e r s of c r e d i t r e s e r v e account would almost i n e v i t a b l y have the e f f e c t of p r e f e r r i n g c r e d i t o r s of the n a t i o n a l bank. Under the National Bank Act such payments or t r a n s f e r s would be void and your bank L-32-d. Harry Yaeg6r - #3 might be h e l d l i a b l e to a subsequently appointed r e c e i v e r of the n a t i o n a l bank to the same e x t e n t a s i f the d r a f t s had not been p a i d and the t r a n s f e r s had not been made. See Hirning, Receiver, v . Federal Reserve Bank of Minneapolis, 52 Fed. (2d) 382. In the case of s t a t e banks in s t a t e s i n the Ninth Fede r a l Reserve D i s t r i c t , we have made a h a s t y examination of the s t a t e s t a t u t e s and do not f i n d any p r o v i s i o n s i m i l a r to T i t l e 12, Sec. 91 of the U, S. Code except i n Michigan. Section 11946 of the Compiled Laws of Michigan, 1929, i s almost i d e n t i c a l with the p r o v i s i o n in the National Bank Act on the s u b j e c t of preferences. Accordingly we t h i n k you should t r e a t member s t a t e banks l o c a t e d in Michigan i n the same manner a s n a t i o n a l banks. When a n a t i o n a l bank or a s t a t e member bank i n Michigan goes on a bank h o l i d a y i t would seem a d v i s a b l e to n o t i f y the o f f i c e r s by telephone not to draw d r a f t s or attempt to make t r a n s f e r s because the same cannot be honored.As to s t a t e member banks i n the other s t a t e s of the Ninth D i s t r i c t , we t h i n k you can s a f e l y continue to pay d r a f t s u n t i l the bank i s a c t u a l l y closed by i t s board of d i r e c t o r s or by the "banking a u t h o r i t i e s . The question remains a s to the proper course to be followed by your bank with r e s p e c t to checks drawn on banks which have d e c l a r e d a h o l i d a y . We t h i n k i t would not be s a f e f o r your bank to r e c e i v e payment of checks drawn on n a t i o n a l bank or s t a t e 477 Ir-32—d Harry Yaeger - #4 banks i n Michigan. Under the d o c t r i n e of t h e Hirning case your hank might thereby render i t s e l f l i a b l e f o r having r e c e i v e d an unlawful p r e f e r e n c e . Accordingly i t seems to us t h a t in the case of th e s e banks your bank should r e t u r n the items to i t s endorsers a d v i s i n g them t h a t the bank in question i s r e p o r t e d on a "bank h o l i d a y " , or words to t h a t e f f e c t . As to checks on o t h e r banks, we t h i n k you have the a l t e r n a t i v e of having them p r e s e n t e d over the counter by an agent or of r e t u r n i n g them to your end o r s e r s , as suggested in the case of n a t i o n a l banks. We assume t h a t non-member banks going on a holiday would be taken off your par l i s t . We do not consider in t h i s opinion under what circumstances or i n what manner a c t s of insolvency of a bank can be cured so t h a t your bank could s a f e l y resume the t r a n s a c t i o n of o r d i n a r y b u s i n e s s with such bank. UELAHD & raMHD By SU*MS. * In McDonald, Receiver, vs. Chemical National Bank, 174 U. S. 610, i t was h e l d t h a t the mere f a c t t h a t a correspondent of a n a t i o n a l bank had r e f u s e d to pay i t s d r a f t was not s u f f i c i e n t proof of an " a c t of insolvency". But i n our opinion t h i s i s q u i t e a d i f f e r e n t t h i n g from t h e r e f u s a l of a n a t i o n a l bank i t s e l f to pay i t s o b l i g a t i o n s i n the usual course of b u s i n e s s .
@FedFRASER