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: COPY 394 X-6851 March 31, 1931. Mr. Walter S. Lo^an, Counsel and Deputy Governor, Federal l e s e r v e Bank of New York, New York City. My dear " ' a l t e r • I have r e c e i v e d your l e t t e r of March 26th r e q u e s t i n g my views on the question whether Section 11 of the Uniform Bank C o l l e c t i o n Code (Section 350j of the Hew York Negotiable Instruments Law), g i v i n g the c o l l e c t i n g bank the option to t r e a t a check as dishonored when the drawee's r e m i t t a n c e d r a f t t h e r e f o r drawn on another bank i s not p a i d in due course, would be h e l d to be a p p l i c a b l e to n a t i o n a l as v e i l as S t a t e banks. As I t o l d you over the telephone y e s t e r d a y a f t e r n o o n , I am i n c l i n e d to agree with your view t h a t t h i s s e c t i o n does not c o n f l i c t in any way with any p r o v i s i o n s of the n a t i o n a l Bank Act and t h a t i t would be a p p l i c a b l e to checks drawn on n a t i o n a l banks. I t seems to me t h a t i t d e a l s only with the r e s p e c t i v e r i g h t s , d u t i e s and l i a b i l i t i e s of the drawer, drawee, endorsers and h o l d e r s of such check and i s not i n tended to i n t e r f e r e with the r a t a b l e d i s t r i b u t i o n of t h e a s s e t s of an i n s o l v e n t n a t i o n a l bank which i s r e q u i r e d by the p r o v i s i o n s of t h e Nat i o n a l Bank Act. I t i s t r u e t h a t i t contemplates t h a t , where such a check has been charged to the drawer's account, the e n t r i e s w i l l be r e v e r s e d thus i n c r e a s i n g the amount of the drawer's claim a g a i n s t the i n s o l v e n t bank. This, however, merely has the e f f e c t of t r a n s f e r r i n g t h e claim of t h e holder of t h e check back to the drawer, where i t belongs; i t does not diminish t h e a s s e t s of the bank nor i n c r e a s e i t s l i a b i l i t y ; and i t does not give any one a p r e f e r r e d claim a g a i n s t t h e bank. Off hand, the only way in which I can see t h a t i t w i l l e f f e c t t h e l i quidation of the bank w i l l be by i n c r e a s i n g the o f f s e t of t h e drawer of the check a g a i n s t any indebtedness he has to the bank. I have discussed t h i s s u b j e c t b r i e f l y " i t h Mr. Await and Mr. Barse; but t h i s question was e n t i r e l y new to them and they were u n w i l l i n g to express any opinion on i t u n t i l they had had time to g i v e i t c a r e f u l study. As soon as I hear from them, I s h a l l communic a t e with you. -? 2 — X-6851, O Mr. Walter S. Logan. In t h e meantime, I am sending a cooy of your l e t t e r to Counsel f o r each of the o t h e r Federal r e s e r v e "banks v i t h a r e q u e s t f o r an expression df t h e i r views On the question which you have r a i s e d and f o r a c i t a t i o n of any a u t h o r i t i e s they may know of vfhich may have a h e a r i n g on t h i s question, t am asking them to w r i t e d i r e c t to you, sending me copies of t h e i r l e t t e r s . If I can be of any f u r t h e r a s s i s t a n c e to you, n l e a s e do not h e s i t a t e to c a l l uoon me. C o r d i a l l y yours, Walter TTyatt General Counsel W 0:IC COPY X-6851-a 896 F~rr?JiL ?^STIV2 BANK of :nrr york March 25, 1931. Walter T y a t t , E s q . , General Counsel, Federal l e s e r v e Board, Washington, D. C. Dear ' " a l t e r ; You w i l l r e c a l l t h a t a short time ago we exchanged l e t t e r s on the question of whether the p r o v i s i o n s of the rank C o l l e c t i o n Code g r a n t i n g p r e f e r e n c e s a g a i n s t closed banks were a p p l i c a b l e to n a t i o n a l banks. The information you gave me a t t h a t time and our own examinat i o n of some of t h e a u t h o r i t i e s convinced me t h a t the p r o v i s i o n s k'ere not a p p l i c a b l e to closed n a t i o n a l banks. I t seems to me, however, t h a t the p r o v i s i o n s of Section 11 of the Bank C o l l e c t i o n Code (which i s Section 350-j of t h e New York Negot i a b l e Instruments law), g i v i n g the c o l l e c t i n g bank t h e option to t r e a t an item a s dishonored when the drawee's r e m i t t a n c e d r a f t t h e r e f o r drawn on another bank i s got p a i d in due course, would be h e l d to be a p p l i c a b l e to n a t i o n a l as well as | t a t e banks. For your convenience I quote below a p a r t of the s e c t i o n in question: "§11. E l e c t i o n to t r e a t as dishonored items p r e sented by mail. There an item i s duly p r e s e n t e d by mail to t h e dravee or payor, whether or not the same has been charged to the account of the maker or drawer thereof or r e t u r n e d to such maker or drawer, the agent c o l l e c t i n g bank so p r e s e n t i n g may, a t i t s e l e c t i o n , e x e r c i s e r ' i t h reasonable d i l i g e n c e , t r e a t such item as dishonored by non-payment and recourse may be had upon p r i o r p a r t i e s t h e r e t o in any of t h e f o l l o w i n g cases: (1) 'There the check or d r a f t of the drawee or payor bank upon another bank r e c e i v e d in payment t h e r e f o r s h a l l not be Paid in due course; * * * * * * * * * * * * * * * * * * H This s e c t i o n does not c o n f l i c t r i t h any p r o v i s i o n of the Nat i o n a l Bank Act so f a r as I know-; and the e x e r c i s e of the option would not in any way harm t h e general c r e d i t o r s of a closed n a t i o n a l bank, b u t would merely o p e r a t e to t r a n s f e r to the maker of the check t h e general claim which the owner of the check r.ould otherwise have against' the c l o s ed bank. On the o t h e r hand, the e x e r c i s e of the option would prevent any l o s s to the owner ( u n l e s s t h e d r a r e r of t h e check were a l s o i n s o l v e n t ) , and vould r e s u l t in the l o s s being t r a n s f e r r e d to the maker of the check where i n f a i r n e s s i t belongs. Moreover, and t h i s i s of course the reason ^ hi' \ J?*.* " ' F~DELAL 2ESriVB 3AI-TK OF 1T3W Y03K .. 2... » ' . Walter Wyatt, Esq. : 3 9 7 X-5851-a March 26, 1931. t h a t the Federal l e serve Banks a r e p a r t i c u l a r l y i n t e r e s t e d in t h i s question, by t h e e x e r c i s e of t h e option a c o l l e c t i n g bank could in most cases p r o t e c t i t s e l f a g a i n s t l i a b i l i t y to the owners of the items who might claim t h a t the c o l l e c t i n g bank had been n e g l i g e n t in forwarding t h e items d i r e c t to the drawee bank in view of the drawee b a n k ' s c o n d i t i o n . I am s o r r y to bother you again, but I would g r e a t l y a p p r e c i a t e any information or expression of opinion on t h i s p o i n t . I would have telephoned to you about t h i s , i n s t e a d of w r i t i n g , except t h a t I thought i t would be more s a t i s f a c t o r y from your standpoint to have a d e f i n i t e statement of t h e question I have in mind. I s h a l l , of course, be delighted to t a l k to you about i t on the telephone, and so f a r as I am concerned any information you can give me by telephone w i l l be j u s t as u s e f u l and s a t i s f a c t o r y as i f conveyed by l e t t e r . me, I am With b e s t r e g a r d s and thanking you f o r any help you can give Yours f a i t h f u l l y , (Signed) Walter 5. Logan, Walter S. Logan, General Counsel. i
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