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- Copy - X-6671 UNITED STATES DISTRICT COURT DISTRICT OF MINNESOTA FOURTH DIVISION. At Law No. 95 2225 John Hirning, a s Receiver of the Farmers National Bank, of Brookings, South Dakota, a c o r p o r a t i o n Plaintiff, vs. DECISION The Federal Reserve Bank of Minneapolis, Minnesota, a c o r p o r a t i o n , Defendant. This cause came on to be t r i e d b e f o r e the Cburt without a j u r y on the 15th day of March, 1930. Miss F» M; Selander, of Minneapolis, Minnesota, and Messrs. Hall & Eidea, of Brookings, South Dakota, appeared f o r the p l a i n t i f f ; and Mr. A. Ueland and Mr. Sigurd Ueland, of Minneapolis, Minnesota, f o r the defendant. This i s a s u i t to recover $21,355.82, the amount of two r e m i t t a n c e s sent by t h e Farmers National Bank,of Brookings, South Dakota, to t h e defendant on the 16th and 17th days of November, 1926, which i t i s a l l e g e d c o n s t i t u t e d an unlawful p r e f e r e n c e under Sec. 91, T i t l e 12, U.S.C.A. The Reserve Bank, a s a c l e a r i n g house and agent f o r i t s member banks, received on November 13, 1926, f o r c o l l e c t i o n , checks on t h e Farmers National Bank of Brookings to t h e amount of $22,114,22, and on November iQth s i m i l a r checks to t h e amount of $15,020.88. On those days i t mailed cash l e t t e r s , being the checks r e f e r r e d t o , to t h e Brookings Bank f o r c o l l e c t i o n and r e m i t tance. Under i t s r u l e s , the Reserve Ba&k was agent f o r t h e forwarding banks, with the r i g h t to send the checks to t h e Brookings Bank f o r c o l l e c t i o n and to r e c e i v e money or d r a f t s t h e r e f o r . The Reserve Bank granted p r o v i s i o n a l c r e d i t s to the forwarding banks on t h e i r r e s e r v e accounts f o r t h e checks, but r e t a i n e d t h e r i g h t to r e v e r s e the c r e d i t s i f the checks were not p a i d . Of t h e checks sent to the Brookings Bank, i t accepted $22,059.11 of those included i n the ' — 2 — 96 X-6671 cash l e t t e r of the 13th, and $14,880.86 of those included i n t h e cash l e t t e r of t h e 15th. The chocks were not a c t u a l l y charged to t h e accounts of i t s depositors u n t i l November 18th, when the bank was i n charge of a National Bank Examiner. On the 16th of November, the Brookings Bank sent two d r a f t s to cover the se cash l e t t e r s to the Reserve Bank, i n which the Reserve Bank was named a s drawee. The r e s e r v e account of the Brookings Bank i n th<$ Reserve Bank was not l a r g e enough to take care of t h e d r a f t s . For t h e purpose of p r o v i d i n g s u f f i c i e n t f u n d s t h e r e f o r , i t sent to the Reserve Bank, on t h e evening of the 16th, checks, f o r c o l l e c t i o n and c r e d i t , drawn by o t h e r s on o t h e r banks to the amount of $10,029.07, on which the Reserve Bank c o l l e c t e d $8,355.82, which was c r e d i t e d to the r e s e r v e account of the Brookings Bank. I t a l s o r e m i t t e d to the Reserve Bank, on November 17th, $13,000 i n currency, which was a l s o c r e d i t e d to i t s r e s e r v e account. The $13,000 i n currency was a c t u a l l y mailed a f t e r a r e s o l u t i o n of the Board of D i r e c t o r s of t h e Brookings Bank, c l o s i n g t h e bank, had been adopted on the evening of November 16th. The Brookings Bank c l o s e d i t s doors so f a r a s t h e t r a n s a c t i o n of ordinary Banking b u s i n e s s was concerned, a t 4:00 P. M. on t h e 16th. While t h e r e i s some u n c e r t a i n t y a s to t h e time of the adoption of t h e r e s o l u t i o n and t h e m a i l i n g of the checks, I f i n d t h a t the $10 , 029.07 of checks was a l s o mailed a f t e r the adoption of the r e s o l u t i o n c l o s i n g the bank, t h a t the bank was then i n s o l v e n t , and t h a t b o t h r e m i t t a n c e s were made " i n contemplation of insolvency". See B a l l v. German Bank, 187 Fed. 750. I t was determined, however, during banking hours on t h e 16th, to send the r e m i t t a n c e s . While the condition of t h e bank was s u b s t a n t i a l l y t h e same f o r s e v e r a l days p r i o r to the adoption of t h e r e s o l u t i o n , i t i s apparent t h a t the determination to c l o s e i t by those r e s p o n s i b l e f o r i t s conduct did not occur u n t i l the evening of the 16th. At t h a t time i t was e v i d e n t l y determined t h a t i t was i m p r a c t i c a l to borrow s u f f i c i e n t funds to keep the bank open and t h a t l a c k of p u b l i c confidence in t h e bank made i t a d v i s a b l e to c l o s e i t s doors. Some eighteen banks had r e c e n t l y f a i l e d i n Brookings County, t h r e e of them i n t h e City of Brookings, and a r a p i d d e c l i n e i n d e p o s i t s s h o r t l y b e f o r e the bank closed i n d i c a t e d a dark f u t u r e f o r i t even i f i t was a b l e to secure t h e necessary funds to continue i n b u s i n e s s . On the morning of the 1 7 t h , the Reserve Bank was n o t i f i e d t h a t the Brookings Bank had closed, but t h a t s u f f i c i e n t funds had been s e n t to the Reserve Bank to t a k e care of i t s cash l e t t e r s . The Reserve Bank did not charge up t h e d r a f t s drawn by the Brookings Bank to i t s r e s e r v e account, but reversed the c r e d i t s given to t h e forwarding banks, n o t i f y i n g them t h a t i f p e r m i t t e d to charge up the d r a f t s , i t would l a t e r give than c r e d i t . On January 27, 1927, r e l y i n g upon advice of counsel, a l e t t e r from t h e then r e c e i v e r , and a l e t t e r from J . E. Fouts, A s s i s t a n t Supervising Receiver, Division of Insolvent Nationa l Banks, which l e t t e r s were construed as g r a n t i n g permission to charge the d r a f t s to the r e s e r v e account, the Reserve Bank did charge them to t h a t account, and c r e d i t e d the forwarding banks with the amount of the chocks contained in t h e cash l e t t e r s of November 13th and 15th. Then followed t h i s s u i t by the p r e s e n t r e c e i v e r to recover the r e m i t t a n c e s . The r e c e i v e r claims t h a t the Reserve Bank was a c r e d i t o r ; t h a t in making the r e m i t t a n c e s the Brookings Bank intended to p r e f e r t h e Reserve Bank a s a c r e d i t o r and to prevent a r a t a b l e a p p l i c a t i o n of t h e a s s e t s of t h e Brookings Bank to the payment of i t s debts as provided by law. All of t h i s the Reserve Bank d e n i e s . . - 3 - X-6671 ' ' 91? The question p r e s e n t e d i s one about which t h e r e cam be and i s a d i f f e r e n c e of opinion, I do not f i n d t h a t t h i s exact s i t u a t i o n has ever been p r e sented to a Federal c o u r t . I t i s obvious t h a t i f t h e Reserve Bank was a c r e d i t o r of t h e Brookings Bank a t the time the se r e m i t t a n c e s were made, the r e c e i v e r should p r e v a i l . Ball v. German Bank, supra. I t i s c l e a r t h a t the Reserve Bank was not o r i g i n a l l y a c r e d i t o r of t h e Brookings Bank; t h a t i t was a mere agent f o r the forwarding banks, respons i b l e only f o r i t s own n e g l i g e n c e . Federal Reserve Bank of Richmond v. Early, 30 F. (2d) 198; Early, Receiver, v. Federal Reserve Bank of Richmond, 281, U.S. 84. The Reserve Bank did not own the checks which c o n s t i t u t e d the cash l e t t e r s and i t was a m a t t e r of i n d i f f e r e n c e to i t whether the checks were p a i d or n o t . The r e c e i v e r claims t h a t the Reserve Bank became a c r e d i t o r when i t accepted the d r a f t s o r , a t any r a t e , when i t charged them up to t h e r e s e r v e account of t h e Brookings Bank. I am unable to see t h a t t h e r e l a t i o n which i t bore to t h e Brookings Bank o r i g i n a l l y was ever changed. I t was a t a l l times a c t i n g on behalf of i t s p r i n c i p a l s , the forwarding banks, a s t h e i r agent, and, under the r u l e s which governed i t s o p e r a t i o n s , i t had the a u t h o r i t y to send the checks to t h e Brookings Bank f o r c o l l e c t i o n and take d r a f t s which were sent in payment t h e r e f o r . As agent, i t was a u t h o r i z e d to appoint the Brookings Bank as agent to c o l l e c t from i t s e l f these checks, and to r e q u i r e the Brookings Bank to account f o r the checks or t h e i r proceeds. The agreement of the Brookings Bank was to remit f o r such checks a s i t accepted or c o l l e c t e d . I t was the agent of t h e Reserve Bank f o r t h a t purpose. If i t was t o charge them to the accounts of i t s d e p o s i t o r s , i t s duty was to remit f o r them i n cash or i t s e q u i v a l e n t . I t was not t h e debtor of the Reserve Bank f o r t h e amount of those checks, b u t , i f i t accepted than, i t s p o s i t i o n was t h a t of an agent who had r e c e i v e d money or i t s equivalent f o r h i s p r i n c i p a l and which i n equity belonged to the p r i n c i p a l . I f the Brookings Bank had used t h e s e checks f o r i t s own purposes, without accounting f o r them, i t would have been g u i l t y of conversion. I f , i n s t e a d of charging the checks to t h e accounts of i t s deposit o r s , i t had c o l l e c t e d t h e checks in cash from them, t h a t cash would have belonged to the Reserve Bank, and i f i t had been mingled with t h e o t h e r cash of the bank, the r e c e i v e r could have been r e q u i r e d to pay i t over on t h e theory t h a t the cash was impressed with a t r u s t to t h e extent of the amount f o r which the Brookings Bank should have accounted. The l i a b i l i t y of t h e Brookings Bank to account became a b s o l u t e upon t h e acceptance of t h e checks. Quoting from Federal Reserve Bank of Richmond v. Early, supra, - - ( 3 0 F. (2d) 199): "The o n l y question t h a t can a r i s e i s : When does t h i s r i g h t of the owners of the checks become f i x e d , so a s to c o n s t i t u t e i t a charge upon the r e s e r v e balance? We t h i n k t h a t i t becomes so f i x e d when the drawee bank, e i t h e r unequivocally accepts the checks, as i n t h i s case, o r , by f a i l i n g to r e t u r n them promptly, becomes chargeable with them under the terms of the agreement." I t has been h e l d by t h e Supreme Court of V i r g i n i a , in Federal Reserve Bank of Richmond v. Bohaiman, 127 S.E. 161, ( f o l l o w i n g Federal Reserve Bank of Richmond v. P r i n c e Eiward-Lunenburg County Bank, 139 Va. 45, 123 S.E.379, 32 Va. Appeals 152) t h a t a Reserve Bank which has received an u n c o l l e c t i b l e d r a f t a s a remittance f o r a cash l e t t e r has a l i e n upon the cash i n t h e v a u l t s of the bank f o r t h e amount of the d r a f t , which i t can enforce a g a i n s t a r e c e i v e r . 98 - 4 - X-6671 If those d e c i s i o n s a r e c o r r e c t * the Reserve Bank could have c o l l e c t e d from the r e c e i v e r an amount s u f f i c i e n t to make the d r a f t s which i t had r e c e i v e d from the Brookings Bank good, even i f no remittances had been made. While i t i s apparent t h a t the managing o f f i c e r s of t h e Brookings Bank, during banking hours on the 16th day of November, r e a l i z e d the p r o b a b i l i t y t h a t the bank would not re-opoa the following day — which, no doubt, was the reason f o r sending d r a f t s to the Reserve Bank drawn on i t r a t h e r than on o t h e r banks — t h e bank had accepted the checks sent to i t as agent f o r c o l l e c t i o n . I t i n tended to account f o r the c o l l e c t i o n of the checks bj- sending s u f f i c i e n t cash and cash items to t h e Reserve Bank to take c a r e of the d r a f t s . P r i o r to the adoption of the r e s o l u t i o n c l o s i n g the bank, i t segregated from i t s a s s e t s the cash and cash items to be sent to the Reserve Bank. My conclusion i s t h a t t h e r e c e i v e r can not recover i n t h i s case,even though these r e m i t t a n c e s were made i n contemplation of insolvency, f i r s t , b e cause the Reserve Bank was never a c r e d i t o r of the Brookings Bank, and the only r e l a t i o n which ever e x i s t e d between the two was t h a t of p r i n c i p a l and agent; second, because the r i g h t s of the general c r e d i t o r s of t h e Brookings Bank were in no way a f f e c t e d by t h e r e m i t t a n c e s , f o r the reason t h a t the Reserve Bank, as p r i n c i p a l , could have impressed a t r u s t upon the cash and cash items segregated from the o t h e r cash of the bank, o r , i f i t should be hold t h a t t h a t was not a s u f f i c i e n t designation of the s p e c i f i c p r o p e r t y to make good the d r a f t s , then upon so much of the b a n k ' s general cash as was n e c e s s a r y to make t h e d r a f t s good. Finding t h e f a c t s and the law to be a s above s t a t e d , my conclusion i s t h a t the defendant i s e n t i t l e d to a judgment of d i s m i s s a l . Let judgment be entered a c c o r d i n g l y . The p l a i n t i f f i s allowed an exception to the denial of h i s motion f o r judgment in h i s f a v o r , made upon t h e s o l e ground t h a t t h e evidence w i l l support no other c o n c lu s i o n . Dated t h i s 28th day of J u l y , 1930. John 3. Sanborn U . S . D i s t r i c t Judge.