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( C O P Y ) FEDERAL OP X-4357 EESBRVE BAM DALLAS. u June 1 0 , 1 9 2 5 . F e d e r a l R e s e r v e Board, Washington., D.C. Gentlemen: A t t e n t i o n Mr. Walter Wyatt, General C o u n s e l . I h a v e y o u r l e t t e r o f May 28 w i t h i n c l o s u r e s , w h i c h I h a v e c a r e f u l l y c o n s i d e r e d w i t h Mr. B. B. Coleman, our Deputy Governor i n c h a r g e o f i n s o l v e n t bank m a t t e r s , and Mr. T. E . P a r k s , t h e c h i e f of our i n s o l v e n t "bank d e p a r t m e n t . We h a v e g i v e n c a r e f u l c o n s i d e r a t i o n t o t h e l e t t e r s from t h e v a r i o u s a t t o r n e y s o f t h e F e d e r a l r e s e r v e hanks and a l s o t h e l e t t e r from t h e o f f i c e o f t h e C o m p t r o l l e r o f Currency o f d a t e May 1 5 , 1 9 2 5 . You h a v e a s k e d me t o c a l l y o u r a t t e n t i o n t o oxi$ p o i n t s i n a d d i t i o n to those covered in the Comptroller's l e t t e r o f May 15, and a l s o t o any p o i n t s m e n t i o n e d i n t h a t l e t t e r whifih I c o n s i d e r ambiguous or i n c o r r e c t l y s t a t e d . I am d e p a r t i n g somewhat from y o u r r e q u e s t and h a v e p r e p a r e d and am s u b m i t t i n g you h e r e w i t h s u g g e s t i o n s f o r . t o p i c s t o be d i s c u s s e d a t the p r o p o s e d c o n f e r e n c e . While many o f t h e t o p i c s s u g g e s t e d i n t h i s o u t l i n e a r e s i m p l e and w i l l be r e l a t i v e l y e a s y t o d i s p o s e o f , I t h i n k t h a t i n o r d e r t o h a v e a c o m p l e t e and harmonious u n d e r s t a n d i n g i t would be w e l l t o d i s c u s s each a n d a l l o f them e v e n though o n l y p e r f u n c t o r i l y . I have a l s o included i n t h e s e t o p i c s a g o o d many q u e s t i o n s which do n o t t e c h n i c a l l y come w i t h i n t h e s c o p e w h i c h you h a v e o u t l i n e d f o r t h i s c o n f e r e n c e . Many o f t h e s e t o p i c s h a v e r e f e r e n c e t o t h e l i q u i d a t i o n o f an i n s o l v e n t b a n k ' s a f f a i r s but t h e y a r e so i n t e r w o v e n w i t h t h e g e n e r a l q u e s t i o n o f c l a i m s a g a i n s t i n s o l v e n t b a n k s , e s p e c i a l l y when c o n s i d e r e d i n c o n n e c t i o n w i t h f i n a l s e t t l e m e n t of t h e s e c l a i m s , t h a t I do n o t t h i n k any c o n f e r e n c e would be c o m p l e t e w i t h o u t i n c l u d ing a d i s c u s s i o n of t h e s e t h i n g s . There a r e many p r o b l e m s i n c o n n e c t i o n w i t h c l a i m s a g a i n s t i n s o l v e n t banks which a r e more p r o b l e m s o f accounting than law. I t i s o f t e n easy to a r r i v e a t a c o r r e c t l e g a l d e t e r m i n a t i o n o f t h e q u e s t i o n b u t when p u t t i n g same i n t o o p e r a t i o n t h e s y s t e m o f a c c o u n t i n g 429 Page No.2 used by the various Federal reserve "banks and r e c e i v e r s o f t e n makes i t impractical to handle things e x a c t l y according to law. As an i l l u s t r a t i o n , I c a l l your a t t e n t i o n to the question of expense. T h e o r e t i c a l l y and l e g a l l y , where c e r t a i n expense has been incurred i n the c o l l e c t i o n of a c o l l a t e r a l note, t h i s expense should "be deducted from the t o t a l amount c o l l o c t e d and the r e c e i v e r c r e d i t e d with the net amount. As a p r a c t i c a l matter of accounting, however, should t h i s he attempted i t would l e a d to endl e s s trouble i n c o r r e c t i n g book e n t r i e s and a r r i v i n g a t agreements with the r e c e i v e r s i n each p a r t i c u l a r instance as to the proper expense chargeable. I t has been considered by u s , t h e r e f o r e , to be the b e t t e r p r a c t i c e to c r e d i t the i n s o l v e n t bank with the gross amount of each c o l l e c t i o n , maintaining i n our bank complete records as to a l l expense incurred, t h i s item being taken care of a t one time upon f i n a l s e t t l e m e n t with the r e c e i v e r . I mention t h i s i l l u s t r a t i o n and could point out o t h e r s . For t h i s reason I am of the opinion that i n a d d i t i o n to the a t t o r n e y s for the various Federal reserve banks i t would not be a bad idea to have as many banks as seem proper send along with t h e i r a t t o r n e y some o f f i c e r f u l l y acquainted with the p r a c t i c a l method of accounting so that i n the event any question should be r a i s e d along t h i s l i n e the same could be properly disposed of a t the conference which you contemplate having. I have been informed that there i s t o be a conference i n Washington some time around the middle of July between r e p r e s e n t a t i v e s of the various Federal reserve banks and the Treasury Department concerning the currency program. Our Deputy Governor in charge of i n s o l v e n t banks expects to a t t e n d t h i s conference, and doubtless other Federal reserve banks w i l l have r e p r e s e n t a t i v e s there who occupy s i m i l a r r e l a t i o n to i n s o l v e n t bank work as Mr. Coleman. I t has occurred to me, t h e r e f o r e , that i f your conference could be arranged so a s to f o l l o w the conference to which I have r e f e r r e d , p o s s i b l y we might have the benef i t of the experience of some of the operating o f f i c e r s of the various Federal reserve banks. I merely mention t h i s because i t has occurred to me that i t might add to the s u c c e s s f u l r e s u l t s of the conference. X-455? 430 Page No. 3 X-4357 I have taken the l i b e r t y , i n the l i s t which 1 submit, o f g i v i n g a b r i e f s t a t e m e n t of our v i e w s i n C o n n e c t i o n w i t h e a c h t o p i c i n o r d e r t h a t y o u may f u l l y understand, t h e scope t h e r e o f . With k i n d e s t r e g a r d s , I am, Very t r u l y y o u r s , ( S i g n e d ) E. B. Stroud, J r . EBS-cc O f f i c e Counsel (COPY) X-4357a Suggested Topics f o r D i s c u s s i o n a t J o i n t Conference of Counsel f o r Federal Reserve Banks and Representatives of the Comptroller of Currency In Connection with Claims a g a i n s t Insolvent National Banka I. CLAIMS EVIDENCED BY MEMBER BAM PROMISSORY NOTES A. Amount of Claim (1) Time of determining amount» ( I t i s our view that t h i s question has 1)6en f i n a l l y decided "by the Supreme Court of the United S t a t e s and that the claim should he f i l e d f o r the amount of the indebtedness on the date of i n s o l v e n c y . ) (2) Interest. (This t o p i c r a i s e s two q u e s t i o n s . F i r s t , i n t e r e s t which should he included i n the amount of the claim f i l e d . As to t h i s i t i s our view that unearned i n t e r e s t should he deducted from the amount of claim and that p a s t due i n t e r e s t should be included a t the going discount r a t e rather than a t the contractual r a t e s p e c i f i e d i n the n o t e . Of course i n those c a s e s where the note has been endorsed and i t i s necessary to sue endorsers, i f the r e c e i v e r i s a necessary party t o such s u i t , i n t e r e s t should be asked f o r at the same r a t e as claimed a g a i n s t endorsers . (The second part of t h i s t o p i c r e f e r s to i n t e r e s t charged i n s o l v e n t bank upon claim i n f i n a l s e t t l e ment. While we h o l d to the view that the promissory note i s a w r i t t e n contract e n f o r c i b l e as a g a i n s t the r e c e i v e r , we do not f e e l that i t would be good p o l i c y , i n a r r i v i n g a t a f i n a l s e t t l e m e n t , to charge a greater rate of i n t e r e s t to the i n s o l vent bank than our going discount r a t e , and as an o f f s e t a g a i n s t t h i s i n t e r e s t we f e e l that a c r e d i t should be allowed the r e c e i v e r at the same r a t e upon a l l c o l l e c t i o n s made upon c o l l a t e r a l notes from the date of each r e s p e c t i v e c o l l e c t i o n . ) mi Page No. 2 (3) X-4357a Attorney's f e e s . (Where a member b a n k ' s p r o m i s s o r y n o t e p r o v i d e s f o r payment of a t t o r n e y ' s f e e s i f p l a c e d i n t h e hands of an a t t o r n e y f o r c o l l e c t i o n , we a r e o f t h e o p i n i o n t h a t t h i s i t e m s h o u l d be r e m i t t e d e x c e p t when i t i s necessary to a c t u a l l y i n s t i t u t e s u i t i n order to e f f e c t c o l l e c t i o n of the n o t e . (4) Offsets, a. I s t h e r e f u n d o f c a p i t a l s t o c k and a c c r u e d d i v i d e n d s an item of o f f s e t ? ( I t i s our v i e w t h a t t h e s e sums a r e n o t i t e m s o f o f f s e t b u t on t h e c o n t r a r y a r e h e l d i n t h e n a t u r e of c o l l a t e r a l . ) b. Ledger b a l a n c e . (We a r e o f t h e o p i n i o n t h a t l e d g e r b a l a n c e i s an i t e m o f o f f s e t , a l t h o u g h by e x p r e s s c o n t r a c t u a l agreement t h e same might be c o n v e r t e d t o c o l l a t e r a l , ) B. Dividends (1) Amount upon which d i v i d e n d s h o u l d bo p a i d . • ' i..i ( ? It i s our v i e w t h a t e v e r y d i v i d e n d p a i d by t h e r e c e i v e r s h o u l d be b a s e d upon t h e amount o f t h e c l a i m a s o r i g i n a l l y f i l e d and a l l o w e d , and t h a t no d e d u c t i o n s s h o u l d be made f o r c o l l e c t i o n s r e c e i v e d upon c o l l a t e r a l , or o t h e r w i s e , b e t w e e n t h e payment o f any two d i v i d e n d s . ) (2) When F e d e r a l r e s e r v e bank no l o n g e r e n t i t l e d t o d i v i d e n d s . ( I t i s our v i e w t h a t we a r e e n t i t l e d t o d i v i d e n d s upon t h e f u l l amount o f t h e c l a i m a s o r i g i n a l l y f i l e d and a l l o w e d u n t i l such time a s t h e d i v i d e n d s , p l u s c o l l e c t i o n s on c o l l a t e r a l and o f f s e t s , e q u a l one hundred p e r c e n t o f t h e i n d e b t e d n e s s , t o g e t h e r w i t h i n t e r e s t t h e r e o n , and a l s o u n t i l we h a v e b e e n f u l l y r e i m b u r s e d f o r t h e e x p e n s e t o which we have b e e n i n c i d e n t i n t h e c o l l e c t i o n o f t h e paper.) A *1*3 4 3 3 X-4357a Page No. 3 II. CLAIMS EVIDENCED BY BSDISCOUMED NOTES: A. Whether p r o v e n c o l l e c t i v e l y o r s i n g l y . ( I t i s our v i e w t h a t c l a i m s on r e d i s c o u n t e d n o t e s should be f i l e d s i n g l y ; that i s , a separate claim upon e a c h r e d i s c o u n t e d n o t e . We t h i n k i t i s l a s r e l y a m a t t e r of c o n v e n i e n c e a s t o w h e t h e r s e p a r a t e c l a i m s a r e f i l e d on e a c h n o t e o r a l l c l a i m s a r e i n c l u d e d on one g e n e r a l c l a i m . As a m a t t e r o f o u r own p e r s o n a l c o n v e n i e n c e , we f e e l i t i s much s i m p l e r t o f i l e a s e p a r a t e c l a i m upon e a c h r e d i s counted note.) B. Amount o f c l a i m . (1) Time o f d e t e r m i n i n g amount. ( I t i s our v i e w t h a t t h e amount of c l a i m s h o u l d he d e t e r m i n e d a t t h e d a t e of t h e m a t u r i t y o f t h e n o t e f o r the reason that the secondary l i a b i l i t y of the e n d o r s i n g "bank does not "become f i x e d u n t i l t h e m a t u r i t y o f t h e n o t e . However t h e r e i s a g r e a t d e a l o f w e i g h t i n t h e c o n t e n t i o n t h a t t h e amount o f c l a i m s h o u l d be d e t e r m i n e d on t h e d a t e o f i n s o l v e n c y , a n d we a r s q u i t e a g r e e a b l e t o d e t e r m i n i n g t h e amount o f o u r c l a i m s on r e d i s c o u n t e d n o t e s a t this time.) (2) Interest. ( I t i s our v i e w t h a t i f t h e t i m e o f f i x i n g . c l a i m i s a t t h e m a t u r i t y o f t h e n o t e no r e b a t e s h o u l d bo I f the time i s to be made f o r u n a c c r u e d i n t e r e s t . f i x e d a s o f t h e d a t e o f i n s o l v e n c y , t h e n on n o t e s w h i c h h a v e n o t matured a t t h a t t i m e i n t e r e s t s h o u l d "be r e b a t e d , and on t h o s e t h a t a r e p a s t due i t s h o u l d b e a d d e d i n a t t h e c u r r e n t r e d i s c o u n t r a t e . We think that a f t e r claim has been e s t a b l i s h e d i t s h o u l d draw i n t e r e s t t h e r o a f t e r w a r d s a t our c u r r e n t r e d i s c o u n t r a t e . W h i l e , a s a m a t t e r o f l a w , no c o n t e n t i o n c o u l d p o s s i b l y be r a i s e d t h a t we were n o t e n t i t l e d t o p a s t due i n t e r e s t c o l l e c t e d from t h e maker i n a c c o r d a n c e w i t h t h e c o n t r a c t s p e c i f i e d i n t h e n o t e , s t i l l a s a m a t t e r of p o l i c y we b e l i e v e i t i s w e l l to take the a f t e r - m a t u r i t y i n t e r e s t c o l l e c t e d 4»4 X-4357a P a g e No. 4 f r o m t h e maker, p l a c i n g a n amount t h e r e o f e q u i v a l e n t t o t h e amount w h i c h w o u l d h a v e b e e n c o l l e c t e d h a d we c h a r g e d him o n l y our c u r r a n t r e d i s c o u n t r a t e i n o u r p r o f i t a c c o u n t , h o l d i n g "balance a s a c o l l a t e r a l item to be a p p l i e d a g a i n s t t h e i n d e b t edness of the r e c e i v e r . ) (3) Attorney's fees, ( T h i s t o p i c b r i n g s up a v e r y i n t e r e s t i n g q u e s t i o n f o r c o n s i d e r a t i o n , *We do n o t b e l i e v e , a s a n o r d i n ary p r o p o s i t i o n , t h a t a t t o r n e y ' s f e e s should be i n c l u d e d i n t h e c l a i m upon a r e d i s c o u n t e d n o t e . However i n many i n s t a n c e s i t b e c o m e s n e c e s s a i y t o s u e t h e maker i n o r d e r t o e f f e c t c o l l e c t i o n o f t h e n o t e , a n d f r e q u e n t l y a s u f f i c i e n t sum i s n o t c o l l e c t e d f r o m t h e maker t o p a y a F e d e r a l r e s e r v e bank t h e p r i n c i p a l , i n t e r e s t , and a t t o r n e y ' s f e e s . Cons e q u e n t l y i n such c a s e s i t i s o f t e n d i f f i c u l t to d e t e r m i n e t h e amount t o b e c r e d i t e d t h e i n s o l v e n t b a n k . We t h i n k t h i c q u e s t i o n c a n b e a v o i d e d b y p r o p e r a g r e e m e n t s w i t h member barlcs c o n s t i t u t i n g expense of c o l l e c t i n g r c d i s c o u n t e d n o t e s an i n d e b t e d n e s s o f t h e member bank, t h u s f i x i n g a n o b l i g a t i o n a g a i n s t which c o l l a t e r a l can be a p p l i e d . ( I t h a s b e e n our p r a c t i c e i n t h o s e c a s e s i n v o l v i n g l i t i g a t i o n w i t h t h e m a k e r s , where t h e c o l l e c t i o n i s l e s s t h a n t h e p r i n c i p a l and i n t e r e s t o f t h e n o t e , to always deduct the a t t o r n e y ' s f o e s a c t u a l l y i n c u r r e d f r o m t h e amount c o l l e c t e d and c r e d i t t h e i n s o l v e n t bank w i t h o n l y t h e d i f f e r e n c e . ) (4) Offsets. a. How a p p l i e d . ( I t i s our v i e w t h a t F e d e r a l r e s e r v e banks h a v e t h e r i g h t t o a p p l y o f f s e t s a s t h e y deem a d v i s a b l e . ) b. C a p i t a l s t o c k and a c c r u e d d i v i d e n d s t h e r e o n . (We b e l i e v e t h i s i t e m t o be a n i t e m o f c o l l a t e r a l a n d not of o f f s e t . ) c. Le d g e r b a l a n c c . (We c o n s i d e r t h i s i t e m a n i t e m o f o f f s e t w h i c h may b e a p p l i e d i n a n y manner doomed a d v i s a b l e by t h e F e d e r a l r e s e r v e b a n k s , a l t h o u g h we t h i n k t h a t by e x p r e s s c o n t r a c t u a l a g r e e m e n t l e d g e r b a l a n c e m i g h t b e made c o l l a t e r a l item. 4vS5 Pago Ho. 5 C. X-4357a Dividends (1) Amount upon which d i v i d e n d s s n o u l d be p a i d , ( I t i s o u r o p i n i o n t h a t d i v i d e n d s s h o u l d "be p a i d o n t h e amount o f t h e c l a i m a s o r i g i n a l l y f i l e d a n d a l l o w e d w i t h o u t d e d u c t i n g c o l l e c t i o n s on c o l l a t e r a l o r p a r t i a l payments made by p a r t i e s l i a b l e on t h e n o t e . ) (2) When no l o n g e r e n t i t l e d t o d i v i d e n d s . (We a r e o f t h e o p i n i o n t h a t we a r e e n t i t l e d t o d i v i dends upon e a c h o f t h e r e d i s c o u n t e d n o t e s f o r t h e f u l l amount o f c l a i m a s o r i g i n a l l y f i l e d and a l l o w e d u n t i l such time a s the d i v i d e n d s , p l u s c o l l e c t i o n s made from p a r t i e s l i a b l e upon t h e r e d i s c o u n t e d n o t e , e q u a l one hundred p e r c e n t t h e r e o f w i t h i n t e r e s t and expense of c o l l e c t i o n . ) a* Do payments made s u b s e q u e n t t o t h e m a t u r i t y of t h e Aoto o r d a t e of i n s o l v e n c y e f f e c t t h e amount o f dividends? ( I t i s our view t h a t a c l a i m once h a v i n g been f i l e d a n d a l l o w e d s u b s e q u e n t payments made by p a r t i e s l i a b l e on t h e n o t e s h o u l d n o t be d e d u c t e d from t h e amount o f t h e c l a i m when d i v i d e n d s a r e p a i d . In o t h e r words, t h e c l a i m once h a v i n g b e e n f i l e d and e s t a b l i s h e d , we t h i n k wo a r e e n t i t l e d t o d i v i d e n d s o n t h e f u l l amount o f t h e c l a i m u n t i l s u c h time a s t h o s e d i v i d e n d s , p l u s p a y m e n t s , e q u a l t o one hundred p e r cent of the n o t e . ) D. Compromises and S e t t l e m e n t s . (1) R i g h t t o make. ( I t i s our v i e w t h a t b e f o r e any compromise o r s e t t l e m e n t i s made upon a r e d i s c o u n t e d n o t e t h a t t h e c o n s e n t and a c q u i e s c e n c e o f t h e r e c e i v e r s h o u l d be obtained. In t h e event the r e c e i v e r r e f u s e s t o g i v e h i s consent or acquiescence to the s e t t l e m e n t , t h e n h e s h o u l d be g i v e n a n o p p o r t u n i t y t o take t h e r e d i s c o u n t e d n o t e up f o r t h e amount o f f e r e d i n s e t t l e m e n t , p e r m i t t i n g t h e c l a i m t o s t a n d and c o n t i n u i n g t o p a y d i v i d e n d s on t h e amount a s o r i g i n a l l y f i l e d a n d a l l o w e d u n t i l such t i m e a s i t i s f u l l y p a i d . ) 436 Page No. 6 X-4357& ( I f t h e r e c e i v e r does not care to take the n o t e up a n d t h e F e d e r a l R e s e r v e bank i s s t i l l o f the opinion that the s e t t l e m e n t i s a good o n e , we t h i n k i t h a s t h e r i g h t t o make s u c h s e t t l e m e n t with the p a r t i e s p r i o r to the i n s o l v e n t b a n k , p r o v i d e d t h a t when d o i n g s o r e c o u r s e i s e x p r e s s l y r e s e r v e d on s a i d n o t e a g a i n s t the r e c e i v e r of the insolvent hank.) (2) In c a s e s of compromises and s e t t l e m e n t s o f r e d i s c o u n t e d n o t e s , what a u t h o r i t y n e e d e d "by t h e r e c e i v e r ? ( I t i s our view t h a t whenever a r e c e i v e r c o n s e n t s to the s e t t l e m e n t of a r e d i s c o u n t e d n o t e , he s h o u l d o b t a i n an order of a court of competent j u r i s d i c t i o n p e r m i t t i n g same.) E. E x p e n s e s o f P r e s e r v a t i o n and C o l l e c t i o n o f R e d i s c o u n t e d N o t e s . ( I t i s our view t h a t proper c o n t r a c t u a l agreement w i t h member b a n k s t r i l l make s u c h e x p e n s e s i n d e b t e d n e s s e s o f t h o bank a n d , t h e r e f o r e , c o l l e c t i b l e f r o m c o l l a t e r a l w h i c h m i g h t be h e l d . ) III. COLLATERAL: A. R i g h t o f Compromise and S e t t l e m e n t . ( I t i s o u r v i e w t h a t a F e d e r a l r e s e r v e bank h a s no r i g h t t o s e t t l e o r compromise n o t e s h e l d a s c o l l a t eral. Howovor t h e y w o u l d b e l i a b l e o n l y f o r t h e v a l u e o f each c o l l a t e r a l n o t e , and i f a s e t t l e m e n t o r compromise s h o u l d b e e f f e c t e d w h e r e b y t h e F e d e r a l r e s e r v e bank o b t a i n e d t h e f u l l v a l u e o f t h e n o t e , t h e r e w o u l d b e no l i a b i l i t y u p o n i t s p a r t . H e n c e , wo t h i n k t h a t when s u c h s e t t l e m e n t s a r e made w i t h out reserving right of recourse against party secondary l i a b l e , consent of r e c e i v e r should be obtained.) t 437 Page No. 7 B. X-4357a A u t h o r i t y n e e d e d "by R e c e i v e r t o Compromise S e t t l e m e n t of C o l l a t e r a l tjote. ( I t i s our v i e w t h a t i t i s n o t n e c e s s a r y f o r t h e r e c e i v e r to have court order i n c o n n e c t i o n w i t h • s e t t l e m e n t s o f n o t e s p l e d g e d a s c o l l a t e r a l . Where the r e c e i v e r consents to the s e t t l e m e n t , t h i s i s prima f a c i e e v i d e n c e that the p l e d g e e has r e c e i v e d f u l l v a l u e f o r t h e n o t e , and e v e n though u n a u t h o r i z e d t o make t h e s e t t l e m e n t t h e t r u s t w o u l d h a v e no l e g a l r i g h t s a g a i n s t t h e p l e d g e e . Where c o n ' v e n i e n t , i t m i g h t be "better p r a c t i c e f o r t h e r e c e i v e r to obtain court order.) C. Kow and When A p p l i e d . (1) C o l l a t e r a l t o member b a n k ' s p r o m i s s o r y n o t e . ( I n t h e C o m p t r o l l e r ' s l e t t e r of May 1 5 h e s t a t e s t h a t c o l l e c t i o n s made on n o t e s h e l d a s c o l l a t e r a l t o b i l l s p a y a b l e s h o u l d be a p p l i e d i m m e d i a t e l y upon c o l l e c t i o n . T h e o r e t i c a l l y t h i s i s t r u e . The d i f f i c u l t y comes, however, i n d e t e r m i n i n g t h e amount t o be c r e d i t e d on a c c o u n t of e x p e n s e , e t c . We t h i n k i t i s t h e b e t t e r p r a c t i c e t o make t h e s e c r e d i t s w i t h t h e u n d e r s t a n d i n g and agreement b e tween t h e r e c e i v e r , t h e C o m p t r o l l e r ' s o f f i c e , and t h e F e d e r a l r e s e r v e bank i n v o l v e d t h a t s u c h c r e d i t s s h a l l i n no w i s e p r e j u d i c e t h e r i g h t t o r e c o v e r l e g i t i m a t e expense i n c u r r e d . ) (2) C o l l a t e r a l to Rediscounts. (We a r e o f the o p i n i o n t h a t c o l l e c t i o n s on c o l l a t e r a l t o r e d i s c o u n t s s h o u l d not be a p p l i e d u n t i l f i n a l settlement with the r e c e i v e r . ) (3) Where i n s o l v e n t b a n k ' s i n d e b t e d n e s s c o n s i s t s o f b o t h r e d i s c o u n t s and c o l l a t e r a l , (We a r e o f t h e o p i n i o n t h a t c o l l e c t i o n s s h o u l d be a p p l i e d , f i r s t , t o member b a n k ' s p r o m i s s o r y n o t e s w i t h t h e agreement and u n d e r s t a n d i n g r e f e r r e d t o i n subparagraph ( l ) a b o v e . A f t e r t h e i n d e b t e d n e s s evidenced thereby has been f u l l y discharged, t o g e t h e r w i t h i n t e r e s t and e x p e n s e , t h e b a l a n c e , i f a n y , s h o u l d bo u s e d upon f i n a l s e t t l e m e n t toward retiring rediscounts.) Pago No. 8 X-4357a ( 4 ) Expense o f p r e s e r v a t i o n and c o l l e c t i o n . (We a r e o f t h e o p i n i o n t h a t t h e l e g i t i m a t e e x p e n s e i n c u r r e d by F e d e r a l r e s e r v e hanks i n t h e p r e s e r v a t i o n and c o l l e c t i o n o f c o l l a t e r a l n o t e s i s a r e c o v e r a b l e e x p e n s e and can b e s t be h a n d l e d upon f i n a l s e t t l e m e n t r a t h e r t h a n a s e a c h n o t e is collected.) (5) S p e c i a l advances necessary f o r c o l l e c t i o n of c o l l a t e r a l n o t e s . (We t h i n k , i n most i n s t a n c e s , t h e r e c e i v e r s h i p i s p r i m a r i l y i n t e r e s t e d i n w o r k i n g out a s l a r g e a sum a c p o s s i b l e upon c o l l a t e r a l n o t e s . Especially i s t h i s t r u e where t h e l i n e of i n d e b t e d n e s s i s amply m a r g i n e d . T h e r e f o r e i t f o l l o w s t h a t where s p e c i a l advances are c a l l e d f o r , these advances s h o u l d b e made by t h e r e c e i v e r w i t h p r o p e r s u b r o g a t i o n agreement e n t i t l i n g t h e r e c e i v e r t o r e imbursement o u t o f t h e f i r s t p r o c e e d s o f t h e c o l lection. ) IV. CLAIMS Oil ACCOUNT OF UNPAID CASH OR -COLLECTION LETTERS: A. Amount o f Claim ( T h i s t o p i c n e c e s s a r i l y depends upon t h e f a c t s o f each i n d i v i d u a l c a s e , but i t i s s u g g e s t e d p r i m a r i l y because f r e q u e n t l y a claim i s f i l e d which does not i n c l u d e c e r t a i n i t e m s a f t e r w a r d s r e q u e s t e d t o be i n c l u d e d . Sometimes t h e r e c e i v e r s i n d i c a t e an u n w i l l i n g n e s s t o i n c r e a s e t h e amount o f t h e c l a i m . I t i s our v i e w t h a t i n s u c h i n s t a n c e s t h e o r i g i n a l c l a i m s h o u l d be i n c r e a s e d r a t h e r t h a n a s e p a r a t e claim f i l e d . ) B. Proof Required (We a r e o f t h e o p i n i o n t h a t t h e a f f i d a v i t o f t h e Federal reserve tank i n connection with the claim i s s u f f i c i e n t p r o o f . However some r e c e i v e r s a r e d i s p o s e d t o be t e c h n i c a l i n t h i s r e g a r d , and we t h i n k a f u l l d i s c u s s i o n of t h e m a t t e r would be o f interest.) 4 8 9 X-4357a Page Ho. 9 C. D u p l i c a t e Claims ( I t f r e q u e n t l y happens t h a t a c e r t a i n c h e c k w i l l "be included, i n t h e c l a i m o f t h e F e d e r a l r e s e r v e Hie drawer "bank upon a u t h o r i z a t i o n s f u r n i s h e d i t . o f the check w i l l a l s o f i l e a c l a i m . In such i n s t a n c e s t h e r e c e i v e r f r e q u e n t l y a d v i s e s the F e d e r a l r e s e r v e "bank t h a t ho cannot a l l o w i t s c l a i m f o r t h e amount o f t h i s c h e c k due t o t h e o t h e r c l a i m h a v i n g "been f i l e d . I t o c c u r s t o u s t h a t t h e "better p r a c t i c e would "be t o a d v i s e t h e F e d e r a l r e s e r v e bank t h a t a d u p l i c a t e c l a i m has "been f i l e d c o v e r i n g t h i s amount, and r e q u e s t t h e F e d e r a l r e s e r v e bank t o t r a c e t h e i t e m back and d e t e r m i n e w h e t h e r t h e F e d e r a l r e s e r v e bank i s e n t i t l e d t o f i l e t h e c l a i m I n t h i s way a l l c o n o r t h e drawer o f t h e c h o c k . f l i c t i n g i n t e r e s t s can u s u a l l y be a d j u s t e d . Whereas i f the r e c e i v e r a r b i t r a r i l y takes the p o s i t i o n that t h e d r a w e r ' s c l a i m i s the p r o p e r one t o be a l l o w e d , u n c e r t a i n t y and c o n f u s i o n r e s u l t s , and i n some c a s e s unnecessary l i t i g a t i o n might e n s u e . ) D. Offsets (Under t h i s t o p i c wo t h i n k an i n t e r e s t i n g d i s c u s s i o n c o u l d be had a s t o t h e p r o p e r a c t i o n o f F e d e r a l r e s e r v e banks w i t h r e f e r e n c e t o u s i n g c a p i t a l s t o c k r e f u n d and l e d g e r b a l a n c e s a s an o f f s e t a g a i n s t cash l e t t e r claims. I t m i g h t be t h a t t h i s would n o t be a p r o p e r q u e s t i o n f o r g e n e r a l d i s c u s s i o n i n v i e w o f the f a c t t h a t e a c h F e d e r a l r e s e r v e bank might p r e f e r t o h a n d l e t h e s e m a t t e r s a s t h e y a r i s e r a t h e r than a l o n g uniform l i n o . ) E. A p p l i c a t i o n of C o l l a t e r a l (The remarks i n t h e t o p i c n e x t p r e c e d i n g a r e applicable here.) F. Whether General o r P r e f e r r e d Claims (We t h i n k a g e n e r a l d i s c u s s i o n o f t h i s q u e s t i o n w o u l d be o f m a t e r i a l b e n e f i t and i n t e r e s t due t o t h e f a c t t h a t some o f t h e l a t e r d e c i s i o n s by s t a t e c o u r t s h a v e d e p a r t e d from t h e r i g i d r u l e o f t r a c i n g t r u s t f u n d s — n o t a b l y t h e c a s e of F e d e r a l R e s e r v e Bank of Richmond v s P e t e r s . < 440 * Pago ITo. 10 X-4557a V. MISCELLANEOUS CLAIMS A. Claims on a c c o u n t o f r e d i s c o u n t e d o r C o l l a t e r a l l?otes s e n t f o r C o l l e c t i o n and r e m i t t a n c e which a r c . c o l l o c t o d "but n o t r e m i t t e d for. (We s u g g e s t a g e n e r a l d i s c u s s i o n of t h i s q u e s t i o n . ) 3. Claims o n b e h a l f o f makers o f n o t e s who pay amount t h e r e o f t o i n s o l v e n t bank n o t knowing t h e n o t e h a s b e e n r e d i s c o u n t e d o r plodded as c o l l a t e r a l . (We t h i n k i n such c a s e s where i t i s t h o u g h t n e c e s s a r y t o e n f o r c e c o l l e c t i o n of such n o t e s a s a g a i n s t t h e maker, t h e F e d e r a l r e s e r v e banks s h o u l d f i r s t a d v i s e t h e makers o f t h o i r r i g h t s and a t t e m p t t o a s s i s t them i n e s t a b l i s h i n g p r e f e r r e d c l a i m s i f t h e f a c t s s o j u s t i f i e d . We t h i n k a g e n e r a l d i s c u s s i o n o f t h i s t o p i c w o u l d bo o f i n t e r e s t . C. Claims on b e h a l f o f t h e U n i t e d S t a t e s . (We t h i n k a d i s c u s s i o n o f t h e v a r i o u s c l a i m s o f t h i s c h a r a c t e r which have boon f i l e d by t h e s e v e r a l F e d e r a l r e s e r v e banks would be o f g e n e r a l i n t e r e s t . ) D. Renewal U o t a s i n hands of R e c e i v e r c v i d c n c i n g saiso i n d e b t e d n e s s a s n o t e s h e l d by F e d e r a l r e s e r v e bank under r e d i s c o u n t o r a s collateral. ( I t n o t i n f r e q u e n t l y happens t h a t a bank, b e f o r e i t s f a i l u r e , t a k e s a renewal n o t e c o v e r i n g a c e r t a i n i n d e b t e d n e s s , t e l l i n g t h e maker t h a t h i s o l d n o t e w i l l be m a i l e d him l a t e r . The bank f a i l s b e f o r e t h e o l d n o t e h a s b e e n o b t a i n e d from t h e F e d e r a l r e s e r v e bank. In s u c h c a s e s , t h e r e c e i v e r n o t i n f r e q u e n t l y takes the p o s i t i o n that h i s note i s a v a l i d n o t e and a s a r e s u l t much t r o u b l e i s e x p e r i e n c e d . We t h i n k i n such c a s e s a s t h e s e t h e r e c e i v e r s h o u l d be i n s t r u c t e d t h a t a f t e r he h a s s a t i s f i e d himself that the note i n h i s p o s s e s s i o n r e a l l y e v i d e n c e s t h o same i n d e b t e d n e s s a s t h e n o t e i n t h e p o s s e s s i o n o f t h e F e d e r a l r e s e r v e bank he s h o u l d t u r n o v e r t o t h e F e d e r a l r e s e r v e bank t h e r e n e w a l note.) X-4357* Pago Ho. 11 44:1 E. Claims f o r F o r g e r i e s . (Under t h e "blanket bonds c a r r i e d by a l l F e d e r a l r e s e r v e b a n k s , f o r g e d n o t e s t a k e n under r e d i s c o u n t or a s c o l l a t e r a l a r e c o v e r e d . In t h e e v e n t o f s u c h a c o n t i n g e n c y , where a F e d e r a l r e s e r v e bank h a s c o l l e c t e d from t h e b o n d i n g company, i t i s our v i e w t h a t no c o l l a t e r a l s h o u l d be s u r r e n d e r e d t o t h e r e c e i v e r u n t i l s u f f i c i e n t amount h a s b e e n c o l l e c t e d t h e r e f r o m t o f u l l y r e i m b u r s e t h e b o n d i n g company a s w e l l a s t h e F e d e r a l r e s e r v e bank. We t h i n k a d i s c u s s i o n o f t h e p r o p e r method o f h a n d l i n g s u c h a t r a n s a c t i o n would be o f g e n e r a l i n t e r e s t . ) VI. FIUAL SETTLE!,•ISM'S WITH RECEIVERS A. General D i s c u s s i o n
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