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COPY X-4618. FEDERAL RESERVE BAH of ST. June LOUIS 13, 1926. Mr. Walter Wyatt, General Counsel, Federal Reserve Board, Washington, D. C. Dear Mr. Wyatt: Your telegram regarding the decision in the case of the City of Douglas vs the Federal Reserve Bank of Dallas was forwarded to me a t L i t t l e Rock, Arkansas, where I was i n t r i a l of a similar case. Upon my r e t u r n to the o f f i c e I f i n d your l e t t e r of June 4th enclosing copy of the Douglas opinion. I have w r i t t e n to Stroud congratulating him on h i s success in t h i s case, as i t seems to have removed a considerable p o r t i o n of the s t i n g contained in the Malloy decision. On Monday of t h i s week we t r i e d out a case before the Circuit Court of L i t t l e Rock, Arkansas. The item i n controversy was one drawn on an Arkansas Bank in favor of a r e s i d e n t of Louisiana who deposited i t in a nonmember bank i n Louisiana, which, in turn, forwarded i t to the F i r s t national Bank of Shreveport and the l a t t e r (under the d i r e c t sending agreement with tho Federal Reserve Bank: of Dallas) forwarded i t to our L i t t l e Rock Branch and by the L i t t l e Rock Branch i t was forwarded d i r e c t to the drawee bank. The item was c o l l e c t e d by charging the account of the drawer of the item. The drawee bank then attempted to remit by d r a f t on i t s L i t t l e Rock correspondent. The d r a f t proved to be u n c o l l e c t i b l e because of the f a i l u r e of the remitting bank. I had employed Mr. H. M. Armistead, of the firm of Cockrill & Armistead, L i t t l e Rock, Arkansas, to represent me as l o c a l attorney in the matter, Mr. Armistead had always f e l t t h a t the c i r c u l a r l e t t e r between the Federal Reserve Bank of Dallas and i t s member, the F i r s t National Bank of Shreveport, La., authorizing the c o l l e c t i o n to be made in exchange, cons t i t u t e d a defense in our f a v o r . I did not f e e l so confident as to t h i s defense and f e l t that if the case was defeated i t must be defeated on the ground t h a t the Louisiana Bank and not the Federal Reserve Bank of S t . Louis must respond f o r the l o s s . Under the Arkansas p r a c t i c e one i s permitted to f i l e a demurrer and an answer in the some pleading. Accordingly, we demurred on the grounds: 356 — 2 — X-4618 (1) That since in Louisiana by j u d i c i a l construction (Martin vs Hibernia Bank & Trust Co. 53 Southern, 572) the i n i t i a l bank was responsible f o r the a c t s of i t s sub-agents. (2) That if the Court should f i n d that the d i r e c t sending s t a t u t e , since enacted by the Louisiana l e g i s l a t u r e , had changed the r u l e in Louisiana from the New York to the Massachusetts r u l e , then since Arkansas has a similar d i r e c t sending a c t , the Arkansas a c t made the drawee bank a s u i t able agent of the owner of the item, and that the drawee bank having c o l l e c t e d the item and having f a i l e d to remit i n money was alone responsible to the owner of the item. We also pleaded the c i r c u l a r l e t t e r contract between the f e d e r a l He serve Sank of Dallas and i t s member, the F i r s t National Bank of Shroveport, authorizing the acceptance of a d r a f t in collection and the c i r c u l a r l e t t e r and regulation between Federal Reserve Banks; also Regulation J . I argued the demurrer on both p o i n t s , and whilst the Court seemed to take kindly to the suggestions he s t a t e d t h a t since under the Arkansas procedure he could consider the demurrer a t the end of the case, he would p r e f e r to hear the evidence. This being agreeable to both p a r t i e s , i t was accordingly done. We thereupon submitted the s t i p u l a t i o n s and o f f e r e d evidence of the universal custom among banks of accepting d r a f t s instead of money in the matter of coll e c t i o n s , and r e s t e d . The Court thereupon inquired of p l a i n t i f f ' s a t t o r ney i f h i s only charge of negligence against the Federal Reserve Bank was that i t took an exchange d r a f t i n s t e a d of cash from the drawee bank and upon receiving an a f f i r m a t i v e reply s t a t e d , under the circumstances, he would have to f i n d against the p l a i n t i f f ; that as he viewed the case, when t h i s item was deposited in the Louisiana Bank, drawn on a bank in another s t a t e , the owner of the item knew that the c o l l e c t i o n would have to be made through other agents and was bound by any contract made by such agents; t h e r e f o r e , was bound by the contract e x i s t i n g between the Federal Reserve Bank of Dallas and the F i r s t National Bank authorizing the acceptance of a d r a f t in l i e u of money in the matter of c o l l e c t i o n s . The p l a i n t i f f , of courso, took an appeal from the decision; nevertheless, the judgment, as i t now stands, can be sustained by the Supremo .Court on any of the defenses or the demurrer o f f e r e d , since the p l a i n t i f f did not ask f o r the f i n d i n g s of f . a c t s a n d d e c l a r a t i o n s of l a w . I am, t h e r e f o r e , v e r y h o p e f u l of t h e s u c c e s s f u l outcome of t h i s e a s e when i t r e a c h e s t h e Supreme Court of A r k a n s a s . P e r s o n a l l y I a n now a n d a l w a y s h a v e b e e n somewhat a f r a i d of t h e c i r c u l a r l e t t e r d e f e n s e on c a s e s a r i s i n g p r i o r t o t h e amendment of R e g u l a t i o n J . However, I t h i n k u n d e r t h e s t a t u s of t h e judgment, a s i t now s t a n d s , we ought t o win i t on t h e d e m u r r e r , o r on t h e custom a s p r o v e d even i f t h e Supreme Court s h o u l d n o t h o l d t h e same views t h e t r i a l c o u r t d i d a s t o t h e c i r c u l a r l e t t e r d e fense. 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 ) J a s . Or. McConkey. Counsel