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3 4 0 X-6740 COPY October 22, 1930 To Federal Reserve Board From Mr. Wyatt-General Counsel Subject: Federal Reserve Bank of Richmond v. Attmore Because of the grave charges made a g a i n s t the Federal Reserve Bank of Richmond by the defendant, because of the p o l i t i c a l f l a v o r i n j e c t e d i n to the l i t i g a t i o n by the defendant, and because of the f a c t t h a t i t may develop i n t o a case involving l e g a l questions of importance to the e n t i r e Federal Reserve System, I r e s p e c t f u l l y submit herewith for the Board 1 s i n formation copies of c e r t a i n l e t t e r s addressed to me by Counsel to the Fede r a l Reserve Bank of Richmond with r e f e r e n c e to the above case, copies of the complaint and answer f i l e d i n the case, and copies of c e r t a i n c o r r e s pondence with the Receiver of the F i r s t National Bank of Hew Bern, Forth Carolina, p e r t a i n i n g to a demand of the Counsel f o r the defendant i n the above case t h a t the Receiver b r i n g s u i t a g a i n s t the Federal Reserve Bank to recover c e r t a i n a s s e t s of the F i r s t n a t i o n a l Bank of Hew Bern pledged to the Federal Reserve Bank as marginal c o l l a t e r a l to i t s indebtedness, and c e r t a i n other a s s e t s a l l e g e d to be held u n l a w f u l l y by the Federal Reserve Bank. Pending f u r t h e r developments, I beg leave to withhold any recommenda t i o n as to what s t e p s , i f any, the Board should take with r e f e r e n c e to the handling of t h i s l i t i g a t i o n * I f the case developes i n such a manner as to involve l e g a l questions of importance to the e n t i r e Federal Reserve System, i t may become advisable to employ s p e c i a l counsel to r e p r e s e n t the i n t e r e s t s of a l l Federal reserve banks, as has been customary i n cases i n v o l v i n g questions of importance to the e n t i r e Federal Reserve System. This, however, depends upon f u t u r e developments and e s p e c i a l l y upon the c o u r t ' s r u l i n g upon a motion now pending, which probably w i l l be handed down sometime during the month of November, SUMMARY OF THE CASE I t appears from the complaint f i l e d i n t h i s case t h a t the Federal Reserve Bank of Richmond rediscounted for the F i r s t National Bank of New Bern, North Carolina, two notes made by G. S. Attmore. The F i r s t National Bank of New Bern having f a i l e d and a r e c e i v e r having been appointed f o r i t , the Federal Reserve Bank brought t h i s s u i t a g a i n s t G. S. Attmore, as maker, to c o l l e c t the two notes above r e f e r r e d t o . In answer t o the comp l a i n t the defendant denies t h a t the F i r s t National Bank was a holder of one of these notes i n due course f o r value and t h a t the Federal Reserve Bank holds e i t h e r of such notes i n due course and f o r value, and demands t h a t the Federal Reserve Bank "produce the s e c r e t w r i t t e n agreements and c o n t r a c t s which i t compelled the i n s o l v e n t F i r s t National Bank of New Bern to execute to i t r e l e v a n t to marginal c o l l a t e r a l . The defendant f u r t h e r avers t h a t the r e c e i v e r of the F i r s t National Bank of New Bern i s a necessary p a r t y to t h i s a c t i o n and moves t h a t he - 2 - X-6740 "be made a p a r t y to the a c t i o n in order t h a t he may p l e a d to the affirriga t i v e defense and c r o s s - p l e a s e t up "by the defendant. As an a f f i r m a t i v e defense, the defendant makes a number of a l l e g a t i o n s v i t h r e f e r e n c e to knowledge "by the Federal Reserve Bank of the insolvency of the F i r s t n a t i o n a l Bank of Hew Bern; with r e f e r e n c e to the p a r t taken by the Federal Reserve Bank in the formation of the F i r s t Nati o n a l Bank of New Bern "by the absorption of a S t a t e "bank "by the National Bank of New Bern and the assumption of the l i a b i l i t i e s of the National Bank of New Bern by the F i r s t National Bank; with r e f e r e n c e to the knowledge of the Federal Reserve Bank of the improper use i n the o r g a n i z a t i o n of the F i r s t National Bank of New Bern of c e r t a i n funds of Craven County, North Carolina; and with r e f e r e n c e to the taking "by the Federal Reserve Bank of marginal c o l l a t e r a l from the F i r s t National Bank of New Bern to secure r e d i s c o u n t s with the Federal Reserve Bank. Hie defendant a l l e g e s t h a t he i s e n t i t l e d to a s e t off a g a i n s t a deposit balance i n the F i r s t National Bank of New Bern and that he i s e n t i t l e d to have the Federal Reserve Bank r e t u r n to the r e c e i v e r of the F i r s t National Bank of New Bern marginal c o l l a t e r a l taken from t h i s bank by the Federal Reserve Bank. The defendant asks the court to require the Federal Reserve Bank to s u r r e n d e r one of h i s notes to him 'and surrender the other to the r e c e i v e r of the F i r s t National Bank of New Bern i n order t h a t i t may be s e t o f f a g a i n s t h i s d e p o s i t i n t h i s bank. He f u r t h e r asks t h a t the Federal Reserve Bank be r e q u i r e d to produce i n court r e p o r t s of examinations of the F i r s t Nati o n a l Bank and i t s p r e d e c e s s o r s , the National Bank of New Bern and the Peoples Bank of New Bern. I t appears t h a t the a l l e g a t i o n s contained in the d e f e n d a n t ' s a f f i r m a t i v e defense above r e f e r r e d to are not m a t e r i a l to the i s s u e involved i n t h i s case and I am advised by the Counsel f o r the Federal Reserve Bank of Richmond t h a t he has made a motion to s t r i k e out the d e f e n d a n t ' s a f f i r m a t i v e defense on the ground that the matter s e t up i s i r r e l e v a n t and in>m a t e r i a l to the i s s u e . The court has taken t h i s motion under advisement and probably w i l l r u l e upon i t sometime i n November. I f the c o u r t s u s t a i n s t h i s motion and i f the defendant does not appeal on the r u l i n g , the case w i l l involve no question of importance or i n t e r e s t to the e n t i r e Federal Reserve System. I f , however, the court should overrule the motion to s t r i k e out the d e f e n d a n t ' s a f f i r m a t i v e defense, or i f the court should s u s t a i n such motion and the defendant should appeal from such r u l i n g , the case may involve questions of importance to the e n t i r e Federal Reserve System, depending upon whether the appeal turns upon questions of procedure or upon questions of s u b s t a n t i v e law. Counsel f o r the defendant i n t h i s case, a c t i n g as counsel f o r c e r t a i n stockholders and d e p o s i t o r s in the F i r s t National Bank of New Bern and i t s p r e d e c e s s o r , the National Bank of New Bern, has demanded t h a t the r e c e i v e r i n s t i t u t e proceedings a g a i n s t the Federal Reserve Bank f o r the r e t u r n of a s s e t s of such banks pledged to the Federal Reserve Bank as s e c u r i t y f o r the indebtedness of such banks to the Federal Reserve Bank ( o t h e r than paper rediscounted with the Federal Reserve Bank without c o l l a t e r a l s e c u r i t y ) and a l s o f o r the r e t u r n of a s s e t s of such banks "not held i n accordance 3 4 2 - 3 - X-6740 with the Federal Reserve Act," i n order t h a t the r e c e i v e r may obtain f o r c o l l e c t i o n and d i s t r i b u t i o n among the c r e d i t o r s of the F i r s t National Bank of Hew Bern "items u n l a w f u l l y obtained and h e l d by the Federal Reserve Bank of Richmond". The t h r e a t i s made t h a t , i f the r e c e i v e r does not i n s t i t u t e such proceedings the stockholders and d e p o s i t o r s w i l l do s o . I am informed t h a t the Comptroller of the Currency lias i n s t r u c t e d the r e c e i v e r not to i n s t i t u t e such proceedings; but d e p o s i t o r s and stockh o l d e r s probably w i l l do s o . I f they do, t h a t case almost c e r t a i n l y w i l l involve questions of System-wide importance. QUESTIONS WHICH MAY BE INVOLVED This l i t i g a t i o n probably w i l l produce p u b l i c i t y unfavorable to the Federal Reserve System and may r e s u l t i n r u l i n g s by the Appellate Courts e s t a b l i s h i n g important precedents on the following questions, and p o s s i b l y o t h e r s , which a r e of importance to a l l Federal reserve banks and some of which axe of importance to the Federal Reserve Board and the Compt r o l l e r of the Currency: 1. Whether a Federal r e s e r v e bank may be r e q u i r e d to produce i n court copies of r e p o r t s of examinations of n a t i o n a l banks e n t r u s t e d by the Comptroller of the Currency to the Fede r a l Reserve Agent f o r h i s c o n f i d e n t i a l information i n h i s o f f i c i a l capacity. 2 . Whether i t i s l a w f u l f o r Federal r e s e r v e banks to r e q u i r e or accept pledges of marginal c o l l a t e r a l when making r e discounts f o r , or loans to, member banks. 3. Whether the makers of notes rediscounted by member banks with Federal reserve banks may o f f s e t a g a i n s t t h e i r i n d e b t edness on such notes the amounts of t h e i r d e p o s i t s i n such member banks a f t e r the insolvency of the l a t t e r . 4. To what e x t e n t are Federal r e s e r v e banks chargeable with n o t i c e of the insolvency of member banks? 5. To what extent are the r i g h t s of Federal r e s e r v e banks in g r a n t i n g c r e d i t accommodations t o member banks a f f e c t ed by knowledge on the p a r t of the Federal r e s e r v e banks of the insolvency of such member banks or of f r a u d u l e n t and unlawful t r a n s a c t i o n s of such member banks? Somewhat s i m i l a r questions were involved i n the cases of Federal Reserve Bank of San Francisco v . Grimm A l f a l f a Seed Growers* A s s o c i a t i o n , 8 Fed. (2nd) 922, c e r t i o r a r i denied 46 Sup. Ct. 347, and Neoga National Bank v. Federal Reserve Bank of Chicago (unreported); and i n both of those cases Honorable Newton D. Baker was employed as Special Counsel to r e p r e s e n t the i n t e r e s t s of a l l Federal reserve banks i n t h e l i t i g a t i o n . He was a l s o r e t a i n e d by the Governors' Conference to make a s p e c i a l study of a l l such questions with a view of a d v i s i n g the Federal r e s e r v e banks how - .4 X-6740 348 t h e i r c r e d i t p r a c t i c e s might be modified to minimize r i s k of l o s s to the Federal r e s e r v e "banks, "but has not yet rendered a r e p o r t . In view of h i s p a s t experience and h i s s p e c i a l knowledge of t h i s s u b j e c t , he would be e s p e c i a l l y well q u a l i f i e d to r e p r e s e n t the i n t e r e s t s of a l l Federal r e serve "banks i f i t should 'become necessary to employ Special Counsel f o r t h i s purpose. I am keeping i n close touch with a l l developments i n t h i s l i t i g a t i o n through correspondence and telephone conversations with Counsel f o r the Federal Beserve Bank of Richmond; and I am keeping a l l Federal r e s e r v e "banks advised of developments through l e t t e r s to t h e i r Counsel* ' I s h a l l , of course, advise the Board of a l l important developments and s h a l l recommend the employment of Special Counsel should f u t u r e developments appear to make t h a t a d v i s a b l e . EXTRAORDINARY CHARGES AGAINST FEDERAL RESERVE BANK. For the Board's f u r t h e r i n f o r m a t i o n , there i s r e s p e c t f u l l y subm i t t e d herewith an a n a l y s i s of the e x t r a o r d i n a r y charges made a g a i n s t the Federal Reserve Bank by the defendant i n t h i s c a s e . I b e l i e v e t h a t these charges are i r r e l e v a n t and immaterial i n t h i s case and t h a t they should be s t r i c k e n o u t . They may, however, be m a t e r i a l i f repeated i n a s u i t brought a g a i n s t the Federal Reserve Bank on behalf of the dep o s i t o r s and other c r e d i t o r s of the F i r s t National Bank of New Bern f o r the purpose of r e q u i r i n g the r e t u r n to the r e c e i v e r of c e r t a i n a s s e t s of the bank f o r the b e n e f i t of i t s d e p o s i t o r s and c r e d i t o r s on the ground t h a t i n obtaining such a s s e t s the Federal Reserve Bank knowingly p a r t i c i p a t e d i n a f r a u d on the depositors and other c r e d i t o r s . In the e x e r c i s e of i t s power of general supervision over the Federal r e serve banks, the Board a l s o may d e s i r e to enquire i n t o the t r u t h of these charges. I doubt t h a t they are t r u e ; b u t , to have such charges a i r e d i n court and p o s s i b l y passed upon by a p r e j u d i c e d j u r y , might r e s u l t i n much u n f a v o r a b l e p u b l i c i t y f o r the Federal Reserve System. CONCLUSION This memorandum i s merely f o r the Board 1 s information and r e q u i r e s no a c t i o n a t t h i s time. Because the a t t a c h e d documents are quite voluminous, I am f u r n i s h i n g copies to each i n d i v i d u a l member of the Board, i n order t h a t he may consider them a t h i s l e i s u r e . Respectfully, Walter Wyatt, General Counsel. Co r r e s p ondence, etc; attached. W-sad.
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