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X 44 34 ~ OFFICE To CORRESPONDENCE. (COPY) The Federal Reserve Board. From Mr. Wyatt - General Counsel. 810 May 2 6 , 1 9 2 5 . SUBJECT: Proof of Claims a g a i n s t i n solvent n a t i o n a l "banks. The a t t a c h e d l e t t e r addressed "by Governor Harding t o Mr. Hamlin- c a l l s a t t e n t i o n to an apparent lack of uniformity i n the r e quirements of the Comptroller's o f f i c e with regard t o the matter of proving claims a g a i n s t i n s o l v e n t national "banks. At Mr. Hamlin's r e q u e s t , t h i s o f f i c e made a preliminary i n v e s t i g a t i o n of the subject from which i t appeared that formerly the usual p r a c t i c e was f o r a Federal reserve bank holding rediscounted paper on which an i n s o l v e n t n a t i o n a l "bank was l i a b l e a s endorser to f i l e a s i n g l e claim with the r e c e i v e r covering the aggregate amount of such rediscounted paper and that a l l dividends p a i d by the r e c e i v e r were based on the t o t a l amount so proved. I t appears, however, that l a t e i n 1924 the Comptroller's o f f i c e inaugurated a new method based on a comparatively recent opinion of the United S t a t e s D i s t r i c t Court f o r the Northern D i s t r i c t of North Dakota i n the case of Federal Reserve Bank of Minneapolis v. F i r s t National Bank of Eureka, 277 Fed. 300, whereby a Federal reserve bank h o l d i n g a number . of rediscounted items on which an i n s o l v e n t n a t i o n a l bank i s l i a b l e ag endorser i s not permitted to f i l e a s i n g l e claim a g a i n s t the i n s o l v e n t bank covering the e n t i r e amount of such rediscounted itetns, bi^t i s required to f i l e a separate claim f o r each and every item. Furthermore, i f at the time a dividend i s declared a particular! pcy discounted item has been p a i d in. f u l l , no dividends are allowed under the new "practice- en the claim based on that p a r t i c u l a r rediscounted item. The Board considered our preliminary report to Mr. Hamlin and requested t h i s o f f i c e to take the matter up with counsel to a l l Federal reserve banks and obtain from them an e x p r e s s i o n of t h e i r opinions on the questions i n v o l v e d . The l e t t e r s from Counsel t o a l l the Federal r e s e r v e banks d i s c u s s i n g the subject i n more or l e s s d e t a i l are r e s p e c t f u l l y submitted herewith. Eight of the Counsel f o r the Federal reserve banks agree with the p o s i t i o n of the Comptroller oar to the p r i n c i p l e underlying h i s new requirement, t h a t i s , that a rediscounted item which has been ppld i n f u l l should not be e n t i t l e d to p a r t i c i p a t e i n any subsequent dividends p a i d by the i n s o l v e n t bank. Only two of the Counsel express themselves a s d i s a g r e e i n g with t h i s p r i n c i p l e . A number of those who b e l i e v e that the p o s i t i o n of the Comptroller's o f f i c e i s w e l l founded suggest or contend that the purpose of the Comptroller may be accomp l i s h e d by the f i l i n g o f one claim covering a l l the rediscounts but t r e a t i n g them s e p a r a t e l y . Such an arrangement would be much simpler and would avoid much trouble both f o r the Federal reserve bank and f o r the r e c e i v e r . The view of the majority of the Counsel seems to be that each of s e v e r a l rediscounted items h e l d by a Federal reserve bank are - 2 - X-4344 d i s t i n c t and separate items of indebtedness and when any one of these rediscounts has "been p a i d i n f u l l or otherwise extinguished, i t should no longer be considered an e x i s t i n g claim f o r the purpose of procuring g r e a t e r dividends on other rediscounts not y e t s a t i s f i e d . To do so would, of course, b e n e f i t the Federal reserve bank but would p r e j u dice the other c r e d i t o r s of the i n s o l v e n t bank pro t a n t o . I t does not seem e q u i t a b l e to ask or expect any dividend upon an item of indebtedness which has been p a i d i n f u l l merely because the c r e d i t o r happens to have other separate and d i s t i n c t claims a g a i n s t the i n s o l v e n t bank. On t h i s p o i n t , then, i n ray opinion, the p o s i t i o n of the Comptroller i s correct and re discounts which have been paid i n f u l l should not p a r t i c i p a t e i n or be made the b a s i s of any dividends subsequently declared by the i n s o l v e n t bank. I f e e l , however, that i n the i n t e r e s t s of s i m p l i f i c a t i o n of procedure and t o a v o i d much c l e r i c a l inconvenience Federal- reserve banks should be permitted to f i l e one Claim covering a l l r e d i s c o u n t s , each rediscount so covered t o be described and t r e a t e d s e p a r a t e l y f o f j a l l purposes. Up to t h i s p o i n t , the d i s c u s s i o n has been confined to the proof of claims i n v o l v i n g r e d i s c o u n t s . The case i s somewhat d i f f e r e n t , however, as to indebtedness secured by c o l l a t e r a l . I t i s w e l l s e t t l e d by c a s e s i n the Supreme Court of the United S t a t e s , c h i e f l y the case of M e r r i l l v* National Bank of J a c k s o n v i l l e , 173 U . S . 131, that a secured c r e d i t o r of an i n s o l v e n t n a t i o n a l bank may prove and r e c e i v e dividends upon the f a c e of h i s claim a s i t stood a t the time of the d e c l a r a t i o n of insolvency, without c r e d i t i n g e i t h e r h i s c o l l a t e r a l s , or c o l l e c t i o n s made therbf&oni After such d e c l a r a t i o n , subject t o t h e p r o v i s o t h a t dividends tntiSt Cfc&se when froM them and from c o l l a t e r a l r e a l i z e d , the claim has beeh paid i n f u l l . On account of t h i s w e l l e s t a b l i s h e d p r i n c i p l e , the question a r i s e s whether Federal reserve bank stock outstanding i n the name of the i n s o l v e n t member bank i s to be t r e a t e d by the Federal r e s e r v e bank as c o l l a t e r a l , or a s a s e t o f f to be a p p l i e d a g a i n s t the indebtedness of the i n s o l v e n t bank, claim being made f o r the net d i f f e r e n c e o n l y . Under the recent i n s t r u c t i o n s of the Comptroller, Federal reserve bank s t o c k i s required to be t r e a t e d a s a s e t o f f and not as c o l l a t e r a l . This reg u l a t i o n i s based on a p o r t i o n of the opinion i n the case of Federal Reserve Bank of- Minneapolis v . F i r s t National Bank of Eureka, above r e f e r r e d t o : but i t does not appear that t h i s was one of the c o n t e s t e d p o i n t s i n the c a s e . On the contrary i t seems t o ijave been conceded. The opinion, t h e r e f o r e , cannot be considered as of much importance on t h i s p o i n t . Most o f the Counsel who expressed an opinion on t h i s p o i n t f e e l that Federal reserve bank sfopek should be t r e a t e d a s c o l l a t e r a l and not a s a s e t o f f . S e c t i o n 6 o f "the Federal Reserve Act provides that upon the i n s o l v e n c y of a member bank the Federal reserve bank stock h e l d by i t s h a l l be c a n c e l l e d and the proceeds a p p l i e d f i r s t to the debts of the i n s o l v e n t bank and the balance, i f any, p a i d to the r e c e i v e r . P r i o r to insolvency the member bank has no claim a g a i n s t the Federal r e s e r v e bank on the s t o c k ; i t merely has an i n t e r e s t i n the Federal r e s e r v e bank a s represented by the s t o c k . On the date — 3 — X-4344 of insolvency a l s o there i s no debt due the member bank from the Federal reserve bank on the stock because the stock has not been c a n c e l l e d . Certainly up to the time of c a n c e l l a t i o n , there i s no debt due the member bank on such stock, and s i n c e the claims are proven a s of the date of insolvency i t does not seem that the proceeds of Federal r e s e r v e bank stock i s a proper item f o r s e t o f f . Furthermore, i t seems to be the i n t e n t i o n of S e c t i o n 6 of the Federal Reserve Act that the proceeds of Federal reserve bank stock s h a l l be used t o save the Federal reserve bank from l o s s , a s f a r a s p o s s i b l e i n c a s e s of insolvency, only the remainder a f t e r paying the debts of the i n s o l v e n t bank being p a i d to the r e c e i v e r . I t i s apparently the i n t e n t i o n that the Federal r e s e r v e bank s h a l l not account to the r e c e i v e r f o r anything due on the stock u n t i l a l l the claims of the Federal r e s e r v e bank a g a i n s t the i n s o l v e n t bank have f i r s t been s a t i s f i e d . Summarizing the conclusions of the majority of the Couns e l of the Federal r e s e r v e banks, with which conclusions I concur, i t may be s a i d : (1) That the p o s i t i o n of the Comptroller of the Currency i s correct i n t h a t no rediscount which has been p a i d i n f u l l or o t h e r wise s a t i s f i e d should be permitted to p a r t i c i p a t e i n dividends subsequent to the s a t i s f a c t i o n of the rediscount; but that t h i s purpose may be accomplished much more conveniently and with l e s s trouble to a l l p a r t i e s concerned by the f i l i n g of one claim f o r a l l red is coun t s but t r e a t i n g and d e s c r i b i n g each s e p a r a t e l y . (2) The proceeds of Federal reserve bank stock should not be considered as a s e t - o f f to be a p p l i e d a g a i n s t the indebtedness of the i n s o l v e n t n a t i o n a l bank to the Federal reserve bank, but should be considered i n the same category as c o l l a t e r a l ; and the Federal reserve bank should be permitted to f i l e i t s claim f o r the e n t i r e amount of indebtedness and to r e c e i v e dividends thereon without deducting anything f o r the proceeds of the Federal r e s e r v e bank stock with the p r o v i s o , of course, that the t o t a l amount of dividends p l u s the proceeds of such stock s h a l l not exceed the amount of the claim of the Federal reserve bank. Under date of May 15th the Comptroller's o f f i c e i s s u e d a c i r c u l a r l e t t e r to a l l Federal reserve banks o u t l i n i n g a uniform p r a c t i c e w i t h r e s p e c t to claims by Federal reserve banks a g a i n s t i n s o l v e n t n a t i o n a l banks which the Comptroller's o f f i c e proposed to put i n t o e f f e c t . A copy of t h i s c i r c u l a r l e t t e r i s r e s p e c t f u l l y submitted herewith. I t r e - a f f i r m s the Comptroller's view that separate claims must be f i l e d with regard to each rediscounted item; and that the Federal r e s e r v e bank stock h e l d by an i n s o l v e n t bank should be o f f s e t a g a i n s t the claims h o l d by that bank. The c i r c u l a r a l s o s t a t e s that a Federal reserve bank i s e n t i t l e d to i n t e r e s t on i t s claims only a t a r a t e equivalent to i t s current discount r a t e , X-4344 3 1 - 3 - 4 - and i t i s b e l i e v e d that t h i s i s not s t r i c t l y c o r r e c t , though i t i s understood that Federal reserve banks f r e q u e n t l y have waived t h e i r r i g h t to any i n t e r e s t on such claims i n e x c e s s of t h e i r going rediscount r a t e s . The c i r c u l a r goes i n t o much d e t a i l , i s not y&tirely c l e a r , and may be i n c o r r e c t i n other r e s p e c t s a l s o . In view of a l l these circumstances, and i n order that a complete understanding may be a r r i v e d a t between the Federal reserve banks and the Comptroller's o f f i c e with regard to t h i s e n t i r e s u b j e c t , i t i s r e s p e c t f u l l y recommended that a conference be arranged between the Comptroller's o f f i c e and Counsel to a l l i n t e r e s t e d Federal reserve banks to d i s c u s s the Comptroller's c i r c u l a r of May 15th, and i f p o s s i b l e to agree upon such modif i c a t i o n s and c l a r i f i c a t i o n s thereof as may be n e c e s s a r y . A d r a f t of a l e t t e r to the Governors of a l l Federal r e serve banks s u g g e s t i n g that such conference bo arranged and t r a n s m i t t i n g a copy of t h i s memorandum together with c o p i e s of l e t t e r s r e c e i v e d from Counsel to a l l Federal reserve banks i s r e s p e c t f u l l y submitted herewith. Respectfully, Walter Wyatt, General Counsel, Papers a t t a c h e d . W O C W M I
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