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X-4464
y
ET T'.dE UlTITED STATES CIRCUIT COURT OF .APPEALS
For the Ninth Circuit.
. FE::::JERU. RESERVE :BMW. OF S.AN
FRA1TCISCO, e corporation,
Plai~tiff
)
)
)
)
in Error
)
vs.
)
)
)
)
)
)
IDAHO GRIL1.~ ALFALFA SEED GR01'iERS
ASSOCIATION, a corporation,
Defendant in Error.
ITo. 4560
Upon Writ of Error to the United States District Court for the
District of Idaho, Eastern Division.
Before GILBERT, HUNT, and BUDKIN, Circuit Judges.
RUDKIN, Circuit Judge:
During the period herein mentioned, the
Idaho Grimm Alfalfa Seed Growers Association was a farm marketing association organized under the laws- of that State and was engaged in the business of cleaning and marketing alfalfa seed produced by its members.
alfalfa seed was sold, a draft was drawn on the buyer for the
price with a bill of lading attached.
When
purcha~e
Up to about a year prior to November
28, 1923, all drafts thus drawn were deposited with D. W. Standrod and
Company Bankers, for collection only, and the Association was not permitted
to draw against the amount of the drafts until payment was actually made to
the Standrod Bank.
But in the fall of 1922, this arrangement was changed
through an agreement between the Association and the Standrod Bank, and
thereafter the Association was given immediate credit for the amount of the
260
X-4464
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drafts when doposi ted, and wc.s pcrmi t.tcd to draw against them to the full
amount, if it so dcsi rod.
If n draft was not paid '7hon presented, tho amount
was charged back to the account of tl1e Association, and if paid, the Association was charged with interest on the
was \actually paid.
amou_~ts
checked out before the draft
0~1 Nove;nber 23, 1923, the Association drew a sight draft
in the sum of $10,848.80 on Teweles and Company for the purchase :price of a
carload of alfalfa seed shipped to that company.
The draft was made payable
to the Standrod Eruik, had attached thereto a bill of lading for the shipment,
and was accoinpanicd by a letter of instructions, stating trot payment might
be deferred Ulltil the arrival of tho car.
The draft was then forwarded by
the Standrod Bank to the Federal Reserve Bank at Salt Lake for discount and
was there discounted and the amount placed to the credit of the Standrod
Ban£~.
Two sLmilar drafts were drawn by the Association on November 26, 1923, for
substantially similar amounts and these drafts took the same course.
be said in this
co~~ection,
It might
however, that tho general manager of tho Asso-
ciation neglected to sign one of the last mentioned drafts nnd the defect was
not discovered until the draft roached the Federal Reserve Bank at Salt
La~e.
The Standrod Bank was then notified of the defect over tho telephone and another draft was substituted in its place.
Tho
Sta~drod
Bank was open for the transaction of business for the
last time on November 28, 1923, and on November 30, 1923, its affairs were
taken over by the Banking Officers of the State.
St~~drod
On the latter date the
Bank had an overdraft with the Federal Reserve
Earu~
in the sum of
$47.96, and the Association had a balance to its cheCking account, on the
books of the Standrod Bank, in the sum of $32,295.20.
On December 1, 1923,
the Association notified the Banking Officers of the State that the Standrod
26~
X-4464
Bank was insolvent at the time of the receipt of the drafts and that its
officers and agents know ur had cause to believe that it was so insolvent, and
the Association made claim to the drafts or, if collected, to the proceeds
thereof.
A copy of this notice was mailed to the Federal Reserve Bank on
the same day.
The present action was then instituted by the Association against
the Federal Reserve Bajk, the Standrod Bank, and the Banking Officers of the
States to recover the amount of the three drafts or their value.
The com-
plaint contains six causes of action in all, or two causes of action based
on each of the three drafts.
The causes of action on each of the three
drafts were identical in form however, so that for persent purposes reference
need only be made to the first and second causes of action based on the draft
of November 23, 1923.
Speaking generally, it was alleged in the first cause
of action that for upwards of a year prior to the date of the receipt of
the qraft in question the Standrod Eank was insolvent; that its directors
and managing officers, and the managing officers of the Federal Reserve Bank
were at all times fully aware of its insolvent condition; that the draft was
forwarded to the Federal Reserve Bank for collection; that the amount thereof was collected by the Federal Reserve Bank after the close of the Standrod
Bank, and that the Federal Reserve Bank refused to account for the proceeds
thereof.
In the second cause of action it was alleged that the draft was
deposited with the Standrod Bank under an agreement between the Association
and the Bank that the draft and the proceeds thereof should be and remain the
property of the Association, and that the title thereto, or to the proceeds
thereof, should not become tho property of the Standrod Bank.
At the com-
mencement of the trial tho Federal Reserve Bank moved the court to require
262
X-4464
tho nlnL1tiff to elect uho thor it vrould proceed or:. the first 1 third and fifth
causes of ac ti o:1, '\71lich it claimed were of oqui table cognizance, or on tho
second, fourth and sixth causes of action 7rhich it clo..irnud
lo:;r.
This motion wo..s denied.
testimony on the
nonsuit
',"TaS
pc~rt
~wro
cognizable at
The motio:1 was rO:i.10Wed at the close of the
of the plaintiff but wns again denied.
A motion for a
then grc:nted to the second, fourth ond sixth causes of action,
but denied as to the rern..'1.ining causes of o.ction.
The Federo.l Reserve :Sank
then moved the court to discharge the jury o.nd transfer the co.use to the cqui ty
side of the court.
Tho court took this motion under advisement ond directed
the trial to proceed in tho rneantLne.
The cause was thereafter submi ttcd to
the jury under instructions to vrhich no exccptionswere tnkon, and the jury
returned a verdict in favor of the plaintiff in the sum of $32,692.12.
Some-
time after the verdict was returned the court filed a memorandum on the
motion to discharge the jury and transfer the cause to tho equity side of tl1e
court in which i t said:
"While the point is not o:ltiroly free from doubt,
upon consideration I lk~ve concluded that the complaint
was properly entertained upon tho law side of the court.
"The further question of iThother or not, if tho
verdict be taken as advisory only, it should be apiJrOvod
and adopted, I answer in the affirmative."
The court then added:
"Counsel for the plaintiff \7ill prepare a judgment
in the ordinary form of a judgment upon the verdict, incorporating therein, at tho proper place, the additional
clause, in substance, 'which finding of the jury is approved and adopted. '"
Judgment was thereafter en tored upon t be verdict, as directed by
the court, after making certain deductions for moneys checked out by the
plaintiff before the close of tho Standrod Bank.
has been brought here for review by '\7ri t of error.
The judgment thus entered
263
X-4464
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Tne first assignment of error is based on the refusal of the court
to require the defendant in error to elect whether it would proceed on the
even or odd numbered causes of action.
In answer to this assignment we need
only say that the granting of the nonsuit as to the even numbered causes of
action necessarily compelled the defendant in error to proceed on the remaining causes of action and, conceding for the p11rposes of this case only,
that it was error not to require an election at an earlier stage of the trial,
the error was plainly and manifestly without prejudice.
Tho next assignment of error is based on the refusal of tho court
to
discl~rge
the jury and transfer the cause to
t~e
equity side of the court
after the nonsuit had been granted as to tho even numbered causes of action.
Again, if we concede that the action or actions were of equitable cognizance,
no error can be predicated upon the action of the court in submitting the issues to a jury in an advisory capacity because that practice is always permissible and its adoption is a matter of discretion with the court.
And
when the court treated tho verdict as advisory only and Dpproved the findings
of tne jury it asserted all the powers and assuned all the responsibilities of
a
Ch~cellor.
This was the utmost consideration to which the plaintiff in
error was entitled and it is in no position to complain of mere matters of
procedure resting in the sound discretion of the court.
We might say in this
connection, however, that it does not appear to us that the defendant in
error was seeking to enforce a trust or to follow trust funds.
It proceeded
upon the theory that the diversion of the proceeds of tho drafts by the Federal Reserve :Sank, with knowledgE:l that the Standrod Bank uas i:::J.solvent, and
with knowledge that the drafts uere not the property of the Standrod Bank,
was a tort or wrong for
~hicl1
complete and adequate remedy.
a court of law has always afforded a full,
264
X-4464
-6-
Nurr.orous errors hc..ve been assigned on the adnission of testimony
over ob.jcction.
Tho defondo..'1t i::l. error offorod in evidence a compilatioa ln...'l.de
by ono of tho \7i tnosses from tho books of tho Ba'1k, showing i:1 dota.i 1 the resources and lio.bi l i tics of the :Bank O:\t the clJso of business on November 28,
1923.
Tl1is compilo.ti on or su.rnrnnry was tclce:.1 from books o.lroady in evidence;
its corroctaess ilao o.t no time questioned and is
V!as
no error in this ruli:r..{s•
~1ot
questioned :1ow.
Thoro
San Pedro Lumber Co. v. Reynolds, 53 Pac. 410;
Jordan v. Warner's Estate, 83 N.W. 946; State v. Brady, 69 N.W. 290.
The liquidating officer of the State, who
1~
charge of the affairs
of the Standrod Bank since its close, was permitted to give the amount collected or realized from the assets in his charge during tho preceding ten
months, and to state whether, in his opinion, any equity re:rnained in tho
pledged bills receivable of tho Bank after payment of tho loans secured by
the pledges.
As already stated, tho witness had been in charge of the affairs
of the Bank for about ten months; it was his duty to collect ond distribute
the assets in his cmrge and he had devoted his entire ti:ne a."1.d attention to
that object.
He had consulted with the collecting agent of tho Federal Re-
serve :Ba..'lk a...'ld. was more familiar w'i th the assets of the :Bonk o....'1d their probable
value than any other person, except perhaps the managing officers of the Bank.
He
~as co~~etent
therefore to express an opinion on the question submitted,
a"1d the fact tho.t his opinion was based on the value of the sccuri ties some
time after the close of the Ba.:'lk \Vould go to the t1cight of his tcstimo:n.;;r, not
to its competency.
State v. Cadwell, 44 N.W. 700; Campbell v.
P~rk,
101
N.W. 861.
The plaintiff in error moved to strike the testimony of one of the
witnesses, based on a.
compil~tion
prepared from tllc books of the Standrod
Bank in evidence, showing tho number of overdue notes hold by tho Sta.'1drod
265
-7-
Eaa}: .:.1nd ho-;; lone; ovcrd·J.o, rmd t:w du:i:'ici.oncy ur excess of reserve o:.1
·cri t:1 tho Federal Reserve llo.:1k o:• difforont d.atos.
There ;.ms
:;10
dG"~losi t
orr or in this
rulin,.-; for :tonsons olready stated.
Undor date of November 10, 1923, or eigh.toon clnys before the close
of tho Bank, tho vicc..'-:rrosidont a:'ld. il'D.nagor of tho Standrod.
:Ba:~
addressed a
lettt'lr to the rrnnag;int,:; officer of tho ]'odcral Rosorvo Bank stating tl:.at :he had
found it ne c.essary to t::U':o o.c:vantage of the offer of thG latter
~o
handle a
note of $10,000; that he was enclosing the note therewith, :payable ten days
from l!ove:nbor 13, oodin€;.;:
11 This
will tide us ovor. 11
The manager of the Feder::J.l
Reserve Bank answered this letter under date of Novcmoer 14, 1923, stating
that the discount
co~~ittco
of the Federal Reserve Bank
:U~d
declined to accent
the note for discount, and further thnt the directors of tho Federal Reserve
Bank r1ere of opinion that tho Federal Reserve branch had advanced o. sufficient
sum to provide for tno ordinary needs of the Standrod
Ba~~,
and that con-
sidering all tho fea.tures entering in to tho security pledged as col1.:1 teral to
its obligation now owing to the Federal Reserve
:s~:uk,
it rrcs only proper that
the directors c.:.1d stockholders of the Standrod Banl-: should ;;rovido fu!lds out
of their perso:1al resources of a suff:l.cicnt amount to prG]?Crly rc:lo.bili tato
tho Ba..'1k n.'ld fu.rnish it with a large enough ro•.-munt of worki!lg CD;?i tal to have
the baak function in a proper manner.
Error is assigned
these two letters, but. tho assignment is without merit.
i~1
tho a<'lr!lission of
Tho letters clearly
tended to show the desperate condition of the Standrod Baril-e on that date and
knowledge of that condition on the part of the Federal Reserve Ba:c1k.
Under date of September 9, 1922, the assistant manager of the Federal Reserve Ba.nlc addressed a le ttor to the prosiden t of tho Standrod Bank
stating that the harvest season was on; that he desired to impress upon the
officers of the bank the necessity of sb£1ping their affairs so that after the
X-4464
-8-
roriod of liquidation
\7C\.S
'
ov,.;.r tho bnnk ·.-:auld sho\1 a decided illlJ?rovomont in
its conditio!1; that at thc.'l.t time tho lo:c.ns of tho institution npproximated
$1,700,000, while tho deposits were less than one half that nmount, or in the
neighborhood of $785,000; that these figures spoke for the;nselves a::ld. called
for :q.o comme:::1t; th:lt i f the StD.ndrod Bank expected to continue to receive assistanco from tho Federal Reserve
Ba~~,
a determined effort must be put forth
by its officers to the end that a proj_)er ratio between loa:1s nnd. deposits
might be shown; and the president of the Standrod Bank was directed to bring
the letter to the attention of the board of directors and furnish the Federal
Reserve Bank with a letter over the signature of each, outlining what tho
Federal Reserve Bank might expect in that regard.
by t4e president of the Standrod
Baril~
This letter was
a1~wered
under date of September 11, 1922.
In
this letter he stated that they expected to reduce their loans to $1,200,000
that season; that with this reduction there would no doubt be a corresponding
increase in
would
ta~e
d~posits;
tr~t
the officers of the Stru1drod Baruc realized that it
another year to put everything in shape, where there would be no
borrowed money; that in a great many cases they lmd loaned money to farmers
and stockmen and it was absolutely necessary to make further advru1ces in order
to secure liquidation on their present indebtedness.
under date of
Se~tember
This letter uas a:1swered
12, by the assistant manager of the Federal Reserve
Bank, by n second letter, stating that the letter of the president of the
Standrod Bank was unsatisfactory for two
ro~sons:
First, because a comnruu1i-
cation over the signature of each of the directors setting forth what might
thenceforth be expected from the bank ¥vas not furnished as requested, and
second, while tho Federal Reserve Bank was not in a position to know how
great a reduction in loons should be made, it believed that the policy of the
Standrod Bank should be to bring about the greatest possible liquidation, to
the end that it might again resume a position more "1early bordering on the
2 6r-l
~-
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X-4464
-9-
sound and norm:::tl.
IJ?hese letters 71nrc objected to for tho like reasons as
tho letters already
the same reasons.
Y-~o~lodgo
co~sidercd,
but, in our opinion, they
~ere
competent for
They· tended. to shorr the condition of the Standrod Bonk and
of that condition on tr£ part of
tl~
Federal Reserve Bru1k.
True,
tho letters were wri tton a little more than a year before tho ban..< closed,
but other testimony in the case shows t1Ja t
uas
t~~"ero
~1o
substantial
in
cho..~go
the condition of the bank from tlmt date ur.til the time it cloaed, except
-;JG:t-
haps for the worse, as the disparity between loans c.nd deposits was even
greater when the bank closed than when these letters were wri tton.
It
o~ly
remains to
co~sidor
the question of the insolvency of the
Standrod Bank; knowledge of that insolvency on the part of its officers m1d
the officers of tho Federal Reserve Bank, and the effect of such insolvency
and kno·.1ledgo, if proven.
.A bnnk is said to be solvent when it has enough
assets to pay, uithin a reasonable time,all of its liabilities through its
own agencies, and is insolvent when unable to meet its liabilities as they become due in the ordinary course of business, or, in shorter terms, when it
cannot pay its deposits on demand in accordunce
~ith
its promise.
7 C.J. 727.
Measured by this rule we think the court and jury were amply justified in
finding that the bank was insolvent, if indeed it was not wholly and hopelessly so.
When the Eank closed, its deposits were approximately $500,000,
its loans and discounts approximately $1,300,000.
plaintiff in error tho sum of
a1~roxi~~tcly
m1d
It had borrowed from the
$700,000; from the United States
National :Bank of Portland approximately $85,000; a.nd from the National :Bank
at P;ocatello, Idaho, $20,000.
It had pledged with tho plaintiff in error,
security for its loan, bills rccoivanl.o of tho face value of approximately
$900,000; with tho United States National Ilanlt of Portland bills rccei vable
~s
268
-10of the fa.ce
va~~e
X-4464
oi a.pproximately $175,000; and
wit~
the bank of Pocatello
bills receiva.blo of tll.e face value of c.:pproximately $30,000.
And
v7G
tl1ink
it fairly appears from tho testimony that thoro was no equity in tho bills
rec0ivable thus pledged, after the payment of the loans which they were
pledged to secure.
Thoro was left wi tl1 tho banlc to meet its ordinary demands
from day to day m1d to pay its depositors, bills receivable of the face value
of approximately $275,000 C4'1d a small amount in stocks; bonds, warrants and
overdrafts.
During tho ton months which had elapsed since the bank closed
its doors, tho liquidating officer of the State had been able to realize but
$40,000 or $50,000 from tho
In the
sum~or
assets and resources t~~t crune into his hands.
of 1923, the board of directors considered the proposition of
forming a holding company to tc.ke over three, four, or five hundred thousand
dollars in face va.lue of the uncollectible
p~er
of the bank, but the vice-
president a.;.1d manager did not think that this would suffice.
During July and August, 1923, tho Pacific Joint Stock Land :Bank
forwarded two checks to the Standrod :Bank aggregating the
s~~
of $11,000,
with instructions to obtain releases of liens against pro:;!ort;;,· a::J.d turn the
proceeds over to borrowers fron the Joint Stock Land :BXJ.lc:.
were not
retur~ed
Tl·~e
releases
and several letters passed without satisfaction.
sentative of the Joint Stock Land Bank was then sent to tho
to inquire into tho matter.
St~'1drod
A repreBank
He there discovered tba. t the money had been
misapplied and was inforr:1od by the vi co-:presidont and roo.nager thr.1. t the demands upon the bonk were ratter large and. unus'-l.D.l, and that omng to low reserves he was not in a po£itio:1 to repay the money.
tim~, but this ~s refused.
He asked for further
Several r.:.1oetin,ss of the board of clircctors fol-
lowed and finally, about two days later, the representative of the Land :Bank
rec~i ved
a draft on the Wal:Jr...er Brothers Bank at Salt W.ke City for the amount.
269
X-4464
-11-
We- have already referred to the refusal of tl1o loan of $10,000 a few days
before the close of
tl~
bank to tide it overo
As against this the only testi-
mony offered by the plaintiff in error was some testi::10ny tending to show
that the officers of the Standrod Bark had no knowledge of its insolvent condition.
j~'y,
While the testimony had that tendency, if creQitcd by the court and
it likewise had a strong tendency to show
solvent.
tr~t
the bank was in fact in-
It 3ppeared from the testimony of one of the directors that M;c.Tly
a.ll the loans had been outstanding since the close of the war; that th:!".e
was no money in the country; that the bank wn.s unable to IlUlke collections;
that its deposits had decreased from a million and a half to about half a
million dollars; trat the directors of tho bank had pledged their personal
cradit to raise money for the bank, in short, that the condition of the bank
was all but desperate.
Under these
circumst~~ces
it is idle to claim that
the finding of the court and jury on the question of insolvency was not
justified by the testimony.
The claim that the directors ond managing officers of the Standrod
Bank had no notice or knowledge of the existing condition is equally unfounded.
The directors, called as witnesses,
the condition of the bank, in most part,
,fro~
derived their knowledge of
reports
to them by other
~~o
officers of the bank, and it is a significant fact that such other officers
were not called as witnesses.
True, they might have been called by the de-
fendant in error, but officers who receive deposits in an insolvent bank
are guilty of a fraud, if not a crime, and a third party who
prove the fact of insolvency cannot be expected to call the
the fraud as witnesses.
u.~erttikes
perpetrator~
Furthermore, the insolvent condition of
to
of
the bank
had so long continued and was manifested in so many different ways, that a
finding of knowledge of insolvency on 1he part of the managing officers of
270
X-44G4
-12both banks
'\7CLS
fully
jut1 ~ificdn
If this to trno, ell tho nuthc..ri ties agree
t:rn t tho receipt of a d.epc..si t "J·.i c.n insolvo:1t bo.11::.-: is a fraud on tho de-
posit0r; that title to t:1o deposit docs not pass, end trk'"'..t the deposit
be followed so long as it can bo identified.
~.ny
A fraud was thus perpetrated
on the defendant in error by tho officers of t:L1e Sto.ndrod. :Bar.Jr:, o.nd, >.ittingly or unwittingly, tho Federal Reserve Bc.nk became o. rJarty to the fro.ud..
It is lastly
co:1.tc~1ilcd
tln t t:1e plo.intiff in error is a bo:no. fide
purchaser before :r.nturi ty nnl that its ti tlc cannot be assailed.
Federal Reserve
Balli~
:C1.·. t. tr"o
had notice that the drafts were not the property of the
Standrod :Bank, in too vm.ys:
First, because it uas apparent thD.t the Stanclrod
Bonk bad no funds with which to purclnse the trafts; and second, beco.use tho
applications for discount stated on their face that the drafts were the
property of a depositor.
With this knoulodgo, a finding of
mala fides on
the part of the plaintiff in error was justified, and the plea of bonn fide
Durchaser caru1ot prevail.
The judgment is affir::J.od.
(ENDORSED:) Opinion. Filed Nov. 9, 19?.5
F. D. Monckton, Clerk, by Paul P. O'Erion, Deputy Clerk.
271.
( c0
FEDE3..AL
p
y
RESERVE
X-4464-a
B.ANK
Of San Francisco
John Perrin,
Uovember 18, 1925.
Chairman of the Board
and Federal Reserve .Agent.
Federal Reserve Board
Washington,
D. C.
Sirs:
During 1924 the Idaho Grimnl .Alfalfa Seed Growers .Association,
an organization of far~ors engaged in tho production and sale of alfalfa
seed, brought an action against the Federal Reserve Bank in the state
courts of Idaho for the recovery of $32,692, loss alleged to have been
s-;.1-s tained through the failure of D. W. St:;.ndr od & Co. , Bankers , Blackfoot,
Idaho. This case was removed by the Federal Reserve Bank from the State
Court to the United States District Court sitting in Idaho. Plaintiff 1 s
claim was predicated upon the following facts:
The Seed Growers Association, for some time prior to the
failure of the Standrod Bruik on November 30, 1923, had been a depositor
in that bank. Tlwy had entered into a special arrangement with the
Standrod Bank vrh0reby they were privileged to deliver to the Standrod
Bank sight drafts drc~n to the order of the ba~~. with order bill of lading
attached, representing tr~ purchase price of seed sold by them to eastern
customers, and for these drafts the St~~drod Bank gave the Association
full and immediate credit. The Association was then allowed to treat the
proceeds as part of their general checking account and to usc the funds
represented by tho drafts without restriction, even· before the drafts could
possibly have been collected. For some time prior to November, 1923, the
Standrod Bank had been in an extended condition and this fact was known to
the Federal Reserve Balli~ and to the officers of the Standrod Ba~~. Duri:1g
the early part of November, 1923, tho condition of tho Standrod B~1k was
such that the Federal Reserve Bank of San Francisco felt that it was not
warranted in making any further advances to the Standrod Bank and so
notified that bank. During the last week that the bank was open for
business, th<': Seed Growers Association deposited with the Standrod :Bank
three sight drafts with bills of lading attached, aggregating over $30,000,
receiving immediate credit therefor, and against the credit thus created
the Seed Growers .Association immediately commenced to dra.'ii.
These drafts
were negotiable in form and bore no evidence of any attempt on the part
of the Association to restrict their negotiation. Im..rnediately upon their
receipt by the Standrod Bwik, that bank transmitted them to the Salt Lake
City Branch of this ·,;o.nk, accompanied by the usual form of a:p:plication
for discouu~t. Credit of the Association being good, and the paper being
eligible and entirely acceptable, the drafts vrere immediately discounted
272
-2-
X-4464-a
by this bank and tho proceeds thereof passed to the reserve account of
the Stnndrod Dank. That bank immediately proceeded to avail itself of
the reserve credit thus established ~~d between the date of the credit
and the date on which the bank closed its doors used all of its reserve
f~nds and failed with an overdraft of a. small amotL~t.
Upon the delivery
of the drafts to tho Federal Reserve Bank they were immediately forwarded
to the eastern points at which they were payable for collection. Proceeds
from the collections had not come into the possession of the Federal Reserve Bnnk when the Standrod Bank closed its doors. As soon as the Association received notice that the Standrod Bank had placed its affairs
in the hands of the State Commissioner of Finance, the Association notified the Standrod Bank and the Commissioner of Finance that the drafts had
been deposited for collection only, that title thereto had not passed to
the Standrod Bank and that the Association would claim as its own any funds
representing the collection of said drafts. Tho Association also claimed
at this time that a fraud had been committed upon it through the receipt
of the drafts by the Standrod Bank at a time when it was insolvent and when
such insolvency.was known to the officers of the Standrod Bank. A cppy of
this notice was served upon the Federal Reserve Bank after the Standrod
Bank had closed. Subsequently, long after collection of the drafts had
:h.eeli ·m:aaa·; ·f11e Aesaociation demanded that the Reserve bank reimburse it for
'the amount :'o<f'"'-i ts deposit in the Standrod Bank at the time of failure, aggregating over $30,000. This demand was refused and the action above referred
to was commenced.
Tho case was tried in the United States District Court at
Pocatello before a jury consisting of eleven farmers and one ex-policeman.
The complaint consisted of six causes of action, two on each of the drafts
involved. The first cause of action as to each draft was predicated upon
the theory that the Standrod Bank was insolvent when the drafts were received, tl~t this insolvency was known to its officers and to the Federal
aeserve Bank and tlat the failed bank, as well as the Federal Reserve Bank.
was liable to the Association for the unused portion of the deposit repre~euting the face value of the drafts.
Tho second cause of action in each
instance was predicated upon the theory t~~t the drafts had been deposited
for collection only and that, title having been retained by the Seed Growers
Association, no purchaser of the drafts could acquire title good as against
the Association. Upon the trial this bank contended that there was no
evidence to ~pport the theory that the drafts had been deposited for collection only and that inasmuch as the Federal Reserve Bank did not know and
t~d no means of knowing the status of accounts as between the Association
and the Standrod Bank, it patently could not be charged as a party to the
alleged fraud resulting from the receipt of deposits. The Court granted
a motion for nonsuit on the three causes of action, predicated upon the
theory that the drafts had boon deposited for collection only, but allowed
the case to proceed on the i:1solvency theory. The case was voluntarily
dismissed as against the Comr.1issioner of Finance, the Standrod Bank and
the liquidating agent, leaving this bank as the sole defendant. A verdict
was rendered for the full amount of the drafts, without any allowance for
the amount thereof actually used by tho Association. The Court ~bso
quently required a deduction of tho amount cheCked out by th~ Association
-3-
and entered
X-4464~a
judgment for the balance.
The case was appealed by us to the Circuit Court of Appeals for
the Ninth Circuit and was recently argued before that court. The judgment
of the lower court was affirmed and it is the present intention of ~~is
bank to ask for a rehearing before the Circuit Court of Appeals and if
this is denied to take the matter to the Supreme Court of the United States.
There are many facts in connection with the case, favorable to
our Dosition, wnich it is difficult to set forth in this letter. It may
be said, however, that there is absolutely no evidence in the record whiCh
even remotely tends to show tba.t the Federal Reserve :Sank had any knowledge
whatever that the Seed GrQWers Association had not received a full, adequate
and present consideration from the Standrod :Sank for the drafts. No att~mpt was made to prove that the Reserve :Sank knew that the proceeds of the
drafts had been left on deposit with the Standrod :Sank. It was sh0wn that
the Association might have withdrawn the fttll amount of the drafts in cash
0ver the counter of the bank, might have accepted exchange on the Standrod
:Sank's correspondents for the amount thereof, or might have used the proceeds te pay a preexisting indebtedness to the Standrod :Sank and tl1at no
lo1owledge of which of these three courses had been f0llowed was brought home
to the Federal Reserve Bank. It was ~~~her shown that the Association itself was so well acquainted with the condition of the Standrod :Sank that
about a month prior to the date when it closed the manager of the Association demanded from the Standrod :S&~k a prerequisite to further deposits
that the bank should give the Asseciation a bond to protect its account
similar to bonds furnished tQ indemnify public deposits. The manager of the
Association also admitted that he had ln1own the Standrod :Sank was in an extended condition for two years prior to its failure. The Directors of the
Standrod Bank all testified that they had no knowledge whatever that the
bank was insolvent UL~til it was taken in clnrge by the Cocmissioner of
Finance. Practically the only evidence of insolvency introduced was that
gained from an examination of tho books of the batik after it had closed
and from an appraisal of the value of its assets by the Deputy Commissioner
of Finance who took ch~rge of the bank in November, 1923. The existence
of a condition of insolvency is predicated solely upon inference and not
upon positive testimony.
Yesterday the Executive Committee of this bank, feeling that
this case involves a question of such vital import~~ce net only to this
bank but to all other Federal reserve banks and banks generally, authorized the employment of Hon. Newton D. :Saker to assist in handling the case
before the Suprece Court of the United States, provided Mr. :Saker was
available. From the brief sumoary of the facts whiCh I have given it can
be plainly seen that if tho judgment of the lower court, sustained by the
Circuit Court of Appeals, is to stand, neither this bank nor any bank can
safely disco~t for another institution, which it knows or has reason to
believe is in an extended condition. :Sanks do nQt usually discount their
customers' paper unless they are in need of :f'u.nd.s and the Court has said
in effect that if the bank is in that condition, the discounting agency is
p~aced on notice that there may be equities enforceable against innocent
third partie's purchasing paper for value. The decision of tho Circuit Court
of Appeals was evidently hastily prepared and is not supported by any
citation of authorities. A copy of the opinion prepared by Judge Rudkin
X-4464-a
-4is attached hereto, o.s well as a copy of our clos':ing brief.
I have taken the liberty of calling this case to your attention,
not only for the purpose of acquainting you with the situation in relation
thereto, but also for the purpose of suggesting that the case and its importance be brought to the attention of the other Federal reserve banks and,
if &tgreoable to them, tha. t Mr. Baker's fco be prorated cmong all of tbo
banks, as has been done in the past in relation to several other cases no
more important and of no more universal interest than this.
I am informed tbat counsel for the Federal Reserve Board has been
advised as to progress in tlus case and has been s~plied with copies of
the briefs. A copy of the Opinion of the Circuit Court of Appeals is being forwarded to Mr. Wyatt.
Very truly yours,
( sigi:ed)
JOHN PERRIN
Chairman of the Board.
Enclosures.
@FedFRASER