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2-6421 COPY FEDERAL 'RESERVE BANK OF RICHMOND November 15, 1929. Federal Reserve Board, Washington, D. C. Attention: Mr. Walter Wyatt, General Counsel. Dear Mr. Wyatt: I am enclosing you herewith a memorandum opinion delivered "by the D i s t r i c t Court of the United States f o r the Eastern D i s t r i c t of Virginia in an action brought "by the Receiver of the F i r s t National Bank of S t . George against the Federal Reserve Bank of Richmond to recover the amount of c e r t a i n checks which i t i s alleged were paid to the Federal Reserve Bank of Richmond in contemplation of insolvency. The case may "be of some i n t e r e s t , "because, as you know, Federal Reserve Banks are frequently compelled to attempt to collect checks drawn upon "banks which are in a weakened condition. If we refuse to accept payment of checks under such conditions we run the r i s k of "being l i a b l e f o r damages because we have announced that the member bank i s I n s o l v e n t , and under t h i s decision i f we accept payment we run the r i s k of being compell e d to refund i t . I contemplate taking an appeal but have not as yet determined upon my course. Very t r u l y yours, (S) MOW L M. G. Wallace, Counsel» IN TEE DISTRICT COURT OF THE WITED STATES FOR THE EASTERN DISTRICT OF VIRGINIA John R. Vann, as Receiver of the F i r s t National Bank of St* George, Complainant, vs. Federal Reserve Bank of Richmond, Defendant. Memo of the Court's findings of f a c t and law f o r the use of Counsel in preparing judgment. A part of the f a c t s i s s t i p u l a t e d . • was taken which i s not disputed. In addition some oral evidence The case i s as follows: On March 29, 1928, the Reserve Bank-had received from i t s correspondent banks and had on hand f o r collection checks drawn on the F i r s t National Bank' of St. George amounting to $8,985.16, which on that day i t mailed to that bank f o r payment. On March 30, i t had on hand $11,059.19 of checks on the S t . George Bank which likewise i t mailed to that bank f o r payment. On the same day, v i z . March 30, i t directed tho manager of i t s Bank Relations Department, Mr. Garrett., who was then in Charleston,, South Carolina, to leave there and go immediately to St. George, and demand of the St. George Bank either payment or return of the checks contained in the two l e t t e r s of the 29th and 30th. On a r r i v a l at St. George about 10:30 A.M. of March 31, Mr.. Garrett was informed by the president of the St. George Bank that the Bank was not abl* to pay the checks and the same were surrendered to Mr.. Garrett and the checks themselves noted •2- X-6421-a for p r o t e s t , but notice of protest was not mailed to the p a r t i e s to said checks. The agent of the Reserve Bank was then informed that the St. George bank'was making an e f f o r t to obtain money a t Charleston, South Carolina, and that the continued operation that e f f o r t . of the bank would depend upon the success of These negotiations having proved abortive, the cashier of the St. George bank n o t i f i e d Garrett to that effect at 4 o'clock A.M. on the * morning of April 2 (Monday), and asked h i s advice. He advised that the National Bank Examiner be called, and t h i s the cashier of the St. George bank did from G a r r e t t ' s hotel room, informing the Examiner that the Board of Directors of the St. George bank would meet at 8:30 Monday morning (April 2), and requesting him to come to the bank at once, stating that they were about rdady to deliver the bank to him. The Bank Examiner was some distance away and could ndt a r r i v e in time for the directors' meeting or u n t i l a l i t t l e bef o r e midday. In the meantime Garrett, mftio Ws Unwell &nd unable to return to St. George, called upon another agent of the Reberve Sahk in the neighborhood to report at once to him, and upon hid reporting dtrouhd 9 o'clock, gave him the information he had with relation to the condition of the St. George bank, delivered to him the checks contained in the two l e t t e r s from the Reserve Bank of the 29th and 30th, and requested him to do a l l needful things in connection therewith. This representative of the Reserve Bank went to the St. George bank, and found the bank open and the o f f i c e r s waiting for the Bank Examiner to a r r i v e . The representative of the Reserve Bank presented the checks on the St. George bank and requested payment. The cashier of the St. George bank thereupon paid (by order oh the funds of the St. George bank with the Reserve Bank) $8,027.02 of checks contained in the l e t t e r of March 29, received the checks for this amount, but at the same time informed him that he -3- X-6421-a was unable to pay any of the checks contained in the l e t t e r of March 30. At 10:30 that morning the St. George "bank closed i t s doors and was taken charge of by the National Bank Examiner. This i s a notice of motion brought on behalf of the receiver of the S t . George "bank against the Reserve Bank to recover the amount of the payment ..just hereinabove mentioned on the ground that the same was a preference and was therefore void under the provisions of Section 52 of the National Bank Act (12 ILS.C.A. 91).. The section is as follows: "All transfers of the notes., "bonds, b i l l s of exchange., or other evidences of debt owing to any national banking association, or of deposits to i t s credit; a l l assignments of mortgages, sureties on r e a l estate, or of judgments or decrees i n i t s favor.; a l l deposits of money, bullion, or other valuable thing for i t s use, or for the use of any of i t s shareholders or creditors; and a l l payments of money to either, made a f t e r the commission of an act of insolvency, or in contemplation thereof, made with a view to prevent the application of i t s a s s e t s in the maimer prescribed "by t h i s chapter, or with a view to the preference of one creditor to another, except in payment of i t s circulating notes, shall be u t t e r l y null and void; * * *" , In my opinion the transaction but of which the claim here a r i s e s was directly in the teeth of this s t a t u t e . "There can be no doubt that the Sti George "bank was insolvent not only a t the time i t closed i t s doors on April 2 "but also at the time the cash l e t t e r s of March 29th and 30th were mailed. On the <3lst, the cashier of the bank admitted i t s i n a b i l i t y to pay in. the ordinary course of "business checks drawn on i t "by i t s depositors, but held out the p o s s i b i l i t y — u t t e r l y without reasonable j u s t i f i c a t i o n — that i t might be able to "borrow money from another bank in Charleston as a reason why i t should continue another twenty-four hours of l i f e , and on this slim chance the Be serve Bank refrained from sending 'out notice of prot e s t of the dishonored cheeks to the p a r t i e s in interest u n t i l the following Monday. By Sunday night the f a i n t hope of the preceding Saturday was —4— E ooq X-642l-a extinguished, and the cashier of the St. George tank went directly to the representative of the Reserve Bank and informed him of the f a c t , and in his presence n o t i f i e d the Bank Examiner to come to the tank as soon as he could and take possession. I t was therefore nbt only the case of an in- solvent hank, "but f u l l and complete knowledge of i t s insolvency on the part of a l l concerned. And the e f f e c t of what was then done with knowl- edge of t h i s condition was to prefer one creditor of the f a i l i n g bank to another, that is to say, to enable i t s depositors whose checks aggregated above eight thousand dollars to be taken up and paid and to that extent to receive their money in f u l l , while the depositors whose checks were f o r warded in the l e t t e r of the 30th as well as a l l other depositors and creditors of the bank i were to the extent of the payment then made prejudiced i n the application of the assets of the bank to the j u s t and equal payment of i t s debts. The Reserve Bank, however, i n s i s t s that notwithstanding a l l that i s said above, the payment of the checks in question "..as not a preference because i t was a payment in the ordinary course of business, and './as in a l l respects analogous to the payment of checks of depositors made in the ordinary course but a f t e r the insolvency of a bank and v.:ith knowledge of the same en the part of i t s o f f i c e r s . Whatever rights a receiver of an insolvent bank may have against a depositor of the bank, vzho. without knowledge of i t s insolvency withdraws h i s money a day or two before f a i l u r e , i t is not necessary here to decide, but there can be no doubt, I think, that if there be added to the facts stated in the foregoing proposition knowledge on the part of the depositor of insolvency, the transaction, even though apparently in the ordinary course of business, woula be subject to be set aside and annulled as in conflict with the statute, for i f , as sometimes happens, knowledge of -5- X-6421-a the impending closing of a "bank i s given a favored depositor as a r e s u l t of which he i s enabled to withdraw his deposit, the e f f e c t of such a withdrawal would "be to create a preference in h i s "behalf, voidable and recoverable under the express terms Of the s t a t u t e . I t i s , however, further insisted by the Reserve Bank that i f a l l the foregoing be conceded, i t i s s t i l l not l i a b l e in t h i s action because i t was a mere agent; that i t s agency was understood by a l l p a r t i e s and was a matter of agreement — in fact — the result of a lawful regulation, that is to say, a legal requirement that i t should act as the agency for the collection of the checks for account of which" the payment was made, and that having bolltected the money and remitted i t to the owners of the checks without notice of any claim by the receiver of the St. George bank u n t i l a f t e r payment* the actual beneficiaries of the preference i^athef than i t s e l f should • * \ be required to indemnify the HedeiVel1. The point is not without d i f f i c u l t y , and I have not been furnished with any authority on the subject, nor have I been able to put my hands on any directly in point. Iftr conclusion, however, i s that the Reserve Bank may not escape on this ground. 1 agree there can be no doubt that in the transaction the Reserve Bank acted wholly as an agent of the owners of the checks, that i s to say, the member banks which had sent them to the Reserve Bank for collection, 235 N.Y.S. 197. Carson v. Reserve Bank, Federal Reserve Bank of Richmond v. Early, 30 F(2d) 198. I farther agree i t i s equally true that under the rules established for the regulation of the Reserve Bank, i t was required to accept checks upon solvent member banks and to present the same for collection, and by agreement was not l i a b l e to the depositing bank, except under circumstances not necessary to detail here, unless collection was made. The Reserve Bank in this case would have assumed no l i a b i l i t y , F -6*- 224 X-6421-a therefore, i f on Saturday, the 31st of March, i t had caused the checks on which payment had "been refused to be dishonored and had returned them to the depositors, and while doubtless i t had a right to extend the period of notice of dishonor u n t i l the following Monday in the hope and expectation that the bank might then be in funds to pay the checks in the regular course, i t had no r i g h t , i n my opinion, a f t e r the most e x p l i c i t proof of insolvency on the part of the St. George Bank, and of i t s i n a b i l i t y to continue in' business, either to make a further presentation of the checks or to accept the money which the cashier, with knowledge of the fact that the payment then demand^ would not only deplete the bank's funds, but create a preference to the depositors whose checks were thus paid — without i t s e l f assuming l i a b i l i t y for i t s participation in a toftuous a c t . made was a breach of t r u s t . The payment then I t was likewise a breach of the s t a t u t e . Knowl- edge of thid was peculiarly in possession of the representative of the Reserve Bank. I t was obviously also in the possession of the cashier of the local bank for a t the very moment that he authorized the transfer of h i s bank*s funds to the Reserve Bank he was awaiting the Bank Examiner to deliver the bank to him for liquidation, and within half an hour this was done and the doors of the bank were closed. I t i s , I think, idle td say that the bank was at the moment open and doing business for the f a c t i s i t was not doing business. I t had received deposits, i t i s true, but no deposits so received had been put through i t s books but had been put aside "because to have done otherwise would have created criminal l i a b i l i t y . The applicable rule of l i a b i l i t y on the p a r t of an agent i s that if money has been voluntarily and by mistake paid to him and before he receives notice of the mistake he has paid i t over to his principal, he will not be personally l i a b l e therefor. Mechem on Agency, Section 561 and cases c i t e d . ' p* * —7— 225 X*6421~a Bat where the element of duress or forced payment or of knowingly p a r t i c i pating i n an unlawful act e x i s t s , the rule i s differentL In such cases the relationship of p r i n c i p a l and agent does not exist — c e r t a i n l y not to the extent of r e l i e v i n g the agent whose personal p a r t i c i p a t i n g made possible the wrong committed.- In such cases both the principal and agent are wrongdoers and may "be sued j o i n t l y or severally. If the collection of the money by the bank was a v i o l a t i o n of the s t a t u t e , and I have Reached the conclusion that i t Was, and i f the Reserve Bank knew that the e f f e c t of the payment would be to violate the s t a t u t e and create a preference, though i t did not i t s e l f p r o f i t thereby, the act was obviously wrong, and the party p a r t i c i p a t i n g in such a wrong may not exonerate himself by another. showing that he was acting for tJpon t h i s general subject, see the case of E l l i o t t vs. Swartwout, 10 Peters 137, in Which there i s a vary s a t i s f a c t o r y discussion of the question of the personal l i a b i l i t y of agents in the receipt of money and the payment thereof to the p r i n c i p a l . See also Shearman & Redfield on Negligence, Section 112, and Wharton on Negligence, Sfection 535. Judgment will go for p l a i n t i f f with i n t e r e s t and costs but without prejudice to the r i g h t of the Reserve Bank in appropriate proceedings to demand of i t s depositing member banks reimbursement to the extent of i t s l o s s .
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