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FEDERAL RESERVE BOARD
WASHINGTON
X-3128
May 17, 1921.
SUBJECT:. Supreme Court Decision in Par Clearing Suit.
Dear Sir:
There is enclosad for your inforrLatj.on copy of the
of the Supreme Court ot the United States in the case of
the Georgia country banks against the Federal Reserve Bank of
Atlanta.
op~nlon
Counsel calls the Board 1 s attention to the fact that
in this opinion the contention of the Federal Reserve Bank is upheld that the District Court of the United States has jurisdiction
in the case but it denies the Federal Reserve Bank's motion to
dismiss the pl3.intiffls complaint. Suit was brought by a group
of non-member banks to enjoin the Federal Reserve Ban.ti. from collecting checks drawn on the country banks by having agents den::and
payment in cash in cases where the country banks declined to remit
at parJ the complaint alleging that the Federal Reserve Bank undertook the collection of such checks by presentation and demand of
payment in cash with the intent of injlfring the bauks on which the
checks were drawn. As the issue before the Supreme Court was
merely whether, as a matter of pleadin6, the plaintiff's bill of
complaint stated a cause of action~ the decision of the Supreme
Court is not a final dete.rmina tion of the 1 i tic:_a tion and the case
will now be sent back to the District Court of the United States
for the Northern District of Georgia for trial upon the merits.
The opinion of the Supreme Court does not deny the legal authority
of the Federal Reserve Bank to collect checks on non-member banKs
by making presentation thereof at the counter 1 but holds merely
that non-member banks may be entitled to relief if they· can prove
that the Federal Reserv~ Bank malevolently intends to accumulate
checks and present them in an oppressive marille~ for the sole purpose
of injuring the banks upon which the checks are drawn.
As to the scope of the Supreme Court 1 s decision~ the
court said:
"The question at this stage is not what the plaintiffs
may be able to prove or what may be the reasoruble interpretation of the defendant's acts but whether the plaintiffs
have shown a ground for relief if they can prove what they
alleged."
X-3128
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In the Qpinion of Counsel. the Supreme Court's decision
will not interfere w·i th the present check clearing functions of .
the Federal Reserve Banks and those banks may continue, as
heretofore, to collect checks drawn upon those banks which are
listed upon the par lists.
Very truly yours,
(Encl osu.re)
CHAIRMEN OF ALL F.R.BANKS.
ll
G o v e r n o r.
..
c 0 p y
X-3128a.
SUPREME COURT OF THE UNITED STATES
No. 679 - October Term, 1920.
American Bank and Trust Company
et al., Appellants 1
vs.
Federal Reserve Bank of Atlanta.,
Georgia~ et al ..
)
) Appeal ftom the United States
) Circuit Court of Appeals
) for the Fifth Circuit.
)
Mr4 Justice Holmes delivered the opinion of the Court.
ll
This is a bill in equity brought by country banks incorporated
by the State of Georgia against the rederal Reserve Bank of Atlanta,
incorporated under the laws of the Un:tted States, and its officers4
It was brought in a State Court but removed to the District Court of
the United States on the petition of the defendants. A motion to
remand was made by the plaintiffs but was overruled. The alle~tions
9f the bill may be summed up in comparatively few words. The plaintiffs are not members of the Federal Reserve System and many of them
have too small a capital to permit their joining it -a capital that
could not be increased to the required amount in the thinly populated
sections of the country where they operate. An important part of the
income of these small institutions is a charge for the services
reniered by them in paying checks drawn upon them at a distance and
The charge
forwarded, generally by other banks, through the mail.
covers the expense incurred by the paying bank and a small profit ..
The banks in the Federal Reserve System are forbidden to make s~ch
charges to other banks in the System. Federal Reserve Act of December
23., 1913., c. 6, Section 13; 38 Stat. 263; amended March 3, 1:;15, c. 93;
38 Stat. 958; September 7, 1916, c .. 461; 39 Sta.t .. 759; and June 21,
19171 c. 32, Sections 4J 5; 40 Stat. 234, 235. It is alleged that in
pursuance of a policy accepted by the Federal Reserve Board the
·
defendant bank has determined to use its power to compel the plaintiffs
and others in like sit~ation to become members of the defendant, or at
least to open a non-member clearing account with defendant, and thereby
under the defendant's requirements, to make it necessary for the
plaintiffs to maintain a much larger reserve than in their present
condition they meed. This diminution of their lending power coupled
with the loss of the profit ca~sed by the above mentioned clearing of
bank checks and drafts at par will drive some of the plaintiffs out
of business and diminish the income of all. To accomplish the
defendants' wish they intend to accumulate checks ~pon the country
banks until they reach a large amount and then to cause them to be
presented for payment over the counter or by other devices det.aD.0d
-2-
X-3128a.
to require payment in cash in such wise as to compel the plaintiffs
to maintain so much cash in their vaults as to drive them out of
business or force them1 if ab~e, to sub~it to the defendant 1 e
scheme ... It is alleged that the proposed conduct will deprive the
plaintiffs of their property without due process of law contrary to
the Fifth Amendment of the Constitution and that it is. ultra vires.
The bill seeks an injunction a~inst the defendants collectin~
checks except in the usual way6 The District Court dismissed the
bill for want of equity and its decree was affirmed by the Circuit
Court of Appeals (November 19, 1920). The plaintiffs appealed,
setting up want of jurisdiction in the District Court and error in
the final decree.
We agree with the Court below that the removal was proper.
The principal defendant was incorporated under the laws of the
United States and that ha.s been established as a ~round of jurisdiction since Osborne v. Ban!C: of the United States, 9 Wheat. 738.
Pacific Railroad Removal Cases, 115 u.s. 1. Matter of Dunn1 212
U. S. 374. We shall say but a word in answer to the appe1l~nts'
argument that a suit aP,inst such a corporation is not a suit
arising under those laws within Section 24 of the Judicial Code of
March 3, 1911, c. 231;. 36 Stat. 1087.. The contrary is established
and the accepted doctrine is intalligibla at lGast since it is
pa.rt of the plaint iff s t ca.ae that the def enda.nt bank existed and
exists as an entity capable of committing the wrong alleged a.nd of
being sued. These facts depend upon the laws of the United States.
&nkers Trust Co. v. Texas & Pacific Ry, Co., 241 u. S. 2951 3o6,
307. Texas & Pacific Ry. Co. v. Cody, 166 U. S. 6o6- See further
Smith v. Kansas City Title & Trust Co., February 28, 1921. A more
plausible objection · is that by the Judicial Code, Section 24,
sixteenth, except as therein excepted national banking associations
for the purposes of suits against them are to be deemed citizens
of the States in which they are respectively located.. But we
agree with the Court below thl.t the reasons for locali.zing ordirary
commercial banks do not apply to the Federal Reserve Banks created
after the Judicial Code was enacted and that the phrase 'national
banking associations~ does not reach fonvard and include them.
That phrase is used to describe the ordinary commercial banks whereas
the others are systematically called 'Federal Reserve Banks'. We
see no sufficient ground for supposing that Congress meant to open
the questions that the other constructionwould raise.
'
.
•
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X- 3128-a
on the merits we are of opinion that the courts below went too
far.. The question at tb.is stage is not what tr.e plaintiffs may be
able to prove,. or what may be the reasonable interpretation of the
defendants' acts, but whether the plaintiffs have shown a grO'\.md. for
relief if they can prove what they allege. We lay on one side as not
necessary to our decision the q11estion uf the de:fendar1ts• pov;ers, and
assuming that they roct within them consider only whether the u.se that
according to the bill they intend to make of them will infringe the
pl: intiffst rights. The defendants say that the holder of a check. has
a right to present it to the bank upon which it was drawn for payment
over the counter, and that however many checks he_ may hold he has the
same right as to all of them and may present them all at once, wt.atever
his motive or intent. They aSk whetheT a mortgagee would be prevented
from·foreclosing because he acted from disinterested malevolence and
not from a desire t~ get his money. But the word trightt is one of the
most decep~ive of- pitfalls; it is so easy to slip from a Qualified meaning in. the 'premise to an undllalified one in the conclusion. Most rights
are C~tlalified. -·p,_ man has at least as absolute a right to give his own
money as he has. to demand money from a party that has made no promise
to him; yet if he gives it to :l.nduce another to steal or murder the
purpose of the act makes it a crime •
.A bark that receives deposits to be drawn upon by check of course
autr.orizes its depositors to draw checks against their accounts and
holders of such checks to present them for payment. When we think of
the ordinary case the right of the holder is so unimpeded that it seems to
us absolute. But looked at from either side ~ t cannot be so. The interests
of business. also are recognized as rights, "TJrotected agidnst injury to a
greater-or less e~tent, and in case of conflict between the claims of
business on the one side and of third persons on the other lines have to
be drawn that .limit both. A man has a right to give advice, but advice
given for the sole purpose of injuring another's business and effective
on a large scale, might create a cause of action. Barik:s as we know them
could not exist if they could not rely upon averages and lend a large
part of the money that they receive fran their depositors on the assumption
that not more than a certain fraction· of 1 t will be demanded on any one
day.. If without a word of falsehood but acting fran what we have called
disinterested malevol~nce a man by persuasion should organize and carry
into effect a run upon a bank and ruin it,. we cannot doubt that an action
would lie. A s·l.milar result even if less complete in its effect is to
pe expected from the course that the defendants are alleged to intend, and
to determine_whether they are authorized to follow that.cOllrse it is not
enough to refer to the general right of a holder of checks to present them
but it is necessary to consider whether the collection of cheCks and presenting them in a body for the purpose of breaking down the petitioner's
business as now conducted is justified by the ulterior purpose in view.
.. ..
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X-3128-a
If this were a. case of cornpeti tion in pri v.:.te business it would
be hard to admit the justification of self interest considering the
now current o~inion.as to public policy expressed in statutes and dec.slons. ~ut this is not private business. The policy of the Federal
Reserve Eariks is governed by the policy of the United States with regard to them and to these relatively feeble competitors. We do not need
aid from the deoates unon the statute under which the Reserve Bsllks
exist to assume that the United States did not intend oy that statute
to sanction this sort of warfare upon legitimate creations of the States.
Decree reversed.
@FedFRASER