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360 FEDERAL RESERVE BOARD WASHINGTON X-4990 ADDRESS OFFICIAL CORRESPONDENCE TO T H E FEDERAL. RESERVE BOARD November 5, 1927. Dear S i r : Through the courtesy of Governor G-eery, of the Federal Reserve Bank of Minneapolis, I enclose f o r your information a cOpy of an unpublished, opinion rendered Ih 1918 "by the U.S, D i s t r i c t Court f o r the D i s t r i c t of Minnesota in the case of Keyes V. Federal Reserve Bank of Minneapolis, wherein that court upheld the r i g h t of a Federal reserve bank to charge checks to the account of a drawee bank subsequent to insolvency even i f i t was handling such checks as agent of the banks from which i t had r e c e i v e d them. I never heard of t h i s d e c i s i o n u n t i l Governor Gocry c a l l e d i t to my a t t e n t i o n during the Governors' Conference, P l e a s e do not take the trouble to acknowledge r e c e i p t of t h i s l e t t e r or any s i m i l a r l e t t e r s transmitting f o r your information copies of opinions, b r i e f s , e t c . , u n l e s s you wish to comment on same. Very t r u l y yours, Walter Wyatt General Counsel Enclosure. X-4990-A -v ; - COPY Iff TEE UNITED STATES DISTRICT COURT, DISTRICT OF MINNESOTA, FOURTH DIVISION. PAUL C. KEYES, as Receiver of the F i r s t National Bank of C l a r k f i e l d , Minnesota, Plaintiff, vs. REBERAL RESERVE BAM OF MINNEAPOLIS, a corporation, Defendant. This cause came on to he heard at Minneapolis, on the 9th and 11th days of October, 1918, J. N. Johnson, Esq., appearing on "behalf of the p l a i n t i f f , and A. Ueland, Esq., appearing on behalf of the defendant. The s t i p u l a t i o n s and testimony having been taken, and each side having r e s t e d , by agreement between Court and Counsel, b r i e f s were f u r n i s h e d to the Court and exchanged between Counsel, and t h e r e a f t e r , on the 21st day of October, 1918, the case was o r a l l y argued by Counsel. And now the Court, having duly considered the same, I t i s ADJUDGED, ORDERED and DECREED, That the p l a i n t i f f take nothing i n t h i s a c t i o n , and that the defendant has a r i g h t to a claim a g a i n s t the Receiver f o r $462.06, which he may f i l e i n the Receivership proceedings, and that defendant have judgment f o r i t s c o s t s and disbursements, to be taxed by the c l e r k . By the Court, (Signed) Pago Morris Judge. X-49S0-A — m e m o r a n d u m . At a l l times mentioned h e r e i n the F i r s t National Bank of C l a r k f i e l d , Minnesota, was a national "banking a s s o c i a t i o n duly i n corporated under and pursuant to the hanking laws of the United S t a t e s , and up to the 18th of September, 1917, conducted business as a n a t i o n a l hank at C l a r k f i e l d , Minnesota. At a l l times mentioned h e r e i n the defendant was a corporation duly organized and e x i s t i n g under and pursuant to an act of Congress of the United S t a t e s e n t i t l e d "Federal Reserve Act, 11 approved December 23d, 1913, and conducting the "business of a Federal Reserve Bank at Minneapolis, Minnesota. The p l a i n t i f f ' s i n s o l v e n t , F i r s t national Bank of Clarkf i e l d , Minnesota, was on the 18th day of September, 1917, i n s o l v e n t , and was on that day c l o s e d by order of the Comptroller of th.j Currency under and by v i r t u e of the power and authority conferred upon him by the banking laws of the United S t a t e s , and by v i r t u e of the same power and a u t h o r i t y the p l a i n t i f f was appointed the Receiver thereof and on the 4th day of October, 1917, duly q u a l i f i e d as such Receiver. Said F i r s t National Bank of Clark- f i e l d was a member bank of the defendant under the p r o v i s i o n s of the Federal Reserve Act. Pursuant to the p r o v i s i o n s of the Federal Reserve Act the Federal Reserve Board, i n the month of Juno, 1916, e s t a b l i s h e d a c o l l e c t i o n and c l e a r i n g system by r u l e s and r e g u l a t i o n s which have s i n c e been i n f o r c e and e f f e c t , and prior to the transactions h e r e i n involved the defendant had become a part of such c o l l e c t i o n and c l e a r i n g system, under such r u l e s and r e g u l a t i o n s . The r u l e s and r e g u l a t i o n s of the Federal Reserve Board provide, under the heading "Check Clearing and Collecting", as f o l l o w s ? X-4990-A. •> • • 3 6 3 , ( E x h i b i t «C»): Bach F e d e r a l Reserve Bank s h a l l e x e r c i s e t h e f u n c t i o n s of a c l e a r i n g house under t h e f o l l o w i n g g e n e r a l terms *nd c o n d i t i o n s : , ( 1 ) Each F e d e r a l Reserve Bank w i l l r e c e i v e a t p a r from i t s member "banks and from non-member banks i n i t s d i s t r i c t * d c h ha v e become c l e a r i n g members checks drawn on a l l member and c l e a r i n g member baulks and on a l l other nonmember banks which a g r e e t o remit a t par through t h e F e d e r a l Reserve l a n k o f t h e i r , district; ( 2 ) Each F e d e r a l r e s e r v e bank w i l l r e c e i v e a t par from o t h e r Federal Reservf Banks and w i l l r e c e i v e a t par from a l l meofoer and c l e a r i n g member banks, regardless of t h e i r l o c a t i o n , f o r the c r e d i t of t h e i r accounts with t h e i r r e s p e c t i v e F e d e r a l R e s e r v e Beaks, checks drawn upon a l l member and. c l e a r i n g member* banks ft i t s d i s t r i c t and tq>on a l l o t h e r nonmember banks o f i t s d i s t r i c t whose checks c a n be c o l l e c t e d a t p a r by t h e Federal Reserve Bank. She F e d e r a l Reserve Banks t r i l l p r e p a r e a par l i s t of a l l nonmember banks t o be r e v i s e d from time t o time, which w i l l be f u r n i s h e d t o member and c l e a r i n g member banks. ( 3 ) Immediate c r e d i t e n t r y upon r e c e i p t s u b j e c t t o f i n a l payment w i l l be made f o r a l l such i t e m s upon t h e books e f the F e d e r a l Reserve Bank a t f u l l f a c e v a l u e , but t h e p r o c e e d s w i l l not b e c o u n t e d a s p a r t o f the minimum r e s e r v e nor become A v a i l a b l e t o meet checks drawn u n t i l a c t u a l l y c o l l e c t e d , i n accordance w i t h t h e b e e t p r a c t i c e now p r e v a i l i n g . Qft Checks r e c e i v e d by a Federal Reserve Bank on i t s member or d e a r - , i n g member banks w i l l be forwarded d i r e c t t o such banks and w i l l n o t be charged t o t h e i r a c c o u n t s u n t i l s u f f i c i e n t time h a s e l a p s e d w i t h i n which t o r e c e i v e a d v i c e o f payment. ( 5 ) I n t h e s e l e c t i o n o f c o l l e c t i n g a g e n t s f o r h a n d l i n g checks on non«? member banks, Which have n o t become c l e a r i n g members, member banks w i l l be g i v e n the preference. ( 6 ) Under t h i s p l a n each F e d e r a l Reserve Bank w i l l r e c e i v e a t par from i t s member and c l e a r i n g member banks checks on a l l member and c l e a r i n g member banks and on a l l o t h e r nonmember banks whose checks can be c o l l e c t e d a t par by any Federal Reserve Bank. Member and c l e a r i n g member banks w i l l be r e q u i r e d by t h e Federal Reserve Board t o p r o v i d e funds t o cover a t par a l l checks r e c e i v e d from or f o r the account o f t h e i r F e d e r a l Reserve Banks, p r o v i d e d , however* 3hat a member or c l e a r i n g member bank may s h i p currency or s p e c i e from i t s own v a u l t s a t t h e expense of i t s F e d e r a l Reserve Bank t o cover any d e f i c i e n c y which nay a r i s e because of and o n l y i n t h e c a s e o f i n a b i l i t y t o p r o v i d e i t e m s t o o f f s e t checks r e c e i v e d from or f o r t h e account of i t s Federal R e s e r v e Bank. ( 7 ) S e c t i o n 19 o f t h e FedAral Reserve Act p r o v i d e s t h a t — The r e q u i r e d b a l a n c e c a r r i e d by a camber bade w i t h a F e d e r a l Reserve Bank may, under t h e r e g u l a t i o n s and s u b j e c t t o such p e n a l t i e s a s c a y be p r e s c r i b e < | by the F e d e r a l Reserve Board, be checked a g a i n s t and withdrawn by such member barilf f o r t h e purpose o f m e e t i n g e x i s t i n g l i a b i l i t i e s : P r o v i d e d , howewer. B i a t no bank s h a l l a t any time aakji now l o a n s or s h a l l pay any d i v i d e n d s u n l e s s and u n t i l the t o t a l b a l a n c e r e q u i r e d by lag* i s f o l l y r e s t o r e d . I t i s m a n i f e s t t h a t items i n p r o c e s s of c o l l e c t i o n can n o t l a w f u l l y >e counted a s p a r t of t h e mis i r s © r e s e r v e b a l a n c e t o be c a r r i e d by a member bank w i t h i t s F e d e r a l R e s e r y e Batik. S h e r e f o r e , s h o u l d a member beak draw a g a i n s t such i t e m s t h e d r a f t would m eharged ag&inst i t s r e s e r v e bsOaace i f such b a l a n c e were s u f f i c i e n t i n ampemt t o pay i t ; b a t any r e s u l t ! * * impairment o f r e s e r v e b a l a n c e s would be s u b j e c t t o a l l t h e p e n a l t i e s provided by t h e A c t . X—4990—A f I n as nach as i t i s essential that the law i n respect to the maintenance "by member "batiks of the required minimum reserve "balance s h a l l be s t r i c t l y comp l i e d with, the Federal Reserve Board, under authority vested i n i t "by section 19 of the Act, hereby prescribes as the penalty for any deficiency i n reserves a sum equivalent to an i n t e r e s t charge on the amount of the deficiency of 2 per cent, per annum above the ninety day discount rate of the Federal Reserve Bank of the d i s t r i c t i n which the member bank i s located. The Board reserves the r i g h t to increase this penalty whenever conditions require i t . For the purpose of keeping t h e i r reserve balances i n t a c t member banks may at a l l t i n e s have recourse to the rediscount f a c i l i t i e s o f f e r e d by t h e i r respective Federal Reserve Banks. ( 8 ) Each Federal Reserve Bank w i l l determine by analysis the amounts of uncollected funds appearing on i t s books to the c r e d i t of each member bank. Such analysis w i l l show the true status of the reserve h e l d by the Federal Reserve Bank for each member bank and w i l l enable i t to apply the penalty for impairment of reserve. A schedule of the time required w i t h i n which to c o l l e c t checks w i l l bg furnished to each bank to enable i t to determine the time at which any item sent to i t s Federal Reserve Bank w i l l be counted as reserve and become a v a i l a b l e to meet any checks drawn. ( 9 ) I n handling items for center and clearing member banks, a Federal Reserve Bank w i l l act as agent only. The Board w i l l require t h a t each member and clearing member bank authorize i t s Federal Reserve Bank to send checks for c o l l e c t i o n to banks on which checks arc drawn, and, except for negligence, such Federal Reserve Bank w i l l assume no l i a b i l i t y . Any further requirements that the Board may deem necessary w i l l be set f o r t h by the Federal Reserve Banks i n t h e i r l e t t e r s of i n s t r u c t i o n to t h e i r member and clearing member banks. Each Federal Reserve Bank w i l l also promulgate rules and regulations governing the details of i t s operations as a clearing house, such rules and regulations to be binding upon a l l member and nonmember banks which are clearing through the Federal Reserve Bank. And the rules and regulations governing the d e t a i l s of i t s operations as a clearing house promulgated by defendant provide, under the heading "Check Clearing and Collecting, 1 1 as follows, (Exhibit "B"): 1. The Federal Reserve Bank of Minneapolis w i l l discontinue i t s present c o l l e c t i o n system on July 15, 1916, i n accordance with Federal Reserve Board Circular 1, Series of 1916, already sent you, and w i l l t h e r e a f t e r , u n t i l further notice, receive from i t s member banks for immediate c r e d i t at par, chefks drawn on a l l member banks i n the United States and on such non-member bapks as can be collected at p a r . A par l i s t of a l l non-member banks w i l l be prepared, to be revised from time to time, which w i l l be furnished meaber bank. A l l such checks, except those drawn on Minneapolis and S t . Paul banks, received by the Federal Reserve Bank by 3:00 P.M., except Saturday, when the hour w i l l be 12:00 o'clock noon, w i l l be credited subject to f i n a l payment a t f u l l face value upon day of r e c e i p t , .Those received l a t e r than these ~4- X-4990-kA. hours w i l l "be c r e d i t e d upon the f o l l o w i n g business day* The proceeds, however. w i l l not "be counted as reserve, nor "become a v a i l a b l e to meet checks drawn.,until a c t u a l l y c o l l e c t e d . Owing to the c l e a r i n g hour, checks drawn on Minneapolis and S t . Paul barks r e c e i v e d a f t e r 10:30 A.M., w i l l not be c r e d i t ed nor proceeds become a v a i l a b l e u n t i l the f o l l o w i n g business day; those r e c e i v e d before that hour w i l l be c r e d i t e d on day of r e c e i p t and proceeds w i l l be a v a i l a b l e that day, 3.. Checks r e c e i v e d by the Federal Reserve Bank, drawn on i t s member banks, w i l l be forwarded d i r e c t to such member banks, and w i l l be charged to t h e i r accounts on the date which,, under usual c o n d i t i o n s , advice of payment may be expected. Member banks should c r e d i t a l l remittances r e c e i v e d from the Federal Reserve Bank upon day of r e c e i p t , a d v i s i n g the Federal Reserve Bank, and should not remit t h e i r d r a f t s in payment. Member banks are required by the Federal Reserve Board to provide funds to cover at par, a l l checks r e c e i v e d from, or f o r the account o f . t h e i r Federal Reserve Bank# S e c t i o n 19 of the Federal Reserve Act provides t h a t : "The reserve c a r r i e d by a member bank with a Federal Reserve Bank may, under the r e g u l a t i o n s , subject to such p e n a l t i e s as nay be orescribed by the Federal Reserve Board, be checked against and withdrawn by such member baijk f o r the purpose of meeting e x i s t i n g l i a b i l i t i e s : Provided, however,. that no bank s h a l l at any time make new loans or s h a l l pay any dividends unl e s s and u n t i l the t o t a l reserve required by law i s f u l l y restored. 1 1 (7. In handling items f o r member banks, the Federal Reserve Bank of Minneapolis a c t s as agent only. I t i s understood that each member bank authorizes i t to send checks f o r c o l l e c t i o n d i r e c t to banks on which checks are drawn, and except f o r negligence the Federal Reserve Bank of Minneapolis assumes no l i a b i l i t y u n t i l funds are a c t u a l l y i n i t s hands. In September, 1917, there was and s t i l l i s at C l a r k f i e l d , Minnesota* where the F i r s t National Bank of Clarkf i e l d was l o c a t e d and doing business,, a bank organized under the laws of Minnesota c a l l e d the Clarkf i e l d S t a t e Bank;, and during a l l of s a i d month t h i s bank was a non-member bank of defendant upon which defendant could c o l l e c t checks at par; and s a i d bank was on the par l i s t of non-member banks prepared by defendant and furnished to i t s member banks i n accordance i t h s a i d r u l e s and r e g u l a t i o n s . On the 17th of September, 1917, checks payable on p r e s e n t a t i o n amounting to $1998.21 were deposited with defendant. These checks to the amount of $1943.96 were on s a i d C l a r k f i e l d S t a t e Bank and to the amount of i' $54.25 dn s a i d F i r s t National Banlc of C l a r k f i e l d . X-4990-A 3 6 3 These checks to the am- ount of $548.49 were so deposited by the Northwestern National Bank of Minneapolis, Minnesota, a member bank of defendant; and to the amount of $555.21 by the Merchants National Bank of S t . Paul, Minnesota, a member bank of defendant; and to the amount of $218.30 by the Peoples Bank of S t . Paul, Minnesota, a member banlc of defendant; and one check f o r $570.86 by the F i r s t National Bank of Chicago, I l l i n o i s , a national banking a s s o c i a t i o n , and as such a member of the Federal Reserve Bank; and one check f o r $5.35 by the Corn Exchange National Bank of Chicago, I l l i n o i s , a n a t i o n a l banking a s s o c i a t i o n , and as such a menber of the Federal Reserve Bank; and one chock f o r $100. by the Des Moines National Bank of Dos Moines, Iowa, a national banking a s s o c i a t i o n , and as such a member of the Federal Reserve Bank. Each check when deposited with defendant contained on the back there- of the u n r e s t r i c t e d and unconditional endorsements i n blank of the payee thereof and of the bank d e p o s i t i n g the sane with defendant and c r e d i t was on that day given by defendant at par to the bank d e p o s i t i n g the same. A f t e r s a i d chocks were deposited with defendant and c r e d i t given for them as a f o r e s a i d , and on s a i d 17th day of September, 1917, defendant forwarded a l l s a i d checks by mail to s a i d F i r s t National Bank of C l a r k f i e l d , for payment and c r e d i t as to the checks f o r $54.25 on s a i d bank, and f o r c o l l e c t i o n and c r e d i t as to the checks f o r $1943.96 on the C l a r k f i e l d State Bank, and a l l s a i d checks were r e c e i v e d by s a i d F i r s t National Bank of Clarkf i e l d on the 18th of September, 1917. On s a i d 18th of September, 1917, the F i r s t National Bank of Clarkf i e l d c l e a r e d with s a i d C l a r k f i e l d State Bank checks which each then h e l d a g a i n s t the other, and in t h i s c l e a r i n g the F i r s t National Bank of Clark X-4990-A —6— f i e l d used a l l the checks on the S t a t e Bank of C l a r k f i e l d r e c e i v e d from defendant as a f o r e s a i d and r e c e i v e d c r e d i t for the same from s a i d C l a r k f i e l d State Bank, "but r e c e i v e d no money.. In s a i d c l e a r i n g the F i r s t n a t i o n a l Bank of C l a r k f i e l d surrendered and d e l i v e r e d to the C l a r k f i e l d S t a t e Bank as f u l l y p a i d and c a n c e l l e d , a l l the checks on the l a t t e r bank which i t had r e c e i v e d from defendant, and the F i r s t National Bank of C l a r k f i e l d thereupon and on s a i d 18th of September, 1517, and "before i t was c l o s e d or a r e c e i v e r appointed f o r i t , gave defendant c r e d i t on i t s books f o r a l l the checks which i t received from defendant on that day as a f o r e s a i d , to w i t : f o r the sum of $1998. 21. The checks f o r $54.25 on the F i r s t National Bank of C l a r k f i e l d were returned by s a i d bank or the p l a i n t i f f to the various drapers t h e r e o f , and the checks f o r $1943.96 on the C l a r k f i e l d S t a t e Bank were returned by i t to the various drawers t h e r e o f , by reason wheruof a more p a r t i c u l a r descript i o n of any of s a i d checks can not be g i v e n . No remittance or payment was ever made to defendant or any of the payees or endorsers of any of the above mentioned checks f o r or on account of such checks, or f o r or on account of the c r e d i t which defendant r e c e i v e d on the books of s a i d F i r s t National Bank of C l a r k f i e l d f o r s a i d checks. Thereafter, and on the 16th of October, 1917, defendant charged back s e v e r e l y to the various banks which had deposited the checks a f o r e s a i d , amounting %o $1998.21, the amount of said checks which had been so deposited by each of s a i d banks. And t h e r e a f t e r , and on the 14th day of May, 1918, t h i s a c t i o n was brought. . On the 18th of September, 1917, the F i r s t National Bank of Clarkf i e l d had a balance to i t s c r e d i t on the books of defendant of $8647.04. -7- X-4990-A 365 On the 25th of January, 1918, upon an accounting "between p l a i n t i f f and defendant i t was found that s a i d bank was e n t i t l e d to a c r e d i t f o r the amount of i t s stock i n defendant with dividends accrued thereon to September 1, 1917, of $963., and to a further c r e d i t f o r unearned discounts on notes due Liarch 1, 1918, of $21.90, making i n a l l $9631.94, and that defendant had a r i g h t to deduct therefrom the amount of c e r t a i n forged notes, the forgery having been discovered a f t e r the c l o s i n g of the bank f o r insolvency with i n t e r e s t , which had been discounted by s a i d bank with defendant p r i o r to the 18th of September, 1917, f o r the purpose of r e p l e n i s h i n g the reserve of s a i d bank with defendant and the proceeds of which forged notes c o n s t i t u t e d a part of s a i d balance of $8647.04. After making these c r e d i t s and deductions a balance of $1536.15 was found to be due from defendant to s a i d bank u n l e s s defendant has the r i g h t to s e t o f f a g a i n s t t h i s balance the amount of the a f o r e s a i d checks f o r $1998.21 On s a i d 18th of September, 1917, and f o r some time p r i o r thereto , s a i d F i r s t National Bank of C l a r k f i e l d was i n s o l v e n t and was known by i t s cashi e r and one of i t s d i r e c t o r s to be i n s o l v e n t . The s o l e contention and question to be decided here i s as to whether' or not the defendant i s e n t i t l e d to o f f s e t against the a f o r e s a i d balance of $1536.15, the amount of the a f o r e s a i d checks, $1998.21, the p l a i n t i f f contending t h a t i t has not the r i g h t to do so and the defendant that i t h a s . Under the pleadings and proofs here whether the o f f s e t be l e g a l or equitable i n i t s nature the r i g h t to i t s allowance can be determined i n t h i s a c t i o n TJ. S. Coiap. S t a t u t e s , Sec, 1251-b, ( J u d i c i a l Code 247-b, as amended by Act of March, 1915, Ch. 90, 38 U. S. S t a t u t e s at largo, 9 5 6 . ) That defendant handled s a i d checks as a c l e a r i n g house, f o r the pur- X-4990-A 3 6 9 pose of c o l l e c t i o n and c l e a r i n g , and f o r no other purpose i s mutually conceded "by counsel. Considering the matter then as a c l e a r i n g house t r a n s a c t i o n i | seems to me c l e a r t h a t , i f the F i r s t National Bank of C l a r k f i e l d and the Clar#f i e l d State Bank had "been "banks doing "business in Minneapolis and the c l e a r i n g had t e e n had there on the 18th of September, 1917, upon f i n d i n g that the $1988.21 was due from the F i r s t National Bank of C l a r k f i e l d to defendant, the defendant would have had the r i g h t to immediate payment thereof to i t "by that "bank e i t h e r in money or "by check on i t s "balance with defendant, or to charge s a i d amount to s a i d "bank's account and have s a i d "bank give i t c r e d i t t h e r e f o r , and that "being done the t r a n s a c t i o n would have "been completely c l o s e d . But the defend- ant was the c l e a r i n g house f o r "banks i n a wide t e r r i t o r y , embracing the whole s t a t e of Minnesota, and was the c l e a r i n g house f o r these two C l a r k f i e l d "banks, and these checks had to "be forwarded "by mail and the clearance had at Clarkfield. Is i t not apparent that upon the clearance "being had "between the Clark- f i e l d "banks defendant had the r i g h t to a c r e d i t with the F i r s t National Bank of C l a r k f i e l d f o r t h i s amount and to charge the same to the account of s a i d "bank? That c r e d i t was given, "but the charge was not made. I t seems to me that defendant then had a r i g h t o* a c t i o n against that "bank f o r s a i d amount i n i t s own name and in i t s own r i g h t . And. i f t h i s i s true i t i s c l e a r i t has had that r i g h t ever s i n c e , and therefore has the r i g h t of s e t o f f . The Receiver, the p l a i n t i f f here, took the a s s e t s of the "bank as a mere t r u s t e e f o r c r e d i t o r s , and not f o r value and without n o t i c e , and, i n the absence of s t a t u t e to the contrary, subject to a l l claims and defences that might have been i n t e r posed as a g a i n s t the i n s o l v e n t bank. The subsequent charging back of the checks by defendant or the subsequent statements of counsel f o r the defendant i n h i s l e t t e r s would not i n any way a f f e c t the conclusion. The recovery of the s e t o f f here w i l l f u l l y p r o t e c t the p l a i n t i f f and he has no i n t e r e s t in, and i s not concerned to inquire i n t o , what was done between defendant and the hanks depositing these checks or what advice has been given to defendant by i t s counsel. Elmquist V. Market., 45 Minn. 305. Vanstrum V* Liljengren, 37 Minn. 191 • But l e t us consider the matter not as a c l e a r i n g house t r a n s a c t i o n but as one of an agency f o r c o l l e c t i o n . The whole argument of p l a i n t i f f * s counsel r e s t s upon the p r o p o s i t i o n that as at the time the s u i t was brought the defendant was not the owner of the checks, they having, on the 16th of October, 1917, been charged back to the banks which had deposited them with defendant f o r c o l l e c t i o n , defendant has now no r i g h t of s e t o f f . He a l s o quotes from l e t t e r s w r i t t e n by defendant 1 s counsel subsequent to the c l o s i n g of the bank which he contends supports h i s p r o p o s i t i o n , and he claims that these l e t t e r s and the charging back of the checks work an estoppel against the defends ant*s now a s s e r t i n g the right of set o f f . I t does not seem t o me that these statements of counsel and the charging back of the checks i n any way a f f e c t the r i g h t s of the p a r t i e s h e r e . As to the claim of estoppel i t may be s a i d that the most e s s e n t i a l element of an estoppel i s absent. In the charging back of the checks and the statements of counsel for defendant there has been no a c t , r e p r e s e n t a t i o n or concealment upon which p l a i n t i f f or h i s insolvent has been induced to a c t , nor has there been any a c t i o n by p l a i n t i f f or h i s i n solvent i n r e l i a n c e thereon of a character to r e s u l t in s u b s t a n t i a l p r e j u d i c e to him or to h i s i n s o l v e n t or to the c r e d i t o r s for whom as r e c e i v e r he i s t r u s t ee of the a s s e t s of the insolvent* I t seems to me that the r i g h t s of the p a r t i e s became f i x e d as of the time of the c l o s i n g of the bank, 146 U . S . , 499-t511« S c o t t v. Armstrong, At that time defendant had a right of a c t i o n against p l a i n - X-4990-A -10- t i f f ' s i n s o l v e n t f o r the amount of the checks, whether or not they were only r e c e i v e d by i t as an agent f o r c o l l e c t i o n and. conditional c r e d i t , and whether or not the endorsements thereon were r e s t r i c t e d or u n i n r e s t r i c t e d . Statutes of Minnesota 1913, S e c t i o n 5848 and 5849. of the checks i s unimportant. General The subsequent ownership There was no defense as to the checks and no defense as to the c r e d i t a r i s i n g therefrom on the "books of the i n s o l v e n t bank. The p l a i n t i f f has no standing to inquire into the r e l a t i o n s between defendant and i t s d e p o s i t i n g banks. Neither the i n s o l v e n t nor i t s r e c e i v e r has any concern with the question of the ownership of the checks, u n l e s s a defense be shown as a g a i n s t the endorsers or drawers t h e r e o f , or that defendant became the holder thereof a f t e r the c l o s i n g of the bank f o r i n s o l v e n cy, or a f t e r knowledge of i t s i n s o l v e n c y . the contrary the opposite appears. There i s no such showing, and on Farmers Deposit National Bank v Penn. Bank, 123 Pa. 283, Penn. Bank v. Farmers Deposit National Bank, 130 Pa. 209. P l a i n t i f f ' s counsel contends that the allowance of the O f f s e t would work a p r e f e r e n c e contrary to the p r o v i s i o n s of s e c t i o n s 5234, 5236 and 5242, Revised S t a t u t e s of the U. S . , 1878, (the National Banking A c t ) . This conten- t i o n i s , I think d u l l y disposed of adversely thereto by the d e c i s i o n of the Supreme Court in the case of S c o t t v . Armstrong, supra. I am t h e r e f o r e of the opinion that defendant i s l e g a l l y e n t i t l e d to the s e t o f f in question. And i f I am i n error as to t h a t , I s t i l l think that under a l l the f a c t s and circumstances of t h i s case i t i s equitably e n t i t l e d thereto. S c o t t v . Armstrong, supra. I t must be remembered that the i n s o l v e n t bank and i t s c r e d i t o r s r e c e i v e d the f u l l b e n e f i t of the amount of the checks. I f the doctrine of estoppel can be invoked at a l l here, i t would be to prevent the r e c e i v e r from o b j e c t i n g to the s e t o f f , at l e a s t to the amount of $1943.96, r-ll- X-4990-A the amount of the checks drawn on the State Bank of C l a r ^ f i e l d . Plaintiff's i n s o l v e n t , was, on the 18th of September, 1917, and f o r some time p r i o r t h e r e to, i n s o l v e n t , and known to be s o "by i t s c h i e f managing o f f i c e r . Notwithstand- ing that f a c t i t h e l d i t s e l f out to "be s o l v e n t , and r e c e i v e d and handled these checks as above s e t f o r t h . Relying on i t s solvency and induced by i t s holding i t s e l f out to be so, defendant forwarded these chucks to i t when i t might have forwarded them d i r e c t to tho S t a t e Bank of C l a r k f i e l d , which of course was to the s u b s t a n t i a l p r e j u d i c e of defendant. The r e s u l t i s , that the balance of $1531.78 i s wiped out, and defendant has the r i g h t to a claim a g a i n s t the r e c e i v e r f o r tho d i f f e r e n c e between that amount and $1998.21, the amount of tho checks, t o - w i t , $462.06. (Signed) Page Morris Judge.
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