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FEDERAL RESERVE BANK

MISC. 4.1.

OF NEW YORK

OFFICE CORRESPONDENCE
To

Mr. Mason

DATE

June 22, 1922

SUBJECT

Governor Strong

'Rom

Please note Resolution 15 in the attached report.
that no legislation is required in
suggested in tbe second paragraph.

and then pass the report along to
attached

for

BS.NINI

at t.




him.

this country to

secure the

It

strikes me

protection

Could you give me a little memoranduip,

Mr. Snyder

with

the

memorandum iThich is

192_

MI9C.3.1-200M-9-20

FEDERAL RESERVE BANK
OF NEW YORK

41111:ne

OFFICE CORRESPONDENCE
TO

Governor Strong

50, 1922.

SU BJ ECT:

_

L. R. Mason
M

The attached memorandum of Mr. Bowers, dated June 28, on the question of law raised by you in connection with Resolution 15 of the Report of
the Financial Commission of the International Economic Conference at Genoa,
points out clearly the
sound conclusions.

legal

questions involved and, in my opinion, reaches

I agree with Mr. Bowers that we can by treaty protect for-

eign deposits against forced loans, moratoria, and Federal taxation, but that
it is very doubtful whether such deposits can be exempted by treaty from state
taxation.

In fact, as you will see from the memorandum, the only court decision

on the subject holds that the states cannot be deprived by treaty of their power
to tax.

States, of course, cannot tax interstate or foreign commerce.

It,may

be that facts will develop from which it could be contended that these deposits
are directly incident to foreign commerce and in that event they might be held
by the courts to be exempt from taxation by the states.

However, on the in-

formation now before us, I am of the opinion that they could not be exempted
by treaty from state taxation.




MISC.3.1-200M--11

FEDERAL RESERVE BANK
OF NEW YORK
DATK_ J4116_214_19 22

OFFICE CORRESPONDENCE
Mr. Mason.

seeieeeseGuaranteeingsLiquidity and Freedol

of Movement of De

Thomae_Wa_Bowersa

sits of For.atn

The Financial Commission of the Genoa Conference adopted certain resolutions,
of which No. 15 contains the following:
"The central 1.1..nks concerned would agree to provide

facilitiee for holding foreign balances (and securities) on deposit on account of other central banks, under special guarantees from each bank and from its Government as to the absolute
liquidity and freedom of movement of such balances under all
conditions, and their absolute exemption from taxation, forced
loans and moratorium."
The question arises as to whether any special action on the part of our Government

would be necessary in order to aseure the desired licuidity of funds deposited in

from taxes or other charges, or from Govern-

this country and their complete exemption

mental interference, and if such action is necessary, how it can best be taken.
First, as to taxation, there can be no doubt that deposits of foreign banks

in this country are, under the law as it now stands, subject to taxation, both by
the State and the Federal Governments.

The taxing power

is

a broad one and can be

carried to an extent where it is practically equivalent to confiscation, but there
are, however, certain limitations upon it.
Constitution provides,

with

Section 8 of Article I of the Federal

reference to "duties, imposts and excises" imposed by the

Federal Government, that they

"shall be uniform

throughout the United States, and

various requirements for uniformity and nondiscrimination in taxes are contained in
many of the State constitutions, and these limitations might prevent the imposition
of taxes directed particularly at the deposits of foreign banks.

Obviously, however,

they would not secure their exemption from taxation.

_
,

I

Forced loans have not, in so far as i have been able to

learn,

ever been

attempted in this country and they have, therefore, not been considered by the courts,

It,

but there are, however, certain principles of law which would have to be applied in


http://fraser.stlouisfed.org/
connection
Federal Reserve Bank of St. Louis

with them.

Assuming that thAg wArR

f

rl-r-Nred by
,

a e

or

12C.3.1-.

111:20

FEDERAL RESERVE SANK
OF NEW YORK

I

OFFICE CORRESPONDENCE

DATE

SUBJECT

9
IR

obtain money for carrying on
of property for public use,

its

governmental functions, they would involve the taking

something which

ig. within the power of the sovereign.

The Fifth Amendment to the Federal Constitution provides, however, as to the Federal
Government, that this shall not be done without just compensation, and similar restrictions are contained in most of the State constitutions.

Just compensation

involves

the payment of the fair market value of the property taken, and, where that is money,
it obviously involves the payment of the same amount of money, so that unless the

Government is

permitted to postpone the payment of compensation, it would accomplish

nothing by the taking of the money.

If,

however,

compensation was postponed, the

Government would ultimately have to return the money, together with interest, and
theoretically this would be exactly equivalent to renting the money for a certain
length of time.

The mere payment of rent does not meet the requirements of the jest

compensation clause of the Constitution, and if the Government sees fit to take control of private property and deal with it as its own, it may not, except by agreement

with the person from whom it is taken, subsequently return the property and pay simply
for

its

use, but it must retain the property and pay its full value.

In view of

these considerations, I believe that, at least in theory, no forced loan could

be

made,

but, as a practioarmatter, it might, in a crisis in the Government's finances, be
accomplished through the Government's simply taking the money and withholding compensa-

tion

which could then be obtained only as a result of judicial proceedings,

4

which would involve delay and result in the Government's' having the use of the

for a substantial length of time and thereby accomplishing its

be the

purpose.

process

money-

This could

more likely in view of the fact that the prohibition of such loans eves not clear

cut and specific

http://fraser.stlouisfed.org/
money would
Federal Reserve Bank of St. Louis

but

based upon a rather theoretical argument, and the taking of the

not, therefore, appear to be neceesarily improper.

Under

these circum-

IS C. 3.1-100M -5. 20
1

11111111111ral.1.111111111111111.11111111
FEDERAL RESERVE SANK
OF NEW YORK

OFFICE CC

DATE

DENCE

RES}-

SUBJECT-

-511
stanees, it seems to me desirable that some specific guarantee of freedom from forced
loans should be made.

In view of the provision of Seen 10 of Aiticle I of the Federal Constitution that "No state shall * * * pass any * * * Law impairing the Obligation of Contracts," moratoria could not be imposed by the individual states.

Thera is, how-

ever, no such constitutional limitation upon the Federal Government, and while private
contracts are not ordinarily a matter subject to the regulation of the Federal.Govern-

ment, it may in

some cases have the power to regulate them as a necessary incident

to one of the other powers specifically granted to it.
power to make war, and, under the pressure of practical

One of those powers is the

necessity,

the courts have

gone and certainly will go very far in holding particular acts to be within that
power, and it seems to me probable that in the event

threatened with

a serious financial

this

country was at war and was

crisis, which might impair its ability to prosecute

the war, the establishment of a moratorium in an effort to check or stave off the
crisis would be held to be within
upon a contrary
1

the

war power.

Certainly

it is not safe to count

holding.

The serious obstacle in the way of giving desired guarantees as to deposits
of foreign banks in this country is, of course, the power of the individual states to

,

do many things without reference to the desires of the Federal Government.

Within

which are expressly reserved for the action of the State Governments, each
of them in limited bnly by

11!thoseEpheres
Federal Constitution and of
vided in the Constitution.

the

provisions of its own constitution and those of the

treaties made by the Federal Government in the manner pro-

Obviously, it is out of the question to amend the Federal

and State Constitutions so as to include the desired guarantees, and that leaves as
the
 only possible


ogurse of action the making of a tre,),ty containing those guarantees.

b. a'.

1- MOOM -D410
1

FEDERAL RESERVE BANK
OF NEW YORK
DATE

OFFICE CORRESPONDENCE
U BJ EC,

TO

-4FROM

The treaty-making power of the Federal Government i; exceedingly broad
and has been described by the Supreme Court in the following language:
"That the treaty power of the United States extends
to all proper eubjects of negotiation between our government
and the governments of other nations, is clear.
It is also
clear that the protection which should be afforded to the citizens of one country owning property in another, and the manner
in which that property may be transferred, devised or inherited,
are fitting subjects for such negotiation and of regulation by
mutual stipulations between the to countries.
As commercial
intercourse increases beteeen different countries the residence
of citizens of one country within the territory of the other
naturally follows, ad the removal of their disability from
alienage to hold, transfer and inherit property in such cases
tends to promote amicable relations.
Such removal has been
within the present century the frequent subject of treaty arrangement.
The treaty power, as expressed in the Constitution, is in
tense unlimited except by those restraints which are found in that
instrument against the action of the government or of its departments, and those arising from the nature of the government itself
and of that of the States.
It eould not be contended that it
extends so far as to authorize what the Constitution forbids, or a
change in the character of the government or in that of one of the
States, or a cession of any portion of the territory of the latter,
without Its consent." (Geofroi v. Riggs, 133 U. S. 258, at p. 266)
It seems probable that, just as in that case, the Supreme Court held that the provisions of a treaty with

Franco authorizing aliens to

hold real estate and designed to

protect the citizens of France owning property in this country were fitting subjects
for regulation by treaty, so would agreements against moratoria or forced loans be
held to be fitting subjecte for treaty-making.

Whether the Federal Government could

by treaty restrict the taxing power of the States is,
,

however, a very

different clues-

tion, and it seems to me very unlikely that it could do so.
one of vital importance and has been retained by the States, and were it possible for
the Federal Government to in any way abridge or destroy that power, it would enable
that Governeent practically

-

this point has apparently


I know, considered


to subvert the

never been

it, said:

whole scheme of the Constitution.

decided, the only court which has, in so far as

MMC.3.1.200M-1111,0

FEDERAL RESERVE SANK
OF NEW YORK

OFFICE CORRESPONDENCE
sue-, ECT

"It needs no argument to prove that an attempt OR the
part of the United States, by compact with a foreign government,
* * * to restrain the power of taxation under state authority,
would transcend,the limits of the treatymaking power, and be
entirely void."
(Pieree
State, 13 N. H. 536, at p. 576)
Despite the fact that the
restrict

the taxing power of

Federal

Government

probably could not

the individual states, any treaty which it made guar-

anteeing freedom from taxation would be binding upon itself and

so long as the Government
by

appropriate

saw fit to observe the treaty.

insure the exemption

Congress could, however,

legislation, subsequently impose a tax, and this tax would be enforced

by the courts despite the treaty restriction, for it

Congress and

by treaty

treaties of the

Federal

which is last in time prevails.

is the law that the statutes of

Government are of equal authority, and that

Precisely- the same situation would exist in con-

nection with any treaty restriction upon the Federal Government as to moratoria and
forced )oans.

Governor Strong has, I understand, asked whether the desired guarantees
could be accomplished by means of a protocof.

Technically, a protocol is simply

a report of a meeting or conference but, in connection with a long and elaborate
course cf negotiations, protocols are sometimes drawn up which contain statements
of the tentative and
and are duly

preliminary

signed by

agreements of the negotiators on certain points

the representatives of

not, I understand, binding upon the parties.

the parties:

These protocols are

Certainly they could not bind our

Government, or be of any effect in limiting the powers of the various

states, since

the Constitution specifically requires that all treaties must be ratified by the

Senate.



TWP/(1713

S.

FEDERAL RESERVE BANK

11119C, 41. 1-$011.1-2.5

OF NEW YORK

OFFICE CORRESPONDENCE
TO

Governor Strong

FROM

DATE

July 10, 1925.

192_

SUBJECT:

Masem._

I am sending this memorandum in conformity with the understanding that
you want a progress report by departments on matters pending in the bank.
Claim of Messrs. York & Sawyer.
On June 30, York & Sawyer presented a claim for $76,600.77 for addi-.
tional compensation.

The claim appears to be in large measure founded on the

provision of their contract that should the execution of the construction work
or any part of it be abandoned or suspended, other than through the architect's
fault, the architect must be compensated on the accounts(in accordance with and
in proportion to the general terms for compensation of the architect)for ser-

vices rendered on account of abandoned or suspended work up to the time of
abandonment or suspension.

Certain other items of the 'claim appear to be found-

ed on the provision df the contract that if after the acceptance of a definite
scheme the owner makes decisions which for their proper execution involve extra services and expense for changes in or additions to the drawings, specifications or other documents, the architect shall be equitably paid for each extra services and expense in the sum or sums to be mutually agreed upon.
I say that the claim is apparently based on these provisions of the
contract, because it doesn't very clearly appear in the claim as at present
set up on which basis certain items are treated.

We have asked the atchitect to

make his claim clearer in this respect.
I think in the last analysis the answer to them will be a counter
claim on the part of the bank.

I notice that the contract con

strict provisions for supervision of the job by the architect.

observation


I know from

and from statements made by others that this supervision was not

FEDERAL RESERVE BANK

OF NEW YORK

OFFICE CORRESPONDENCE
To

DATE

July 10, 1925.

192_

SUBJECT:

Governor Strong
L. B. _Masan

FROM

-2-

given in accordance with the requirements of the contract and that the bank paid
for supervision furnished by Eidlitz which properly should have been paid by
the architect.

We have not yet assembled all the figures on this and I don't

know what the total will be.

Messrs. Ten Eyck, Gleason and I are carefully in-

07vesting all the facts and I think will in a short time be ready to make a final
A

recommendation to the directors on the subject of this claim.

Claim of Henry C. Meyer, Jr.

Messrs. Ten Eyck, Gleason and I reported orally to the directors to
the following effect:




On June 1, 1925, Messrs. York & Sawyer forwarded to the bank
a copy of letter, dated May 15, 1925, addressed to them by Henry C.
Meyer, Jr., in which Mr. Meyer reviews and renews the claim made by
him for additional compensation for his services as engineer on the
bank's new building, in the sum of $45,000.00. A copy of Mr. Meyer's
In their letter of June 1, 1925, Messrs.
letter is attached hereto.
York & Sawyer offered to discuss the matter with the Building Committee. On June 17, Messrs. Sawyer and Allen went over the matter of
Mr. Meyer's claim with Messrs. Ten Eyck, Gleason and Mason at the
In a letter dated June 24, which is attached hereto, Messts.
bank.
York & Sawyer recommended payment of Mr. Meyer's claim in accordance
with Mr. Meyer's letter of May 15, above referred to.
The contract of December 17, 1920, under which Mr. Meyer
agreed with the architects to at as engineer for certain purposes
in the construction of the bank's new building, provides among other
things as follIaws:
If, on account of repeated changes in the
plans made by the Bank, the cost of the Engineer's work is
increased, he is to present his claim to the Architects and
to take the matter up with them to the Building Committee
of the Bank, which is free to approve or reject such claim
as shall seem to it fair and just."
"15.

We think there are two questions of fact presented by Mr.
Meyer's claim under this contract: (1) what was the cost to him of
(2) what is reasonable
services rendered on account of changes;
compensation to him for these services.

FEDERAL RESERVE BANK

OF NEW YORK

OFFICE CORRESPONDENCE

DATE

ro _Gaverno_r_Stmng
FROM

July 10, 1925.

SUBJECT:

ILA/M.6011_

-3-

As to the first question, we find the report of Mr. Gleason,
the bank's auditor of construction, copy of which is attached, shows
that Mr. Meyer incurred during the progress of the work and after
May 1, 1922, on account of changes, a final direct cost to April 1,
1925, of $10,092.73.
These changes resulted in additional costs in
the work of construction, on which additional costs Mr. Meyer received
his fee of five per cent.
In the letter of the architects of June
24, above referred to, Mr. Meyer states that the direct cost to him
on changes in plans prior to May 1, 1922, amounted to considerably more
than $4,000.
The auditor of construction says that from his examination of Mr. Meyer's books nothing was disclosed in the way of figures
The fact that there was no change
and facts to support this statement.
account prior to May 1, 1922, is the explanation of this condition.
It is certain that Mr. Meyer was complaining of excessive changes
prior to the establishment of the change account on May 1, 1922' It
thus appears that the cost to Mr. Meyer of changes is the sum of
$10,092.76, plus a, sum which Mr. Meyer states is in excess of $4,000,
but it is so far unsubstantiated by anything more than his general
statement.
On the second question, that is, as to the worth of Mr.
Meyer's services, the architect, the engineers, and the general contractor, state that the usual and customary compensation for changes
made in the plans and consequent changes in the drawings of the
engineer is three times the direct cost of such work to the engineer,
and that payment to Mr. Meyer on this basis is fair and reasonable.
It is our recommendation that Mr. Meyer, being entitled to compensation
under his contract for changes, be paid, in addition to his five per cent.
commission, which amounts to a sum in excess of $87,000, and which leaves
him a profit of from seven to eight thousand dollars for the job on
which he has been employed about six years, - first, three times the
direct cost of changes found by the bank's auditor of construction,
namely, three times $10,092.73, or $30,278.19; second, three times
such part of the sum of $4,000, being the amount stated by Mr. Meyer
to be the direct cost of changes prior to May 1, 1922, as the Building
Committee may find, after hearing Mr. Meyer on this question, he actually spent as the direct cost of such changes.

#
I do not send you the correspondence referred to in the report because
report fairly indicates what the letters are.


ver,


The directors apparently agreed to the principle of the report, saying,
that they wanted further evidence on the subject of alleged custom to

192_

r11113C. 3. 1-$0M-1-23

FEDERAL RESERVE BANK

OF NEW YORK

OFFICE CORRESPONDENCE
3

Governor Strong

DATE

.713.13/_104_ 1925.

192_

SUBJECT

FROM

-4-

pay an engineer three times the direct cost to him of such work.
I think Meyer is entitled as a matter of contract to some compensation
on account of these changes.

The question is for the directors to determine un-

der the contract what is the fair and just compensation.

Of course, I do not

think they have the power arbitrarily to fix a sum, but must fairly compensate
Meyer.

Claims against failed national banks.

A conference on this subject will be held in Washington on Monday,
July 13, and I expect to attend.

The purpose is to settle a number of questions

of law and accounting in regard to the procedure before receivers of failed national banks, to establish claims of Federal Reserve Banks.

The questions are

many and are complicated, and I shall not discuss 'them in detail.

I hope that

counsel of the banks and the Comptroller may be able to settle the various questions about which there is difference of view.

As you know, the question is only

academic with us now, but I think we have a very real interest in trying to establish the right procedure.

Real orooerty of the bank.
The directors yesterday approved the form "of agreement under which we

reserve to the bank title to the strip of land on Nassau Street and to give the
City at the same time a revocable license to use it for sidewalk purposes.

The

City have indicated that they will execute the agreement and I am hopeful that
they will do so, as it will save,the necessity of the bank's asserting possession

of the


land by barriers, etc., which are dangerous and often give rise to person-

FEDERAL RESERVE BANK

OF NEW YORK

OFFICE CORRESPONDENCE

DATE

July 10, 192.5.

192_

SUBJECT:
FROM

L. R. lasso

-5al injury, besides much public annoyance.
This was not settled with the City in the first place, as you know, be-

cause the City declined to enter into the Agreement which

is similar to the one

in regard to the piece of land on Liberty Street.

Express rates.

There have been no developments in this since you left.

The hearing

before the Interstate Commerce Commission is on the 22nd, and I expect to present
the case for the bank in so far as the Cummins amendments are concerned.

I

think there is no doubt of the ...soundness of our legal position and it seems to

me that the evidence preponderates very heavily on the side of the injustice
and discriminatory features of the rates.
Miscellaneous.

We have made some progress in the way of further improvements to the
vault rules and regulatipns,and are taking steps to iron out the difficulties

between the various local banks and the Federal Reserve Bank of Atlanta arising
out of delays in check collections, though final settlement of the matter has
not yet been reached.

On July 2, Mr. Wyatt addressed to me a letter, enclosing copy of a
letter, dated June 26, addressed to Governor Crissinger by Governor Talley of
the Federal Reserve Bank of Dallas.

Mr. Talley set forth the proposal of Mt.

Stroud, counsel of the Dallas bank, which is as follows:



FEDERALRESERVE BANK
OF NEW YORK

15C. 3. I-5011..1.25

'OFFICE CORRESPONDENCE
To

DATE July 10, 1925.
SUBJECT:

aovernor_ltrong

FROM

192_

I,- R. Mason

-6"These matters concerning which it seems desirable
to employ a special counsel are not unlikely to arise from
time to time and, though, like this one, they may be quite important, the importance may probably be accentuated or even
over-emphasized by the action of employing special counsel of
national reputation and outstanding ability at the time they
arise. Our view here is that it might be well for the Board,
in its own behalf and representing the twelve banks, to give
consideration to employing counsel on a specified retainer so
that such counsel would not only be available for cases like
the Atlanta and San Francisco cases, but could also act as a
sort of Clearing Haase for the legal departments of all the
Federal Reserve Banks."

Mr. Talley suggested that this topic be discussed at the conference
of the Federal Reserve Bank counsel in Washington on Monday next.

(This being

a conference primarily in regard to claims against failed national banks.)
I was inclined favorably to this proposal and so stated to the directors, because I said I did not wish to express a favorable view without advising the bank.

As you know, it has been the practice in the past to retain special

counsel in cases involving system matters, and this proposal carries that a step
farther by suggesting a permanent retainer instead of employment from time to
time and by constituting the special counsel a clearing house for legal departments of Federal reserve banks.

In view of the apparent present impossibility

of the legal department of the Federal Reserve Board carrying on the work of
coordination, it seemed to me a highly desirable thing that it be done by outside
counsel.

However, Mr. Harrison objected to the feature of the proposal that

outside counsel be permanently retained and that he act as a clearing house for
legal information, though agreeing to the principle that in system matters such
outside counsel should be retained.

along


the 7.ine of Mr. Harrison's.

Mr. Young also expressed some objection
I shall of course in my attendance at the

FEDERAL RESERVE BANK

MISC. S. I-SOW,.

OF NEW YORK

OFFICE CORRESPONDENCE

DATE

July 10, 1925.

192_

SUBJECT:

44vornor Strong
L. R. Mason

FROM

-7-

conference bear in mind these views and be governed accordingly.

The directors

finally decided that they would take definite action on the proposal when,it
shall have reached a more definite form.

Mr. Hart came down to see us on the subject of the claim of the United
States Rubber Company. against the bank for overtime in connection with the re-

pairs to the rubber flooring, and finally abandoned the claim.




Spa, Belgium,
July 21, 1925.

Dear Mr. Mason:

T was very glad to get your memorandum of July 10, which was interesting and enlightening.
There are only two or three natters calling for cerement:

I do hops, for selfish
As to the Claim of York snd Sawyer:
This is the scrt of think that
reasons, that it can be settled before my return.
Milo it Lay be that soma claim along the lines
I like to escape when possible.
of their proposal is Justified, T cannot believe, from what you write me, that we
are called upon to pny then 76,000.

On account of my brother having formed a
As to Meyer's claim:
partnership with him subsequent to his retention by the Bank, even though the
arrangement was carefully safeguarded, I must ask to be relieved from expressing
any opinion, or tonne any part in it.
FrankThe propoeal about Specie/ Counsel for the Reserve System:
In the first place, to get the man that we would
ly, this does not appeal to ma.
It should be, and will be, a pretty heavy
need means a pretty heavy retainer.
retainer if it develops, es I expect it will, - the work being pretty active and
The fact is that the Board should retain counsel who is competent
responsible.
If they
to coordinate the work of the local counsel, and ect as a clearing house.
have not such counsel now, they should get the right man.
ted by Talley means that pretty soon the Board's counsel, in fact its legal department, will become a nonentity. No one willcare a rap for the opinions of that ofI think the policy should be to
fice, and the expenses eill to much increaseC.
have a good lawyer, capable of doing ell the work of rulings, interpretations, pasand that
sing on the various questions ,U,eat came up, and dealing with litigation;
only in those cases of amergency character, requiring the services of trial lawyers
of long experience and natione/ reputation, such as the par clearance cases, should
Frankly, / think the development proposed by
be dealt with by special counsel.
Talley would be all in the wrong direction, and dangerous to the system in the long
run.

Very truly yours,

L. R. Mason, !sq.,
General Counsel, Federal Reserve Bonk,
33 Liberty Street, New 'fork.




Rote]. Majestic,

Paris, France,

August 15, 1925.

Dear Mr. Mason:

Thank you for yours of the third. I had no doubt that
the matters mentioned in my letter wore in mind, but thought best to
pass them along. Of course we want to have everything in apple-pie
order, because I am certain now that the newspapers have the story,

there is liable to be quite a lot of talk about the way this was

handled. And if Congress, or anyone else, should feel it necessary

to look into our own arrangements, I want everything ship shape, as T

am sure it is.

I am glad you agree in general with the views I sent to
the office about the amployment of special counsel. And I hope you

will put a pin in the subject, as I would like to talk it over
further with you on my return.

Best regards to you.
Sincerely yours,

L. R. Mason, Esq.,
General Counsel,
Federal Reserve Bank of New York,

33 Liberty Street, Eew York.




FEDERAL RESERVE BANK

OF NEW YORK
June 1, 1926.

Dear Governor Strong:

Mr. Wyatt wrote me that he and Mr. Baker would be interested in
having a statement of the principles of law which had governed this bank
in the matter of taking collateral from weak member banks.

I have accord-

ingly collected all the data which I had assembled in writing a memorandum

on the subject in January, 1925, and have included it in the memorandum which
is enclosed and of which I have sent copies to Messrs. Baker and Wyatt.
I think you may be more interested in the conclusions which are
stated in the first few pages than in the citations of authority which fol-

low, but I am sending both because I know your interest in the matter and believe that the reference to the statutes themselves and the language of the
courts in construing them will give you the reassurance which you desire.
It is my belief that the subject has been fully covered here, but

it will be a matter of great satisfaction and benefit to have an expression
of the views of Messrs. Baker and Wyatt.

I am advised already that these

gentlemen are in agreement with the proposition that it is Impossible to lay
down hard and fast rules in the matter and that we cannot do more than state
general principles, which will have to be applied to cases as they arise.
With kind regards and best wishes,
Very truly yours,

Encl.

Benjamin Strong, Esq.,
Care of Bank of England,
London, England.




if

May 27, 1926.
MEMORANDUM

-oPOSSIBLE UNLAWFUL PREFEaENCE OF FEDERAL RESERVE am OF NEW YORK
ra ?LEDGE OF SECURITIES BY INSOLVENT '.!EMBER BANK.

The manner in which the Reserve Bank of New York in fact takes col-

lateral for advances has been fully stated in a letter to Mr. Baker of March
In my judgment, it is not possible In advising the bank to prescribe

17, 1926.

hard and fast rules on this subject. We can only
law.

state general principles of

There will always be the problem of applying these principles to a par-

ticular case as it arises.

The purrose here is to state

in a general way cer-

tain conclusions of law which are material to the question, and to proceed

from such a statement to an examination of the National Bank Act
of New York and New Jersey relating to state member banks,
tion

of the

and the laws

and to a considera-

decisions of the various courts construing these laws - all to the

end that this bank may act with due regard to the rights of all concerned in

may be insolvent or approaching insolvency.

taking collateral from banks which

Insolvency has been defined as that condition of affairs in which a

to

merchant or business man is unable

the ordinary course of business.

A

meet his obligations as they mature in

bank is said to be in contemplation of in-

solvency when the fact becomes reasonably apparent to its officers

that the

concern will presently be unable to meet its obligations and will be obliged
to

suspend its ordinary operations.




Under Federal and State

statutes

ary transfer of property by a bank

ede after the COMMISSIOU of an act of insolvency or in contemplation thereof,

with a view to Pr' vent the distribution of its assets, as provided by law,
or with a view to prefer one creditor over another, Is null and void, and cone
fere no title whatever upon the preferred creditor. A very plain case of this

sort would be a transfer by an insolvent bank of collateral for an existing indebtelness, the officers of the Wink knewlng its insolvent condition and the

transfer being made with a vier to prefer the transferee to other creditors.
Under the National 3ank Act the transferee's knowledge or wset of knowledge

of the debtor's conlition or of the intentions or purposes of its officers in
making a transfer, is not an eloeent of preference and such knowledge or lack
of knowledge is immaterial. The statutes of 7er York and New Jersey contain

provisions designed to protect tons fide purchasers for vales.

Notwith-

standing this, the courts in New York at least eave made it clear that the

validity of the transfer- Is not eade to depend on whether it Is lone in the
ordinary course of business or whether the creditor has any rensoneble ground

to believe the debtor insolvent, but simply whether there is insolvence actual

or anminert and an intent to prefer. In any event, the rule on the question
of whether the transferee had kasele4ge of the batik's insolvency Is that what-

ever Is sufficient to pat a person on inquiry is notice. The relation of reserve banks to their members is such that it is doubtful that it would ever be
possible for a reserve bane successfully to contend that it he no notice of
-asoleessy or a condition verging on insolvency In one of its ember banks.

The bare fact alone of insolveney of a bank at the time of a pledge

of soeurities is not conclusive that the transfer is made in contemplation of
insolvency or with a view to a preference of the pledgee over other creditors.

The provisions of the banking acts referred to are directed against preferences



of pre-existing debts and not to the giving of security to protect a,loan
made at the time to meet conditions which the officero reasonably expect the
bank to survive. And this has been held to be true despite the fact that the
pledgee may hem° had knowledge that the beek was in trouble and in need of as-

sistance. The coerts have been quite liberal in recegnixing that banks and
other corpoeatiens continue In many instances to do their regular and ordi-

nary business for long periods though it condition of actual insolveney, as
disclosed by suboeluent events, and that it cannot be said that all peyments
nade In dae coarse of business in such eases are to be deemed to be made in

contemplation of Insolvency or with a view to prefer one creditor to another.

The courts have referred to the fact that often It is hoped that If only the
credit of the bank can be kept up by continuing its ordinary business and by
avoiding any acto of Insolvency, affairs moy take a favorable turn am* euspen-

sion of pereents end of buslress be avoided. It has been held that Section
5242, R

(National sank Act ) does not apply to many transattions of the

bank in the ordinary course of business, though at the time the bank was act-

ually insolvent with the knowledge of its officers but at the time It lesd commatted no act of insolvency.

applying these general principles the courts have said that checks
and remittanaee mailed In the usual course of business of the bank to another

bank, with the understanding that they are to be oredited to Its constantly
overdrawn *comsat, become the property of the latter bank. as soon as they are

deposited In the post office and its title thereto Is not affected by the insolvency of the seneer bank between the time of moiling and the reeelpt of letters contelning such remittances. There are other Instances of the liberality

of the courts in this mattere



Reserve banks In the performance of their important function of ad-

vancing funds to member banks need have no fear that the mere fact that the mem-

ber bank needs to borrow money will of itself invalidate any pledge of security
made by the member bank as collateral for loans presently made.

In oases where,

as part of the sane transaction, it is agreed that securities pledged shall staid
as security also for antecedent debts, it has been held that the creditor was
entitled to held the securities to the extent necessary to protect

vances.

It has been held, also, that hypothecation

present ad-

of collateral by a bank to

secure future loans and indebtedness, does not constitute a pledge to secure a
pre-existing debt, since such future loans are for a present consideration.
In concluding these general observations, the thought that it is de-

sired to leave uppermost is that it is the purpose of the statutes in question to declare that a transfer of evidences of debt by a bank, made after
the commission of an act of insolvency or in contemplation thereof with a
view to prevent

the application of its assets to the proper payment of its

just liabilities or with a view to preference of One creditor over another,

than be null and void.
In the following pages will be found the Federal and State statutes

in questions also, some decislons of the courts whioh are the authority for
the conclusions hereinabove set forth.

LIIM.GSR




o

rezeee AND wigs.

he Federal statute on this eubject is Section 5242 of the Revised
Statutes of the United States, whioh provide as follews:

°3e. 5242. (Transfers, time void.) All tr no e a
of the notes, bonie, bills of exchange, or other evidences
of debt owing to any national bankinp asseciatton, or of deposita to its °relit; all essignments of mortgeees, sureties
on real estate, or of judgments or decrees in its favor; all
deposits of money, bullion, or other 'callable thing for its
use, or for the use of ary of its shareholders or creditors.;
and all peyeents of money to either, -lade after the commission of an not of Insolvency, or in contemplation thereof,
made with view to prevent the application of its assets in
the eannor prescribed by this chapter, or "4th a view to the
preference of one oreditor to another, except in porment of
its circulating notes, shall be utterly null snd void; aal no

iLitegkatas-W72=1.011-23.9...-1.
Ampl_amagAltimAritg,:beforefinsilladirsert_1:..:1,Nrr
a

ewaepoert.7

a

.e
(ct of Juno 3, 1864, Chap. 106, 13 St. L., p.

115. The words underscored 'ere added by amendeent to the ler
of March 3, 1873. eee 17 St. L., 603.)

ra Tager v. Hall, (1872), 16 Tall., 584, the following definition
of insolvency appears at pip 599s
"Insolvency, as used in the anitrupt Act, when applied to traders; does not mean an absolute Inability of the
debtor to pay his debts at some future time, upon a settlement and wineing up of his affairs, but a present inability
to pay in the ordinary course of his busiteas, or, in other
words, that a trader is insolvent when he oannot pey his
debts in the ordinary course of beeineee as men in trade
usaallo do, and such meet be the conclusion, even though

his Inability be not so great as to compel him to stop bueiness."
In Roberts V. Hill (1895), 24 red. 571, the court, in defining what
is insolvency within the _Teaming of Seetion 5242, n.s.u.s.,




"?here must be an act of insolvency; or rach a state
of Insolvency, as an existiee feet, as to nake it apparent
that the creditors cannot be paid in full, and that a 113,
tribution of the assets among the creditors uneer the statute
will tale place. Less insolvency than thin could not fairly
be said to be oaeable of being contemplated are acted epon

to prevent such distribution."

(Statutes and. eases e 2.)

In Ball v. German sank (1911), 187 Fed., 750, it was held that the

plaintiff, the receiver of a certain batk, was entitled to recover the valae
of certain notes oonstitutine bills receivable rhich the bane had trarsferred

to it creditor, the defendant. The court said
"The Sint National. Seek WAA not only aotually

insolvent, but its final effort to continue in business
had failed. It knew on eaturday evening, when the notes
were transferred, that it voule not open its doors for

In these circumstances it must be charged
with knowtedee of its awn eonlitiot, and of the necessaey
business Again.

censeettence of its act in transferring a substantial part
of its assets to smeare one creditor, namely, that that
creditor woald thereby get a preference over others. This
consequence the cashier (eho made the transfer) admits he

In the case of lational Security Bank v. antler,
(1889) 129 U. S. 223, 9 S. Ct. 281, 32 U. Se (L. ed.) 682,
the 5.nsprems Conrt dealt with a similar situation, ane there

knew.

saiett

°The uedispated facts of the ease shelved

that the act of the cashier mad, under the eir-

cemstances, have no other result, if al/owed to
stamd, than to operate as a preference in favor
of the eemerity !Lark; that the ?twine Bank had
decided to close its doors and to go into liquidation; that after that the necessary consequence of
the transfer was to create a preference,' ete.!

In this case it was also held that the transferee's kowIedge or want
of knowledge of the condition of the bank or of the intentions or purposes of

its officers is ennaterial; that the statute does not melte thaw an element affeetirg the liability of the transferee.
Armstrong v. Chemical National Bank (1890), 41 .?ed., 234.

This was a

suit brought by the receiver against the defendaat to recover certain securities
in which it was alleged that defendant had been given a preference over other

creditors. In deciding the rights of the parties the court said, among other
thinget




he lake feet that the Fidelity Sank was insolvent at the time it sent the secerities to the defendant does not imply that the transfer of the sommittee was
made in contemplation of insolvency, or with a vie of a

(Statetes and COSOS

2.)

In Ball v. German Beek (1911), 187 Fed., 760, it was held that the

plaintiff, he receiver of a certain bank, was entitlel to recover the value
of certain notes o nstitutine bills receivable ehich the bank had trarsferree

to its creditor, the defonlant. The court mid:
The Sirst National Saak was not on

aoteally

insolvent, but its Mal effort to continue in business
had failed. It knew on eaterday evening, when the notes
were traesferred, that it yould not open its doors for

In these circemstaroes it must be eharged
with knowleege at its own condition, an4 of the necessary
business Again.

censeseeeece of its act in transferring a eabstantial part
of its assets to samere one creditor, namely, that that
creditor eeeld thereby get a preference over others. This
consequence the cashier febo male the transfer) admits be
In the case of National aoourity Bank_ v. Butler,

knew.

(1819) 129 U. S. 223, 9 S. Ct, 201, 32 U. 8. (I. ed.) 452,
the 5espreme Conn dealt with a similar situation, and there

saill

'The eneispeted facts of the ease ahawed

that the net of the cashier would, ender the cirsumstances, have no other result, if alloyee to
stand, than to operate as a preference in favor
of the 3eourity Bank; that the Pacific Beek had
decided to close Its doors and to go into liquidation; that after that the necessary coneeluerce of
the transfer was to create s preference,' etc.".
In this case it was also held that the transferee's knowledge or want
of knowledge of the condition of the bank or of the intentions or purposes of

its officers is A.:material; that the statute does not make them an element af-

fecting the liability of the transferee.
Armstrong v. Chemioal National Bank (1890)* 41 ?ed., 234. This was a

suit brought by the receiver against the defendant to recover certain securities
in which it was alleged that defendant had been given a preference over other

creditors. In deciding the rights of the parties the court said, among other
things:




"The nand feet that the Fidelity Blink ISO in-

solvent at the time it sent the securities to the defendant does not imply that the transfer of the secerities was

made in contemplation of insolvency, or with a vie e of a

(Statutes and Cedes - 3.)

preference to the defendant over its other creditors.. Although, in the light of subsequent events, the Fidelity
Bank was thee insolvent, It may be that its insolvenoe was
not suspected by its officers. $o far as appears, no act
of insolvency had been committed. A bank is not in cone
templation of insolvency until the feet becomes reasonably
apparent to its officers that it will presently be unable
to meet its obligations, and will be obliged to =spend
its ordinary operations. Until this condition of affairs
exists, certainly a national banking association does net
violate the statute by eleAgins, its securities to a reason-

able amount to raise money needed to meet an unexpected run.
The bestemanagee institutions are liable to such contingen-

cies, and the ripht to use their assets in an bonett attempt
to bridge over such a crisis is indispensable to their safety.
Obviously, the exercise of this right yeetei be impracticable

If the pledge becoees void whenever- the attenpt of the beret
to rescue itself from failure proves unsuceassful. It is apparent that the Yidelity Beek did not intend to pledge the se-

curities as collateral to its antecedent indebtedness when It
sent them in June to the defendant, or for any purpose °thee
If there
than to the advances which it then desired.* *
was no transfer ef the eeeerities to protect the antecedent

Indebtedness of the Fidelity Bank, then there WWI not a preference of the defendant over its other creditors, and consequently there is nothing In the transaction which contravenes the
provisions of the statute. Although the securities sent were
of a value vastly in OX0033 of the sum advanced upon them, they

were sent upon the expectation by the Fidelity Balk of ebteining
advances to the limit for *tech they would be acceptable eollatorals; and before there was aey seggestion of pledging them for
pre-existing-indebtedness the defendant had acquired a valid.
lien upon them by the advances already ado, and the Fidelity
Bank was enable to recall them if it had desired to do so."
In eatiey v. The Credit Mobilier, Federal Cases, MO. 2496, at pegs 264,

the eoert said:




"Is it the leaning of the section of the curreeqe
act on which the bill is based, that after a. national bank is

in contemplation of Insolvency, no person could do business
with it except at the risk of having any means he may pat under the control of the 'hank, no natter under what solemn contract for security, confiscated for the Use of the general
Creditors of the banel If this is the construction to be
given to the 524 section of the eurrenee act, then the moment

bank becomes eebarrassed, it *mat Five up and suspend payment,

for all who come to its assistance must do so without security.
In my judgment, the preference of one creator to another, mentioned in the 52d motion, is a preference given to an existing
Creditor for a pre-existing debt. If a cestemer or friend of a
batik, kneeing it to te eebsrraesee and in need, of assistance,
proffers it, for instance, a loan of :5101,000 in cash, on receiv-

(Statutes and Cases - 4.)

ing security for the amount by a transfer of a part of its
portfolio, that cannot be fairly construed as giving hint a
preference over other creditors. Other creditors are not injured by such a transaction, for the securities that such a
creditor takes oat, he leaves an equivalent in cash. lie becomes a creditor solely on condition of receiving security.

"The policy of the law is plain, tamely: to prevent
preferenoe among creditors holding pre-existing debts. It

clearly was not the purpose of the act to forbid the bank from
Ovine security to its friends for means to be advanced on the
spot or In the fetters. The general creditors are not injured by
sech an arraeeement; they may be greatly benefited by it."

In 0Donald v. Chemical National Sank (18)9), 174 U. S., 614, the

court said:
"It is a matter of commoe knowledge that banks and

other coreoratiens continue, in mazy instances, to do their
reaelor mai ordinary business for lone periods, thoegh in a
condition of actual insolveney, as disclosed by subsequent
events. It cannot surely be said that all peyments made in
the due course of business in such cases are to be deemed to
be male In oontemplation of Insolvency, or eith a view to prefer one creditor to another. There is often the hope that, if
only the credit of the bank °an be kept up by continuing its
ordinary business, ani by avoiline any act of insolvency, affairs may take a favorable tarn, and thus spension of paymeets and of business be avoided."

:he court in this case held that the text of R. S. sec. 5242 &id not
apply to transactions by the bank in the ordinary course of its business, though
at that time the bank was aoteal/y insolvent with the knowledge of its officers
*here at the time it had committed no act of insolvency.

The court further said:
eehether a bank is or is not actually Insolvent
eay be, often, a question hard to answer. Mere may be good
reason to believe that, though temporarily embarrassed, the
bank's affairs may take a fortunate tarn. Some of the assets
that cannot at once be converted into money may be of a character to justify the expectation that, if actual and open insolfancy is avoided, they eay be ultimately oollectible, and thus
the rein of the bank and its creditors be prevented."

The intent of a national bank after it is insolvent to prefer a crsditar by a transfer of assets in violation of the statute may be eonausively presamed, where the transaction was such that it oould have no other effect if al


(Statutes and CaaOS

lowed to stand than to work anreferenoc.

National Security Bank v. Price, (C. C.

Vass. 1985) 22 Fed. 697, affiffled (1999) 229 U. S. 225, 9 S. Ct, 291e 32 U. S.
(L. e4.)992,

"An intent to give a oreferenoe is presnmod when
a peyment is node to a oreditor by a debtor who knows his
on insolvency, and therefore knows that he cannot pay all
his creditors in full. A preference Is the natural and probable consequence ander slab conlitions." Roberts v. Hill.

(C. C. Vt. 1985) 24 Fed. 571, rehearince 1.1: (C. O. Vt. 1865)
23 Fed. 311.

The law on this subject in the State of New York is to be
1

of 1923, Chapter 797, Section 15 of the Stook Corporation Law.

found in the
This see-

tion now reads as follows




No corporation which shall have reflood to pay any of its
notes or other obligatione, when tine, in lawful money of
the Unite4 etates, nor any of its officers or directors,
shall transfer any of its property to any of its officers,
direetors or stookbolders, directly or indirectly, for the
payment of any debt, or upon any other consideration than
the full value of the property paid in cash. NO conveyance, assienment or transfer of any property of any such
corporation by it or by any officer, director or stookholder thereof, nor any payment made, judgment suffered, lien
created or security given by it or by any officer, director or stockholder when the corporation is insolvent or its
inoolvenoy is imminent, eith the intent of giving a preference to any particular creditor over other creditors of the
oorooration, shall be valid, moot that laborers' veRea for
services shall be ereforred Claims an/ be entitled to naooent
before any other oredIttrs Out of tile oorooratior aosets
no t o
4
forned ondor or soteiect to the bankino. losorance or rallroad
r
3very person receiving by eeans of eny such prohibited act or
deed any property of a corporation shall be bound to account
therefor to its creditors or stockhollers or other trustees.
30 stockholder of any corporation shall 12ake any transfer or
assignment of his stock therein to any person in oontemplatIon
very transfer or assignment or other sot
of its insolvency.
done in violation of tho foregoing provisions of this section

Shall be void. No conveyance, assignment or transfer of any
property of a oorporation formed ander or subject to the banking law, exceeding in valuo one thousand toilers, shall be
made by such corporation, or by any officer or director there-

(Statutes end Cases -6.)

Of, unless authorised by previous resolution of its board of
directors, except promiseory notes or other evidenoes of debt
issued or reeeived by the officers of the corporation in the
transaction of its ordinary business, and except payments in
specie or other cerrent monoy or in bank bills made by such
officers. No soh conveyance, assignment or transfer shall
bo void in the hands of a porehaser or a valuable considers,
tion eithout notice. Every director or officer of a 0OrpOrs,
tion who shall violate or be concerned in vioAtting any provision of thio section shall be personally liable to the cred,
itors eni stockholders of the corporation of -which he shall be
director or an officer to the full extent of any loss they may
resoeotively sustain by sech violation.
(The part onderlined was added by amendment of Lees of 1901.)

The lee vas originally enacted in 1890 as Chapter 564 of the
Corporation Lew of New York Stet°, Section 48, which reed as follows:

"ft corporation ehich shall have refused to pay soy
of its notes or other obligetionsooten duo, in lewfol money of

the United States or any of its officers or directors shall
assign any of its proporty to any of its officers, directors
or etockholders,directly or irdirectly,for the oeyeent of any
debt; end no officer, director or stockholder thereof shall

make any transfer or assignment of its property or of any
stook therein to any person in contemplation of its insolvency;
and every such transfer or assignment to such officer, director
or other person or in trust for them or for their benefit, shall
be void.*
The law les re-enacted in 300t ion 48, Chapter 689 of the Steak Cor-

poration Laws of the State of ew Tork In 1892.

At that time It was passel

substantially in its present farm, the only difference being the amendment of
1901, which has been heretofore Indicated.
The present law of New Jersey is

VD

be foun4 in the Corporation Laws

Of the State, ?Ublic taws of 1896, page 298. The statute is as follows:




VII. rsmutncY.

ere. -

°64. Coeveoenoee, eto.o tovalid: bona rite eierohaeo
ohenever any corporation shall 'oecoee insolvent or

shall suspent its ordinary business for want of funds to carry
on the same, neither the directors nor any oftioer or agent of
the corporation shall sell, eonvey, assign or transfer ony of

Its estate, effects, ahoses in action, goods, chattels, rights
or oredite, lands or tenenents; nor shall they or either of them

(Statutes and Cases . 7.)
each sale, conveyance, assignment or transfer in contemplation of insolvency, one every such sale, corveynece, assignment or transfer ahall be utterly null and void as against
creditors; provided, that a hems file pueohase or a valueble
consideration, before the corporation shall hare actually suspended its ordinary business, by ay person without notice of
such insolvenoy or of the sale being nada in oontemp/ation ef
insolvency, shall not be invalidated or impeached. v
make

The law was first enacted in 1929 and is to be found in the ambito LOOS

of atre Jersey of 1829 at page 58. tt WS re-mooted by Seotion 2 of the Aet of

April 15, 1846, relatina to insolvent corporations. The difference betaaen the
present law and the earlier statutes of 1929 and 1846 is only in form. The act
has been substantially the snme since its inception.
There nre many oases In the reports of the oourts of New York and New

Jersey construing these statutes. The general _airport of the decisions is that
the purpose of the eaeateents is to prevent unjust discrimination and to deny to

ansolvent associations the rtitht to give preference to any of their creditors or
in contemplation of insolvency to transfer their property. in short, the purpose

of the statutes is identical with the Federal statutes which we have heretofore
discessede ?or exaaple, the fol/owier appears in the lenge:Age of the court in

the case of Standard National Bank IN National Silk Label Coe, 75 N. Y. 3.9 282




"Then a corporation beeortes insolvent or *eases to

do 'easiness, its property Is charged with a trust for the benefit of its creditors in order that their claims mea be equal/7
or ratably satisfied before it passes to stockholders; and
any preference to one creditor or deviation from the application of that peoperty to the last payment of debts mev be set
aside. * * * And while the coarts eill aleays protect the
rights of bona fide purchasers of property who have parted
with value for that *Mesh they receive, they will not regard
the claim of a creditor, honest though it may be, 84 giving
to that creditor the standing of a bona fide parchaser in order that he may obtain a preference destrective of the equitable rale for equal divieion of the property of a corporation
on

all its creditors. *

*

*

The rule that a debtor may honest-

ly prefer a creditor does not apply to the obligations of a
corporation. The right of u natural person to so act is one
thing; the power of a corporation to discriminate is forbidden."

(8tatutes and Cases - 8.)

In the case of Baker v. aserson, 38 N. Y. 5., Mt
"The validity of the payment is not mado to depend
on whether It is made In the ordinare course oC business or
whether the creditor has any reasonable ground, to believe the
debtor insolvent, but simply on whether there is insolvency,
actual or imminent, and an intent to prefer."
Again, in lowland. v. Metropolitan Sank, 229 led. 542e

nu a ease of this kind we must carry our minds

back to the situation as it was at the time of the trans-

sot
under consideration. Swab is the mental approach
which enables courts to award redress for frauds, even
though dealings seem innocent on their faces, and, per con-

tra, to refrain from stignatising as offensive to statutes,

such as this, transactions honestly and fairly engaged La,
merely beeause after events and a later point of view tend
to discredit what, at the time, was beyond question."

An& while the restraint is put upon the corporation, its officers
and stockholders, alloos000 is made for the Mot that corporations apparently
insolvent are occasionally saved by care and prudence in the management of

their affairs and that frequently insolvency is not expected by its officers,
but is suddenly brought about by some unexpected loss; hence the further con-

dition that the acts described in the section must have been done with the in-

tent to prefer the creditor affected in order to render than void. Soo gine&
v. DeRiesthai, 31 N. Y. 8., 522.
There are magr Row 'fork cases on the question of what constitutes in-

solvency and they are aumeed up in the proposition that inselveucy is the in-

ability to pay and discharge obligations as they accrue in the ordinary course
of business. Van Riper v. Popeenhausen, 43 T. Y., 69:
"The term insolvent usually means one levee eatate

is not safficient to pay his debts, or one who is unable to

pay all his debts from his own menns."

See, elso, Perry v. Central New York Bask, 15 Row. Pr., 445:




"There is not so such difficulty In defining in-

solvency when applied to moneyed ooreorations as in 4e-

termining what in a particular case, or class of cases,
shall be evidence of insolvency. Insolvency in the sh-

(Statutes and Cases - 9.)

street has the same signification, hether applied to corporations or associations, and means a general inability
to ean one's debts: an Inability to fulfil one's obligations, according to his undettaking; a general inability
to answer in the course of business the liabilities existing and capable of being enforced. got an absolute inability to pay one's debts at some tature time, upon a settlement and winding up of all a trader's concerns, but as
not being in a condition to pay one's debts In the ordinary
course, as persons carrying on trade usually do."
In the case of Reed v. Specialty Co., 64 N. J. I., page 231, the court

held that a corporation mortgage Is valid to the extent that it secures a presently passivr consideration, notwithstanding it may have been made in contempla-

tion of the possible insolvency of the company.

It is not a fraud, and not with-

in the prohibition of this section; and* se far as the mortgage attempts to secure pre-existine debts mine to the mortgagees by the company, it is within the
prohibition of the section and, being given in contemplation of the insolvency

of the oompaey, is to that extent invalid.
Contemplation of insolvency is something more than contemplation of

the possibility of insolvency on 'a oontintmoy which does not in fact happen.

If a corporation or its officers regard a suspension of its ordinary business,
for want of funds, as likely to happen in the event of its not being able to
borrow money with which to meet its current expenses, and it is in fact able

to borrow it, and it secures the money lent by a mortgage, and goes on, it cannot be said to contemplate insolvency, within the meaning of section 64, at the

time the mortgage is executed, for then it contemplates, not Insolvency, but the
reverse. Menlo Box Co. v. Otto & Sons, 65 N.J.., 582, 56 A. 715.

There an assignment of credits by a corporation was eade, for the

most part, in consideration of a pre-existing indebtedness, such indebtedness

was not a 'valuable consideration" sufficient to sustain the assignment, under

this section. Uanufacturing Co. v. Hardware Co., 62 A. 421.



Mere a coepany is not insolvent at the time it gave mortgages, and

(Statutes and Cases - 10.)

inso/venoy was not contemplated within the meaning of the statute, its assets far

exceeding its liabilities as a going concern, end the loans rere made to relieve
the compsey of the erebarrasement of not having sufficient ready (math, In the be-

lief of all concerned that the compely would prosper, and some of the money vas

borrowed to extend the enessirs business, such mortgages were not made to hinder

end delay creditors, but were made in good faith to advance the Interests of the
compeer.

Ploothart, etc., Co. v. Cox Aut. Pipe. etc., Co.. 11 N.JeCiv. 11., 58.
Before a corporation insolvent, in the sense of laboring under a gen-

eral inability to pay maturing obligations, oan make, for a present advance, a

valid pledge of its assets to a person having know/edge of the condition. it
must at least appear that the pledge is In pursuance of some financial scheme

*blob it is reasonable to suppose will result in placing the corporation in a
poeition of solvency as contempiated by the statute. Hoover Steel Bel/ Co. v.
Schafer Ball Bearings Co., 89 N. J. 1:4. P. 433.
Under the law Jersey statate, 'nee/Irenc:rt. denotes n general inability

to meet pecuniary liabilities as they mature, by means of either available as-

sets or an honest ese of credit. Trust Co. v. Trustees, 67 X. J. Z., 602, 60
A. 940.

State and Peteral authorities mieht be multiplied, but it is thought
that the statutes theesolvos and the oases cited safficiently support the declarations of principle ehieh eere stated at the outset and which form a ground work

suffielently compr hensive ts serve as is basis upon ehioh to rest decisions in

particular canes as they arise.




Betel du Cap d'Antibee,
Antibes, Atne 21, 1926.
My dear Mr. Mason:

Thank you for writing me about the puzzling question of collateral.
/ have read the memorandum of May 27th, whieh is of course confined to a discus-

sion of the law and of the cases on which we rely.

It is all quite in accord-

ance with my own skimpy knowledge of the law, co far as it app/ios generally.

The point uppermost in my mind has to do with the question of notice.

We are

Charged with all the responsibilities resulting from more complete information

about our member bankathan is the case with any other type of bank or in fact
applies to anyone dealing with banks outside of the Reeerve nanks themselves.

It ic that point which requires the greatest emphasis in developing our awn policy.

I am wondering Whether the memorandum you prepared gives Mr. Balzer a suf-

ficient picture of our practical point of view as distinguished from the statement of law It;ildh you have already sent him.

But it may be that that is not

what he asked for.

nth best regards, and thanks for your letter, I am
Sincerely yours,

Mr. L. R. Mason,
c/o Federal Reserve Bank of New York,
New York.
13S:11




FEDERAL RESERVE BANK

OF NEW YORK
July 6, 1926.

Dear Governor Strong:
I was very glad to receive your letter of June 21.

As you know, we

prepared a letter to Mr. Baker stating the circumstances surrounding the taking
of collateral by this bank
ference.

and

sent it to him before the last Governors' Con-

He and Mr. Wyatt expressed an interest in my opinion on the legal

principles governing the matter in this district and, accordingly, I sent them
the memorandum of May 27, of which I sent you a copy.

I am prepared for further'

discussion with Mr. Baker, either on the technical or practical aspects of the
matter.

I think so far as the legal situation is concerned we may accept it

as a fact, as stated in the memorandum, that a reserve bank will never be heard
to say that it did not have notice of the condition of its member.
is that it has notice, actual as well as constructive.

The fact

My own judgment of the

practical situation, however, is that so long as we do not in fact get a preference, we need not trouble about the question of notice.

I think unquestionably

the sound policy is to conduct each transaction with ameak or failing bank in
such a manner as that there will in fact be no preference of this bank as a
creditor of the borrowing bank.

If we do that, there can be no trouble, even on

the basis that reserve banks will always be charged with notice.
I hope you are taking as good care of your health as possible under
the circumstances.

With kind regards and best wishes,
Sincerely yours,

Benjamin Strong, Esq.,
Bank of England,
England.


Care of
http://fraser.stlouisfed.org/
London,
Federal Reserve Bank of St. Louis

FEDERAL RESERVE BANK

OF NEW YORK
February 24, 1927.

RAD AND NOTE, ,.y

a.;.

Dear Governor Strong:
It

occurred

to me that you might be interested in seeing the

4-

LOOSE.

closed digest of the McFadden-Pepper bill, known as the branch banking bill,

which is now before the President for signature.

A statement is mad

nection with most of the changes effected by the McFadden bill of the present
state of the law, as I thought this might assist in getting within a brief
compass a complete picture of the effect of the bill.

We have all been giving considerable time and thought to the pension
bill.

Today Fenzel was informed by Ogden Mills that "Messrs. Prall and O'Connor,

members of Congress from New York, were in opposition to the bill, along with
other Democrats.

I immediately tried to reach Judge O'Brien, but found that

he does not land until tomorrow morning, and so have arranged to see him at

f

11:30 tomorrow.

The suggestion was made that we see Mr. Woodir, which I did.

After hearing the proposition, he stated that he would immediately communicate
with Judge Olvaney, but.he telephoned later to say that Judge Olvaney is out
of town and could not be reached.

In the meantime, he had got in touch with

Mr. Riordan, who, he said, knows both O'Connor and Prall very well, and said
he would communicate with them forthwith.

Yenzel communicated with Mr. McLaugh-

lin, who likewise promised to communicate with the New York members in Congress.
I have been delighted to hear from Harrison of your rapid progress
on the road to recovery.

We all miss you sorely and are hoping for your speedy

recovery and return here.

With kind regards and best wishes,
Mr. Benj. Strong,
Stuyveeant Road, Biltmore Forest,

Biltmore, North Garolinf..


Sincerely your

C


Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102