frsbog_mim_v21_0740.pdf

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Law Department 423-429 Healey Bldg. Ho 11ins H. Randolph

Attorney

Mr. Walter Wyatt, General Counsel, Federal Reserve Board, Washington, D. C.

Dear Mr. Wyatt:

We hand you herewith copy of a l e t t e r written us under date of October 15th. by Mr. Edward J . Smith, counsel for the Nashville Branch of the Federal Reserve Bank of Atlanta, and also copy of our reply the re to . The enclosures are self-explanatory.

You wi l l of course note that the Circuit Court apparently held that the Tennessee-Hermitage National Bank was l i ab l e in the premises be-cause i t was negligent in select ing as a sub-agent fo r the purposes of col-lect ion, a bank which under i t s rules and regulations proposed to handle a check in an i l l e g a l way. We think thd Court was c lear ly r ight in d i s -charging the Reserve Bank from a l l l i a b i l i t y , and i t may be that under the Tennessee law the judgment against the member bank was correc t .

Inasmuch as the case is apparently of considerable importance to a l l Reserve Banks, and pa r t i cu l a r ly since we would d i s l i k e to see the Supreme Court of Tennessee hold in terms that a member bank (operating in a j u r i s -diction where the so-called New York ru le obtains) incurs a potential ' l i a -b i l i t y whenever i t deposi ts checks with a Reserve Dank# we have thought i t best to submit th is tiorredporldende to you in order that we may get the benef i t of any suggestions which you may wish to make in the premises.

I t occurs to us tha t some steps might be taken to educate the member banks to the importance of making contracts with the i r own customers, embodying the r ight to present items d i r e c t to drawee banks and to accept exchange d r a f t s in payment therefor .

We would l ike pa r t i cu l a r ly to get your views as to the propr ie ty of so doing.

With personal regards, we are ,

Cordially yours,

(signed) Randolph & Parker

FEDERAL RESERVE BALTIC OF ATLANTA

October 17, 1924.

RSP-G General Counsel.

Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

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EDWARD J . SMITH Attorney a t Law

Nashville, Term. October 15th, 1924,

Mr. Hollins N. Randolph, Attorney at Law, 422-530 Healy Building, Atlanta, Georgia.

dear S i r :

On July 30th, 1924, in reply to your l e t t e r of July 26th ad-

dressed to Mr. Hil l McAlister, I wrote to you with reference to the advice

which I had given to the Nashville Branch of the Federal Eeserve Bank of

Atlanta with reference to items handled by i t as co l lec t ion agent f o r

various Nashville banks, which items were presented d i rec t ly f o r payment

to the payee bank, the Peoples Bank of Springfield.

On September 30th, 1924 a corporation engaged in the t a i lo r ing

business at Nashville, Tennessee under the name of "Jack and Jake" brought

su i t before a Jus t ice of the Peace at Springfield, Tennessee to recover on

a check f o r $72 which had been given to i t by a man named Woolworth in

se t t l i ng a merchandise account. "Jack and Jake" sued Woolworth, the Tennessee-

Hermitage National Bank of Nashville, Tennessee, and the Nashville Branch

of the Federal Reserve Bank. On September 30th a judgment was given by two

Jus t ices of the Peace against a l l the defendants and a l l appealed to the

Circuit Court of Robertson County in which, under our law, cases a re t r i ed

de novo.

On October 9th the case came on for hearing before Judge Morton,

the Circui t Judge, and on yesterday, October 14th, he rendered a decision to

the e f f ec t that the Tennessee-Hermitage National Bank was l i ab l e but dismissed


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the su i t as to the Nashville Branch cf the Federal Reserve Bank of Atlanta.

I deem i t advisable to put you in possession of a l l the f a c t s of

t h i s case f o r the reason tha t items aggregating approximately $125,000 were

handled by the Federal Reserve Bank under conditions lega l ly equivalent to

those presented in the t r i a l of the above mentioned case.

On July 5th Woolworth gave to "Jack and Jake" the check in contro-

versy, and on July Sth, the 6th being Sunday and as the p l a i n t i f f claimed the

7th being a holiday in Tennessee, the check was deposited by "Jack and Jake"

with the Tennessee-Hermitage National Tank of Nashville, Tennessee f o r col-

lect ion, and by that bank was transmitted on the same day to the Federal Re-

serve Bank, which, on the same day, that i s July Sth, forwarded i t with other

items aggregating about $33,000 to the payee bank, the Peoples Bank of

Springfield, Tennessee.

Under the banking custom prevai l ing in Nashvil le, and under the rule

of the Federal Reserve Bank, as Mr. por t , the cashier , informs me, three days

are allowed for the purpose of col lec t ing items before not ice i s given to the

pa r t i e s to the instrument. On July 10th Mr, Fort cal led up Mr. S t ra t ton , the

President of the Peoples Bank, and inquired about the items sent to that bank

on July Sth, aid Mr. St ra t ton told Mr. Fort that he, St ra t ton, would be in

Nashville on the 11th, and on that day he came to Nashville and had a con-

ference with Mr. Fort in which Strat ton s tated that he was then making ar-

rangements with the American National Bank of Nashville to borrow $50,000,

and would remit for the items of July Sth m July 12th. Relying on t h i s

promise, which i t can be shown was made bona f ide , Mr. Fort le t the matter

hang on July 12th, and as the 13th was Sunday, and the l4 th also a bank hol i -

day, Mr. Fort gave no t ice on the 15th on which day the Peoples Bank closed i t s

doors.


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In representing the Federal Reserve Bank, I made the point t ha t ,

while under the law of Tennessee (Milling Company v. Bank, 120 Tenn. 225)

i t was negligence for a col lec t ing bank to send an item d i rec t ly to the payee

bank, nevertheless under Regulation J , Series of Regulations of the Federal

Reserve Board of 1923, as well as under a c i rcular of the Federal Reserve

Bank of Atlanta dated May 16, 1924, a Federal Reserve Bank, as a federa l

corporation, had the author i ty under these rules and regulat ions to send

items for col lect ion d i r ec t l y to the payee bank, and that these ru les and

regulat ions passed by the Federal Reserve Board pursuant to sub-sections I

and J of Section 11 of the Federal Reserve Bank Act had the same legal e f fec t

as i f they had been d i r ec t ly enacted by Congress and inser ted in the Federal

Reserve Bank Act.

To support t h i s proposition, I re l ied on numerous decisions of the

Supreme Court of the United States of which Field v. Clark, IU3 U. S. 649;

But t f i e ld v. Stranahan, 192 U. S. 470; F i r s t National Bank v. Fellows, 244

U. S. 416, and McKinley v. United Sta tes , 24$ U. S. 397 are typica l .

I made the fu r t he r point that there was no p r i v i t y of contract be-

tween "Jack and Jake" and the Federal Reserve Bank, and t ha t , the re fo re , the

sui t could not be maintained. See F i r s t National Bank of Denver v. Federal

Reserve Bank of Kansas City, Mo. 283 Fed. 700; City of Douglas, Ariz. v .

Federal Reserve Bank of Dallas, }QQ Fed. 573*

Also I ins i s ted that if the item in controversy had been sent to

another bank a t Spr ingf ie ld , as for instance the Springfield Bank of tha t

place, the resu l t would have been the same, and tha t , therefore , the p l a i n t i f f

wa.s not prejudiced. 2 Michie on Banks and Banking, Sec. 162 (1 b) pages

1405-140?.


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On yesterday the Circuit Judge delivered h i s opinion in which he

held tha t under the law of Tennessee the Tennessee-Hermitage National Bank was

gui l ty of negligence in employing an agent which, under the terms of i t s con-

t r a c t , reserved the r igh t to send an item for col lec t ion d i r ec t ly to the payee

bank. The Circuit Judge did not however hold that the Federal Reserve Bank

was gui l ty of any negligence in handling the item in question, but , as above

stated, predicated h i s conclusion as to the l i a b i l i t y of the Tennessee-

Hermitage National Bank solely m the ground that i t had contracted with a

forwarding agent which reserved the r igh t to send an item d i rec t ly to the

payee bank, and that as such action was in violat ion of the law of the State

of Tennessee the Tennessee-Hermitage National Bank was answerable to i t s de-

pos i tor , "Jack and Jake", for placing the item in the hands of the Federal

Reserve Bank for co l lec t ion .

Of course, i f the Circuit Judge had held that there was any negl i -

gence in handling the item or that he could not render judgment against the

Federal Reserve Bank for the reason that there was no p r iv i t y of contract be-

tween i t and "Jack and Jake", I would be inclined to make a motion fo r a new

t r i a l and appeal the case for the p la in reason that such a judgment rendered

against the Tennessee-Hermitage National Bank would probably form the bas i s

for an action by that bank against the Federal Reserve Bank in an e f f o r t to

recoup what i t might be required to pay in sa t i s fac t ion of the judgment. As,

however, no such conclusion was reached by the Circui t Judge, i t seems to me

that the only course open f o r the Tennessee-Hermitage National Bank i s to ap-

peal on the ground that by employing for purposes of col lect ion the Federal

Reserve Bank i t was not gu i l ty of negligence, and as that bank was not

negligent in handling the item a f t e r i t s reception no l i a b i l i t y a t taches to


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the Tennessee-Hermitage National Bank.

I have writ ten to you a t length with reference to the f a c t s of the

case and. the legal points made by me because, while the case ac tua l ly t r i ed

was r e l a t i ve ly ins ign i f ican t in amount, i t determined a pr inc ip le of great

importance to the Federal Reserve Bank, as the matter stands, the Tennessee-

Hermitage National Bank cannot recover from the Federal Reserve Bank fo r the

reason that the Circuit Judge did not f i nd that the Federal Reserve Bank was

gui l ty of any negligence in handling the item so as to make that negligence

the basis of a der ivat ive l i a b i l i t y to the Tennessee-Hermitage National Bank,

but based h i s decision on the ground above stated. I am constrained to be-

l ieve that the Circuit Judge took an erroneous view of the legal r e l a t i on be-

tween the Tennessee-Hermitage National Bank and the Federal Reserve Bank,

but, as .1 do not represent the former bank, I am not concerned with t ha t

phase of the controversy.

•please l e t me hear from you as to whether or not you agree with the

policy which I have adopted in trying t h i s case, as doubtless many others

will be brought in the near fu ture which I , of course, wi l l attend to , and I

wi l l be glad to receive any suggestions you may see f i t to make with reference

to the conduct of such cases .

Very t ru ly yours,

( E. J . SMITH) Sg

5


4 *• 7 4 6

x~iiiS3

October 17, lgeU.

Mr. Edward J . Smith, Attorney-at-Law, Nashville, Tennessee.

Dear Mr. Smith:

We have your l e t t e r of October 15th, addressed to our Mr. Randolph.

In our opinion, the points made by you at the t r i a l were well taken, and we think tha t the t r i a l court was c lear ly r i g h t in holding that there was no l i a b i l i t y agains t the Federal Reserve Bank. We gather from your l e t t e r that the law of Tennessee follows the l ine of au thor i t i es which hold that the bank of i n i t i a l deposit accepts checks from i t s customers for col lect ion and c red i t with f u l l l i a b i l i t y for the negl igent acts or de-f a u l t s of any sub-agent selected by i t fo r purposes of col lec t ion , and tha t there i s no p r i v i t y of contract between the or iginal depositor and any sub-agent so selected. If such be the law of your s t a te , there would be no r igh t of action as against the Reserve Bank in the case which you have t r i ea . Even in the absence of the regulations and c i rcu lars determining the con-t r ac t between the member bank and the Federal Reserve Bank, the p l a i n t i f f could not have recovered against the Reserve Bank, f o r the reason s t a t e d . However, in the absence of an agreement varying the provisions of law which would otherwise be appl icable , the Reserve Bank would be responsible to the member bank for any negligent act en ta i l i ng a l i a b i l i t y as against the mem-ber bank.

As between the Reserve Bank and the member bank the regulat ions of the Board and the c i r cu l a r s of the Reserve Bank are binding, aid we do not bel ieve that any f i n a l judgment which may be rendered in your case would furn-ish the bas i s for a recovery against the Reserve Bank.

We bel ieve, therefore , that you have handled the case proper ly , and we take t h i s occasion of thanking you fo r your ca re fu l and e f f i c i e n t a t tent ion there to .

We assume tha t under your p rac t i ce the Federal Reserve Bank of Atlanta wi l l not be a par ty to the record made on any appeal by the member bank, and tha t unless the p l a i n t i f f sues out a writ of error to the judgment of the Court discharging, the Reserve Bank, the immediate case i s terminated so fa r as the Reserve Bank i s concerned.

Under these circumstances, we see no occasion f o r a motion for a new t r i a l on the p a r t of the Reserve Bank, and in f ac t i t would seem doubtful as to whether you would have any grounds fo r excepting to the judgment in your favor . We think i t would be well , however, for you to keep in touch


with the case and aid the member bank as f a r as poss ib le .

I t i s unfortunate that the Tennessee-Hermitage National Bank did not have a contract with i t s own customer giving i t the r igh t to present items for payment direct to the drawee bank.

If we can be of any help to you at any time you wi l l of course ca l l on u s .

With personal regards, we are

Cordially yours,

(signed) Randolph & Parker

General Counsel.

ESP-G


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