E X O F F I C I O M E M B E R S

CARTER GI,ASS SECRETARY OF THE TREASURY

CHAIRMAN

JOHN SKELTON WILLIAMS COMPTROLLER OF THE CURRENCY

ADDRESS REPLY TO FEDERAL RESERVE BOARD

FEDERAL RESERVE BOARD

WASHINGTON

998 W. P. 6 . HARDING, GOVERNOR ALBERT STRAUSS, VICE GOVERNOR ADOLPH C. MILLER CHARLES S. HAMLIN HENRY A. MOEHLENPAH

W. T. CHAPMAN. SECRETARY R. G . E M E R S O N . ASSISTANT SECRETARY

W. M. IMLAY, FISCAL AGENT

December 18,1919* 3W760

Subjec t : Right of a Federal Reserve Bank to send Checks, which i t has rece ived f o r c o l l e c t i o n , d i r e c t to drawee bank.

Dear S i r :~

The question was ra i sed by Governor Strong of the Federal Reserve Bank of New York a once time ago as t o the l i a b i l i t y which may be incurred by Federal Reserve Banks i n sending checks f o r c o l l e c t i o n d i r e c t to the bank upon which drawn. The matter was r e f e r r e d to the Board , s General Counsel, who has aubisitted a memorandum, a copy of whibh i s t ransmit ted herewith*

I t i s suggested t h a t t h i s question be d iscussed by your d i r e c t o r s and r e f e r r e d , i f they deem i t necessary* t o youls own counsel . The Board would l ike t o be advised of any conclusions reached as to the proper course t o be pursued.

Very t r u l y yours ,

Enclosure, Governori

l e t t e r to Governors and Chairmen of a l l F.R« Banks#

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Subjects Right of a Federal Reserve Bank to send checks which i t has received for c o l l e c t i o n d i r e c t t o drawee bank.

The quest ion has been ra i sed whether a Federal Reserve Bank may properly and without r i s k of loss forward checks which i t has rece ived for c o l l e c t i o n d i r e c t t o the drawee bank.

The w e l l accepted pr inc ip le of law r e l a t i n g to t h i s s p e c i f i c question i s that a bank which sends a check which i t has received for c o l l e c t i o n d i r e c t to the drawee bank, without express authori ty from the p r i n c i p a l for whom i t i s making the c o l l e c t i o n , becomes l i a b l e for any lo s s r e s u l t i n g because of the f a c t that the checic was sent d i r e c t to the drawee bank. Even a general usage or custom of making c o l l e c t i o n s in t h i s manner does not r e l i e v e the c o l l e c t i n g ban# of r e s p o n s i b i l i t y under the dec i s ions of a majority of the courts .

The question at i s s u e , however, i s not whether a Federal Reserve Bank may properly send an item d irec t to the drawee bank without authority of i t s p r i n c i p a l , but whether the general provis ions contained i n the c o l l e c t i o n c i rcu lar of the Federal Reserve Bank of New York may be construed. to be s u f f i c i e n t authori ty to protect the Federal Reserve Ban& i n the event of any l o s s caused by the f a c t that the check was forwarded d i r e c t to the drawee bank.

Circular No. 10) of the Federal Reserve Bank of New York dated June 1, 1918, provides that -

"Every member bank sending items to us a f t e r the inauguration of t h i s system w i l l be understood to have agreed to the terras and condit ions s e t f o r t h in th i s c i rcu lar and to have thereby s p e c i f i c a l l y agreed that in rece iv ing such items the Federal Reserve Bank cf New York w i l l ac t only as tne c o l l e c t i o n agent of the sending bank, w i l l assume no r e s p o n s i b i l i t y other than due d i l i g e n c e and care i n forwarding such items promptly, and w i l l be authorized, to send such items for payment d i rec t to the bank on which they are drawn or to another agent for c o l l e c t i o n , at i t s d i s c r e t i o n . "

Although a general agreement between a c o l l e c t i n g ban*, and i t s customer that the c o l l e c t i n g bank w i l l not be l i a b l e for the negl igence or f a i l u r e of the a^ent which i t s e l e c t s cannot be construed to authorise the c o l l e c t -ing bank to sena the checK d i r e c t to the drawee barm (See Mian. Sash & Duor Co., v . Metropolitan Bern., 76 Minn, 13b ) neverthe less an agreement s p e c i f i c a l l y

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authorizing the c o l l e c t i n g bank to send the item d irec t to the drawee bank i s general ly understood to be va l id and i s s u f f i c i e n t to r e l i e v e the c o l l e c t i n g bank from any l i a b i l i t y on account of a loss resu l t ing from the f a c t that the item was sent d i rec t t o the drawee bank. (See Chicago-First National Bank v . Citizens Savings Bank, 12) Mich. 336).

The question presents i t s e l f , therefore, whether the general condition in the terms of the New York c ircular quoted above can be considered a s p e c i f i c . agreement between the Federal Reserve Bank and i t s customers. There i s no doubt that the terms of tiae c i r c u l a i i t s e l f are s u f f i c i e n t l y s p e c i f i c in the circumstances to protect the New York Bank, provided, that the customer of the bank may be said to have not ice of the provisions of that c ircular and to have assented thereto. I t i s probable that a court would protect the co l l ec t ing reserve bank in such a case on the theory that the c ircular having been sent t o the member bank, and the member bank having forwarded items in accordance with the terms of that c ircular , the member bank may be presumed to have assented to the terms of the agreement. But there may be some d i f f i c u l t y in establ i shing the f a c t that the member bank actua l ly had not ice of the c ircular aid for that reason and in order to remove any poss ib le doubt I agree with the suggestion which has been made that when the Reserve Bank issues i t s new circular out-l ining i t s c o l l e c t i o n f a c i l i t i e s , particular at tent ion be directed to tae clause giving the Reserve Bank authority to forward items d i r e c t to the drawee bank, and that the member bank acknowledge receipt of the c ircular containing that provision.

In th i s connection, the Federal Reserve Bank of New York should, of course, make sure that member banks of other d i s t r i c t s which forward items d irec t to the Federal Reserve Bank for c o l l e c t i o n agree to the terms of the c ircular issued by the Federal Reserve Bank for the pr inc ip les discussed above apply with equal force to member banks out-side the New York D i s t r i c t which are using the New Yoifck Bank as a c o l l e c t i n g agency.

There i s a lso presented the question whether the Federal Reserve Bank would be l i a b l e even in a case where there i s a s p e c i f i c agreement authorizing i t to forward checks to the drawee bank i f , as a matter of f a c t , the Federal Reserve Bank had actual knowledge of f a c t s which would lead i t to be l i eve that there would be a loss re su l t ing i f the checks were forwarded d i r e c t . I have been unable to f i n d any cases discuss ing th i s particular phase of the question but i t sou Id appear reasonable to assume that the agreement would protect the c o l l e c t i n g bank unless i t had actual knowledge of f a c t s such as to make i t a breach of good f a i t h to forward the checks d i r e c t . This, however, i s a question which would have to be decided by the courts .

Very t ru ly yours,

(Signed) GEORGE L. HARRISON.

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