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UNITED STATES DISTRICT COURT 9 5 DISTRICT OF MINNESOTA

FOURTH DIVISION.

At Law No. 2225

John Hirning, as Receiver of the Farmers National Bank, of Brookings, South Dakota, a corporat ion

P l a i n t i f f ,

v s .

The Federal Reserve Bank of Minneapolis, Minnesota, a corpora t ion ,

Defendant.

DECISION

This cause came on to be t r i e d before the Cburt without a j u r y on the 15th day of March, 1930.

Miss F» M; Selander, of Minneapolis, Minnesota, and Messrs. Hall & Eidea, of Brookings, South Dakota, appeared f o r the p l a i n t i f f ;

and

Mr. A. Ueland and Mr. Sigurd Ueland, of Minneapolis, Minnesota, f o r the defendant .

This i s a s u i t to recover $21,355.82, the amount of two remit tances sent by the Farmers National Bank,of Brookings, South Dakota, to the defendant on the 16th and 17th days of November, 1926, which i t i s a l l eged cons t i t u t ed an unlawful p re fe rence under Sec. 91, T i t l e 12, U.S.C.A.

The Reserve Bank, as a c lea r ing house and agent f o r i t s member banks, received on November 13, 1926, f o r c o l l e c t i o n , checks on the Farmers National Bank of Brookings to the amount of $22,114,22, and on November iQth s imi la r checks to the amount of $15,020.88. On those days i t mailed cash l e t t e r s , being the checks r e f e r r e d to , to the Brookings Bank f o r co l l ec t i on and remit-tance. Under i t s r u l e s , the Reserve Ba&k was agent f o r the forwarding banks, with the r i g h t to send the checks to t he Brookings Bank f o r c o l l e c t i o n and to rece ive money or d r a f t s t h e r e f o r . The Reserve Bank granted p rov i s iona l c r e d i t s to the forwarding banks on t h e i r reserve accounts f o r the checks, but r e t a ined the r igh t to r eve r se the c r e d i t s i f the checks were not p a i d . Of the checks sent to the Brookings Bank, i t accepted $22,059.11 of those included in the

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cash l e t t e r of the 13th, and $14,880.86 of those included i n the cash l e t t e r of the 15th. The chocks were not a c t u a l l y charged to the accounts of i t s deposi tors u n t i l November 18th, when the bank was i n charge of a National Bank Examiner. On the 16th of November, the Brookings Bank sent two d r a f t s to cover these cash l e t t e r s to the Reserve Bank, i n which the Reserve Bank was named as drawee. The reserve account of the Brookings Bank in th<$ Reserve Bank was not l a r g e enough to take care of the d r a f t s . For the purpose of providing su f -f i c i e n t funds t h e r e f o r , i t sent to the Reserve Bank, on the evening of the 16th, checks, f o r c o l l e c t i o n and c r e d i t , drawn by o the r s on o ther banks to the amount of $10,029.07, on which the Reserve Bank co l l ec t ed $8,355.82, which was c red i t ed to the r e se rve account of the Brookings Bank. I t a lso remi t ted to the Reserve Bank, on November 17th, $13,000 in currency, which was a lso c r ed i t ed to i t s r ese rve account. The $13,000 in currency was a c t u a l l y mailed a f t e r a r eso lu -t i o n of the Board of Di rec tors of the Brookings Bank, c los ing the bank, had been adopted on the evening of November 16th. The Brookings Bank closed i t s doors so f a r as the t ransac t ion of ordinary Banking business was concerned, a t 4:00 P. M. on the 16th. While there i s some unce r t a in ty as to the time of the adoption of the r e so lu t ion and the mai l ing of the checks, I f i n d tha t the $10 , 029.07 of checks was a l so mailed a f t e r the adoption of the r e so lu t ion c los ing the bank, tha t the bank was then inso lven t , and tha t bo th remit tances were made " in contemplation of insolvency". See Bal l v . German Bank, 187 Fed. 750. I t was determined, however, during banking hours on the 16th, to send the remi t tances . While the condit ion of the bank was s u b s t a n t i a l l y the same f o r severa l days p r i o r to the adoption of the r e so lu t ion , i t i s apparent t ha t the determination to c lose i t by those responsible f o r i t s conduct did not occur u n t i l the evening of the 16th. At that time i t was evident ly determined tha t i t was impract ica l to borrow s u f f i c i e n t funds to keep the bank open and tha t l ack of publ ic confidence in the bank made i t advisable to c lose i t s doors. Some eighteen banks had recen t ly f a i l e d in Brookings County, th ree of them in the City of Brookings, and a r ap id decl ine in deposi ts s h o r t l y be fo re the bank closed ind ica ted a dark f u t u r e f o r i t even i f i t was able to secure the neces-sary funds to continue in bus iness .

On the morning of the 17th, the Reserve Bank was n o t i f i e d tha t the Brookings Bank had closed, but t ha t s u f f i c i e n t funds had been sent to the Re-serve Bank to take care of i t s cash l e t t e r s . The Reserve Bank did not charge up the d r a f t s drawn by the Brookings Bank to i t s reserve account, but reversed the c r e d i t s given to the forwarding banks, n o t i f y i n g them tha t i f permit ted to charge up the d r a f t s , i t would l a t e r give than c r e d i t . On January 27, 1927, r e ly ing upon advice of counsel, a l e t t e r from the then r ece ive r , and a l e t t e r from J . E. Fouts, Ass i s t an t Supervising Receiver, Division of Insolvent Nation-a l Banks, which l e t t e r s were construed as gran t ing permission to charge the d r a f t s to the r e se rve account, the Reserve Bank did charge them to tha t account, and c red i t ed the forwarding banks with the amount of the chocks contained in the cash l e t t e r s of November 13th and 15th. Then followed t h i s s u i t by the present r ece ive r to recover the remit tances .

The r ece ive r claims tha t the Reserve Bank was a c r e d i t o r ; tha t in making the remi t tances the Brookings Bank intended to p r e f e r the Reserve Bank as a c r ed i to r and to prevent a r a t a b l e app l i ca t ion of the a s s e t s of the Brook-ings Bank to the payment of i t s debts as provided by law. All of t h i s the Reserve Bank denies .

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The quest ion presented i s one about which there cam be and i s a d i f -fe rence of opinion, I do not f i n d tha t t h i s exact s i t u a t i o n has ever been p r e -sented to a Federal cour t . I t i s obvious tha t i f the Reserve Bank was a c red i to r of t he Brookings Bank a t the time these remit tances were made, the r ece ive r should p r e v a i l . Bal l v. German Bank, supra.

I t i s c lear tha t the Reserve Bank was not o r i g i n a l l y a c red i to r of the Brookings Bank; t ha t i t was a mere agent f o r the forwarding banks, respon-s i b l e only f o r i t s own negl igence. Federal Reserve Bank of Richmond v. Early, 30 F. (2d) 198; Early, Receiver, v. Federal Reserve Bank of Richmond, 281, U.S. 84. The Reserve Bank did not own the checks which c o n s t i t u t e d the cash l e t t e r s and i t was a mat te r of i n d i f f e r e n c e to i t whether the checks were pa id or no t .

The r ece ive r claims tha t the Reserve Bank became a c r ed i t o r when i t accepted the d r a f t s o r , a t any r a t e , when i t charged them up to the reserve account of the Brookings Bank. I am unable to see t h a t the r e l a t i o n which i t bore to the Brookings Bank o r i g i n a l l y was ever changed. I t was a t a l l times ac t ing on behalf of i t s p r i n c i p a l s , the forwarding banks, as t h e i r agent , and, under the r u l e s which governed i t s opera t ions , i t had the a u t h o r i t y to send the checks to the Brookings Bank f o r co l l ec t ion and take d r a f t s which were sent in payment t h e r e f o r . As agent , i t was author ized to appoint the Brookings Bank as agent to c o l l e c t from i t s e l f these checks, and to r e q u i r e the Brook-ings Bank to account f o r the checks or t h e i r proceeds. The agreement of the Brookings Bank was to remit fo r such checks as i t accepted or co l l ec ted . I t was the agent of the Reserve Bank f o r tha t purpose. If i t was to charge them to the accounts of i t s depos i tors , i t s duty was to remit f o r them in cash or i t s equivalent . I t was not the debtor of the Reserve Bank f o r the amount of those checks, b u t , i f i t accepted than, i t s p o s i t i o n was tha t of an agent who had received money or i t s equivalent fo r h i s p r i n c i p a l and which in equity belonged to the p r i n c i p a l . I f the Brookings Bank had used these checks f o r i t s own purposes, without accounting f o r them, i t would have been g u i l t y of conversion. I f , ins tead of charging the checks to the accounts of i t s deposi-t o r s , i t had co l l e c t ed the checks in cash from them, tha t cash would have be-longed to the Reserve Bank, and i f i t had been mingled with the o ther cash of the bank, the rece iver could have been requi red to pay i t over on the theory tha t the cash was impressed with a t r u s t to the extent of the amount f o r which the Brookings Bank should have accounted. The l i a b i l i t y of the Brookings Bank to account became abso lu te upon the acceptance of t he checks. Quoting from Federal Reserve Bank of Richmond v. Early, supra, - - ( 30 F. (2d) 199):

"The on ly question tha t can a r i s e i s : When does t h i s r i g h t of the owners of the checks become f i x e d , so as to c o n s t i t u t e i t a charge upon the rese rve balance? We th ink tha t i t becomes so f i x e d when the drawee bank,

e i t he r unequivocal ly accepts the checks, as i n t h i s case, o r , by f a i l i n g to r e t u r n them promptly, becomes chargeable with them under the terms of the agreement."

I t has been he ld by the Supreme Court of Vi rg in ia , in Federal Reserve Bank of Richmond v. Bohaiman, 127 S.E. 161, ( fo l lowing Federal Reserve Bank of Richmond v. Pr ince Eiward-Lunenburg County Bank, 139 Va. 45, 123 S.E.379, 32 Va. Appeals 152) tha t a Reserve Bank which has received an u n c o l l e c t i b l e d r a f t as a remit tance f o r a cash l e t t e r has a l i e n upon the cash in the vau l t s of the bank f o r the amount of the d r a f t , which i t can enforce aga ins t a r ece ive r .

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If those dec is ions a r e correc t * the Reserve Bank could have co l l e c t ed from the rece iver an amount s u f f i c i e n t to make the d r a f t s which i t had rece ived from the Brookings Bank good, even i f no remit tances had been made.

While i t i s apparent t ha t the managing o f f i c e r s of the Brookings Bank, during banking hours on the 16th day of November, r e a l i z e d the p r o b a b i l i t y tha t the bank would not re-opoa the fol lowing day — which, no doubt, was the reason fo r sending d r a f t s to the Reserve Bank drawn on i t r a the r than on o ther banks — the bank had accepted the checks sent to i t as agent f o r c o l l e c t i o n . I t in -tended to account f o r the c o l l e c t i o n of the checks bj- sending s u f f i c i e n t cash and cash items to the Reserve Bank to take care of the d r a f t s . P r io r to the adoption of the r e so lu t i on c los ing the bank, i t segregated from i t s a s s e t s the cash and cash items to be sent to the Reserve Bank.

My conclusion i s tha t the rece iver can not recover i n t h i s case,even though these remit tances were made in contemplation of insolvency, f i r s t , be-cause the Reserve Bank was never a c red i tor of the Brookings Bank, and the only r e l a t i o n which ever ex is ted between the two was tha t of p r i n c i p a l and agent; second, because the r i g h t s of the general c r e d i t o r s of the Brookings Bank were in no way a f f e c t e d by the remi t tances , f o r the reason t h a t the Re-serve Bank, as p r i n c i p a l , could have impressed a t r u s t upon the cash and cash items segregated from the other cash of the bank, o r , i f i t should be hold tha t tha t was not a s u f f i c i e n t designat ion of the s p e c i f i c proper ty to make good the d r a f t s , then upon so much of the bank ' s general cash as was necessary to make the d r a f t s good.

Finding the f a c t s and the law to be as above s t a t e d , my conclusion i s tha t the defendant i s e n t i t l e d to a judgment of d ismissa l . Let judgment be entered accord ing ly .

The p l a i n t i f f i s allowed an exception to the denial of h i s motion f o r judgment in h i s f avo r , made upon the so le ground tha t the evidence w i l l support no other conclusion.

Dated t h i s 28th day of Ju ly , 1930.

John 3. Sanborn U .S .D i s t r i c t Judge.

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