frsbog_mim_v35_0573.pdf

7/17/2019 frsbog_mim_v35_0573.pdf

http://slidepdf.com/reader/full/frsbogmimv350573pdf 1/10

C O P Y

(. 5 7 3

X-7031

IN THE

 MUNICIPAL COfeT

  OF

 PHILADELPHIA

CIVIL DIVISION

MORBIS WEBBER

vs .

FEDERAL RESERVE BANK

OF PHILADELPHIA.

March Term,  1931

No. 1417

MEMO. OPINION

LEWIS,  J . ,  November  17, 1931.

The  pl a i n t i f f , ho lder  of a  check  of  $500, payable  to

h i s

  order,

  and

  drawn

  on the

  Darby Bank

  and

  Trust Company,

  of

Darby, Pennsylvania, endorsed  i t i n  blank,  on the 5th day of

January,

  1931, and

  deposited

  i t t o h i s

  account with

  th e

Pennsylvania Company  f o r  Insurances  on  Lives  and  Granting

Annui ties . That company cre di ted p l a i n t i f f ' s account

conditionally with

  th e

  amount

  of the

  check

  an d

 forwarded

  the

same  to the  Federal Reserve Bank  of  Philadelphia,  th e  defendant,

f o r

  col lec t ion .

  The

  defendant bank promptly sent

  th e

  check,

together with other items,  to the  drawee, Darby Bank  and  Trust

Company,

  f o r

  payment.

  I t

  received from that bank,

  in

  payment

of the  several items,  a  d ra f t  on the  Philadelphia National

Bank,  th e  Darby Bank  and  Trust Company  a t t h e  same time marking

p l a i n t i f f ' s check paid ,

and

  charging

  th e

  account

  of the

  drawor

o n i t s  books with  th e  amount  of the  check. Before defendant  p r e -

sented

  th e

  drawee bank*

 s

  remittance draft

  to the

  Philadelphia

7/17/2019 frsbog_mim_v35_0573.pdf

http://slidepdf.com/reader/full/frsbogmimv350573pdf 2/10

«; 5 7 4

- 2 -  X-7031

National Bank

  th e

  drawe6 b&ijk closed

  i t s

  doors

  and

  possession

  o f i t s

business  and  asse ts  was  taken over  by the  Secretary  of  Banking  of

t h e  Commonwealth  of  Pennsylvania. Payment  of the  remittance draft

was  thereupon stopped,  t h e  defendant advised  th e  Pennsylvania  Com-

pany  of  that fac t ,  and the  latter company  in  turn not if ied  the

p l a i n t i f f  o f i t s  ina b i l i t y  to  col lec t  th e  check,  and  charged back

t h e  p la in t i f f ' s a c c oun t  o n i t s  books  f o r t h e  amount thereof.  The

plaintiff therqjapon instituted this action  of  assumpsit against  the

defendant

  f o r t h e

  amount

  of the

  uncollected check, alleging

in  substance that  in  col lec t ing  t h e  p la in t i f f ' s c he c k  the

defendant  was  negligent  i n  accepting payment therefor  of the

remittance draft

  of the

  drawee bank instead

  of

  cash.

  We now

have before  u s  this rule  f o r  judgment  f o r  want  of a  su f f i c i e n t

a f f i d a v i t

  of

  defense

  f o r t h e

  purpose

  of

  t e s t ing

  t h e

  various

defenses

  se t up by the

  defendant bank.

These defenses

  may be

  summarized under three headings;

(1) By th e  terms  of the  depositor's agreement

defendant  i s  absolved from re sp on si bi li ty because  of the

acceptance  by i t of  something other than cash,  in  payment

of an  item.

(2 )

  That th er e

  i s a

  custom

  of

  collecting banks,

which custom  i s  certain, uniform  and  reasonable,  and  j u s t i f i e s

t h e

  acceptance

  by

  defendant

  of

  something

  in

  l i e u

  of

  money,

  and

therefore re l ieves  t h e  defendant from l i a b i l i t y ,

(3 )

  That

  t h e

  acceptance

  by the

  defendant Federal

Deserve Bank

  of an

  exchange draft

  in

  payment

  of a

  check, which

7/17/2019 frsbog_mim_v35_0573.pdf

http://slidepdf.com/reader/full/frsbogmimv350573pdf 3/10

- 3 -

  X-7031

i t

  holds

  f o r

  -collection, does frot Constitute negligence,

  in

view  of t he  authority given  i t i n  Regulation  J .  (Series  of

1930) of the  Federal Reserve Board,  and  ci rcular  477,  issued

by the  Federal Reserve Bank  of  Philadelphia (Sept.  2 ,  1930).

The  principal  and  controlling question raised  by the

pleadings  may be  s tated  a s  follows*  I s a  Federal Reserve Bank,

in  collecting checks endorsed  and  transmitted  to i t by a

member bank, negligent when  i t  accepts  a  draft , instead  of

cash,

  f o r t h e

  items transmitted

  t o i t f o r

  collection?

The

  general rule

  in

  Pennsylvania

  i s

  that, apart from

custom

  of

  agency

  o r

  special authority,

  a

  bank

  in the

  collect ion

of

  commercial paper

  has no

  r igh t

  to

  accept

  in

  payment thereof

anything except money.

  (See

  exhaustive note

  in 61

  American

Law

 Reports Annotated, page

  739, and the

  Pennsylvania cases

c i t ed

  on

  page

  742 of the

  no te ). Brady

  on

  Bank Checks

  (2nd Ed.

p . 456, Sec . 282) .

The

  Supreme Court

  of the

  United States,

  in 1924,

decided  t h e  case  of  Federal Reserve Bank  of  Richmond  v s  Mayloy,

264 U. S . , 160,  which created considerable discussion  and con-

cern  in  banking circles because  of the  ruling therein announced.

It was  there held that  i f t h e  bank responsible  to the  payee  f o r

t h e  col lect ion  of a  check surrenders  t h e  check  to the  drawee bank

and  accepts  in  payment  an  exchange draft  of  that bank which proves

worthless,

  t h e

  collecting bank

  i s

  l i ab l e

  to the

  payee

  of t he

  check

f o r t h e

  result ing loss.

The

  regulat ions

  of the

  Federal Reserve Board

7/17/2019 frsbog_mim_v35_0573.pdf

http://slidepdf.com/reader/full/frsbogmimv350573pdf 4/10

- 4 -

  X-7031

authorized Federal  He serve Battles  in  handling checks forwarded

t o  them  f o r  col lec t ion  to  send them direct  to the  banks  on

which they  a r e  drawn  and  accept  th e  drawee's draft  in  payment.

The  Malloy case, (sup ra ), hel d th at such  a  regulation cannot  b e

enlarged  by  implication  to  include authority  to  accept  a  draf t

of the  drawee  of a  check  in  payment.  To  counteract  t h e  e f fec t

of  this decision, Regulation  J ,  Series  of 1930, was  promulgated,

(superseding Series  of  1924),  and  Circular  477,  issued  by the

Federal Reserve Bank

  of

  Philadelphia, (September

  2 ,

  1930,)

which regulation  and  cir cu la r de cla re that every bank sending

checks  to the  reserve bank would  be  understood  to  have agreed

t o t h e  terms  and  conditions therein stated authorizing  th e

reserve bank  to  receive payment  in  cash  o r  bank drafts  f o r

th e  collection items.

We  think that t hese regulati ons  a r e  val id ,  and

persons dealing with member banks  of the  Federal Reserve

system

  a r e

  chargeable with knowledge

  of

  their existence,

Louisvi l le

  and

  Nashville Railroad

  Co. vs.

  ITashville Branch

  of

th e

  Federal Reserve Bank

  of

  Atlanta,

  44

  Bankers

  Law

  Journal,

665;

  Transcontinental

  Oil Co, vs

  Federa l Reserve Sank

  of

Minnesota, (infra).

Bank

  of

  Wesleyville

  vs

  Rose,

  85 Pa .

  Super

  Co. 52,

relied upon

  in

  support

  of

  pla in t i f f ' s content ion ,

  is not

control l ing,

  in

  view

  of t he

  amendatory

  and

  supplementary

regulations

  of the

  Federal Reserve Bank promulgated si nc e t hat

7/17/2019 frsbog_mim_v35_0573.pdf

http://slidepdf.com/reader/full/frsbogmimv350573pdf 5/10

• 577

- 5 -

  X-7031

case

  was

  decided. Moreovel*j

  in the

  present case

  th e

  a f f i dav i t

of

  defense avers knowledge

  of the

  Federal Reserve regulations

on the

  part

  o f t h e

  pl ai nt i f f depositor, l imi t ing l ia bi l i ty

by the

  defendant.

  See

  Ar ti cl es , Some Aspects

  of

  Regulations

of

  Federal Reserve Board

  and

  State Statutes authorizing

Forwarding

  of

  Checks

  f o r

  Collection direct

  to

  Drawee Bank

and

  Acceptance

  of

  Drafts

  in

  payment.

4

  Wash.

  Law Rev . 39 . •

Liab i l i t y

  of

  Collecting Bank

  f o r

  Accepting Draft

  a s

  Payment

f o r

  Commercial Paper,

  41

  Harv.

  L. Rev. 249.

An  illuminating statement upon this subject will

be  found  in the  opinion  of  that eminent scholar  and  j u r i s t ,  •

Cordoza,  C. J . , i n  Carson  vs  Federal Reserve Bank,  254, ft. Y. •

218,  where  h e  s ta tes :  By the  Federal Reserve  Act , as  f i r s t

enacted  in 1913; a  reserve bank  was  authorized  to  collect

only those checks which were drawn

  on

  member banks

  and

  which

were deposited

  by a

  member bank

  or

  another reserve bank

  o r t he

United Sta te s. (Farmers Bank

  vs

  Federal Reserve Bank,

  252

U. S. 64 9.) •

  Even then, however,

  th e

  regulat ions

  of the

Board provides:

  ' I n

  handling items

  f o r

  member banks,

  a

Federal Reserve Bank will

  a c t a s

  agent only.'

  . . .. .. . The

s ta tu te

  was

  amended

  in

  September,

  1916,

  (Section

  13) so as to

authorize

  a

  reserve bank

  to

  receive

  f o r

  collection from

  any

member checks drawn

  on

  nonmember banks located

  i n t h e d i s -

t r i c t .

  The

  Board renewed

  i t s

  order that

  th e

  relation should

be one of  agency  . . . . . In 1917 th e  s ta tu te  was  again

7/17/2019 frsbog_mim_v35_0573.pdf

http://slidepdf.com/reader/full/frsbogmimv350573pdf 6/10

amended, this time  by • a  provis ion tha t ' ' so le l y  f o r t h e  purposes

of  exchange  or of  col lec t ion ,

1

  a  reserve bank  may  receive from

a  nonmember bank  o r  trust company  th e  checks payable upon  p r e -

sentation, upon condition that such nonmember bank  o r  trust

company maintain  an  adequate balance with  t h e  reserve bank  of

i t s  d i s t r i c t .  (Act of  Congress, June  21, 1917, ch, 32 , Sec. 4 ) .

Collections were thus permissible both  f o r  members  and fo r

nonmembers.

The  following statement  of the  Supreme Court

of  Minnesota  in  Transcontinental  Oil Co. v.  Federal Reserve

Bank  of  Minneapolis, (1917)  i s  s igni f icant -

  The  defendant  was  employed  by t he  p l a i n t i f f

1

s

authorized agent,  t h e  First National Bank  of  Chicago,  t o c o l -

l e c t

  th e

  checks. Such agent knew that

  th e

  only terms

  and

  coiv-

ditions upon which defendant would accept such employment were

those

  of

  Regulation

  J . ,

  Series

  1917, and

  Clearing

  and

  Collection

Circular

  Ho. 193, and

  therefore must

  b e

  held

  to

  have consented

and

  agreed

  in

  behalf

  of

  pla in t i f f tha t

  n o t

  only

  th e

  checks

might  b e  sent directly  to t h e  payer bank  f o r  col lec t ion,  b u t

also that such bank might remit  to  defendant  by  draft upon  a

bank  in  Minneapolis. Defendant  i s n o t  compelled  by law to

collect checks  o r  d r a f t s  f o r i t s  member banks  o r f o r  member

banks  of  other Federal Reserve Bp.nks.  I t i s  authorized  to

render such service under terms  and  conditions established

7/17/2019 frsbog_mim_v35_0573.pdf

http://slidepdf.com/reader/full/frsbogmimv350573pdf 7/10

  79

- 7 -

  X-7031

by the

  Federal

  He

 serve Board

  and by i t s own

  regulations

communicated

  to

  banking insti tutions

  who see f i t to r e -

quest

  t h e

  service.

Adopting  and  employing  th e  language  of  Judge Cordoza

in the  Carson case (supra),  a s  applicable  to the  present  c o n -

troversy,  we  repeat:  I n t h e  se t t ing  of  this s ta tute ,

Regulation  J  (Series  1930) was  adopted  by the  Board  and is

now to be

  construed.

  I t

  r e c i t e s

  ( i n

  terms substantially

  the

same

  a s

  those

  of

  earlier regulations) that

  t h e

  Board, ' de si ri ng

to  afford, both  to the  public  and to the  various banks  of the

country,  a  di rec t, expeditious  and  economical system  of  check

col lec t ion  and  settlement  of  balances  h a s  arranged  to  have

each Federal Reserve Bank exercise  th e  functions  of a  clearing

house

  and

  collect checks

  f o r

  such

  o f i t s

  member banks

  a s

  desire

to

  avail themselves

  of i t s

  p r i v i l e g e s ' ,

  to

  which

  i s

  added

  a

rec i ta l tha t l ike pr ivi leges wil l

  b e

  accorded

  to

  nonmember

banks  and  trust companies qualifying  in  certain ways.  I t  then

proceeds  to a  statement  of the  terms  and  conditions  on  which

business  may be  done.  ' T h e  Federal Reserve Board hereby

authorizes

  t h e

  Federal Reserve Banks

  to

  handle such checks

subject

  to t h e

  following terms

  and

  conditions,

  and

  each member

and

  nonmember clearing bank which sends checks

  to any

  Federal

Reserve Bank shall

  by

  such action

  be

  deemed

  (a ) To

  authorize

a l l  Federal Reserve Banks  to  handle such checks subject  to

th e  following terms  and  conditions:  (b) To  warrant  i ts own

7/17/2019 frsbog_mim_v35_0573.pdf

http://slidepdf.com/reader/full/frsbogmimv350573pdf 8/10

- 8 -

  X-7031

author i ty  to  give  a  Federal Bank such authority,  and (c ) To

agreb  to  indemnify  any  Federal Reserve Bank  fo r any  loss  r e -

sulting from  t h e  f a i l u r e  of  such sending bank  to  have such author-

i t y .

  f

  Among

  th e

  terms

  and

  conditions thus prescribed

  a r e

  these:

•A

  Federal Reserve Bank wi l l

  a c t

  only

  a s

  agent

  of the

  bank from

which

  i t

  receives such checks.

  A

 Federa l Beserve Bank

  may

 present

such checks  f o r  payment  o r  send such checks  f o r  collection direct

to the  bank  on  which they  a r e  drawn,'  o r  forward them

  1

 to  another

agent

1

.

  'A

  Federal Reserve Bank

  may *** a t i t s

  option either

d i r e c t ly  o r  through  an  agent, accept  ** *  bank drafts  *** in  l ieu

of  cash, without being liable  for any  loss thereby resulting. '

•The amount

  of any

  check,

  f o r

  which payment,

  n o t

  actual

  and

  f i n a l -

l y

  collected funds,

  i s n o t

  received, shall

  be

  charged back

  to the

forwarding bank regardless  of  whether  or not the  check itself  can

b e

  re tu rn ed .' Fi na ll y, each Federal Reserve Bank

  may

  promulgate

i ts own  regula t ions  n o t  inconsistent with  law or  with  th e  regula-

tions  of the  Board,  and  such regulations shall  b e  binding upon

member  and  nonmember banks availing  o f i t s  pr iv il eg es . Pursuant

to the  authority thus conferred  th e  (defendant) made  i ts own  regula-

tions (Circular  477 ,  September  2 ,  1930), reaffirming  t h e  regulations

adopted  b y t h e  Board  and  supplementing them  by  others ****  The

regula t ions

  of the

  Board, reinforced

  by the

  defendant 's circular ,

and

  assented

  to by the

  transmitting bank,

  a r e

  equivalent

  to an ex-

press agreement that  a s  between  th e  defendant  and the  other banks

th e  relation engendered  by the  receipt  of  uncollected paper shall  b e

an

  agency

  and

  nothing more.

11

7/17/2019 frsbog_mim_v35_0573.pdf

http://slidepdf.com/reader/full/frsbogmimv350573pdf 9/10

; 5 8

- 9 -  X-7031

The  e f f e c t  of th e  regulation  was the  same  a s  though

i t s

  provisions

  had

  been written

  on the

  face

  of the

  check,

  and

therefore when

  th e

  maker thereof

  d id no t

  specify cash payment,

h e  agreed,  a s d id the  payee* that  i f t h e  check were presented  by

o r  through  a  Federal Reserve Bank,  t h e  check might  b e  payable  b y

an  exchange draft drawn  by the  payee bank  o n i t s  reserve deposit.

See 46  Banking  Law  Journal  865;  Transcontinental  O i l

Co. v.

  Federa l Hesarve Bank; Minn. Supra.

The

  tremendous modern expansion

  of

  credit banking

  has

disclosed  t h e  inadequacy  of th e  rules  of  common  law  a f fec t ing

banks  and  col lec t ion .  A  str iki ng recognition  of  this s i tua t ion

i s  found  in t h e  Bank Collection  Act of 1931 (Act of  General

Assembly

  of the

  State

  of

  Pennsylvania,

  1931, No. 198),

  which

allows

  t h e

  collecting bank

  to

  send

  th e

  item directly

  to the

  payor

bank  and  accept  a  d ra f t  o r  credi t  in  payment.

The  provisions  of  that  a c t a r e n o t  retroactive, hence

n o t  applicable  to the  present case.

We a r e of the

  opinion

  and so

  hold that

  th e

  acceptance

by a

  Federal Reserve bank

  of an

  exchange draft

  in

  payment

  of a

check drawn  on a  State bank  and  which  i t  holds  f o r  col lec t ion,

does  n o t  constitute negligence.  I t  wil l , therefore ,  b e  unnecessary

f o r u s t o  pass upon  th e  other points made  by the  defendant  i n i t s

Aff idavi t

  of

  Defense

  and

  under

  th e

  heading

  of New

 Matter.

  See Sec .

283

  Brady

  on

  Bank checks

  p . 458 , and 1929

  Supplement

  p . 1 50, S ec .

283, and  cases cited.

Another problem

  h a s

  confronted

  t h e

  Court, that

  i s ,

  whether

7/17/2019 frsbog_mim_v35_0573.pdf

http://slidepdf.com/reader/full/frsbogmimv350573pdf 10/10

- 10 -  X-7031

an  Affidavi t  of  Defense  i s  reqiiirfcd  irl an  action  of  assumpsit which

i s  essen t ia l ly  ex  del ic to ,  f n  view  of t he  fact that this matter

has no t  been called  to the  at tent ion  of the  Court  i n t h e  arguments

so

  ably made

  by

  counsel representing both parties,

  t h e

  Court deems

i t

  su f f i c i en t

  to

  simply refer

  to the

  following au th or it ie s: Corry

  v .

Penna.

  B. R. 194 P a. 516

  Parry

  v .

  First National Bank

  of

  Lensford,

270 P a. 556;

  Smith's Pennsylvania Practice

  Act ,

  page

  267

  Wilson

  v .

Adams Express

  Co ;, 72 P a. Sup; Ct;

  384-387 (1919) Arrant's Penn-

sylvania Practice

  Act of 1915,

  page

  212;

  Stewart

  v .

  First Mortgage

Guaranty

  and

  Trust Co«i

  24

  Dist.

  927;

  Marcus

  v .

  Bank,

  12

  Lackawanna,

266;'

  Cosgrov

  v. B. B ., 16

  Dist. Beports

  161; 33 Co.

  Court

  613;

Southern

  B. B. v.

  Hull,

  46 Pa . Sup. Ct. 299;

  Cowan

  v .

  Nagel,

  89 P a.

Sup. Ct. 122;

  Coyle

  v .

  Schrull ,

  49 Pa . Sup. Ct . 385 - and th e

  author-

i t i e s

  a r e

  general ly

  to the

  effect that where

  th e

  cause

  of

  action

  i s

of a

  mixed character containing elements

  of

  contract

  and of

  tor t ,

an  a f f i dav i t  of  defense  i s n o t  required, although  th e  action  i s a s sump**

s i t .

The  actions  of  assumpsit  f o r  which judgment  may be  taken  f o r

want

  of an

  a f f i d a v i t

  of

  defense

  a r e

  l imited

  to

  such

  as a re on

  contract

alone,

  and do no t

  include cases

  in

  which

  the

  cause

  of

  action

  i s

  exdelicto

The

  ru le

  f o r

  judgment mast

  be

  discharged.