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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

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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

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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

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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


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

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• 577

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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

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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

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79

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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

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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


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

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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

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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.

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