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EX OFFICIO MEMBERS 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. EMERSON. ASSISTANT SECRETARY W. M. IMLAY, FISCAL AGENT December 18,1919* 3W760 Subject: Right of a Federal Reserve Bank to send Checks, which it has received for collection, direct to drawee bank. Dear Sir:~ The question was raised by Governor Strong of the Federal Reserve Bank of New York a once time ago as to the liability which may be incurred by Federal Reserve Banks in sending checks for collection direct to the bank upon which drawn. The matter was referred to the Board , s General Counsel, who has aubisitted a memorandum, a copy of whibh is transmitted herewith* It is suggested that this question be discussed by your directors and referred, if they deem it necessary* to youls own counsel. The Board would like to be advised of any conclusions reached as to the proper course to be pursued. Very truly yours, Enclosure, Governori letter to Governors and Chairmen of a l l F.R« Banks# Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

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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