Farmers' & Merchants' Bank v. Federal Reserve Bank of Richmond, Va.

• Citation: 112 S.E. 252,183 N.C. 546
• Decision Date: 24 May 1922
• Docket Number: 419.
• Parties: FARMERS' & MERCHANTS' BANK ET AL. v. FEDERAL RESERVE BANK OF RICHMOND, VA.
• Court: United States State Supreme Court of North Carolina

112 S.E. 252

183 N.C. 546

FARMERS' & MERCHANTS' BANK ET AL. v. FEDERAL RESERVE BANK OF RICHMOND, VA.

No. 419.

Supreme Court of North Carolina

May 24, 1922

Appeal from Superior Court, Union County; Webb, Judge.

Action by the Farmers' & Merchants' Bank and others against the Federal Reserve Bank of Richmond, Va. From a judgment granting the injunction prayed for by plaintiffs, defendant appeals. Reversed.

Though the holder of a check has no contract rights with the drawee bank until the check is presented, it can require the payment of the face amount of the check in legal tender on presentation of the check to the drawee bank.

This action was brought by 13 banks and trust companies organized under the laws of this state which are not members of the Federal Reserve System, against the Federal Reserve Bank of Richmond, Va., to obtain an injunction to prevent the Federal Reserve Bank from refusing to accept exchange drafts drawn by the plaintiffs on their reserve deposits in payment for checks presented at the counters of plaintiff banks and from returning, as dishonored checks drawn by various depositors upon the plaintiff banks which had been presented at their counters by the Federal Reserve Bank of Richmond, but for which the plaintiffs had tendered drafts drawn by them upon their respective reserve depositories. A temporary restraining order was awarded in accordance with the prayer of the complaint. The action having been brought by said banks for the benefit of themselves and such other like institutions who might join in the suit, and the restraining order providing that all such institutions might become plaintiffs in the action and have the benefit of said restraining order, some 265 state banks and trust companies have become parties plaintiff as appears from the record.

By agreement between counsel, trial by jury was waived, and by consent the judge found the facts, and upon the said finding of the facts adjudged:

(1) That the defendant, Federal Reserve Bank of Richmond, is hereby enjoined from refusing to accept exchange drafts when tendered by the plaintiff banks in payment of checks drawn on them under the option given said banks under provisions of chapter 20, Laws N.C. ratified February 5, 1921.

(2) The said defendant is hereby enjoined from returning as dishonored any check, payment for which in exchange drafts by plaintiff banks, or either of them, has been tendered under the provisions of said act and the defendant refuses to accept the same.

(3) The said defendant is likewise enjoined from protesting for nonpayment any check, payment for which in exchange drafts by plaintiff banks, or either of them, has been tendered under the provisions of said act and defendant refuses to accept the same.

(4) The said defendant is likewise enjoined from publication or authorizing the publication of the name of any of the plaintiff banks, literally or by inclusion, in any list or other publication designed for circulation among banking institutions generally, regardless of the name employed to designate such list or publication unless and until the bank thus published or included shall have previously given its consent to such publication.

Appeal by the defendant.

Connor & Hill, of Wilson, Henry W. Anderson and M. G. Wallace, both of Richmond, Va., and C. W. Tillett, Jr., of Charlotte, for appellant.

Alex W Smith, of Atlanta, Ga., and Stack, Parker & Craig, of Monroe for appellees.

CLARK C.J.

The defendant, Federal Reserve Bank of Richmond, is a banking corporation duly organized under the acts of Congress, and especially under a certain act known as the Federal Reserve Act (38 Stat. 251). It is one of the 12 federal reserve banks which were organized under the terms of that act and does business in accordance therewith, especially with the national banks and state member banks in the Fifth Federal Reserve District, which consists of a portion of the state of West Virginia, the whole of Maryland, the District of Columbia, Virginia, North Carolina, and South Carolina. Under the terms of this act, the member banks, which are the national banks in the above-mentioned district and also certain state banks therein, which have qualified for and been admitted to membership in the federal reserve system, are required to keep and maintain with the Federal Reserve Bank of Richmond certain balances as reserves. The member banks create these balances by sending to the Federal Reserve Bank for collection checks or other instruments which they have received on deposit or for collection. Since the business of all banking institutions consists largely in the handling of checks, it is clear that, if the Federal Reserve Bank is to discharge efficiently its function as a reserve depository of its member banks, it must be able to collect their checks and other instruments which are the ordinary means of making settlement of accounts and transmitting funds. When the federal reserve banks were first organized, they were not expressly empowered to accept for collection any check unless it was drawn upon a member bank or other federal reserve bank. Since member banks receive checks not only upon other member banks but also upon nonmember banks, and since the member banks, which include most of the larger banks of the country, acted as agencies through which the nonmember banks collected checks which they had received, it soon became evident that, if the federal reserve banks undertook to collect checks upon their member banks but could not collect for member banks checks upon nonmember banks, a vast majority of checks upon member banks would pass through the federal reserve banks while checks on nonmember banks would be collected through other agencies.

As the amount of the checks which any bank receives upon others and the amount of checks upon itself which it is compelled to pay will usually be about the same, if a federal reserve bank could handle all checks upon member banks but could receive from member banks only a portion of the checks which they themselves receive, in the course of time the flow of checks would be unequal and the member banks would be placed at a great disadvantage in their efforts to maintain proper reserves. As a consequence, Congress, by the Act of Sept. 7, 1916, and of June 21, 1917 (U. S. Comp. St. § 9796), amended section 13 of the Federal Reserve Act and authorized any federal reserve bank to receive for collection from its member banks "checks and drafts payable upon presentation in its district," thus removing any limitation upon the power of the federal reserve bank to receive checks. From the very nature of a check no person is obliged to consider the drawee, or person upon whom it is drawn, before receiving it either as a holder or as an agent for collection.

Under the law before the last-mentioned amendment to the Federal Reserve Act, federal reserve banks were required to receive checks upon member banks for collection at par, and were therefore compelled to require member banks to pay them the full face amount of all checks received. It is obvious that if member banks were compelled to pay the full face amount for all checks handled through the federal reserve banks, but such banks could not require nonmember banks to pay the full face amount on checks drawn upon them, a great inequality would result because nonmember banks would, through the agency of their member bank correspondents, collect all checks upon any member bank at par, but would not pay to member banks checks drawn upon themselves at par. With this in view, Congress expressly...