Carson v. Fed. Reserve Bank of New York

Citation172 N.E. 475,254 N.Y. 218
PartiesCARSON et al. v. FEDERAL RESERVE BANK OF NEW YORK.
Decision Date08 July 1930
CourtNew York Court of Appeals

OPINION TEXT STARTS HERE

Action by William A. Carson and others, as trustees in bankruptcy of Leonard S. Zartman and another, individually and as copartners, doing business under the firm name of G. E. Zartman & Company, against the Federal Reserve Bank of New York. From a judgment of the Appellate Division (226 App. Div. 225, 235 N. Y. S. 197), reversing a judgment of the Trial Term (133 Misc. Rep. 277, 231 N. Y. S. 620), entered on a verdict of a jury in favor of the plaintiffs and dismissing the complaint, plaintiffs appeal.

Affirmed.Appeal from Supreme Court, Appellate Division, Fourth Department.

Arthur E. Sutherland and Samuel B. Dicker, both of Rochester, and Earl W. Murray, of Waterloo, for appellants.

Colin McLennan and Keith D. Poland, both of Rochester, and Walter S. Logan, of New York City, for respondent.

CARDOZO, C. J.

Trustees in bankruptcy are seeking to recapture moneys collected by the defendant a Federal Reserve Bank, with notice that a preference among creditors might be an effect of the collection.

G. E. Zartman & Company were engaged for many years in the business of private bankers at Waterloo, N. Y. On May 16 and 17, 1927, there came into the possession of the defendant the Federal Reserve Bank in the Second Federal Reserve District, 157 checks drawn on the Zartman bank for sums amounting in the aggregate to $15,271.56. These checks, drawn by Zartman depositors in favor of various payees, had been indorsed by the payees to banks, thirty-seven in number, members of the Federal Reserve banking system, and by these indorsed and transmitted to the defendant. The indorsements by the member banks show diversities of form, some being simply to the order of the Federal Reserve Bank of New York, some to the order of any bank, banker, or trust company, some to the order of any bank or banker, and some to the order of any Federal Reserve Bank. Accompanying the checks, when received by the defendant, were letters of remittance. In these the member banks gave notice to the defendant that the checks were inclosed ‘for credit,’ or, more commonly, for ‘collection and credit,’ ‘collection and return,’ or ‘collection and remittance.’ The defendant pursuant to this mandate caused the checks to be presented for payment to the Zartman bank, the drawee named therein. In response to this demand, it received two drafts, one for $8,699.25, the other for $6,572.27, drawn by the Zartman bank in Waterloo upon the American Exchange Irving Trust Company of New York. These drafts, received by the defendant on May 18 and 19, were presented to the trust company for payment on May 20 and again on May 21. On each presentation payment was refused on the ground that the drafts had been drawn by Zartman against uncollected funds. Thereupon, on May 23, the defendant's manager went to Waterloo and made demand upon Zartman that the drafts be paid in cash. There is no occasion to recite the conversation that ensued. Enough for present purposes that what was said might reasonably be found by the triers of the facts to have been notice to the manager that Zartman was insolvent. After a delay of a few hours there was paid to the defendant in cash the sum of $10,363.93. The following day, May 24, the doors of the Zartman bank were closed for business, and have never been reopened. A petition in bankruptcy, filed on June 27, was followed by an adjudication of bankruptcy and the appointment of trustees. The trustees are suing to recover the cash paid to the defendant on May 23 as a voidable preference under the provisions of the federal statute.

We turn back at this point to state the defendant's use of the proceeds of collections. Each of the member banks had an account with the defendant, an account exacted by the statute (Federal Reserve Act, 38 U. S. Stat. pp. 251, 270, § 19 as amended [12 USCA § 462] as one of the incidents of membership. These accounts were credited on May 19 and 20 with the amount of the Zartman drafts, i. e., the drafts drawn on the trust company, which were supposed, when received by the defendant, to be equivalent to cash. As soon as notice came that these drafts had been dishonored, the entry was reversed. Later, on May 31, the credit was re-established to the extent of $10,363.93, the cash payment then in hand, each of the thirty-seven banks being allotted its appropriate share. Before the bankruptcy petition, the banks had withdrawn from their deposit accounts in the usual course of business moneys equal to the balances in their favor at the date of the contested credits, though they had also made new deposits which kept the daily balances at a level nearly uniform. If the first payments out of the accounts be appropriated to the first receipts, all moneys collected from the bankrupts had been remitted by the defendant to the thirty-seven member banks, its correspondents and depositors.

The trial judge left it to the jury to say whether the collections had been made by the defendant as agent or as owner. The jury found for the plaintiff, thus holding by their verdict that the collection was as owner. The Appellate Division held as a matter of law that the collection was as agent, basing its holding in large degree upon an agreement yet to be considered between the defendant and its members. The collection having been made as agent, the conclusion was thought to follow that the agent was not liable, since it had settled with its principals before the right of reclamation had been perfected by the bankruptcy.

We think the defendant was an agent and not an owner in its receipt of the Zartman drafts and the substituted moneys. How the 157 checks were indorsed by the payees when deposited with the member banks, the record does not tell us. The problem to be solved, however, is not one as to the relation between the member banks and their depositors. It is a problem as to the relation between those banks and the defendant. We assume that the form of the indorsements, if not qualified by agreement, would have passed to the defendant such title, if any, as belonged to the indorsers. Federal Reserve Bank of Richmond v. Malloy, 264 U. S. 160, 164, 44 S. Ct. 296, 68 L. Ed. 617, 31 A. L. R. 1261;City of Douglas v. Federal Reserve Bank of Dallas, 271 U. S. 489, 46 S. Ct. 554, 70 L. Ed. 1051;Equitable Trust Co. of New York v. Rochling, 275 U. S. 248, 48 S. Ct. 58, 72 L. Ed. 264;Heinrich v. First Nat. Bank of Middletown, 219 N. Y. 1, 113 N. E. 531, L. R. A. 1917A, 655. An agreement, however, is in existence, the terms thereof prescribed by regulations adopted by the Federal Reserve Board under authority conferred by the provisionsof the statute. We must look to this agreement to discover the relation between the defendant and its members in the process of collection.

By the Federal Reserve Act, as first 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 or the United States. Farmers' & Merchants' Bank of Monroe, N. C., v. Fed. Reserve Bank of Richmond, Va., 262 U. S. 649, 654, 43 S. Ct. 651, 67 L. Ed. 1157, 30 A. L. R. 635. Even then, however, the regulations of the Board provided: ‘In handling items for member banks, a Federal reserve bank will act as agent only.’ Circular No. 1 of [254 N.Y. 226]1916, Federal Reserve Board Report of 1916, p. 153, note; Fed. Res. Board Bulletin, May, 1916, pp. 259, 260. The statute was amended in September, 1916 (section 13 [39 Stat. 752]), so as to authorize a reserve bank to receive for collection from any member checks drawn on nonmember banks located in the district. The Board renewed its order that the relation should be one of agency. Regulation J, subd. 7, Fed. Res. Bd., Report of 1916, p. 171. In 1917 the statute was again amended, this time by a provision that ‘solely for the purposes of exchange or of collection,’ a reserve bank may receive from a nonmember bank or trust company checks payable upon presentation, upon condition that such nonmember bank or trust company maintain an adequate balance with the reserve bank of its district. Act Cong. June 21, 1917, c. 32, § 4, 40 Stat. 232, 234 (12 USCA § 342); cf. 262 U. S. at page 655, 43 S. Ct. 651, 67 L. Ed. 1157, 30 A. L. R. 635. Collections were thus permissible both for members and for nonmembers.

In the setting of this statute, Regulation J (series of 1924) was adopted by the Board, and is now to be construed. It recites (in terms substantially the same as those of earlier regulations) that the Board, ‘desiring to afford both to the public and to the various banks of the country a direct, expeditious and economical system of check collection and settlement of balances, has arranged to have each Federal Reserve Bank exercise the functions of a clearing house and collect checks for such of its member banks as desire to avail themselves of its privileges,’ to which is added a recital that like privileges will be afforded to nonmember banks and trust companies qualifying in certain ways. It then proceeds to a statement of the terms and conditions on which business may be done. ‘The Federal Reserve Board hereby authorizes the Federal Reserve banks to handle such checks subject to the following terms and conditions, and each member and non-member clearing bank which sends checks to any Federal Reserve bank shall by such action be deemed (a) to authorize the Federal Reserve banks to handle such checks subject to the following terms and conditions, (b) to warrant its own authority to give the Federal Reserve banks such authority, and (c) to agree to indemnify any Federal Reserve bank for any loss resulting from the failure of such sending bank to have such authority.’ Among the terms and conditions thus prescribed are these: ‘A federal reserve bank will act only as agent of the bank from which...

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