frsbog_mim_v29_0159.pdf

7/17/2019 frsbog_mim_v29_0159.pdf

http://slidepdf.com/reader/full/frsbogmimv290159pdf 1/52

C O P Y

X-6130

IN THE

DISTRICT COURT

OF THE

UNITED STATES

i n a n d f o r

THE EASTERN DISTRICT OF ILLINOIS

I n E q u i t y Ho.

J . F . JARVIS, e t a l . ,

Complainants,

v .

OTTO K3PP,

e t a l . ,

D e f e n d a n t s . )

PPI7F

TN

SUPPORT

03

MCT101T TO DISMISS.

STATEMENT OF FACTS AND PROCEEDINGS

The o r i g i n a l p e t i t i o n i n th i s case w as f i l e d i n t h e S t a t e

Court b y t h e p r es e nt p l a i n t i f f s , a group o f d e p o s i t o r s o f t h e

Neoga Na ti on al Bank, ag ai ns t

t h e

o f f i c e r s

a n d

d i r e c t o r s

o f

t h a t t a n k . T ha t p e t i t i o n w a s s u b s t a n t i a l ] y l i k e t h e amended

p e t i t i o n now before th i s co ur t , s o f a r a s t h e a l l e g a t i o n s a s -

s e r t i n g l i a b i l i t y a g a in s t t h e o f f i c e r s a n d d i r e c t o r s o f t h e

Neoga Bank a r e conce rned. This case w a s , u po n p e t i t i o n , r e -

moved from t h e Sta te Cour t t o t h e U n i t e d S t a t e s D i s t r i c t C ou r t

f o r t h e

E a s t e r n D i v i s i o n

o f

I l l i n o i s ,

a n d

a f t e r r emova l

t h e

amended b i l l

o f

complain t

w as

f i l e d .

I n t h e

amended b i l l

o f

compla in t t h e Federal Reserve Bank of Chicago w a s f o r t h e f i r s t

time made a p a r t y a n d t her e were added a l l eg a t i on s which a t t emp ted

t o a s s e r t l i a b i l i t y a g ai n s t t h e Federal Reserve Bank o f Chicago.

7/17/2019 frsbog_mim_v29_0159.pdf


X-6130

The p r e s e n t h e a r i n g i s upon a mot ion o f t h e F e d e r a l

Reserve Bank o f Chicago t o d iWis fe t h e amended b i l l of com-

p l a i n t a s t o i t , o n t wo grounds :

( 1 ) Thh.t t h e amended b i l l o f c o m pl a in t f a i l s t o s t a t e

a cause o f a c t i o n a g a i n s t t h e Federal Heserve Bank

o f Chicago, a n d

( 2 ) That th er e i s a m i s j o i n d e r o f cause s o f a c t i o n i n

t h a t a n e n t i r e l y d i f f e r e n t c a u s e of a c t i o n i s sought

t o be s e t up by th e

c o m p la in a n t s a g a in s t

t h e

d i r e c -

t o r s a n d o f f i c e r s o f t h e Neoga Bank fro m t h a t soug ht

t o b e s e t u p

a g a i n s t

t h e

Federal Reserve Bank

of

Chicago.

I n t h e amended b i l l o f compla in t , i t i s a l l e g e d t h a t t h e

Eeoga National Bank w as i n c o r p o r a t e d i n 1 9 0 5 w i t h a c a p i t a l o f

$ 2 5 , 0 0 0 . 0 0 , a n d c o n t i n u e d to do b u s i n e s s i n t h e V i l l a g e of

Neoga un t i l

t h e 1 2 t h d a y o f

J a n u a r y ,

1 9 2 5 , a t

which t ime

i t

suspended bus ine ss b y d i r e c t i o n of a na t iona l bank examiner ,

a n d t h e C o m p t r o l l e r o f t h e Cur rency appo in ted a R e c e i v e r f o r

t h e bank . T he o r i g i n a l R e c e i v er , M r. S h u b e r t , w a s succeeded

b y M r . Har ry B . Marsh during t h e y e a r 1 9 2 7 . M r . Marsh, a s

R e c e i v e r ,

i s

made

a

p a r t y

t o t h e

ame nde d b i l l .

T he

d i r e c t o r a t e

o f t h e

b an k r e m ain e d p r a c t i c a l l y u n ch a ng e d d u r in g

t h e

t h r e e

o r

f o u r y e a r s p r e c e d in g i t s s u s p e n s io n a n d t h e n i n e d i r e c t o r s who

a c t e d d u r in g t h a t p e r i o d a r e a l l named p a r t i e s de fe ndan t wi t h

t h e e x c e p t i o n o f S tephen Bur ton . M r. Bur ton hav i ng d ied , h i s

h e i r s a t l a w , t o whom h i s e s t a t e h a s b e e n d i s t r i b u t e d , a r e

made p a r t i e s d e f e n d a n t b y th e b i l l . Judgment i s a s k e d a g a in s t

t h e i n d i v i d u a l d i r e c t o r s a n d o f f i c e r s o n t h e a l l e g e d g r o u n d of

7/17/2019 frsbog_mim_v29_0159.pdf


X-6130

3

t h e i r c a r e l e s s a n d negligent management o f t h e a f f a i r s o f t he

t a n k , a n d Svlsb o n t h e g round th a t t h ey wro ngfu l ly a n d unlaw-

f u l l y a c c e p t e d d e p o s i t s f ro m

t h e

p l a i n t i f f s when t h e y

( t h e

d i r e c t o r s a n d o f f i c e r s ) k n e w o r should have known that t h e

Neoga National Bank

w as

i n s o l v e n t .

T he p r a y e r o f t h e b i l l a s k s a s t o t h e d i r e c t o r s a n d

o f f i c e r s ,

t ha t t hey a n d each o f them h e r e q u i r e d a n d compelled

t h e r e b y t o accoun t f o r a n d p a y over t o t h e complainants

a n d o t h e r d e p o s i t o r s of She Heoga nat ional Bank o f Heoga,

I l l i n o i s , such sums

o f

money wi th i n t e r es t t he r eon

a s

have been los t

t o t h e

compla inan t s

a n d

each

o f

them

a n d

o t h e r d e p o s i t o r s o f sa id bank, b y , through o r o n account

of t h e i r w r o n g f u l a n d u n l a w f u l a c t s a f o r e s a i d ; a n d tha t

they a n d each o f them b e r e q u i r e d t o r e imbur se t h e c o m -

p l a i n a n t s

a n d

each

o f

them

f o r a l l

l o s s e s o c c a s i o n e d

t o

t h e

compla inan t s

o r

e i t h e r

o f

them

b y t h e

mismanagement

o f said bank o r b y t h e i r n e g l e c t o r f a i l u r e t o d i scharge

t h e i r d u t i e s a s o f f i c e r s o r d i r e c t o r s o f s a i d T he Heoga

National Bank,

a n d

tha t t hey

b e

r e q u i r e d

a s

t r u s t e e s

f o r

t h e

compla inan t s

a n d

each

o f

them

t o

accoun t

f o r a n d

p a y over t o t h e complainants a n d each o f them t h e funds

a n d d e p o s i t s a f o r e s a i d o f t h e complainants a n d each o f

them l o s t t hrough a n d b y t h e wrongfu l a n d un lawfu l ac t s

o f

s a i d d e f e n d a n t s

who

w er e d i r e c t o r s

o f

s a i d

The

Neoga

Nat ional Bank

o f

Neoga, I l l i n o i s ,

a s

h e r e i n b e f o r e

s o t

f o r t h ;

The p r a y e r f o r judgment against t h e Federal Reserve Bank

of Chicago i s i n these words , •

That your ora tors m ay have a d e c r e e a g a i n s t t h e

d e f e n d a n t , TEHERAL RESERVE BANK OF CHICAGO, r e q u i r i n g

i t t o

accoun t

t o t h e

R e c e i v e r

of The

Neoga National

Bank

o f

Ne oga , I l l i n o i s ,

f o r

such sums

o f

money with

i n t e r e s t t h e r e o n a s have been los t t o t h e complainants

a n d each o f them a n d o t h e r d e p o s i t o r s of sa id bank, b y ,

t h rough o r o n accoun t o f those wrongfu l a n d un lawfu l

a c t s

a s

a f o r e s a i d ,

7/17/2019 frsbog_mim_v29_0159.pdf


X-6130

4

An e x a m i n a t i o n o f t h e amended bi l l di s cl os es Vari ous

a l l e g a t i o n s , w hi ch w i l l be l a t e r c o n s i d e re d i n d e t a i l , c ha r g -

i n g t h a t t h e r e w as by l aw a duty upon t h e Federal Reserve Bank

o f Chicago t o examine t h e Neoga Na ti on al Bank, a n d t h a t i f such

e x a m i n a t i o n s

h a d

been made,

t h e


o f

Chicago

would have d is co ver ed

t h e

a l l eg ed misconduc t

o f t h e

d i r e c t o r s

a n d o f f i c e r s o f t h e Neoga National Bank a n d t h e i n s o l v e n c y o f

t h e bank; b u t i t i s n o t a l l e g e d t h a t t h e Fe de ra l Reserve. Bank

o f Chicago co ul d have tak en a n y d i s c i p l i n a r y a c t i o n a s a c o n -

sequence o f such d i scovery o n i t s p a r t . I t w i l l h e r e a f t e r be

shown that

t h e


o f

Chicago owed

no

such

du ty t o t h e d e p o s i t o r s o f t h e Neoga National Bank* a n d t h a t no

w r o n g f u l a n d u n l a w f u l a c t s & r e i n f ac t we l l cha rged ag a in s t

i t i n t h e amended b il l.

Apart , however , f rom t h e a l l e g a t i o n s w h i c h t h u s s e e k t o

c h a r g e n e g l i g e n c e a g a i n s t

t h e

Federal Reserve Bank,

t h e

h i l l

does claim a r i g h t , o n t h e p a r t o f t h e p e t i t i o n e r s , t o r e l i e f

growing o u t o f t h e f a c t t ha t upon suspe ns ion o f business by

t h e Neoga Bank under t h e o r d e r s o f t h e Compt ro l l e r o f t he

Currency, t h e Federal Reserve Bank o f Chicago appropr i a t ed t h e

s t o c k i n t e r e s t o f t h e Neoga Na ti on al Bank i n - t h e Federa l Reserve

Bank o f Chicago o f t h e va lue o f $ 1 ,0 0 0 * 0 0 , c r e d i t i n g i t s value

upon t h e i n d e b t e d n e s s o f t h e Neoga Na ti on al Bank t o t h e Federa l

Reserve Bank

o f

Chicago;

a n d

f u r t h e r

s e t o f f

a g a i n s t t h a t

i n d e b t e d n e s s t h e d e p o s i t s o f t h e Neoga n a t i o n a l Bank i n t h e

Federal Reserve Bank o f Chicago t o t h e c r e d i t ' o f t h e r e s e r v e

7/17/2019 frsbog_mim_v29_0159.pdf


X-6130

f u n d ; a n d f u r t h e r u s e d t h e c o l l a t e r a l o f t h e Neoga National

Bank t o t h e e x t e n t n e c e s s a r y t o p a y t h e r e s i d u e o f t h e i n d e b t -

edness ,

From

t h e

f o r e g o i n g

i t i s

c l e a r t h a t

t h e

causes

o f

a c t i o n

sought t o b e s e t u p a g a i n s t t h e Federal Reserve Bank o f Chicago

have t o d o : f i r s t , w it h t h e a l l e g e d d u t y o f t h e Federa l

Reserve Bank

o f.

Chicago

t o

examine

t h e

a f f a i r s

a n d

d i s c i p l i n e

t h e o f f i c e r s o f t h e Ueoga n a t i o na l Bank; a n d second- with t h e

a c t i o n

o f t h e

Chicago Fed era l Reserve Bank, a f t e r

t n e

suspen-

s i o n o f t h e Neoga Bank, i n t h e a p p l i c a t i o n o f r e s o u r c e s o f t h e

Ueoga Bank

i n i t s

hands

8

s o f a r a s

they were nec css ary ,

t o t h e

payment o f t h e i n d e b t e d n e s s of that member bank to i t , Nei the r

o f

t h o s e a l l e g e d c a u s e s

of

act ion grow

o u t o f , o r a r c i n a n y

w ay a s s o c i a t e d w i t h , t h e a l l e g e d n e g l i g e n c e a n d misconduct o f

t h e

d i r e c t o r s

a n d

o f f i c e r s

o f t h e

Ueoga Bank.

T he c a u s e s o f a c t i o n a t t e m p t e d t o b e a s s e r t e d a g a i n s t

t h e


o f

Chicago

bo bh

r e s t upon

t h e

du t i e s

imposed upon a n d t h e r i g h t s g i v e n t o Federa l reserve banks b y

l a w .

These du t i e s

a n d

r i g h t s

c a n b e

do te r a ined on ly

b y an

examina t ion o f t h e Federa l Reserve A c t , which, o f c o u r s e , i s

to b o i n t e r p r e t e d a s a whole a n d s o c o n s t r u e d a s t o accompl ish

t h e

g r o a t p u b l i c p u r p o s e s

f o r

which

i t w a s

p a s s e d ,

THE FEDERAL RESERVE SYSTEM:

Federal Reserve Banks

a n d

Member Banks,

T he Federa l Rese rve A c t w a s approved b y t h e P r e s i d e n t o n

7/17/2019 frsbog_mim_v29_0159.pdf


X-6130

6

t h e 23rd. d a y o f December* 1 9 1 3 . I j s t i t l e i s a s f o l l o w s :

An Ac t t o

p r o v i d e

f o r t h e

e s t a b l i s h m e n t

o f

F e d e r a l

Reserve Banks, t o f u r n i s h a n e l a s t i c c ur r en c y, t o a f f d r d

means o f r ed is co un t i ng commerc ia l pape r ; t o e s t a b l i s h a

m o r e e f f e c t i v e s u p e r v i s i o n o f banking i n t h e U n i t e d S t a t e s ,

a n d f o r

o t h e r p u r p o s e s .

; (The

Fede ra l Rese rve

A c t , 3 8

S t a t . 3 6 8 ; Comp. Stat . A n . 1 9 1 6 , S e c . 9799; 3 9 S t a t . 7 9 2 ;

4 0 S t a t . 2 3 8 ; i s bes t found i n U . S . C . A. , T i t l e 1 2 , S e c .

2 2 1 e t s e q . )

P r i o r t o t h e p a s sage o f t h e Fede ra l Rese rve A c t , n a t i o n -

a l banks we re in co rp ora te d a n d governed under t h e National Bank

A c t p a s s e d a t t h e c l o s e o f t h e C i v i l W ar . T h e c h a r a c t e r i s t i c

o f t h e

Nat iona l Bank

A c t w a s

t h a t

i t

p r o v i d e d

f o r t h e

i s suance

o f n a t i o n a l ba nk n o t e s a s t h e p r i n c i p a l r e l i a n c e o f t h e country

f o r

c u r r e n c y ,

a n d

b a s e d

t h e

amount

o f

such no te s

a t a n y

time

p o s s i b l e u p o n t h e amount o f bonds o f t h e Federal Government

o u t s t a n d i n g . T h e debt o f t h e National Government b y r e a s o n o f

w a r e x p e n d i t u r e s w a s v e r y l a r g e a n d f o r seme y e a r s Government

bonds cou ld b e bought by n a t i o n a l b a n ks a t s o f a v o r a b l e a r a t e

a s t o

enable them

t o

s u p ply a d e q u a t e ly

t h e

c o u n t r y ' s n e e d s

f o r

c u f r o n c y . A s t h e na t iona l deb t began t o b e p a i d o f f , however,

t h e b a s i s f o r c u r r e n c y i s s u e d w a s co ns ta n t ly na r rowed . Mean-

w h i l e , w i th t h e c o mm e rc i al , i n d u s t r i a l a n d a g r i c u l t u r a l

development of t h e c o u n t r y , t h e need f o r cur rency inc rea sed*

The consequence,-, o f t h i s w as t h a t t h e c u r r e n c y of t h e country

became r ig id a n d . i n e l a s t i c , a n d t h e demand f o r cur rency

e x c e s s i v e a n d f l u c t u a t i n g , u n t i l f i n a l l y t h e count ry reached

t h e s i t u a t i o n w he re i n d u s t r i a l a n d commerc ia l p rospe r i ty

c r e a t e d

a

c e r t a i n t y

o f

c u r r en c y s t r i n g e n c y w i t h r e s u l t i n g

7/17/2019 frsbog_mim_v29_0159.pdf


- -

j

X-6130

7

p a n i c . A f u r t h e r c au se of p a n i c s , c r i s e s and. d e p r e s s io n s

a rose f rom t h e f a c t t h a t by th e Nat iona l Bank A c t , n a t i o n a l

banks were required t o ma i n ta in re se r ve s based upon s t i pu l a te d

p e r c e n t a g e s o f t h e i r d e p o s i t l i a b i l i t i e s . These r e s e r v e s

w e r e r e q u i r e d t o be d e p o s i t e d i n o t h e r banks i n r e s e r v e a n d

c e n t r a l r e s e r v e c i t i e s , a n d i n t h e course o f t ime , t h e

p r a c t i c e g r e w u p o f c onc en t ra t in g na t i on a l bank re se rv e

d e p o s i t s i n g re a t metrop olita n banking ce nt er s where employ-

ment w a s found f o r surp lus funds by lo a n s f o r s p e c u l a t i v e

p u r p o s e s . When s t r i n g e n c i e s a r o s e a n d de po s i to rs began t o

withdraw t h e i r de po s i ts , banks were ob l i ge d t o c a l l i n t h e i r

r e s e r v e s . A s the se ca l l s inc re a se d , they accumula ted p r e s su re

o n t h e g r e a t m e t r o p o l i t a n b a n k s c a u s in g r a p id ly r i s i n g r a t e s

f o r c a l l money, dumping o f s e c u r i t i e s i n s toc k mar ke t s , wi t h

c o ns e qu e nt f a l l i n g p r i c e s ,

a n d , a l l t o o

of ten, commerc ia l

a n d

bank f a i l u r e s , which qu ic k ly en l a rge d

a

r e l a t i v e l y l o c a l

bank scare into a gene ra l j , an ic .

T he ve ry na tu re o f t h e f i n a n c i a l s y s t e m o f t h e

c o u n t r y , t h e r e f o r e , w a s s uc h t h a t p a n i c s w er e i n e v i t a b l e a n d

t h e f r e q u e n c y a n d s e v e r i t y o f th e i r o c c ur r e n c e i n c r e a s e d w i th

t h e development a n d expans ion o f t h e c o u n t r y ' s b u s i n e s s . To

mee t th i s s i t u a t i o n Congre ss pa s sed t h e s o - c a l l e d A l d r i c h -

V r e e l a n d A ct o f May 3 0 , 1 9 0 8 , which sought t o l e n d e l a s t i c i t y

t o t h e c u r r e n c y b y a u t h o r i z i n g t h e i s suance : o f c urr enc y bas ed

7/17/2019 frsbog_mim_v29_0159.pdf


X-6130

8

upon commercial paper b y t h e a s s o c i a t i o n o f banks known a s t h e

Hat ion a l Cur rency Ass oc ia t i on . This

A c t w as

temporary

i n

c h a r a c t e r

a n d

pu r pos e ,

o n e

s e c t i o n

o f i t

a u t h o r i z i n g

t h e

appoin tment

o f a

national Monetary Commission

t o

s t udy

t h e

problem

a n d

suggest more fundamental

a n d

pe rmanen t r e l i e f *

The

r e p o r t

o f t h e

Na ti on al Monetary Commission made c l e a r

t h e

e v i l s

to be

cu red : namely,

t h e

i n e l a s t i c i t y

o f t he

cu r r ency

a n d t h e

l a c k

o f

r e a l r e s e r v e s a v a i l a b l e

t o

meet

a n d

r e l i e v e f i n a n c i a l

u n e a s i n e s s .

T h e Federa l Reserve A c t w a s drawn a n d p a s s e d t o cure

t h e s e e v i l s . T he t i t l e o f t h e A c t qu ot ed above shows t h a t

i t s pr imary purposes h a d t o d o w i t h t h e e s t a b l i s h m e n t o f r ea l

r e s e r v e s

i n

Fe de ra l re se rv e banks

a n d

a u t h o r i z a t i o n

of an

e l a s t i c c u r r e n c y »

T he

t i t l e f u r t he r s how s t ha t

t h e A c t

aimed

a t a

m o r e e f f e c t i v e s u p e r v i s i o n

o f

banking

i n t h e

Uni ted

S t a t e s . T h i s ,

o f

course, does

n o t s a y a

s u p e r v i s i o n

of

banks

but a


o f

banking

a n d i t

w i l l l a t e r

be

made clear

t h a t

t h e


i n

q u e s t i o n

h a d t o d o

wi th banking p r a c -

t i c e s n e c e s s a r y

t o be

c o n t r o l l e d

t o

a s s u r e

t h e

c h a r a c t e r

o f

commercial paper

t o be

u s e d

a s a

cu r r ency bas i s ,

a n d

with

re ser ve de po s i t s , which were

b y t h e l a w

r e q u i r e d

t o b e

accumu-

l a t e d

i n

Fede r a l r e s e r ve banks r a t he r t han

i n

p r i v a te banks

a n d

thus removed from speculative engagement.

A n examinat ion o f t h e Federa l Reserve A c t shows that

7/17/2019 frsbog_mim_v29_0159.pdf


X-6130

9

i t e s t a b l i s h e s a n agency o f t h e Government f o r t h e accom-

p l i s h m e n t

o f

p u b l i c p u r p o s e s .

A t t h e

head

o f t h e

system

i s

a n o f f i c i a l board composed o f o f f i c e r s a p po i nt e d by t h e P r e s -

i d e n t a n d conf i rmed b y t h e Sena te , l av in g n o invesem0£$»

i n t e r e s t i n a n y bank i n t h e system, a n d e x e r c i s i n g p u b l i c

power s . T h e Federa l resdrve banks a s distingui8h #& fro m t h e

Federal Reserve Board a r e r e g i o n a l . A l l n a t i o n a l b a n k s i n

e a c h d i s t r i c t a r e r e q u i r e d t o b e ntetabers o f t h e Federa l

r e se rve bank

o f

thfe distf ibt t t r id

t o

Subsc r ibe

i n a

f i x e d

p r o -

p o r t i o n t o i t s c a p i t a l s t o c k . E l i g i b l e s t a t e b an ks a n d t r u s t

companies

a r e

i n v i t e d

t o

j o i n

t h e

System under

a n

e q u a l i t y

o f

burden a n d o f o p p o r t u n i t y w i t h t h e n a t i o n a l b a n k s , b u t t h e

whole System i s a p u b l i c , o f f i c i a l t h i n g . The d i r e c t o r s o f

t h e Federa l r e se rve banks a r e o f t h r e e c l a s s e s , t h e members

of one c l as s be ing appo i n ted b y t h e Federal Reserve Board.

B u t t h e

s toc kho l d ing banks

a r e

l i m i t e d

t o a n

accumula t ive

d i v i d e n d o f 6 $ o n t h e p a i d i n c a p i t a l , a n d th roughou t t h o

e n t i r e A c t i t i s c l e a r t h a t t h e Federa l reserve banks, ac t ing

under

t h o

d i r e c t i o n

a n d

c o n t r o l

o f t h e

Federal Reserve Board,

a r e a g e n c i e s o f t h e Federa l Government , exerc is ing govern-

ment al power, equip ped wi th

t h e

r i g h t

t o

a c q u i r e i n f o i m a t i o n

wherever necessa ry t o enable them t o exerc ise tha t power

w i s e l y ,

a n d

wi th ce r t a in d i sc ip l i na ry power over

t h e

m'dmbor

banks, which, however , i s l i m i t e d t o t h a t n e c e s s a r y t o insu re

7/17/2019 frsbog_mim_v29_0159.pdf


X-6130

1 0

p e r f o r m a n c e b y t h e members o f t h o s e o b l i g a t i o n s t o t h e system

which a r e n e c e s s a r y t o c a r r y o u t t h e p u b l i c p u r p o s e s f o r

which t h e banks were org an ize d . There i s n o s u g g e s t i o n a n y -

where

i n t h e a c t o f a n y

duty runn ing f rom Fed era l re se rv e

banks t o t h e s t o c k h o l d e r s a n d d e p o s i t o r s of member banks. As

a m a t t e r o f f a c t , a t t h e time o f t h e deb ate upon t h e Federa l

Rese rve A c t , a n amendment w as r e j e c t e d b y Congress t o i n t r o -

duce what would i n e f f e c t have been a g u a r a n t e e o f d e p o s i t s

t o

member banks,

a n d t h e A c t w a s

l e f t w i t h o u t

a n y

such d i r ec t

o r even ana logous p rov i s ion .

FUNCTIONS AFP POWERS OF FEDERAL RES3RVS BAMS

From

t h e

f o r e g o i n g

i t i s

c l ea r t h a t Fede ra l r e se rve

banks a r e n o t p r i v a t e money m ak in g i n s t i t u t i o n s b u t a r e r a t h e r

i n s t r u m e n t a l i t i e s o f t h e F ed er al Government th ro ug h whi ch

d e f i n i t e n a t i o n a l p u r p o s e s

a r e

a c c o m p l is h e d . S p e c i f i c s e c t i o n s

o f t h e Federa l Rese rve A c t i l l u s t r a t e t h i s s t a t e m e n t . Thus

U . S . C . A . , T i t l e 1 2 , C h . 3 , S e c . 2 4 8 enumerates t h e powers o f

t h e Federa l Reserve Board a n d each o f the se powers i s shown t o

have a p u b l i c o b j e c t r e l a t e d t o t h e main tenance o f sound f i n -

a n c i a l c o n d i t i o n s t h r o u g h o u t t h e c o u n t r y .

S e c . 2 8 1 o t s e q .

show

t h e

method

o f

o r g a n i z i n g F e d e r a l

r e s e r v e b a n k s . S e c . 3 4 1 enumerates t h e powers o f Federa l

r e se rve banks , a n d i t i s h er e s i g n i f i c a n t t o note that oven

7/17/2019 frsbog_mim_v29_0159.pdf


X-5130

Federa l r e se rve banks

m a y n o t

t r a n s a c t b u s i n e s s u n t i l th e y

have been duly au th or iz ed th er e t o by th e Compt ro l l e r of the

C u r r e n c y .

The

e x t e n s i o n

o f

credi t accommodat ions ,

t h e

i s suance

o f F e d e r a l r e s e r v e n o t e s , a n d a p a r c o l l e c t i o n s y s t e m f o r t h e

genera l benef i t o f t h e f i n a n c i a l s y s t e m o f t h e c o u n t r y a r e

a l l shown i n t h e s u c c e e d i n g s e c t i o n s , a n d v er y s t r i c t l i m i t -

a t i o n s a r e p r o v i d e d i n t h e s t a t u t e a s t o what Federa l reserve

n o t e s

ma y be

a u t h o r i z e d

t o be

i s s u e d ,

an d how

i s sued no tes

s h a l l be p r o t e c t e d by g o l d d e p o s i t s i n t h e T r e a s u r y . ( S e c .

4 1 4 ) . I n

l i k e manner , beginning wi th

S e e . 4 5 1 , t h e

s u b j e c t

o f

bank reserves i s f u l l y covered . Throughou t the se se c t io ns i t

w i l l be found th at such su pe rvi s i on ar y power a s i s g i v e n t o

t h e Fe de ra l re se rv e bank over i t s members h a d t o d o w i t h t h e

p r o t e c t i o n o f t h e r e s e r v e , o r t h e s a f e g u a r d i n g o f cur rency

i s s u e d ,

o r

o t h e r w i s e f u r t h e r i n g

t h e

g r e a t g e n e r a l p u r p o s e s

of

t h e Federa l Rese rve A c t i n t h e w ay o f p r e v e n t i n g t h e devot ion

o f e xp an de d c u r r e nc y f a c i l i t i e s t o s p e c u l a t i v e u s e s o f t h e

p r e j u d i c e o f sound bu si ne ss un de r t ak in gs . Nowhere i n these

s e c t i o n s i s a n y g e n e r a l o r s p e c i f i c v i s i t o r i a l o r d i s c i p l i n a r y

power given

t o

Federal reserve banks over their members.

A l l n a t i o n a l b a n k s a r e r e q u i r e d b y t h i s A c t t o be

members

o f

F e d e r a l r e s e r v e b a n k s .

The

Heoga National Bank

was

a n a t i o n a l b a n k . The b i l l o f c o m p l a i nt a l l e g e s t h a t t h e Kcoga

Bank w as o r g a n i z e d i n 1 9 0 5 a s a n a t i o n a l b a n k i n g a s s o c i a t i o n .

7/17/2019 frsbog_mim_v29_0159.pdf


I t w a s , th e r e f o r e , o rg an iz ed some yea r s be f o re t h e enactment

o f t h e

Federa l Reserve

A c t .

When

t h e

Federa l Reserve

A c t

w a s p a s s e d , t h e r e w as no concur r en t r epea l o f t h e e a r l i e r

na t iona l Bank

A c t . T he

system

o f

n a t i o n a l t a n k s t h e n

i n

e x i s t e n c e w as c o n t i n u e d . The method o f o r g a n i z i n g , o p e r a t i n g ,

c o n t r o l l i n g , d i s c i p l i n i n g a n d d i s s o l v i n g n a t i o n a l b a n k s r e -

mained unchanged. Nat ion al banks wore t i e d in to t h e Federa l

Reserve System i n d e f i n i t e ways f o r d e f i n i t e p u r p o s e s , b u t

r emained o the rwise

a s

they

h a d

been under

t h e o l d

Nat iona l

Bank A c t . I t i s , t h e r e f o r e , i m p o r t a n t t o s t a t e b r i e f l y j u s t

how n a t i o n a l b an k s a r e or g a ni z e d, d i s c i p l i n e d a n d c o n t r o l l e d .

U .S .C .A . , T i t l e 12 , Ch . 2 , beginn ing wi t h S e c . 2 1

( R e v . S t a t . 5 1 3 3 e t s e q . ) d e a l s w i t h t h a t s u b j e c t . An

examr-

i n a t i o n

o f

these sec t ions shows that

t h e

Compt ro l l e r

o f t he

Cur rency , ac t in g under t h e d i r e c t i o n o f t h e S e c r e t a r y o f t he

T r e a s u r y ( R e v . S t a t . S e c . 3 2 4 ; U .S .C .A . , T i t l e 12 , Ch . 1 ,

S e c . 1 ) , i s th e

c e n t e r

o f

a u t h o r i t y w i t h r e g a r d

t o

n a t i o n a l

banks. They c a n b e formed only upon h i s a p p r o v a l a s p r o -

v i d e d i n S e e s . 2 1 a n d 2 2 . He keeps t h e r e c o r d s o f t h e i r

o r g a n i z a t i o n a n d only when h e h a s approved t h e s t e p s b y which

they were organized c a n they begin t o t r a n s a c t b u s i n e s s a s

n a t i o n a l b a n k s . ( S e c . 2 6 a n d 2 7 ) . A l l changes i n t h e i r

o r g a n i z a t i o n , l o c a t i o n o r name must b e f i r s t s u b mi t t ed t o

a n d

approved

b y t h o

C o m p t r o l l e r . C o n s o l i d a t i o n s

a n d t h e

7/17/2019 frsbog_mim_v29_0159.pdf


. f __

X-6130

1 3

e s t a b l i s h m e n t a n d o p e r a t i o n o f branches a r e s u b j e c t t o t h e

C o m p t r o l l e r ( s a p p r o v a l , a n d s t a t e banks m ay become n a t i o n a l

b a n k s o n l y a f t e r h a v i n g s a t i s f i e d

t h e

Compt ro l l e r

o f

the r

compl iance wi th t h e r e q u i r e m e n t s o f t h e s t a t u t e s

e

The enfo rcemen t o f t h e National Bank A c t i s p l a c e d

i n t h e

hands

o f t h e

Compt ro l l e r

b y S e c . 9 3 ( R e v .

State 5239),

a n d b y Sec* 1 9 1 t h e Compt ro l l e r i s g i v e n a u t h o r i t y t o appo in t

Receivers when i n h i s o wn s ou nd d i s c r e t i o n h e h a s become

s a t i s f i e d t h a t a na t iona l bank i s i n s o l v e n t . I n o rde r tha t

t h e

Compt ro l l e r

m ay

have

t h e

in for ma t io n upon which

t o

base

t h i s v i s i t o r i a l a n d d i s c i p l i n a r y a c t i o n , i t i s p r o v i d e d i n

U.S .C.A. C h . 3 , S e c . 4 8 1 ( R e v . Sta t . 5240) t

n

The Comptrol ler

o f t h e

Currency,

w i t h t h e approva l o f t h e S e c r e t a r y o f t he

Treasury , shal l appoint examiners who s h a l l

examine every member bank other than those

e x p r e s s l y e x c e p t e d b y S e c . 3 3 0 o f t h i s t i t l e ,

a t l e a s t t w i c e i n each ca lendar year a n d

o f t e n c r i f n e c e s s a r y ;

I t i s thus c l ca r t ha t a l l examina t ions o f n a t i o n a l

banks

t o

d e t e c t

a n d

c o r r e c t n e g l i g e n c e

o r

misconduct

o f t h e

k i n d a l l e g e d i n b i l l o f complain t agai nst t h e o f f i c e r s a n d

d i r e c t o r s o f t h e Eeoga National Bank i s committed t o t h e

Compt ro l l e r o f t h e Currency a n d n o t t h e Federa l reserve bank

o r

Board# Th is

w a s

t r u e b e f o r e

t h e

p a s s a g e

o f t h e

Federa l

Rese rve A c t a n d r emains t rue now, A d i f f e r e n t s i t u a t i o n

e x i s t s w i t h r e g a r d t o state banks, members o f a Federa l r e se rve

7/17/2019 frsbog_mim_v29_0159.pdf


/ i .J

X-6130

1 4

bank .

We a r e n o t

con cer ned wi th them

i n

t h i s ca s e

and . i t

w i l l

be

s u f f i c i e n t

t o s a y

t ha t s t a t e banks ob j ec t ed

t o

being

examined

by

n a t i o n a l bank examine rs

a s

they were al re ad y

s u b -

j e c t

t o

exami na t i on

b y

s ta te bank examiners .

A

l i m i t e d

d i s -

c r e t i o n

w a s ,

t h e r e f o r e , g i v e n

t o t h e

Federa l r eserve bank

t o

examine member state banks when

f o r a n y

r e a s o n

t h e

Federa l

reserve bank

i n

q u e s t i o n d e c l i n e d

t o

a c c e p t

t h e

r e s u l t

o f

exami na t i ons

b y

s t a t e exami ne r s .

B u t

w i t h r ega r d

t o

n a t i o n a l

banks t h e st at em en t above made i s t r u e . The en t i r e pow er o f

exami na t i on

a n d

d i sc ip l i ne over na t i on a l banks remains

i n t h e

C ompt r o l l e r a s i t w a s b e f o r e t h e pas s age o f t h e F e d e r a l R e -

s e r v e

A c t .

C e r t a i n d i s c r e t i o n a r y

a n d

v o l u n t a ry r i g h t s

o f

supplementa l examina t ion

a r e

g i ven

t o t h e

Federa l r eserve banks

w i t h r ega r d

t o

member national banks

f o r

s p e c i f i c p u r p o s e s ,

b u t t hey a r e n o t v i s i t o r i a l o r d i s c i p l i n a r y a n d they impose

n o

duty upon

t h e


o f t h e

k i n d a l l e g e d

i n

t h e b i l l o f compla in t . With the se gpncra l obs erv a t i ons wo may

now

p r o c e e d

t o

examine

t h e

causes

o f

a c t i o n a t t e m p t e d

t o b o s e t

u p a g a i n s t t h e Federal Reserve Bank o f Chicago i n t h e b i l l of

compla in t

i n

t h i s ca s e .

I .

THE

AIMMD BILL DDES

NOT

STATS

A

CAUSE

OF

ACTION ACAIHST

THE

FEDERAL RESERVE

BAITK

OF

CHICAGO.

A t t h e

o u t s e t

i t i s

i mpor t an t

t o

s e p a r a t e

t h e

a l l o g a -

7/17/2019 frsbog_mim_v29_0159.pdf


t i o n s o f t h e M i l o f complain t in to tw o c l a s s e s :

1 . Those which a l le ge d a b r e a c h o f duty growing

o u t o f t h e n e g l i g e n t o r c a r e l e s s f a i l u r e o n

t h e p a r t o f t h e Federal Reserve Bank o f

Chicago t o examine t h e Heoga Bank; a n d

2 .

Claims as s e r t e d because

o f t h e

a c t i o n t a k e n

b y t h e Federal Reserve Bank o f Chicago a f t e r

t h e i n s o l v e n c y o f t h e Heoga Bank.

1 . A l l e g e d F a i l u r e o f Duty o f Federa l Reserve

Bank

o f

Chicago.

F o r t h e conven ience o f t h e c o u r t , w e s e t o u t here

s e r i a l l y a l l th e a l l e g a t i o n s o f t h e b i l l o f compla in t dea l ing

w i t h

t h e

a l l e g e d f a i l u r e

o f t h e


of

Chicago t o t ake ac t i on which i t i s a s s e r t e d i t w a s i t s duty

t o t a k e f o r t h e p r o t e c t i o n o f t he compla inan t s .

I n

p a r a g r a p h

2 ,

page

3 , i t i s

s a i d ;

*** th a t sa id Ac t s o f Congress a l so r e -

qu i r ed sa id bank t o be a member o f t h e Federa l

Reserve Bank o f Chicago a n d empowered said

Fe de ra l Reserve Bank when ext end ing c r e d i t t o

a member bank t o s u p e r v i s e a n d examine t h e

b u s i n e s s

of

such member bank

i n

l ike manner

t o

t h e s u p e r v i s i o n a n d e x a m i n a t i o n e x e r c i s e d b y

t h e Compt ro l l e r o f t h e Currency;

I n p a r a g r a p h 9 , page 7 , i t i s s a i d :

* * * s a i d d i r e c t o r s w er e c o n s t a n t l y

r e q u i r e d t o make repor ts o f t h e f i n a n c i a l

c o n d i t i o n o f sa id bank over th t i r indiv idual

s i g n a t u r e s t o t h e Compt ro l l e r o f t h e Currency

a n d a l s o t o t h e Federal Reserve Bank o f

Chioago .

P a r a g r a p h 1 2 , page 1 1 , i n d e a l i n g w i t h t h e a l l e g e d

n e g l e c t o f duty o f t h e examining committee o f d i r e c t o r s o f

7/17/2019 frsbog_mim_v29_0159.pdf


t h e Neoga Na ti on al Bank a n d r e c i t i n g t h e things which should

have p u t sa id commit tee o n no t i c e , says :

***e.nd regardless o f t h e c o n s t a n t r e q u i r e -

ments

o f t h e


o f

Chicago

t h a t c o l l a t e r a l

o f t h e

f ac e va lue

o f

more than

twice t h e amount o f t h e money loaned t o t h e

Neoga National Bank should h e h e l d b y sa id

Federal Reserve Bank a n d r e g a r d l e s s o f t h e f a c t

t h a t

t h e


w a s i n

p o s s e s s i o n

o f s u b s t a n t i a l l y a l l o f t h e v a l u a b l e a s s e t s o f

sa id bank .

I n p a r a g r a p h 1 3 , page 1 2 , dea l in g wi th requ i re ment s

imposed b y t h e Comptrol ler o f t h e Currency a n d b y n a t i o n a l

bank examiners under h i s a u t h o r i t y t h a t t h o board o f d i r e c t o r s

improve Neoga Ban k's c on di t i on

' o u t o f

t h e i r p r i v a t e f u n d s ,

i t

i s s a i d :

• • • t h a t t h e Federal Reserve Bank o f Chicago

from whom t h e Neoga National Bank h a d borrowed

more than $80,000.00

i n 1 9 2 0 b y

r e d i s c o u n t i n g

a l ike amount of i t s note s wi t h sa i d Reser ve

Bank h a d been constant ly asking demands dur ing

a l l t h e y e a r s a f o r e s a i d o n t h e s a i d T he Neoga

Nat ional Bank

to

r e d u c e s a i d r e d i s c o u n t s

a n d

s a i d b o a r d

o f

d i r e c t o r s

h a d

r e d u c e d s a i d r e d i s -

c o u n t s i n 1 9 2 4 t o approximate ly $51,000.00,

t h a t s i n c e t h e y e a r 1 9 2 1 t h e q u a l i t y a n d c h a r a c t e r

o f

sa id r ed i scoun t s mere found

s o

u n s a t i s f a c t o r y

a n d

valueless tha t sa id Federa l Reserve Bank

r e -

q u i r e d t h e sa id board o f d i r e c t o r s t o turn over

t o sa id Fede ra l Rese rve Bank a s c o l l a t e r a l f o r

s a i d r e d i s c o u n t s a d d i t i o n a l s e c u r i t i e s o r notes

i n

approximate ly equal face value

t o

s a i d s e c u r -

i t i e s . r e d i s c o u n t e d ; t h a t t h e s a i d r e d i s c o u n t s

a n d c o l l a t e r a l in c l ud e d s u b s t a n t i a l l y a l l o f t h e

n o t e s a n d s e c u r i t i e s o f said bank which were o f

a n y va lue ; t ha t t h e sa id board o f d i r e c t o r s b e i n g

fu l ly aware tha t

t h e

said Federal Reserve Bank

h a d s u b s t a n t i a l l y a l l of i t s a s s e t s o f a n y value

i n i t s p o s s e s s i o n a n d knowing that t h e v a u l t s o f

sa id bank con ta ined n o s e c u r i t i e s o f a n y s u b s t a n t i a l

7/17/2019 frsbog_mim_v29_0159.pdf


a

%

S - S 1 S J

IV

v a l u e a n d con ta ined on ly funds r ecen t ly

d e p o s i t e d by customers o f t h e bank co nt in ue d

t o keep said bank open f o r business ;

I n p a r a g r a p h 1 4 , o n page 1 3 , i t i s s a i d t h a t t h e board

o f

d i r e c t o r s

o f t h e

ITeoga Bank made f a l s e

a n d

m i s l e a d i n g

r e p o r t s t o t h e Compt ro l l e r o f t h e Currency a n d caused them t o

#•

be p u b l i s h e d i n T h e Neoga News,

ii ***and t ha t by r e a s o n o f t h e f a l s e a n d m i s -

l e a d i n g c h a r a c t e r o f s a i d r e p o r t s t h e Comptrol ler

o f t h e Currency a n d t h e d e p o s i t o r s o f s a i d The

ITeoga national Bank were n o t informed a s t o t h e

a c t u a l c o n d i t i o n o f said bank a n d f a i l e d t o take

s t e p s t o r e p a i r o r p u t t h e t a n k i n l i q u i d a t i o n a t

a much e a r l i e r da t e by r e a s o n o f which t h e l o s s e s

o f

s a i d bank were fu r th er in cr ea se d .

P a r a g r a p h

1 6 , o n

page

1 4 , i s i n

f a l l

a s

f o l l o w s :

O r a t o r s f u r t h e r r e p r e s e n t t h a t The Neoga

National Bank was a member o f t h e Federa l Reserve

Bank o f Chicago from t h e o r g a n i z a t i o n o f s a i d

Reserve Bank i n 1 9 1 3 ; th at s a i d Fed er a l Reserv e

Bank wa s a corpora t ion governed by a Board o f

D i r e c t o r s a n d t h e chairman o f t h e Board o f D i r e c t o r s

i s known also a s •Federal Reserve Agent

1

; tha t

under t h e National Banking Laws t h e sa id Feder a l

Reserve Bank o f Chicago w a s empowered t o r e d i s c o u n t

b i l l s a n d n o t e s o f member national banks a n d when-

ever a n y member na t i on al bank re di sc ou nt ed pa per

w i t h t h e said Federal Reserve Bank immediately said

Federal Reserve Bank h a d f u l l a n d comple t e au thor i ty

under said banking laws with

t h e

a p p r o v a l

o f th e

sa id Federa l Reserve Agent

who was

t h e n

a n d

the re

t h e

chai rman

o f t h e

Board

o f

D i r e c t o r s

o f

sa id


t o

make special examinations

o f member banks rediscounting paper with said Federal

Reserve Bank; that The ITeoga N a t i o n a l Bank h a d been

r e d i s c o u n t i n g i t s paper wi th t h e Federa l Reserve

Bank o f Chicago f o r some years a n d i n t h e 1 9 2 0 b y

means o f s a i d r e d i s c o u n t i n g h a d borrowed from said

Fe de ra l Reserve Bank more th an $80 ,00 0.0 0; th at t h e

Nat ional Banking Laws requi red t h e Federal Reserve

Bank t o s o conduct such specia l examinat ions a s t o

7/17/2019 frsbog_mim_v29_0159.pdf


- vJ

X- 61GC

2 3

i n fo rm

t h e

Federal Reserve Bank:

o f t h e

cond i t ion

o f i t s

member banks

an d . o f th e

l i n e s

o f

c r e d i t

whic h were being ex te nd ed by them; t h a t one of

t h e o b j e c t s i n t h e e s t a b l i s h m e n t o f t h e Federa l

Reserve Bank System w a s t o e s t a b l i s h a more

e f f e c t i v e s u p e r v i s i o n o f t h e banks i n t h e Uni ted

S t a t e s ; t h a t i n t h e y e a r 1 9 2 0 t h e sa id Fede ra l

Reserve Bank made a r equ i r emen t of The ITeoga

na t iona l Bank tha t i t reduce i t s r e d i s c o u n t s w i t h

t h e Fe de ra l Reserv e Bank a n d t h a t i t p u t u p a s

c o l l a t e r a l w i th sa i d r ed i sco un to d paper o the r no t es

a n d s e c u r i t i e s o f approx imate ly t h e same face value

a s s a i d r e d i s c o u n t o d p a p e r ; t h a t t h e Federa l Reserve

Bank continued t o r e d i s c o u n t t h e p a p e r of The Neoga

National Bank

a n d i n

l ike manner

a s

a f o r e s a i d

c o n -

t i n u e d

t h e

r equ i r emen t

o f

c o l l a t e r a l s e c u r i t y

u p to

t h e

d a t e

of

c l o s i n g

t h e

s a i d

The

ITeoga n a t i o n a l Bank

when

t h e

amount

o f

sa id loan

to The

ITeoga national

Bank

w a s

approx imate ly $51 ,000 .00

a n d

tha t du r ing

a l l t h i s p e r i o d t h e Federal Reserve Bank w as c o n t i n -

uous ly mak ing c r i t i c i sm o f t h e banking methods o f

T he ITeoga National Bank a n d w a s c o n t i n u o u s l y c r i t i -

c i s i n g t h e c l a s s o f p a p e r f u r n i s h e d i t f o r l o a n s b y

t h e Federal Reserve Bank a n d a t t h e t ime of c los ing

s a i d T h e ITeoga National Bank t h e Federa l Reserve

Bank h a d r e q u i r e d t h e d e p o s i t w i t h i t o f more than

$130,000,,00 i n f ace va lue o f t h e n o t e s a n d paper o f

T he Neoga National Bank t o s e c u r e i t s l o a n o f

$ 5 1 , 000,00 a n d t h a t i n c o n s t a n t l y r e q u i r i n g s a i d

ad d i t i on a l co l l a t e r a l sa id Fede ra l Rese rve Bank

n o t i f i e d , t h e Board o f D i r e c t o r s of The Neoga National

Bank o f t h e w o r t h l e s s n o s s a n d u n s a t i s f a c t o r y n a t u re

o f t h e n o t e s a n d p a p e r s o f s a i d Neoga Na ti on al Bank

a n d i n o rde r t o p r o p e r l y s e c u r e i t s e l f t h e Federa l

Rese rve Bank r eq u i r ed c o l l a t e r a l o r more than double

t h e amount o f t h e l o a n to T h e ITeoga National Bank

because same were t o a l a r g e e x t e n t w o r t h l e s s a n d

n o t p ro per ly secured ; t ha t a t t h e t ime o f t h e c l o s i n g

o f t h e s a i d Neoga Na ti on al Bank i t h a d o n depos i t

a s a r es er ve fu nd wi th the Fe de ra l Rese rve Bank

approximate ly $10,000.00 which w a s approx imate ly a l l

t h e

a v a i l a b l e c a s h

Tho

Neoga National Bank

h a d a t

tha t t ime; tha t dur ing

a l l t h e

t im e a f o r e s a i d

t h e

Federal Reserve Bank made

no

examina t ion

a s

r e q u i r e d

by la w o f Tho

Neoga National Bank

s o f a r a s

your

o r a t o r s

a r e

adv i sod ; t ha t

t h e


o f

Chicago being

so

o rgan ized under

t h e

laws

o f t h e

7/17/2019 frsbog_mim_v29_0159.pdf


X—6130

1 9

Uni ted S ta tes wi th fu l l power t o examine member

banks a s a f o r e s a i d h a d a l s o t h e f u l l a n d f r e e

a c c e s s

t o a l l

i n f o r m a t i o n a c q u i r e d

by th e

Comp-

t r o l l e r o f t h e Currency a n d t h e nat ional Bank

Examiners

a s t o

s a i d

The

Neoga National Bank

i n

t h e t r a n s a c t i o n o f i t s b us i ne s s w i t h s a i d The

E'soga national Bank

a n d w a s

a l s o a u t h o r i z e d

t o

engage i n t h e p r i v a t e bank i ng bus i nes s o f r e d i s -

coun t i ng pape r

f o r i t s

member banks

f o r

p r o f i t

a n d w a s then a n d t h e r e a governmental agency

o r g a n i z e d

f o r t h e

pu r pos e

of

s u p e r v i s i n g

a n d i m -

p r o v i n g t h e b a n k i n g f a c i l i t i e s of a l l i t s member

banks a n d f o r t h e p r o t e c t i o n o f t h e pu b l i c ; t h a t

b y r e a s o n o f t h e powers con fe rr ed upon sa id Reserve '

Bank a s a f o r e s a i d i t w a s t h e duty o f sa i d Reserve

Bank

t o

know

t h e

a c t u a l c o n d i t i o n ' o f

t h o

a f f a i r s

o f s a i d Eha ITeoga n a t i o n a l Bank a n d i t w a s then

a n d

t h e r e

t h e

duty

o f

said Reserve Bank

n o t t o

p e r m i t t h e d e p o s i t o r s o f said The ITeoga national

Bank

t o

s u f f e r l o s s

b y a n y a c t o f

sa id Fed era l

Reserve Bank a n d i t became therefore a t r u s t e e

f o r your orators when i t began a n d c o n t i n u e d t o

r e d i s c o u n t t h e b i l l s a n d p a p e r s of The ITeoga

Nat i ona l Bank - s ince sa id r ed i s co un t i ng mere ly i n -

c r eas ed t h e i ndeb t ednes s o f s a i d The ITeoga National

Bank; a n d t h a t i t r educed t h e a s s e t s t h e r e o f a n d

t he r eby caus ed f u r t he r l o s s

t o

y o u r o r a t o r s

a n d

t h a t i t w a s t h e duty of said Federal Reserve Bank

t h e n

a n d

there hav ing fu l l power

o r


of

The Neoga National Bank t o have made a n examinat ion

o f t h e

sa id Neoga Na ti on al Bank

a n d t o

have known

o f i t s i n s o l vency be f o r e i t d i s cou nte d such pape rs

a n d t o have e i ther caused The Neoga National Bank

t o b e c l o s e d o r t o h a v e r e f u s e d t o make said r e -

d i s c o u n t s a n d t he r eby p r even t ed l o s s t o year

o r a t o r s ; a n d s a i d Fe de ra l Reserv e Bank would hav e

known o i t h e i n s o l vency o f sa id Tho Neoga National

Bank i f i t h a d oxe r c i s ed o r d i na r y ca r c i n th o p e r -

formance o f i t s du t i e s t hen a n d there owing t o your

o r a t o r s .

Pa r ag r aph

3 4 , o n

pegs

2 1 , i s a s

f o l l o w s :

A nd

o r a t o r s f u r t h e r r e p r e s e n t t h a t

t h e

Federa l

Reserve Bank o f Chicago, b y r e a s o n o f t h e powers

con f e r r ed upon i t b y l a w , h a d f u l l a n d complete

s u p e r v i s i o n o f t h e a f f a i r s o f s a i d The Neoga

7/17/2019 frsbog_mim_v29_0159.pdf


— J

X-S130

20

Hationa l Bank s ince t h e y e a r 1 9 2 1 , a n d dur ing

tha t t ime w as in formed , o r i n t h e e x e r c i s e of

o r d in a r y c a r e i n t h e pe r fo rmance o f i t s d u t i e s

o f

sup e rv i s i on shou ld have been in formed

o f th e

a c t u a l f i n a n c i a l c o n d i t i o n o f said Bank a n d

shou ld have a sc e r ta in ed whe the r s a id Bank h a d

s u s t a i n e d l o s s e s a n d w a s i n s o l v e n t , a n d should

h a v e a s c e r t a i n e d t h e n e g l i g e n c e o f t h e D i r e c to r s

a n d

o f f i c e r s

o f

said Bank

i n a n d

ahout th e i r

d u t i e s , a n d sh ou ld have known t h a t sa id Bank was

t o t a l l y i n s o l v e n t

o n t h e

f i r s t

d ay o f

Janua ry ,

1 9 2 4 u p t o t h e da te of i t s c l o s i n g a s a f o r e s a i d ,

a n d th a t dur ing a l l t h e time o f sa id inso lvency

y o u r o r a to r s a n d o th e r c r e d i t o r s o f said Bank

were making depos i ts i n said Bank, a n d should

h a v e a s c e r t a in e d t h a t s a id D i r e c to r s w e r e f r a u d -

u l e n t l y h o l d i n g o u t said Bank t o t h e p u b l i c a n d

t o y o u r o r a to r s a f t e r J a n u a r y 1 , 1 9 2 4 , a s a

f i n a n c i a l l y s o u n d a n d s o l ve n t i n s t i t u t i o n , y e t

sa id Federa l Reserve Bank o f Chicago ha vi ng such

knowledge

a s

a f o r e s a i d ,

a n d

being in for med ,

o r

i n t h e e x e r c i s e o f o r d in a r y c a r e i n t h e p e r -

formance

of i t s

s a i d d u t i e s , b e in g f u l l y a d v i s e d

a s t o t h e in s o lv e n c y o f sa i d Bank a n d o f t h e

neg l igen t conduc t o f t h e o f f i c e r s a n d d i r e c t o r s

o f s a i d Bank, a ppro ved a n d c o n f i r m e d t h e keep ing

open o f said Bank a s a s o l v e n t a n d s o u n d f i n a n -

c i a l i n s t i t u t i o n

a s

h e r e i n b e f o r e

s e t

f o r t h ,

a n d

t h e r e b y a b e t t e d a n d approved t h e n e g l i g e n t a n d

f r a u d u l e n t c o n d u c t o f t h e o f f i c e r s a n d d i r e c t o r s

o f said Bank i n keeping said Bank open a n d i n

ad d i t i on th e r e t o , s a i d Fede ra l Rese rve Bank,

knowing

t h e

i n s o l v e n t c o n d i t i o n

o f

s a i d

The

ITeoga

Nationa l Bank a n d knowing t h a t sa i d Bank d i d n o t

have funds

o f i t s ow n

wi th which

t o

r e d u c e

i t s

i n d e b t e d n e s s t o sa id Fe de ra l Reserve Bank wit hou t

u s i n g t h o f u n d s d e p o s i t e d b y yo ur o r a t o r s a n d

o t h e r d e p o s i t o r s i n said Bank i n t h e d a i l y t r a n s -

a c t i o n o f t h e i r b u s i n e s s , r e q u i r e d s a i d The ITeoga

Nationa l Bank

t o

c o n t i n u e

t o

r e d u c e

i t s

i n d e b t -

e d n e s s t o said Reserve Bank b y u s i n g t h e moneys

d e p o s i t e d b y your o rS tor s a n d o t h e r d e p o s i t o r s '

i n T h e Neoga Na ti on al Bank; t ha t b y r e a s o n of t h e

p o w e r s c o n f e r r e d by Law upon sa id F ed er a l Reserve

Bank under

t h e

f a c t s

i n

t h i s c a s e ,

t h e

sa id

Federal Reserve Bank became a n d w a s a t r u s t e e f o r

t h e d e p o s i t o r s of The Nooga National Bank, a n d

7/17/2019 frsbog_mim_v29_0159.pdf


— j <y

X-6130

2 1

w as burdened un de r t h e l a w w i t h t h e duty o f

p r o t e c t i n g t h e d e p o s i t o r s o f s a i d The Neoga

National Bank from a n y l o s s d u e t o a n y a c t o f

said Federal Reserve Bank; a n d t h a t b y reason

o f t h e sa id Federa l Reserve Bank coopera t ing

w i t h

t h e

o f f i c e r s

a n d

d i r e c t o r s

o f

said Bank

i n t h e i r n e g l i g e n t a n d f r a u d u l e n t c o n d u c t o f

sa id Bank, your ora tors a n d o t h e r d e p o s i t o r s

i n

sa id Bank have su s t a i ne d lo ss es

i n

e x c e s s

o f

4 0 p e r c e n t , o f t h e deposi t s made by your o r a t o r s

a n d o t h e r d e p o s i t o r s i n said Bank during said

t i ne , which sa id dep os i t s - o f y o u r o r a t o r s i s s e t

f o r t h i n P a r a g r a p h 2 2 h e r e o f .

H i e f o r e g o i n g a r e a l l o f t h e p r o v i s i o n s i n t h s b i l l

o f compla in t dea l ing wi th t h e s u b j e c t o f t h e a l l e g e d d u t i e s

o f t h e


t o t h e

compla i nan t s . D i s r e ga rd i ng

f o r t h e moment t h e a c t i o n o f t h e Fe der a l Reserve Bank a f t e r

t h e i n s o l v e n c y o f t h e Neoga Bank, w e now ask :

D o t h e f o r e g o i n g a l l e g a t i o n s c o n s t i t u t e a cause o f

a c t i o n a g a i n s t t h e Federal Reserve Bank o f Chicago?

R e s t a t i n g t h e e f f e c t o f t h e f o re go i ng ave rmen t s , t hey

charge tha t t h e Federa l Rese rve A c t r e q u i r e d t h e ETeoga

na t iona l Bank

t o b e a

member

o f t h e


o f

Chicago, when ext end ing cr e d i t t o t h e Neoga Ban k,t o s up er -

v i s e a n d examine i t s b u s i n e s s i n l ike manner t o t h e s u p e r -

v i s i o n a n d e x a m i n a t i o n e x e r c i s e d b y t h e Compt ro l l e r o f t h e

Currency. That t h e d i r e c t o r s o f t h e Ueoga Bank were c o n s t a n t l y

r e q u i r e d

t o

make repor ts

of i t s

f i n a n c i a l c o n d i t i o n

t o t he

Compt ro l l e r o f t h e Currency and t o t he Federal Reserve Bank

o f Chic ago. That t h e Federal Reserve Bank o f Chicago r ed i s -

7/17/2019 frsbog_mim_v29_0159.pdf


X-6130

22

coun ted paper o f t h e Heoga n a t i on a l Bank i n varying amounts ,

demanded se cu r i ty th e r e f o r , compla ined o f t h e q u a l i t y a n d

c h a r a c t e r

o f t h e

paper t endered

b y

ITeoga Batik

f o r r e d i s -

c o u n t i n g , a n d u l t i m a t e l y h a d i n i t s hands a s s e c u r i t y f o r

s uc h l o a n s s u b s t a n t i a l l y a l l o f t h e a s s e t s o f t h e Heoga

Bank o f a n y s u b s t a n t i a l v a l u e . T ha t t h e d i r e c t o r s o f t he

Heoga National Bank made false

a n d

m i s l e a d i n g r e p o r t s

o f i t s

c o n d i t i o n t o t h e Compt ro l l e r o f t h e Curr enc y. That t h e

Federal Reserve Bank o f Chicago h a d f u l l a n d comple t e au thor -

i t y , w i t h t h e a p p r o v a l o f t h e Federa l Reserve Agent , t o make

s p e c i a l e x a m i n a t i o n s o f t h e Heoga Bank b y r e a s o n o f i t s

d i s c o u n t

o f i t s

p a p e r ,

b u t

t h a t

t h e


o f

Chicago co nt i nue d re di sc ou nt in g Heoga Bank pape r a n d demanding

s e c u r i t y f o r e a c h r e d i s c o u n t i n g l o a n a n d a t t h e same time

c r i t i c i z e d t h e c l a s s o f paper t endered , a n d s o h a d knowledge

t h a t t h e a f f a i r s o f t h e Heoga national Bank were i n d o u b t f u l

c o n d i t i o n . T h a t h a d t h e Federal Reserve Bank o f Chicago made

f u r t h e r e x a m i n a t i o n s ,

i t

would have d isc ove red th a t

t h e

d i r e c t o r s o f Heoga Bank were f r au du le n t ly ho l d i ng tha t i n s t i t -

u t i o n o u t t o t h e compla inan t s a s a s ol v en t i n s t i t u t i o n , b u t

t h a t t h e Federal Reserve Bank o f Chicago being advised o f t h e

i n s o l v e n c y

o f t h e

Heoga Bank

a n d o f t h e

neg l igen t conduc t

of

i t s o f f i c e r s a n d d i r e c t o r s a p p r o v e d a n d c o n f i r m e d t h e keep ing

open o f sa id bank a s a s o l v e n t a n d s ou nd f i n a n c i a l i n s t i t u t i o n

7/17/2019 frsbog_mim_v29_0159.pdf


X-6130

2 3

and. t h e r e b y a b e t t e d a n d approved t h e n e g l i g e n t a n d f r a u d u l e n t

conduct of i t s o f f i c e r s a n d d i r e c t o r s .

I t i s c le ar tha t the se averments d o n o t s t a t e a cause

of

a c t i o n ' a g a i n s t

t h e


of

Chicago ut il es s

i t w a s t h e duty o f federal Reserve Banlc t o cause examinat ions

o f t h e a f f a i r s o f Hsoga Batik, a n d , a s t h e r e s u l t o f such

examination^ t o ta ke some a c t i o n upon a showing o f inso lvency ,

but t h i s we have shown i n t h e f o r e g o i n g no t t o be t r u e . The

whole duty,

a n d

indeed ,

t h e

exclusive power

t o

make such

examina t ions a n d t a k e su ch d i s c i p l i n a r y a c t i o n w i t h r e g a r d t o

t h e

Neoga Bank

i s b y

s t a t u t e imposed upon

t h e

Comptrol ler

o f

t h e Cur ren cy. There were only tw o ways i n which t h e ITeoga

National Banlc could have been declared

t o b e

in so lv en t . They

a r e

b o t h

s e t

f o r t h

i n

U.SoC.A. , T i t l e

1 2 , S e c . 1 9 1 .

They

a r e

t h a t a n y c r e d i t o r h a v i n g o b t a i n e d a judgment against t h e

ITeoga Bank might make application

t o t h e

Compt ro l l e r

o f t h e

Currency, accompanying h i s a p p l i c a t i o n b y a c e r t i f i e d c o p y .of

t h e judgment showing i t t o h a ve re ma i ne d u n s a t i s f i e d f o r

t h i r t y d a y s a n d upon such ap p l i c a t io n t h e Comptrol ler would

a p p o i n t a R e c e i v e r ; a n d t h e second method would b e t h a t t h e

Comptro l ler should have h ims el f become s a t i s f i e d

o f t h e

bank ' s

i n s o l v e n c y a f t e r a n examina t ion o f i t s a f f a i r s .

I f t h e Federal Reserve Bank o f Chicago h a d made a n

examina t ion o r h a d i n a n y other manner become sa t i sf ied o f

7/17/2019 frsbog_mim_v29_0159.pdf


t h e i n s o l v e n c y o f t h e Neoga Bank, i t would hav e h a d n o r i g h t

t o d e c l a r e t h a t f a c t o r t o make a n y a p p l i c a t i o n t o t h e Comp-

t r o l l e r t o d e c l a r e i t w i t h o u t f i r s t h a v i n g p u t i t s e l f i n t o

t h e eairle p o s i t i o n as k n y o th e r C r e d i t o r by s e c u r i n g a judgment

a g a i n s t t h e Neoga Bank a n d send ing a c e r t i f i e d c o p y o f such

u n s a t i s f i e d j u d g m e n t t o t h e Comptro l le r wi th i t s a p p l i c a t i o n .

The

Federal Reserve Baric

o f

Chicago

h a d t h e

r i g h t ,

under some c ircumstances , t o make supplementa l examina t ions

o f t h e Neoga Na ti on al Bank f o r i t s own i n f o r m a t i o n i n t h e

e x t e n s i o n of c r e d i t a n d f o r t h e p r o t e c t i o n b o t h o f t h e p u b l i c

i n t e r e s t a n d o f t h e i n t e r e s t o f t h e other member hanks i n t h e

Federa l Reserve Bank

of

Chicago,

b ut i f i n th e

course

o f

such

e x a m in a t i o n s i t h a d come t o t h e c o n c l u s io n t h a t t h e Neoga

Na t iona l Bank w a s i n s o l v e n t a n d h a d c a l l e d i t s be l ie f t o t h e

a t t e n t i o n

o f t h e

C o m p t r o l l e r

o f t h e

Currency

a n d t h e

Comp-

t r o l l e r h a d come t o a d i f f e r e n t c o n c l u s i o n , t h e F e d e r a l

Rouorve Bank o f Chicago , l ike a n y o the r in d i v i du a l , would

have been fo re c l os ed a n d e s to p p e d by t h e o f f i c i a l d e t e r m i n a t i o n

o f t h e C o m p t r o l l e r o f t h e Currency t o whom a l o n e t h e power t o

d e t e r m in e t h a t f a c t i s committed.

As a

m a t t e r

o f

f a c t

t h e

t h e o r y

o f t h e

a l l e g a t i o n s ,

which a r e n ow being con s id ere d, i s a t o t a l m i s c o n c e p t i o n o f

t h e f u n c t i o n <f the Fed er a l res e r ve bank toward i t s member

b a n k s . T h e Fede ra l Rese rve A c t c r e a t e s t h e Fede ra l Rese rve

7/17/2019 frsbog_mim_v29_0159.pdf


System

t o be o f

a s s i s t a n c e

t o

member banks,

n o t s o

much

f o r

t h e b e n e f i t o f t h e member banks, a s f o r t h e b e n e f i t o f t he

e n t i r e f i s c a l

a n d

f i n a n c i a l s i t u a t i o n

i n t h e

coun t r y ,

a n d

p r a c t i c e u n d e r

t h e

Federal Reserve

A c t

shows that this purpose

h a s from t h e f i r s t b ee n u n d e r s t o o d a n d fo ll ow e d. Member ban ks

t e m p o r a r i l y

i h

t r o u b l e

g o t o t h e


t o a i d

them

t o

t i d e o v er t h e i r t e mp or ar y d i f f i c u l t i e s

a n d t h e

Federa l

r e s e r ve bank b r i ngs t o t h e suppor t o f a n embarrassed member

t h e

a g g r e g a t e d s t r e n g t h

o f t h e

D i s t r i c t . E ve ry c o n s i d e r a t i o n

o f

wisdom

a n d

po l i cy app r oves

t h e

a c t i o n

o f

Congress

i n

thus

e x c e p t i n g t h e d i s c i p l i n a r y c o n t r o l o f na t iona l banks f rom t h e

Federal reserve banks , whose duty

i t i s t o

p r e v e n t b a n k f a i l -

u r e s ,

n o t t o

br ing them about ,

to go

perhaps beyond

t h e

l e n g t h s o f p r udence a n d f o r b e a r a n c e i n t h e a i d o f weak members

i n

o r d e r ,

i f

p o s s i b l e ,

t o

a v e r t

t h e

n e c e s s i t y

of

u l t i m a t e

f a i l u r e .

A l l t h e

p r o v i s i o n s

o f t h e

Federa l Reserve

A c t

i t s e l f

show t h a t t h i s w a s t h e pu r pos e o f Congress , b u t i n o r d e r t o

l e a v e

no

doubt about

i t , t h e

Federal Reserve

A c t

i t s e l f

c o n -

t a i n s s p e c i f i c r e f e r e n c e s

t o t h e

o f f i c i a l e x a m i n a t i o n s

o f

member banks

b y t h e

C ompt r o l l e r .

.

Thus

i n

U.S..C.A.

S e c . 4 8 2 ,

t h e

Federal Reserve Board

i s

given power, upon

t h e

recommen-

d a t i o n o f t h e C ompt r o l l e r of t h e Currency, t o f i x t h e s a l a r i e s

o f

bank examiners ,

b u t t h e

i n i t i a t i v e h e r e l i e s w i t h

t h e

C o m p t r o l l e r .

;

I n

U.S ,C ,A. ,

S e c . 4 8 3 , t h e

power

t o

make special

7/17/2019 frsbog_mim_v29_0159.pdf


X-6130

2 6

examina t ion

i s

g i v e n

t o t h e

Fed era l re se rv e banks,

bu t

these

s p e c i a l e x a m i n a t i o n s a r e , by t h e language o f t h e s t a t u t e , i n

a d d i t i o n t o examinations made a n d conducted by t h e Comptrol ler

o f t h e Currency a n d t h e Federa l reserve bank m a y n o t make

these spe c i a l examina t ions wi thou t f i r s t hav ing t h e approval

o f t h e Federa l r e se rve agen t o r t h e Federal Reserve Board,

a n d t h e n , i h o rde r t o p r e v e n t a n y p o s s i b l e m i s c o n s t r u c t i o n ,

U .S .C .A.

S e c . 4 8 4

p r o v i d e s t h a t

no

bank shal l have

a n y

v i s i t o r i a l p o w e r s o t h e r t h a n s u c h

a s a r e

a u t h o r i z e d

b y l aw o r

v e s t e d

i n t h e

c o u r t s ,

o r

s h a l l

b e , o r

have been, exorc ised

b y

ei ther House

o f

Congress

o r a n y

commit tee thereof .

To

e s t a b l i s h

a

cause

o f

a c t i o n a g a i n s t

t h e

Federa l

Reserve Bank o f Chicago i n t h i s b e h a l f , i t would b e necessa ry

t o show that t h e Federal Reserve Bank w a s under a duty t o t h e

complainants which i t h a d n e g l i g en t l y f a i l e d t o per fo rm.

There being n o such duty, there c a n b e n o s u c h d e l i c t a s i s

a l l e g e d . .

2 . T h e Act ion o f Federal Reserve Bank o f

Chicago Af ter t h e Inso lvency o f t h e

ITeoga n a t i o n a l Bank.

T he

a l l e g a t i o n s

i n t h e

p e t i t i o n w i t h r e g a r d

t o t h e

conduct

o f t h e


o f

Chicago a f t e r

th e

i n s o l v e n c y of t h e ITeoga Bank m a n i fe s t l y have n ot hi ng to do

w i t h t h e wrongfu l ac t s a n d n e g l e c t s a l l e g e d a g a i n s t t h e

d i r e c t o r s a n d o f f i c e r s o f t h e ITeoga Bank. The a l l e g a t i o n s i n

7/17/2019 frsbog_mim_v29_0159.pdf


X-6130

2 7

q u e s t i o n a r e a s fo l lows ;

P a r a g r a p h s 18 and. 19 of th e bil l , page 1 7 , a r e a s

f o l l o w s :

O r a t o r s f u r t he r r ep r e s en t t ha t w hen The

Neoga n at i on a l Bank cl os ed

i t s

doors

o n

January

1 2 , 1 9 2 5 , t h e said Federal Reserve Bank took

u n t o i t s e l f

a l l t h e

r e d i s c o u n t s

a n d

c o l l a t e r a l

o n depos i t w i t h i t amounting t o app r ox i ma t e l y

$120,000

a n d t h e

r e s e r ve f und

o n

dep os i t w i t h

i t

amount ing t o approximate ly $10 ,000 a n d t h e s tock

i n t h e said Federal Reserve Bank o f t h e approximate

va l ue o f $1000.00 a n d k e p t a n d p a i d i t s e l f i n f u l l

t h e r e f r o m a n d t u r n e d t h e balance o f s a i d c o l l a t e r a l

a n d r ed i s coun t s ove r t o t h e Receiver thereby making

i t s e l f a p r e f e r r e d c r e d i t o r of The Neoga National

Bank; that

t h e

t r a n s f e r s

o f t h e

n o t e s

a n d

b i l l s

o f

The 'Neoga Na ti on al Bank t o t h e said Federal Reserve

Bank were

a l l

made af te r

t h e

sa id Neoga Na t i on al

Bank became i n s o l v e n t a n d a f t e r s uch i n s o l vency

would have become known

t o t h e

Federal Reserve

Bank i f i t h a d used ord ina ry care i n a n d abou t t h e

pe r f o r mance

of i t s

dut ies owing

t o t h e

p u b l i c

a n d

t ha t unde r t h e Fed era l Banking Laws such t r a n s f e r s

we re u t t e r l y n u l l a n d vo i d a s aga i ns t you r o r a t o r s

a n d t h a t t h e Federal Reserve Bank should be r e -

q u i r e d t o turn over t o t h e R e c e i v e r a l l t h e funds ,

n o t e s

a n d

b i l l s

i n i t s

hands

o n

J anua r y

1 2 , 1 9 2 5 ,

a n d s hou l d b o p u t o n t h e same b a si s a s a n y o ther

c r e d i t o r

o f

said Bank;

a n d

t ha t be i ng

s o

adv i s ed

a s t o t h e c o n d i t i o n s o f t h e a f f a i r s of The Neoga

Nat ional Bank

t h e


of

Chicago, connived, consented a n d coopera ted wi th

t h e d i r e c t o r s a n d o f f i c e r s of The Neoga National

Bank t he r eby pe r m i t t i ng t h e m a n i p u l a t i o n o f t h e

d e p o s i t s o f sa id Bank, t h e management a n d con t r o l

o f

sa id bank

t o t h e

i n j u r y

a n d

damage

o f

your

o r a t o r s a n d thereby commit ted a fraud upon your

o r a t o r s

a n d

o t he r depo s i t o r s .

1 9 .

O r a t o r s f u r t h e r r e p r e s e n t t h a t

a t t h e

t ime o f c l os in g sa id Bank your or a t or s a n d o ther

d e p o s i t o r s

h a d o n

dep os i t appro ximat e ly $116 ,381 .46;

t h a t t h e l o a n s a n d discounts owned b y said Bank h a d

a f ace va l ue o f $170,655 .88 a n d ove r - d r a f t s amoun t i ng

t o $1881.45 a n d h a d o ther as se t s amount ing t o

7/17/2019 frsbog_mim_v29_0159.pdf


X-6130

2 8

$38,430.79 which should have been appl ied t o t h e

payment

o f

yo ur o r a t o r s ; t h a t

t h e

s a i d D i r e c t o r s

p e r m i t t e d

t h e


t o p a y

i t s e l f

i n f u l l t h e s i m o f approx imate ly $51 ,000 o u t o f sa id

a s s e t s a s a p r e f e r r e d c r e d i t o r o f s a i d Bank; th a t t h e

s a i d Feder a l Reserve Bank hav ing f u l l knowledge o f t he

s i t u a t i o n a n d o f t h e a f f a i r s of The Neoga National

Bank under t h e National Banking Laws h a d n o a u t h o r -

i t y o r

r i g h t

t o

m a k e i t s e l f

a

p r e f e r r e d c r e d i t o r ,

y e t t h e

R e c e i v e r

of

s a i d Bank

a n d t h e

D i r e c t o r s

s t o o d

b y a n d

a b e t t e d

t h e


i n t ak ing advan tage o f i t s ow n wrong a n d p e r m i t t i n g

i t t o b e p a i d i n f u l l a n d depr iv ing your o ra to r s

a n d o t h e r d e p o s i t o r s o f said Bank o f a f a i r , j u s t

a n d e qu al d i s t r i b u t i o n o f t h e a s s e t s o f said Bank

a n d t h a t i n e q u i t y a n d i n good conscience t h e F e d -

eral Reserve Bank o f Chicago should b e compel led a s

a

t r u s t e e u n d er

t h e

c i r c u m s t a n c e s

t o p a y

over

to

t h e

R e c e i v e r

o f

s ai d Bank

t h e

s a i d

sum of

a p p r o x i -

mate ly $51,000

a n d

s h o u l d

b e

made amen,e

b i o t o t h o

l a w a s o t h o r c r e d i t o r s o f sa id Bank a n d t h a t t h e

s a i d D i r e c t o r s o f sa id Bank should b e r e q u i r e d t o

make good t o y o u r o r a t o r s a n d o t h e r d e p o s i t o r s

t h e i r p r o r a t a s h a r e o f s a i d $51 ,000 .

T h e n e t e f f e c t o f these averments i s t h a t a f t e r

t h e ITeoga Na ti on al Bank cl o se d i t s doors , through t h e a c t i o n

o f t h e C o m p t r o l l e r , t h e Federal Reserve Bank o f Chicago

a p p r o p r i a t e d t h e s t o c k o f t he Neoga Bank i n t h e Chicago Bank

o f t h e

v a l u e

o f

$1000 .00 ,

t h e

r e s e r v e f u n d

o f t h e

Neoga Bank

amount ing t o $ 1 0 ,0 0 0 .0 0 a n d s o much a s w a s n e c e s s a r y o f t h e

c o l l a t e r a l i n i t s h a n d s s e c u r i n g r e d i s c o u n t s t o p a y t h e debts

o f t h e Neoga Bank t o t h e Federal Reserve Bank, a n d r e t u r n e d

t h e

b a l a n c e

i n i t s

hands

t o t h e

R e c e i v e r

o f t h o

Neoga Bank.

Tho a l l e g a t i o n s t h a t t h o Federal Reserve Bank o f Chicago

7/17/2019 frsbog_mim_v29_0159.pdf


X-6130

2 9

connived, consented,

a n d

coope ra ted wi th

t h e

d i r e c t o r s

a n d

o f f i c e r s

o f t h e

Heogd. Sa nk

t o

s e c u r e

a

pre fe reh .ce

i s , o f

c o u r s e ,

a

c o n c l u s i o n

o f l aw

f l a t l y

a t

v a r i a n c e w i th

t h e

f a c t s

p l e a d e d *

T he

fedelre.X .Bes.ferye Bank

o f

Chicago

w a s n o t , a n d

d i d n o t become, a p r e f e r r e d c r e d i t o r . I t w a s a n d rema ined a

s e c u r e d c r e d i t o r *

I t i s n o t

a l l e g e d

i n t h e

t i l l

o f

c o m p la in t ,

a n d

c o u l d

n o t

have been, t ha t

t h e


o f

Chicago

s e c u r e d

a n y o f t h e

r e s o u r c e s

o f t h e

Ueoga National Bank

a s

a n

u n l a w f u l p r e f e r e n c e .

A l l t h e

a s s e t s

o f t h e

Heoga Bank

i n

i t s hands came into i t s p o s s e s s i o n i n d u e c o u r s e f o r va lue

r e c e i v e d

a n d

p u r s u a n t

t o l a w .

Thus

t h e

$1000 .00 inves ted

i n

t h e

c a p i t a l s t o c k

o f t h e


o f

Chicago

was

a n

i n v e s t m e n t r e q u i r e d

t o b e

made

b y a

member bank,

t h e

re se rve

f u n d s

o f t h e

Neoga na t i on a l Bank were de po s i ts re qu ir ed

to be

made

b y la w f o r

s p e c i f i c p u r p o se s

a n d t o b e

a d m i n i s t e r e d

i n

f u r t h e r a n c e

o f

th o s e p u r p o s e s .

The

s e c u r i t i e s

f o r

loans

s i m i l a r l y w e r e r e q u i r e d t o b e e x a c t e d b y t h e Federa l Reserve

Board o f Chicago b y t h e l a w which au th or iz ed those lo an s .

T h e

a p p l i c a t i o n

b y t h e


o f

Chicago

o f t h e

a s s e t s

o f t h e

Heoga Bank

i n i t s

hands

t o t h e

payment

o f

t h e

d e b t s

d u e t o i t w a s

n e c e s s a r y c a r r y

o u t t h e

p u r p o s e

o f

t h e

Federa l Reserve Sys tem.

I f t h e


o f

Chicago

h a d

r e t u r n e d

a l l

t h e s e a s s e t s

t o t h e

R e c e i v e r

a n d h a d

7/17/2019 frsbog_mim_v29_0159.pdf


- i U

X-S130

3 0

become merely a g e ne r a l c r e d i t o r o f t h e Neoga Bank, t h e l o s s

su s t a i ne d would have t e en a l o s s t o t h e o t h e r member banks o f

t h e Federa l Resej^e Bank o f Chicago, since a l l th e r e s o u r c e s

o f t h e Federal Reserve Bank o f Chicago belonged t o t h e member

banks

a n d a r e

made

up o f

t h e i r i n v e s t m e n t s

i n i t s

c a p i t a l

s t o c k

a n d

t h e i r r e s e r v e d e p o s i t s .

T h e

p l a i n p u r p o s e

o f t he

Federa l Rese rve A c t i s t o accumula t e these r e sources o f t h e

members t o make them a va i la bl e t o t h e members under condit ions

o f s a f e t y a n d s e c u r i t y . I f t h e Fed era l re se rv e banks were

r e q u i r e d t o s u s t a i n l o s s e s i n t h e s e r e s o u r c e s i n t h e manner

s u g g e s t e d b y t h e b i l l o f compla in t , t hen in s t ea d o f b e i n g a

source

o f

s t r e n g t h

t o t h e

f i n a n c i a l s t r u c t u r e

o f t h e

count ry ,

t h e

Fed er a l re se rv e banks would

b e a

source

of

weakness ,

a s

every such loss would

p r o

t a n t o a f f e c t

t h e

s t r e n g t h

o f a l l

member banks

a n d

thus sp read

t h e

consequences

o f

l o c a l l o s s

th roughou t t h e w ho le s t r u c t u r e . T h i s i d e a w a s s u g g e s t e d t o

t h e Congress i n t h e amendment proposing a g u a r a n t e e o f d e p o s i t s

i n member banks through t h e Federa l r e se rve banks b u t w a s r e -

j e c t e d a s b e i n g a t v a r i a n c e w i t h th e purpose o f t h e Federa l

Reserve System.

D e a l i n g s p e c i f i c a l l y w i t h t h e th ree i t ems o f a s s e t s

o f t h e Neoga Na ti on al Bank, w e t a k e u p f i r s t :

Federal Reserve Bank o f Chicago w as

E n t i t l e d t o A p p r o p r i a t e t h e S t o c k I n t e r e s t

o f t h e

Neoga Bank.

7/17/2019 frsbog_mim_v29_0159.pdf


x_> ^

X-C150

3 1

S e c t i o n

6 o f t h e

F e d e r a l

lie

se rve

A c t

(U.S.C.A. ,

T i t l e 1 2 , C h , 3 , S e c . 2 8 8 ) p r o v id e s :

I f a n y member bank s h a l l be d e c l a r e d

i n s o l v e n t

a n d a

R e c e iv e r a p p o in t e d t h e r e f o r ,

t h e

s t o c k h e l d

b y i t i n

s a i d f e d e r a l r e s e r v e

bank sha l l

b e

ca nc e l le d wit hou t impairment

o f i t s

l i a b i l i t y ,

a n d a l l

c a sh p a id s u b s c r i p -

t i o n s

o n

sa id s to ck , wi th one -ha l f

o f o n e p e r

centum

p e r

month from

t h o

p e r i o d

o f

l a s t

d iv id e n d ,

n o t t o

exceed

t h e

book va l ue th er eo f ,

s h a l l b e f i r s t a p p l i e d t o a l l deb ts o f t ho

insolvent member bank

t o t h e

F e d e r a l r e s e r v e

bank

a n d t h o

b a l a n c e ,

i f a n y ,

s h a l l

b e

pa id

t o t h e

R e c e iv e r

o f t h e

in s o lv e n t b a n k .

I t w i l l b e obse rved tha t i n t h e f o r e g o in g q u o t a t i o n

f rom t h e s t a t u t e , t h i s a p p l i c a t i o n of p a i d s u b s c r i p t i o n s t o

c a p i t a l s t o c k

i s

made mandatory

b y t h e u s e o f t h e

word sh a l l .

The

Supreme Court

o f t h e

U n i t e d S t a t e s

i n

Farmers

&

Mer cha nts Bank

o f

Monroe

v .


of

Richmond,

2 6 2 . U . S . 6 4 9 ,

s a y s ,

a t

page

6 6 3 ;

11

T h is s t a t u t e a p p e a r s

t o

have been drawn

wi th gro a t ca re . Throughout

t h o A c t t h e

d i s t i n c t i o n

i s

clearly made between what

t h o

Board

a n d t h e

r e s e r v e b an ks ' s h a l l '

d o a n d

what they ' m a y ' d o .

T he s u b s c r i p t i o n s t o t h o c a p i t a l s t o ck o f t h e Fede ra l

re se rve banks b y n a t i o n a l b a n k s a r e made mandatory b y t h o

Fede ra l Rese rve A c t (U.S .C.A. T i t l e 1 2 , C h . 3 , S e c . 2 8 2 ) a n d

t h e amount i s f i x e d a t a sum equa l t o s i x p e r centum o f t h e

p a i d u p c a p i t a l s t o c k a n d s u r p l u s o f each member. I n view

o f th e s e r e q u i r e m e n t s o f t h e Federa l Reserve A c t , t h e

7/17/2019 frsbog_mim_v29_0159.pdf


X-613C

3

Federal Reserve Bank o f Chicago h a d n o a l t e r n a t i v e a n d t h e

complainants must be h e l d t o have deal t wi th t h e lleoga Bank

with knowledge o f i t s inves tmen t i n t h e c a p i t a l s t o c k o f t h e

Federal Reserve Bank o f Chicago, a n d t h e p r e f e r e n c e c r e a t e d

b y l a w i n f a v o r o f t h e Federal Reserve Bank o f Chicago t o

t h e e x t e n t o f a n y i n d e b t e d n e s s t o i t by t h e Ueoga National

Bank.

The


o f

Chicago

w as

E n t i t l e d t o S e t O f f Aga ins t t h e Reserve

Fund

o f t h e

Neoga Bank

a n y

Indeb tedness

d u e I t from t h a t Bank.

The second as se t i t em o f t h e Neoga Na ti on al Bank a s t o

which complainants complain h a d t o d o w i t h t h e r ese rve fund

o n d e p o s i t w i t h t h e Federal Reserve Bank o f Chicago amounting

t o a p p r o x i m a t e l y $ 1 0 ,0 0 0 .0 0 .

Reserve funds i n Fed era l r e se rve banks depo s i t ed under

S e c t i o n 1 9 o f t h e Federa l Reserve A c t (U.S .C.A. C h . 3 , S e c .

4 6 2 ) c o n s t i t u t e a c r e d i t b a l a n c e . T he member bank deposits

checks a n d o t he r i t ems wi th t h e Federa l r e se rve bank da i ly t o

t h e c r e d i t o f t h i s a c c o u n t a n d draws i t s ow n checks o n i t s

b a l a n c e i n t h e t r a n s a c t i o n o f i t s d a i l y b u s i n e s s * B y s t a t u t e

(U.S .C.A. C h . 3 , S e c . 4 6 4 ) t h i s b a l a n c e i s made subjoct t o

b e c h e c k e d a g a i n s t a n d wi thdrawn b y t h e mombor bank f o r t h o

p u r p o s e o f m ee ti ng e x i s t in g l i a b i l i t i e s . I t w a s , t h e r e f o r e ,

l i k e a n o rd ina ry accoun t ma in ta ined i n a bank b y a d e p o s i t o r .

7/17/2019 frsbog_mim_v29_0159.pdf


Heoga Bank ttdtxld ha,ve drawn

a

check upon

i t a n y d a y t o

p a y a n y i ndeb t ednes s f r om i t t o t h e Federal Reserve Bank

o f Chicago a n d , o n t h e d e c l a r a t i o n o f t h e i n s o l v e n c y o f Neoga

Bank, th i s fund i n t h e hands o f Federal Reserve Bank o f

Chicago w a s s u b j e c t t o a n o r d i na r y banke r' s l i e n t o h e s e t

o f f a g a i n s t a n y indebtedness f rom t h e Heoga Bank t o i t . T h e

l a w i s e n t i r e l y w e l l s e t t l e d t h a t a bank upo n t h e inso lvency

o f i t s d e p o s i t o r m ay app l y t h a balances re ma in in g o n depos i t

i n open acc oun ts i n payment o f o b l i g a t i o n s d uo i t fr om suc h

d e p o s i t o r .

A

Fede ra l r es er ve bank

i s i n

e f f e c t

a

b a n k e r ' s

bank

a n d t h e

r e l a t i o n s h i p b e t w e e n

i t a n d i t s

members

i s i n

many r e s p ec t s s i m i l a r

t o t h e

r e l a t i o n e x i s t i n g b e t w e e n

a n

or d i na r y bank

a n d

i n d i v i d u a l d e p o s i t o r s .

T h e

r u l e w i t h r ega r d

t o ban ke r ' s l i en s , more p r o pe r l y a r i g h t o f s e t - o f f , i s n o t

p e c u l i a r t o banks b u t i s a n outgrowth of the gene r a l doc t r i ne

o f s e t - o f f a n d h a s been r epea t ed l y r ecogn i zed b y t h e S t a t e

a n d Fed era l co ur t s a l i k e bo th where t h e d e p o s i t o r was an

a

i n d i v i d u a l a n d where t h e depos i to r was /bank .

S c o t t v . Armstrong, 1 4 6 U . S . 4 9 9 .

S t u d l e y v . Boylston Bank, 3 2 9 U . S . 5 2 3 .

The l a t t e r of these cases a rose i n a b a n k r u p t c y p r o -

c e e d i n g , b u t t h e Supr eme C our t s pec i f i ca l l y r ecogn i zed t ha t

t h o r i g h t w a s n o t c r e a t e d b y t h e Bankruptcy A c t , b u t w a s a n

outgrowth o f s e t - o f f . ( S e e page 5 2 8 ) .

7/17/2019 frsbog_mim_v29_0159.pdf


A si mi la r ca se , Fe der al Reserve Bank o f Minneapolis

v . Fi rs t Nat ional Bank o f Eureka, 3 7 7 F e d , 3 0 0 (1921) , a rose

f rom t h e c l o s i n g o f a na t io na l bank by th e Compt ro l l e r o f t h e

Cur rency . A R e c e i v e r h a d been ap po in te d a n d t h e Federa l

Reserve Bank ins is ted upon i t s r i g h t t o cance l t h e member's

s t o c k

a n d

a p p l y t h a t

a n d t h e

r e s e r v e d e p o s i t

o f t h e

mbaber

bank t o t h e payment o f t h e member bank's ob l i g a t i o n s . These

o b l i g a t i o n s a r o s e b y t h e endorsement o f papur o f t h e member

bank f o r r e d i s c o u n t . I t w a s contandad on b e h a l f o f t h e R e -

c e i v e r t h a t t h e Fede ra l Reserve Bank must f i r s t ex haust t h e

makers

o f t h e

p a p e r

a n d

a s s e r t o n ly

a

s e c o n d a r y l i a b i l i t y

a g a i n s t t h e member bank. The cour t , however , hold tha t t h e

o b j e c t o f t h e Federa l Reserve A c t w a s a t a l l h a z a r d s t o securo

t h e Federa l r e se rve banks a n d that endorsement f o r r e d i s c o u n t

b y a member bank const i tu ted a pr im ar y l i a b i l i t y a n d approved

t h e

a c t i o n

o f t h e


i n

a p p l y i n g

t h e

r ese rve

b a l a n c e a n d t h e p r o c e e d s o f t h e member 's stock immediately a n d

w i t h o u t f i r s t e x h a u s t i n g

t h e

makers

o f t h e

p a p e r .

On

page

3 0 2 t h e cour t says :

I f t h e purpose a n d i n t e n t o f t h e

s t a t u t e s a n d r u l e s a n d r egu la t ions above

r e f e r r e d t o a r e t o b e r e c o g n i z e d , i t i s

t h e e v i d e n t i n t e n t a n d purpose t o p r o t e c t

t h e

bank

i n i t s

s e r v i c e ,

a n d t h e

advancement

o f f u n d s t o member banks, a n d upon t h e r e c e i p t

o f t h e n o t e s o f t h e bank a n d c o l l a t e r a l n ot e s

w i t h

t h e

endorsement

o f t h e

bank. .

7/17/2019 frsbog_mim_v29_0159.pdf


X-6130

3 5

The c o u r t h e r e r e c o g n i z e s t h e d i s t i n c t i o n w hi ch we

h a v e p o in t e d o u t a b o v e . T he f u n c t i o n of F e d e r a l r e s e r v e

banks i s t o a i d , n u r s e a n d , i f po ss i bl e , save member ban ks .

E v e r y s a f e g u a r d i s th rown a round t he i r pe r fo rma nce o f th i s

f u n c t i o n .

I t i s n o t

r e q u i r e d

to b e

p e r f o r m e d

a t t h e

haza rd

o f i t s o wn

re so ur ce s , which

a r e ,

a f t e r

a l l , t h e

r e s o u r c e s

o f

i t s ot he r member ba nk s. I t h a s n o g en er a l v i s i t o r i a l o r

d i s c i p l i n a r y f u n c t i o n . P e r c o n t r a , t h e v i s i t o r i a l a n d d i s -

c ip l i n a r y p o w e r o f t h e Government i s v e s t e d i n t h e Comptro l le r

o f t h e Cur rency a n d i n h i m a l o n e .

Federa l Heserve Bank o f Chicago Was E n t i t l e d

t o R e t a i n a n d Apply t h e C o l l a t e r a l W h ic h I t

H ad

R e c e iv e d

f o r

R e d i s c o u n t i n g

o f

P a p e r ,

T h e 1 8 t h a n d 1 9 t h

p a r a g r a p h s

o f t h e

amended b i l l a l l eg e

r e p e a t e d l y t h a t

t h e


h a s

m a d e i t s e l f

a

p r e f e r r e d c r e d i t o r .

Che

f a c t s a l l e g e d

b y t h e

b i l l , h ow e ve r ,

a r e

t h a t

t h e

Federa l Reserve Bank

was a

s e c ur e d c r e d i t o r

as to

t h e

c o l l a t e r a l d e m a n d e d

a n d

r e c e i v e d

b y i t t o

p r o t e c t l o a n s

made t o t h e Neoga Bank.

P a r a g r a p h 1 8 o f t h e a me nd ed b i l l a l l e g e s t h a t t h e

F e d e r a l R e s e r v e Ba nk , a f t e r s a t i s f y i n g t h e i n d e b t e d n e s s t o i t

o f Neoga Bank, tu rn ed - t he ba la nce o f t h e c o l l a t e r a l a n d r e -

d i s c o u n t s o v e r t o t h e R e c e i v e r o f t h e Neoga Bank.

The m a t t e r o f r e d i s c o u n t s i s c o v e r e d i n S e c t i o n 1 3

o f t h e F e d e r a l R e s e r v e A c t ( ILS .C.A. C h . 3* S e c . 3 4 3 ) which

7/17/2019 frsbog_mim_v29_0159.pdf


provides:

Upon th e indorsement;; o f a n y o f i t s

member banks, which shall bo deemed a

waiver o f demand, notice, and protest b y

such bank

a s t o i t s ow n

indorsement

ex-*

c l u s i v e l y , any Federal res erv e bank may

discount notes, drafts, and b i l l s of exchange,

a r i s i n g out o f actual commercial transactions;

that

i s ,

notes, , dr af ts ,

and

b i l l s

o f

exchange

i s sued o r drawn f o r agricul tural , indu str i a l . ,

or commercial purposes, or the proceeds of

which have been Used,

or are to be

used,

f o r

such purposes, th e Federal Reserve Board to

have the right t o determine o r def ine the

character

of the

paper thus el igible

f o r

discount, within t h e meaning o f this chapter.

B y t h e

provis ions

o f

Sections

3 4 4 a n d 3 4 6 ,

addit ional

authori ty i s given t o discount other forms o f paper, including

acceptances,

a n d b y

Sect ion

3 4 ? , i t i s

provided:

Any

Federal reserve bank

may

make advances

t o i t s

member banks

on

their promissory notes

f o r a period n o t exceeding f i fteen days a t

rates to be es tab l i shed b y such Federal reserve

banks, subject

to the

review

an d

determination

o f t h e Federa l Reserve Board,, pr ov id ed such

promissory notes a r e secured by such notes,

d r a f t s , b i l l s

o f

exchange#

o r

bankers

1

accept-

ances

a s a r e

e l i g i b l e

f o r

rediscount

o r f o r

purchase b y Federal reserve banks under t h e

provis ions of this chapter, or by the deposit

or

pledge

of

bonds

o r

notes

of the

United

States .

Limitations a r e imposed upon this power b y Section

352 and provis ion i s made f o r t h e regulat ion of t he r e d i s -

count rate from time

t o

time. This la t te r

is one o f the

vital powers i n t h e Federal Reserve A c t . Through i t t h e

Government controls th e tendency to speculat ion and regulates

7/17/2019 frsbog_mim_v29_0159.pdf


i n t h e

p u b l i c i n t e r e s t

t h e

a v a i l a b i l i t y

o f

loan money.

I t i s ve r y i mpor t an t , f u r t he r , t o note tha t t h e

p r o v i s i o n o f e l a s t i c i t y i n t h e cu r r ency was o n e o f t h e g r ea t

o b j e c t s

i n t h e

Federal Reserve

A c t , a n d

t h a t t h i s o b j e c t

•

w as accompl i shed b y t h e a u t h o r i z a t i o n o f Federa l r eserve no tes .

T hes e no t e s cons t i t u t e now a l a r g e p a r t o f o u r cur ren cy* They

a r e

p r o t e c t e d

b y t h e

depo s i t w i th

t h e

Federa l r eserve agent

a s c o l l a t e r a l s e c u r i t y o f pape r r ed i s coun t ed b y t h e Federa l

reserve banks , so t h a t i t i s o f t h e very hi gh es t impor tance

t ha t r ed i s cou n t ed pape r s houl d b e f u l l y p r o t e c t e d b y t h e most

adequate secur i ty#

I n S e c t i o n 1 6 o f t h e Federal Reserve A c t (U.S.C.A.,

C h . 3 , S e e . 4 1 2 ) i t i s provided;

Any

Fe do ta l rb se rv e bank:

may

melco

a p p l i c a t i o n W ih S l o c a l

f e d e r a l r e s e r v e

agen t f o r such amount o f t h e Federa l r eserve

no t e s he r e i nbe f o r e p r ov i ded f o r a s i t may

r e q u i r e . Such a p p l i c a t i o n s h a l l b e accompanied

w i t h

a

t ende r

t o t h e

l oca l Fede r a l r e s e r ve

a g e n t

o f

c o l l a t e r a l

i n

amount equal

t o t h e

sum o f t h e Federa l r eserve no tes thus appl ied

f o r a n d i s s ue d pu r s ua n t t o s uc h a p p l i c a t i o n .

********The said Federal Reserve Board may a t

a n y t ime cal l upon a Federa l r eserve bank f o r

a d d i t i o n a l s e c u r i t y

t o

p r o t e c t

t h e

Federa l

r e s e r ve no t e s i s s ued

to i t .

I t w a s , t h e r e f o r e , n o t only t h e r i g h t , b u t t h e p l a i n

du t y , unde r t h i s s t a t u t e o f t h e Federal Rosorve Bank o f

Chicago t o demand, receive a n d h o l d c o l l a t e r a l , w h ic h, i n i t s

j u d g n e n t , f u l l y p r o t e c t e d r e d i s c o u n t e d p a p e r

o f

Neoga nat ional

7/17/2019 frsbog_mim_v29_0159.pdf


X-6130

3 8

Bank. E e su l t an t ly Fe de ra l re se rv e not es based, upon

t h e

r e d i s -

count paper have en tered in to

t h e

gene r a l cu r r ency

o f t h e

coun t r y

a n d t h e

so lvency

o f r e

d i s coun t ed pape r

i s t h e

basis

upon which Fede ra l r e ser ve cu r rency r e s t s .

I t thus appears tha t i n a l l t h r e e o f t h e m a t t e r s com -

p l a i n e d

o f , t h e


o f

Chicago acted wi thin

t h e

p l a i n l anguage

o r

n e c e s s i t i e s

o f t h e

s t a t u t e .

T he

Neoga

nat iona l Bank secured va lue rece ived

f o r a l l of i t s

a s s e t s

i n

t h e

hands

o f t h e


o f

Chicago

a n d

those

a s s e t s w e r e a p p l i e d

i n

accordance wi th

t h e

o b l i g a t i o n s

o f t h e

Neoga National Bank,

a l l o f

which were created

by l aw a nd

were , therefore , known t o d e p o s i t o r s i n t h e Neoga Bank.

I n t h e

f o r e g o i n g

we

have demons t ra ted tha t

t h e

Fede r a l

Reserve Bank o f Chicago w as g u i l t y of no breach o f duty toward

t h e

compl a i nan t s ,

ba t , on t h e

c o n t r a r y , a c t e d

i n

accordance

w i t h t h e l a w i n a l l r e s p e c t s . I t i s , t h e r e f o r e , r e s p e c t f u l l y

s ubmi t t ed t ha t

t h e

amended b i l l does

n o t

s t a t e

a

cause

of


t h e


o f

Chicago.

7/17/2019 frsbog_mim_v29_0159.pdf


X-613Q

39

I I .

THERE

I S A

MISJOINDER

OF

CAUSES

OF

ACTION

IN THE

AMENDED BILL

We

ha ve shown

i n t h e

f o r eg o i ng pages t ha t

no

cause

o f

a c t i o n

i s

s t a t e d

i n t h e

amended b i l l ag a i ns t

t h e

Federa l

Reserve Bank

of

Chicago,

but ,

a pa r t f rom those ques t i ons ,

we

submi t tha t there i s a n improper jo inder o f t h e caus es o f


t h e

o f f i c e r s

a n d

d i r e c t o r s

o f t h e

Neoga Bank

o n t h e o n e

hand

a n d

those supposed

t o

e x i s t a g a i n s t

t h e

Federal Reserve Bank o f Chicago o n t h e o t h e r .

We

have se en th at

t h e

b i l l a s se r t s

t h e

l i a b i l i t y

o f

t h e


o f

Chicago upon

tw o

d i s t i n c t t h e o r i e s

which

we

have d i s cus s ed

i n

d e t a i l . T he se

a r e ;

1 . That th er e w as a b r each o f duty growing o u t

o f t h e

n e g l i g e n t

o r

c a r e l e s s f a i l u r e

o n t h e

p a r t

o f t h e


o f

Chicago

t o

examine t h e Neoga Bank.

2 . That t h e Federal Reserve Bank o f Chicago w as

g u i l t y

o f

some wrong, b ec au se

o f t h e

a c t i o n

t a k e n

b y i t

a f t e r

t h e

i n s o l vency

o f t h e

Neoga

bank i n a p p r o p r i a t i n g t h e a s s e t s i n i t s hands .

O n t h e

o t he r hand , ther e

a r e t w o

d i s t i n c t c au s es

o f

a c t i o n s t a t e d a g a i n s t

t h e

o f f i c e r s

a n d

d i r e c t o r s

o f t h e

Neoga

Bank, which

m ay be

br ie f ly summar ized

a s

f o l l o w s :

.

1 . The n e g l i g e n t a d m i n i s t r a t i o n o f t h e a f f a i r s o f

t h e

bank

b y t h e

d i r e c t o r s c a u s e d

t h e

bank

t o b e -

come insolvent

a n d t h e

p l a i n t i f f s w i l l l o s e

a

p a r t o f t h e i r d e p o s i t s . .

2 . T h e

Neoga Bank

w as

ke pt open

a n d

r e c e i v e d

d e p o s i t s f ro m p l a i n t i f f s a f t e r

t h e

d i r e c t o r s

7/17/2019 frsbog_mim_v29_0159.pdf


3 3

X-6130

4 0

knew, o r s hou ld have known, t h a t th e bank was

i n s o l v e n t .

B e a r i n g i n mind t h e d i s t i n c t c h a r a c t e r o f t h e four

claims made b y t h e amended b i l l , l e t u s examine t h e s t andards

which have been es t ab l i shed

b y t h e

Federa l Cour t s

f o r

d e t e r -

m i n i n g q u e s t i o n s o f m i s j o i n d e r o r o u l t i f a r i o u s n e s s . S in c e

F e b r u a r y 1 , 191 3 , t h e new e q u i t y r u l e s a d o pt e d b y t h e Supreme

Cour t have con t ro l l ed t h e p r a c t i c e o n t h e e q u i t y s i d e of the

Fed era l Cour t . Rule 2 6 d ea l s s p e c i f i c a l l y w i t h j o i n d e r of

causes

o f

a c t i o n

a n d

r e a d s

a s

f o l l o w s :

Rule

3 6 .

J o i n d e r

o f

Causes

o f

Act ion .

The p l a i n t i f f m ay j o i n i n o n e b i l l a s many

c a u s e s

o f

a c t i o n , c o g n i z a b l e

i n

e q u i t y ,

a s h e

m ay ha ve a g a i n s t t h e d e f e n d a n t . B u t when there

a r e more than o n e p l a i n t i f f , t h e c a u s e s o f a c t i o n

jo ined mus t b e j o i n t , a n d i f t h e r e b e more than

o n e defendan t t h e l i a b i l i t y m u s t be one a s s e r t e d

a g a i n s t

a l l o f t h e

m a t e r i a l d e f e n d a n t s ,

o r

s u f f i -

c i en t grounds must appea r f o r u n i t i n g t h e causes

o f

a c t i o n

i n

o r d e r

t o

promote

t h e

convenient

a d m i n i s t r a t i o n o f j u s t i c e . I f i t appear tha t a n y

such causes o f ac t ion canno t b e c o n v e n i e n t l y

d i s p o s e d o f t o g e t h e r , t h e c o u r t m ay o rde r sepa ra t e

t r i a l s .

T h is r u l e , a l t h o u g h i t h a d n o p r o t o t y p e i n t h e e a r l i e r

r u l e s o f t h e Supreme Court, d i d n o t e s t a b l i s h a new s t a n d a r d

f o r

d e t e r m i n i n g q u e s t i o n s

o f

m i s j o i n d e r

o r

m u l t i f a r i o u s n e s s ,

b u t w a s r a t h e r a c r y s t a l i z a t i o n o f t h o s e r u l e s o r c r i t e r i a

which h a d been developed a n d app l i ed over a l o n g p e r i o d o f

t ime b y t h e Fede ra l co ur t s . Thus, i n Low v . McMaster, 2 5 5

F e d . 2 3 5 , 2 3 6 , t h e cour t r ecogn ized tha t t h e r u l e d i d n o t

7/17/2019 frsbog_mim_v29_0159.pdf


X-6130

4 1

e s t a b l i s h

a new

b a s i s

a n d

h e l d t h a t

i t d i d n o t

p r o h i b i t

a n y

j o i n d e r o f c a u s e s o f ac t i on which w a s p e r m i s s i b l e b e f o r e i t s

p a s s a g e .

I n

view

o f

t h i s h o l d i n g ,

i t

w i l l

b e

i n t e r e s t i n g

t o

examine cas es deci ded be fo re a s w e l l a s a f t e r t h e p romulga t ion

of

Rule

2 6 .

Almost half a c e n t u r y a g o , t h e Supreme Cou rt, sp ea ki ng

th rough M r . J u s t i c e M i l l e r , d e f i n e d m u l t i f a r i o u s n e s s i n a n

opinion which h a s b e en f r e q u e n t l y c i t e d a n d quo ted s ince tha t

t ime .

Walker

v .

Powers,

1 0 4 U . S . ( 1 4

O t t o ) ,

2 4 5 .

T he Court sa id , page 2 5 1 :

B y

m u l t i f a r i o u s n e s s

' i s

meant

t h e

improper ly

j o i n i n g i n o n e b i l l d i s t i n c t a n d independent

m a t t e r s , a n d thereby confounding them; a s , f o r

example,

t h e

u n i t i n g

i n o n e

b i l l

o f

s e v e r a l

m a t t e r s , p e r f e c t l y d i s t i n c t a n d unconnec ted ,

a g a i n s t o n e d e f e n d a n t o r t h e demand o f s e v e r a l

m a t t e r s o f a d i s t i n c t a n d independent na ture

a g a i n s t s e v e r a l d e f e n d a n t s

i n t h e

same b i l l . *

S t o r y , E q . P I . , s e c t . 2 7 1 . I n Da n i e l l ' s Chancery

P r a c t i c e , 3 3 5 , i t i s saicd i n e x p l a n a t i o n o f t h i s

t h a t ' i t m ay b e t h a t t h e p l a i n t i f f s a n d defendan t s

a r e

p a r t i e s

t o t h e

whole

o f t h e

t r a n s a c t i o n s w hi ch

form t h e s u b j e c t o f t h e s u i t , a n d , n e v e r t h e l e s s ,

t h o s e t r a n s a c t i o n s may be so d i s s i m i l a r t h a t t h e

c o u r t w i l l n o t allow them t o b e j o i n e d t o g e t h e r ,

b u t w i l l r e q u i r e d i s t i n c t r e c o r d s . '

T he C i r c u i t C o u r t o f Appeals f o r t h i s c i r c u i t h a s h a d

o c c a s i o n t o pass upon a q u e s t i o n o f m i s j o i n d e r i n a s i t u a t i o n

which w a s i n many r e sp ec t s s im i l a r t o t h a t no w b e f o r e t h e

c o u r t . I n Watson v . U . S . Sugar Ref ine ry , 6 8 F e d . 7 6 9 (C.C.A.

7 t h C i r c u i t 1 8 9 5 ) . t h e b i l l a s k ed f o r d i s s o l u t i o n o f a c o r -

p o r a t i o n a n d a n a ccou n t in g upon va r io us g rounds a n d a l so

7/17/2019 frsbog_mim_v29_0159.pdf


sough t t o r ecover judgment ag a i ns t ce r t a in ind iv idu a l de fend-

a n t s

o n t h e

ground th at compla inant

h a d

been in du ce d

by

f a l s e

r e p r e s e n t a t i o n s t o purchase s tock i n t h e c o r p o r a t i o n . The

c o u r t h e l d t h a t t h e r e

was a

m i s j o i n d e r

o f t h e

causes

o f

a c t i o n a n d that t h e cause o f a c t i o n a g a i n s t t h e c o r p o r a t i o n

w as e n t i r e l y d i s t i n c t f ro m t h a t a l l e g e d a g a i n s t t h e i n d i v i d u a l s

f o r

f a l s e r e p r e s e n t a t i o n s

a n d

sa id (page

7 7 2 ) :

I f t h e a p p e l l a n t w a s induced by f a l s e r e p r e -

s e n t a t i o n s t o make a l o s i n g i n v e s t m e n t i n t h e

c o r p o r a t e s t o c k ,

h i s

remedy

i s a t l a w

a g a i n s t

t h o s e who d e c e i v e d h i m , a n d n o t a g a i n s t t h e

c o r p o r a t i o n . * * * * * U n l e ss , t h e r e f o r e , t h e

avermen t s i n r e s p e c t t o t h e d e c e i t p r a c t i c e d

upon

h i m h e

r e j e c t e d

a s

mean ing less

o r

s u p e r -

f l u o u s , t h e b i l l i s c l e a r l y m u l t i f a r i o u s , n o t

only because i t j o i n s d i s t i n c t a n d independent

m a t t e r s ,

b u t

because

i t

s e e k s

t o

e n f o r c e d i f f e r e n t

r e me d i es a g a i n s t d i s t i n c t p a r t i e s n o t j o i n t l y

l i a b l e o r i n t e r e s t e d .

The

ru le l a i d down

i n t h e

Sugar Refinery Company case

b y t h e C i r c u i t C o u r t o f Appeals f o r t h i s c i r c u i t h a s been

r e c o g n i z e d

b y t h e

c o u r t s

o f

a p p e a l s

i n

o th e r c i r c u i t s

a n d h a s

b e e n a p p l i e d s i n c e t h e a d o p t i o n of the new e q u i t y r u l e s . .

Watson

v .

Hunt ing ton ,

2 1 5 F e d . 4 7 2 , C . C . A .

2 n d C i r c u i t . ( 1 9 1 4 ) .

The

d e c i s i o n

o f t h e

c o u r t

i s

shown

b y t h e

s y l l a b u s :

A b i l l b y s t o c k h o l d e r s o f a c o r p o r a t i o n t o

recover damages from t h e defendan t o n t h e

ground

of h i s

f r a u d u l e n t a c t s

a s a n

o f f i c e r

o f

t h e c o r p o r a t i o n b y which , a s a l l e g e d , c e r t a i n

o f t h e complainants were induced t o purchase

t h e i r s t o c k ,

a n d

o t h e r s ,

w ho h a d

p r e v i o u s l y

purc has ed , were o the r wise in ju re d , i s b a d f o r

m u l t i f a r i o u s n e s s ; t h e r i g h t t o r e l i e f of the two

groups be ing based o n a d i f f e r e n t s t a t e of f a c t s .

7/17/2019 frsbog_mim_v29_0159.pdf


O i

X-6130

4 3

Backus v . Brooks, 1 9 5 F e d . 4 5 2 , C.C.A. 2 n d

C i r c u i t , ( 1 9 1 2 ) ^ ~

The dec i s ion , o f t h e Court i s shown by th e s y l l a b u s :

A b i l l i n e qu i t y wh ich s t a t e s a cause of

a c t i o n i n behalf o f ind iv idua l compla inan t s

based o n t h e f r audu len t conduc t o f m a j o r i t y

s tockho lde r s toward t h e m i n o r i t y , a n d which

a s s e r t s

t h e

r i g h t

o f

s t o c k h o l d e r s

t o

fo l low

corpora t e p roper ty conveyed i n f r a u d , a n d which

s t a t e s a cause o f a c t i o n i n f a v o r o f a c o r p o r a -

t i o n ,

a s

compla inan t ,

f o r

breach

o f

c o n t r a c t

by

defendan t co rpora t ion a n d i n d i v i d u a l d e f e n d a n t s

f o r t h e purchase o f a r t i c l e s , i s m u l t i f a r i o u s

f o r

m i s j o i n d e r

o f

causes

o f

a c t i o n .

P r i c e v . Union Land C o . 1 8 7 F e d . 8 8 6 . C . C . A .

8 t h Ci r cu i t ( 1911) .

T he d e c i s i o n o f t h e cour t i s shown by t h e s y l l a b u s :

A r i g h t t o m a i n t a i n a s u i t a g a i n s t t h e

o f f i c e r s

o f a

c o r p o r a t i o n

f o r

f r a u d u l e n t m i s a p p r o -

p r i a t i o n o f i t s p r o p e r t y i s a r i g h t o f t h e c o r -

p o r a t i o n , a n d s tockho lde r s su ing i n such r ight

c a n n o t j o i n t h e r e w i t h

a

cause

o f

a c t i o n

f o r

f r a u d

a n d d e c e i t p r a c t i c e d o n them when they purchased

th e i r s t ock which i s p e r s o n a l #

T h e cour t sa id , page 8 8 9 :

B u t running through t h e bil l i s a n a t t empted

a s s e r t i o n

o f a

cause

o f


t h e

i n d i v i d u a l d e f e n d a n t s n o t f o r t h e u s e a n d bene-

f i t o f t h e Fuel Company bu t e x c l u s i v e l y a f f e c t -

i n g t h e

compla inan t s

a s

i n d i v i d u a l s .

I t i s f o r

f r a u d a n d dece i t p r ac t i ced upon them i n t h e

o r i g i n a l s a l e a n d purchase o f t h e stock which

they ho ld . C le a r l y such a cause o f a c t i o n h a s

n o

p l a c e

i n a

s t oc kh ol de rs ' s u i t brought

f o r t h e

benef i t o f t h e c o r p o r a t i o n . 'A r i g h t t o main ta in

a s u i t a g a i n s t t h e o f f i c e r s o f a c o r p o r a t i o n f o r

f r a u d u l e n t m i s a p p r o p r i a t i o n o f i t s p r o p e r t y i s

a

r i g h t o f t h e c o r p o r a t i o n . • P o r t e r v . S a t i n , 149

U . S . 4 7 3 , 4 7 8 , 1 3 S u p . C t . 1 0 0 8 , 3 7 L . E d . 8 1 5 .

A

r i g h t

o f a

s t o c k h o l d e r

t o s u o f o r

f r a u d

a n d

d o c o i t p r a c t i c e d u p o n h i m whon h e purchased s tock

i s

a

p e r s o n a l o n e .

7/17/2019 frsbog_mim_v29_0159.pdf


X-5130

44

I n view o f S a l e 2 6 a n d t h e f o r eg o i ng a u t h o r i t i e s , i t

a p p e a r s t h a t t h e r e a r e t h r e e d i s t i n c t r e a s o n s why a b i l l may

be m u l t i f a r i o u s .

1 .

M i s j o i n d e r

o f

p a r t i e s p l a i n t i f f .

2 . M i s j o i n d e r o f p a r t i e s d e f e n d a n t .

3 . M i s j o i n d e r o f causes o f a c t i o n .

The

p r e s e n t b i l l

i s

o b j e c t i o n a b l e u po n

a l l

t h r e e

o f

these grounds, a n d w e w i l l examine i t s e p a r a t e l y w i t h r o s p e c t

t o oach.

1 .

MISJOINDER

0 ?

PASTIES PLAINTIFF:

A s t o t h e j o i n d e r o f p a r t i e s p l a i n t i f f , Rule 2 6

p r o v i d e s :

B a t when there a r e more than o n e p l a i n t i f f

t h e c a u s e s o f a c t i o n j o i n e d m us t b e j o i n t .

T he second cause o f ac t i on which t h e w i l l a l l e g e s a g a i n s t t h e

o f f i c e r s a n d d i r e c t o r s o f t h e Ueoga bank ( i . e . , t h e wrongful

r e c e i p t o f d e p o s i t s a f t e r i n s o l v e n c y ) , i s c l e a r l y o n e i n which

t h e p l a i n t i f f s a r e s u i n g i n t h e i r i n d i v i d u a l c a p a c i t i e s . I n -

deed , t he re

a r e

a c t u a l l y

a s

many causes

o f


t h e

i n d i v i d u a l d i r e c t o r s o f t h e Neoga bank a s t h e r e a r e p l a i n t i f f s .

I t i s e v i d e n t t h a t t h e a c c e p t a n c e o f d e p o s i t s b y t h e d i r e c t o r s

f rom t h e v a r i o u s p l a i n t i f f s when t h e Hooga bank w a s i n s o l v e n t

w a s n o t a n i n j u r y t o t h e c o r p o r a t i o n , t h o Hooga bank, b u t w a s

o n l y an . i n j u r y t o t h e in di v i du al d ep os i t or s whoso monoy was

w r o n g f u l l y a c c e p t e d .

7/17/2019 frsbog_mim_v29_0159.pdf


1

X-6130

4 5

Cass idy v . Uhlmann, 170 N. Y. 50 5 , 63

E . 5 5 4

I t i s possible that t h e f i r s t c la im attempted to be

asser ted aga ins t t h e Federal Reserve Bank of Chicago ( i . e . ,

t h e

breach

o f

duty

t o

examine

and

superintend

t h e

ITeoga bank)

i s

a l s o

a n

individual c la im

o f t h e

various depositors .

We

have pointed o u t that t h e Federal Reserve Bank had no such

duty a s i s claimed by the amended b i l l , b u t i f there wore such

a duty, we could n o t determine t h e party aggrieved b y a broach

thereof without knowing whether

th e

duty

w as

owing

t o t h e

ITeoga

bank

o r t h e

depositors

o f

such bank

or the

publ ic

a t

large*

On the other hand, t h e f i r s t c laim aga ins t t h e o f f i c e r s

an d d ir e c t o r s of the ITeoga bank ( i . e . , f o r neg l igence) , and

t h e second claim ag ai ns t th e Federal Reserve Bank ( i . e . , f o r

appropriat ing t h e s e c u r i t y i n i t s p o s s e s s io n a f t e r t h e r e c e i v e r -

s h ip ) ,

a r e

undoubtedly rights which were vested

i n t h e

corpo-

r a t io n an d which t h e Receiver could have as so rt ed . The

p l a i n t i f f s

1

only ri ght t o s u e , th er ef or e, must depend upon the

fact that they have made

a

demand upon

th e

Receiver

t o

commence

s u i t

a n d

that

h e h a s

re fu se d. Thus,

we

have

t h e

p l a i n t i f f s

a s t o a t l e a s t one cause o f action suing i n their indiv idual

c a p a c i t i e s a n d i n a t l e a s t tw o other causes o f action suing

merely i n their representat ive capacit ies , because th e directors

o r t h e

rece iver

who

should compel action

b y t h e

corporation

have fa i led t o a c t . T he situat ion thus presented i s within

t h e rule laid down i n Watson v . Huntington. Backus v . Brooks

7/17/2019 frsbog_mim_v29_0159.pdf


**? -t

x - e i s o

4 6

a n d P r i c e v . Union Land. C o . , ci te d, abov e.

2 . MISJOINDER OF PARTIES nmiTOAICT:

A s t o t h e m i s j o i n d e r o f p a r t i e s d e f e n d a n t , R ul e 2 6 s a y s :

I f

t h e r e

b e

more than

o n e

d e f e n d a n t ,

t h e

l i a b i l i t y m a s t b e o n e a s s e r t e d a g a i n s t a l l of

t h e m a t e r i a l d e f e n d a n t s .

The

mere s ta t emen t

o f

t h i s r u l e

a n d t h e

enumera t ion

o f

t h e var ious causes o f a c t i o n i n c l u d e d i n t h e b i l l makes i t

c l e a r t h a t t h e r e i s a m i s j o i n d e r . The Federal Reserve Bank

of

Chicago

i s n o t , o f

c o u r s e , j o i n t l y l i a b l e w i t h

t h e

d i r e c -

t o r s , e i t h e r b e c a us e o f t h e d i r e c t o r s ' n e g l i ge n c e o r because

d e p o s i t s w e r e w r o n g f u l l y r e c e i v e d a f t e r t h e i n s o l v e n c y o f t h e

Neoga bank,

a n d , o n t h e

other hand,

t h e

o f f i c e r s

a n d

d i r e c t o r s

o f t h e Neoga bank a r e n o t l i a b l e , a i t h o r f o r t h e b r e a c h o f t he

supposed duty o f t h e Federal Reserve Bank t o examine a n d s u p e r -

i n t e n d t h e Neoga bank o r f o r t h e a p p r o p r i a t i o n o f t h e s e c u r i t y

b y t h e

Fed era l Rese rve Bank a f t e r

t h e

roc o i vo r sh ip . There

a r e , t o b o s u r e , s ome a l l e g a t i o n s i n t h e n i n e t e e n t h p a r a g r a p h

o f t h e

amended b i l l which sugges t th a t

t h e

d i r e c t o r s

a n d

o f f i c e r s c o n n i v e d a n d coopera t ed wi th t h e Federal Reserve Bank

i n a p p r o p r i a t i n g t h e s e c u r i t y i n q u e s t i o n , b u t inasmuch a s

t h i s w a s n o t d one u n t i l a f t e r t h e r e c e i v e r s h i p , i t must b e

c l e a r t h a t t h e s e a l l e g a t i o n s w hi ch a r e mere ly i n t h e form o f

c o n c l u s i o n s

a r e

e n t i r e l y i n c o n s i s t e n t w i t h

t h e

s p e c i f i c f a c t s

a l l e g e d by t h e compla inan t .

7/17/2019 frsbog_mim_v29_0159.pdf


<r* v -

X-6130

4 7

3 , MISJOINDER 0 ? CAUSES OF ACTION:

Rale 2 6 c o n t a i n s a n a d d i t i o n a l p r o v i s i o n w h i c h may

j u s t i f y a j o i n d e r o f defendants which would otherwise be

i mpr ope r . I t r eads :

o r

s u f f i c i e n t g r ounds mus t appea r

f o r

u n i t i n g

t h e causes o f a c t i o n i n o r d e r t o promote t h e

c o n v e n i e n t a d m i n i s t r a t i o n

o f

j u s t i c e .

What

a r e t h e

grounds which must ap pe ar

t o

j u s t i f y

t h e

j o i n d e r ?

S h e

c r i t e r i o n w h i c h

h a d

b o o n e s t a b l i s h e d

b y t h e

Fede r a l C our t s p r i o r t o t h e a d o p t i o n o f Rule 2 6 a n d which h a s

been ap p l i e d con s t a n t l y s i nce t ha t t i me , i s t h a t t h e r e a r e

such grounds f o r u n i t i n g c a u s e s o f ac t ion on ly when there i s

s u c h i d e n t i f y o f i s s u e s e i t h e r o f f a c t o r o f l aw which wi l l b e

d e c i s i v e o f t h e va r i ous caus es o f a c t i o n , t h a t t h e convenience

o f t h e p a r t i e s a n d o f t h e cou r t w i l l b e s e r v e d b y de termin ing

t h o s e i s s u e s a t o n e t ime ra ther than i n d i s t i n c t t r i a l s . I t

i s , t h e r e f o r e , n e c e s sa r y t o c o n s i d e r t h i s p a r t o f t h e r u l e i n

connec t i on w i t h

t h e

d i s c u s s i o n

o f

m i s j o i n d e r

o f

caus es

o f

a c t i o n .

A s

s t a t e d

b y t h e

Supreme Court

i n

Walker

v .

Powers

( s up r a , page

4 1 ) ,

m u l t i f a r i o u s n e s s m ea ns :

T h e

u n i t i n g

i n o n e

b i l l

of

s eve r a l ma t t e r s ,

p e r f e c t l y d i s t i n c t a n d unconnec t ed , ag a i n s t o n e

d e f e n d a n t , o r t h e demand o f s e v e r a l m a t t e r s o f

a d i s t i n c t a n d i ndependen t na t u r e aga i n s t s eve r a l

d e f e n d a n t s i n t h e same b i l l .

B ea r i ng i n mi nd t h i s r u l e , w e c a n m ost e f f e c t i v e l y

demons t r a t e t h e f u t i l i t y o f c o n s o l i d a t i n g i n o n e case t h e

c l a i m s a g a i n s t t h e Federal Reserve Bank o f Chicago a n d t h e

7/17/2019 frsbog_mim_v29_0159.pdf


jC-6130

4 8

c l a i m s a g a i n s t t h e d i r e c t o r s o f t h e ITeoga Bank by enumerat ing

t h e i s sues which a r e i nvo l ved i n each case a n d t hus de t e r mi n -

i n g what , i f a n y , common p o i n t s o f l i t i g a t i o n t h e r e a r e i n t h e

tw o

c a s e s .

The cas e aga i ns t t h e Federal Reserve Bank o f Chicago,

i f

t h e r e

i s a

cas e , i nvo l v es

t h e

f o l l o w i n g q u e s t i o n s :

1 . Th e r i g h t o f a Fe de ra l re se rv e bank t o cance l t h e

s t o c k

o f an

insolvent member tank

a n d

app l y

t h e

va lue thereof

t o t h e d e b t s o f t h e insolvent member bank t o t h e Fede r a l

Reserve Bank, a s p r o v i d e d f o r i n U . S . - C . A . T i t l e 1 2 , s e c t i o n

288.

2 . Th e r i g h t o f a Federa l r eserve bank t o a s s e r t a

l i e n o r s e t - o f f o n t h e r e s e r ve depos i t o f an insolvent member

bank.

3 . T h e

r i g h t

o f a

Federa l r eserve bank

t o

app l y

t h e

d i s c o u n t e d p a p e r a n d c o l l a t e r a l r e c e i v e d f ro m a n i n s o l v e n t

member bank i n payment o f t h e o b l i g a t i o n s o f t h e member bank

which such pa pe r w a s g i v e n t o s ecu r e ,

4 . Whether t h e Federal Reserve Bank h a d a n y a c t u a l

knowledge

o f t h e

c o n d i t i o n

o f t h e

Heoga Bank.

5 . Whether t h e Federal Reserve Bank w a s cha r geab l e

a s a

m a t t e r

o f l aw

w i t h n o t i c e

o f t h e

c o n d i t i o n

o f

such ba nk .

6 . Whether , i f t h e Federal Reserve Bank h a d knowledge

e i t h e r a s a m a t t e r o f f a c t o r a s a m a t t e r o f l a w , such knowl -

. edge makes a n y d i f f e r e n c e i n t h e l i a b i l i t y of such Fe de ra l

7/17/2019 frsbog_mim_v29_0159.pdf


£ <3 ~ > r

X-6130

4 9

Reserve Bank.

7 .

Whether

t h e

p l a i n t i f f s

i n

t h i s c a s e ,

a s

d e p o s i t o r s ,

a c t u a l l y s u f f e r e d

a n y

damage through dealings between

t h e

Heoga

bank

a n d t h e

Federal Reserve Bank.

8 .

What,

i f a n y ,

d u t i e s

a

Fe de ra l re s e r v e bank owes

t o t h e

d e p o s i t o r s

o f

member banks

t o

p ro t e c t su ch d e p o s i t o r s

a g a in s t mi s f e a sa n c e , ma l f e a sa n c e

o r

nonfeasance

o f t h e

d i r e c t o r s

a n d

o f f i c e r s

o f

such member bai ikt

9 » I f t h e r e i s such a duty , whether there w a s a n y

f a i l u r e

o t i t h e

p a r t

o f t h e

Federal Reserve Batik

t o

per fo rm

th&t duty i n t h e preeeiit c&ee,

1 0 . I f

t h e r e

w a s

such

a

duty

a n d a

f a i l u r e

t o

per fo rm

i t , whe ther t h e Heoga Bank, o r i t s d e p o s i t o r s , s u f f e r e d a n y

damage

o f

wh ic h su c h f a i l u r e

w a s t h e

prox imate cause .

I t i s c l e a r t h a t no one of t h e s e i s s u e s i s a t a l l

m a t e r i a l

i n

d e t e rmin in g

t h e l

i a b i l i t y

o f t h e

d i r e c t o r s

a n d

o f f i c e r s o f t h o Heoga Bank t o t h e p l a i n t i f f s i n t h e p re se n t

c a se .

On tho othor hand, t h e c a se a g a in s t t h o d i r e c t o r s

o f t h e

Heoga Bank in vo lv es , among o t h e r s ,

t h o

f o l l o w i n g

q u e s t i o n s :

1 . Th e

knowledge

o r

l a c k

o f

knowledge

o f

each

o f t h o

n i n e d i r e c t o r s a s t o t h e c o n d i t i o n o f t h e Heoga Bank a t

var ious t imes f rom

1 9 2 1 t o

Ja n u a ry

1 9 2 5 .

3 . T h e

p a r t i c i p a t i o n

o r

l a c k

o f

p a r t i c i p a t i o n

i n t h e

7/17/2019 frsbog_mim_v29_0159.pdf


• rt , ' » • v>

X-61%0

5 0

a f f a i r s o f t h e Heoga Bank o f each o f t h e n in e, d i r e c t o r s ,

3 . T h e

e x t e n t

t o

which

t h e

d i r e c t o r s ,

a s a

m a t t e r

o f

l a w , a r e char geab le wi th knowledge o f t h e a f f a i r s o f t h e bank.

4 .

Whether

t h e

d i r e c t o r s k e p t

t h e

a f f a i r s

a n d

books

o f t h e bank i n su c h c o n d i t i o n th a t t h e y c o u ld e a s i l y a sc e r t a in

i t s

c o n d i t i o n .

5 . W he th er f a i l u r e t o keep t h e a f f a i r s arid books of

t h e

bank

i n

su c h c o n d i t i o n th a t

t h e

d i r e c t o r s c o u l d

be

e a s i l y

a d v i s e d o f i t s so lvency o r insolvency, amounted t o neg l igence

o n t h e

p a r t

o f t h e

o f f i c e r s

o r

d i r e c t o r s .

6 . Whether va ri ou s lo an s mado by th e bank a n d approved

b y t h e

d i re c t o r s were improper because

o f t h e

inadequacy

o f t h e

s e c u r i t y r e c e i v e d b y t h e bank.

7 .

Whether va ri ou s lo an s made

b y t h e

bank

a n d

a p p ro v -

e d b y t h e d i rec to rs were improper because of t h e c h a r a c t e r o f

t h e

i n d i v i d u a l s

w ho

mado

t h o

lo a n s .

8 . Whether ex eo ss iv o lo an s were made t o p a r t i c u l a r

p e o p l e

i n

view

o f t h e

s i z e

o f t h e

bank,

t h e

fu n d s a v a i l a b l e

f o r

l o a n s

a n d t h e

r e s p o n s i b i l i t y

o f t h e

bor rower .

9 .

W he th er f a l s e r e p o r t s ,

a s

a l l e g e d

i n t h e

amended

b i l l , were made

b y t h e

d i r e c t o r s

a n d

r e s u l t e d

i n

mis l e a d in g

t h e

d e p o s i t o r s

a n d t h o

Comptro l le r

o f t h e

Currency.

1 0 . A n y

o t h e r f a c t s

a n d

circumstances whatsoever which

m ay

t e n d

t o

show

t h e

negligent management

o f t h o

a f f a i r s

o f t h e

bank

b y i t s

o f f i c e r s

a n d

d i r e c t o r s #

7/17/2019 frsbog_mim_v29_0159.pdf


X-6130

5 1

1 1 . Whether t h e Heoga Bank w a s inso lvent when depos i t s

were rece ived f rom

t h e

v a r io u s p l a i n t i f f s .

1 2 .

Whether eac h

o r a n y o f t h e

d i r e c t o r s a c t e d

i m -

p r o p e r l y

i n

view

o f h i s

knowledge , ac tua l

o r

c o n s t r u c t i v e ,

o f

t h e a f f a i r s o f t h e hank, i n c o n t i n u i n g t o o p e r a t e t h e bank a n d

r e c e i v e d e p o s i t s d u r i n g

t h e

y e a r

1 9 2 4 .

We

submit th at

n o o n e o f

tiiese issues

i s a t a l l

m a t e r i -

a l i n

de t e r mi n i ng

t h e

l i a b i l i t y

o f t h e


t o

t h e p l a i n t i f f s i n t h e p r e s en t ca s e .

I t i s

s ubmi t t ed ,

i n

view

o f t h e

foregoing enumera t ion ,

t h a t

t h e

u n i t i n g

o f

tBae caus es

o f


t h e

d i r e c t o r s

o n t h e o n e

hand

a n d t h e


o n t h e

o t he r

would n o t s e r ve t o promote t h e c o n v e n i e n t a d m i n i s t r a t i o n o f

j u s t i c e ,

b u t

would

b e a

s e r i ous i nconven i ence

t o t h e

c o u r t

a n d

t h e

p a r t i e s c o nc e rn e d

i n

d i s p o s i n g

o f t h e

s e v e r a l e n t i r e l y

d i s t i n c t c o n t r o v e r s i e s a t t e m pt e d

t o b e s e t

f o r t h

i n t h e

amend-

e d b i l l .

CONCLUSION

T h e

fundament

o f t h e

p l a i n t i f f s ' c la im

i s t h e m i s -

conduct a n d n e g l i g e n c e o f t h e o f f i c e r s o f t h e Neoga Bank.

T he i r w r ongf u l ac t s

a r e

a l l e g e d

t o

h a v e i n j u r e d

t h e

p l a i n t i f f s

i n t w o

d i s t i nc t w ays :

1 . T h e

negligent management

b y t h e

de f endan t d i r ec -

t o r s caus ed t h o i n s o l v e n c y o f t h e bank a n d t h e consequent los s

t o t h e

d e p o s i t o r s .

7/17/2019 frsbog_mim_v29_0159.pdf


w

X-6130

5 2

2 . T h e

d e fe n d a n t d i r e c to r s wro n g fu l ly c o n t in u e d

t o

o p e r a t e

t h e

bank

a n d

acce p t depos i t s f rom

t h e

p l a i n t i f f s a f t e r

they knew

o r

should have known that

t h e

bank

w a s

i n s o l v e n t .

I t

must

be

c l e a r t h a t

t h e


o f

Chicago

w a s n o t i n a n y w a y

in v o lv e d

i n

e i t h e r

o f

t h es e breaches

o f duty toward t h e p l a i n t i f f s a n d t h e r e a r e n o f a c t s a l l e g e d

i n t h e

amended b i l l showing t h at

t h e


w a s

i n v o l v e d i n t h e s l i g h t e s t d e g r e e . The cla ims which a r e made

a g a i n s t

t h e

Federa l Reserve Bank i t se l f

a r e

unfounded

i n l a w ,

c o n t r a r y t o t h e e x p r e ss p r o v i s i o n s o f t h e Federal Reserve

A c t a n d t h e

d e c i s i o n s

o f . t h e

Cour ts the reunder ,

a n d t h e

motion

o f t h e defendan t shou ld b o gran ted bo th o n t h e ground that no

cause

o f

a c t i o n

i s

s t a t e d a g a i n s t

t h e


o f

Chicago a n d o n t h e ground th a t th e r e i s a m i s j o i n d e r o f t h e

c a u se s

o f

a c t i o n

s e t

f o r t h

i n t h e

amended b i l l .

R e s p e c t f u l l y s u b m i t t e d ,

A t t o r n e y f o r Federal Reserve

Bank

o f

Chicago.

o f

Counsel

frsbog_mim_v29_0159.pdf

Documents

Transcript of frsbog_mim_v29_0159.pdf