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C O P Y X-6740

October 22, 1930

To Federal Reserve Board Subject : Federal Reserve Bank of

From Mr. Wyatt-General Counsel Richmond v. Attmore

Because of the grave charges made agains t the Federal Reserve Bank of Richmond by the defendant, because of the p o l i t i c a l f l avor i n j e c t e d in -to the l i t i g a t i o n by the defendant, and because of the f a c t tha t i t may develop i n to a case involving l ega l questions of importance to the e n t i r e Federal Reserve System, I r e s p e c t f u l l y submit herewith for the Board1s i n -formation copies of c e r t a i n l e t t e r s addressed to me by Counsel to the Fed-e r a l Reserve Bank of Richmond with reference to the above case, copies of the complaint and answer f i l e d in the case, and copies of ce r t a in cor res -pondence with the Receiver of the F i r s t National Bank of Hew Bern, Forth Carolina, pe r t a in ing to a demand of the Counsel fo r the defendant in the above case that the Receiver br ing s u i t agains t the Federal Reserve Bank to recover ce r t a in a s s e t s of the F i r s t na t iona l Bank of Hew Bern pledged to the Federal Reserve Bank as marginal c o l l a t e r a l to i t s indebtedness, and c e r t a i n other a s s e t s a l leged to be held unlawful ly by the Federal Re-serve Bank.

Pending f u r t h e r developments, I beg leave to withhold any recommend-a t i on as to what s t e p s , i f any, the Board should take with re fe rence to the handling of t h i s l i t i g a t i o n * I f the case developes in such a manner as to involve l ega l questions of importance to the e n t i r e Federal Reserve System, i t may become advisable to employ spec ia l counsel to represent the i n t e r e s t s of a l l Federal reserve banks, as has been customary i n cases involving questions of importance to the en t i r e Federal Reserve System. This, however, depends upon fu tu re developments and espec ia l ly upon the c o u r t ' s ru l ing upon a motion now pending, which probably w i l l be handed down sometime during the month of November,

I t appears from the complaint f i l e d in t h i s case tha t the Federal Reserve Bank of Richmond rediscounted for the F i r s t National Bank of New Bern, North Carolina, two notes made by G. S. Attmore. The F i r s t National Bank of New Bern having f a i l e d and a receiver having been appointed fo r i t , the Federal Reserve Bank brought th i s s u i t aga ins t G. S. Attmore, as maker, to c o l l e c t the two notes above r e f e r r e d to . In answer t o the com-p l a i n t the defendant denies tha t the F i r s t National Bank was a holder of one of these notes i n due course fo r value and tha t the Federal Reserve Bank holds e i t h e r of such notes in due course and f o r value, and demands that the Federal Reserve Bank "produce the secre t w r i t t e n agreements and con t rac t s which i t compelled the insolvent F i r s t National Bank of New Bern to execute to i t re levant to marginal c o l l a t e r a l .

SUMMARY OF THE CASE

The defendant f u r t h e r avers tha t the rece iver of the F i r s t National Bank of New Bern i s a necessary p a r t y to th i s ac t ion and moves tha t he

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"be made a pa r ty to the ac t ion in order tha t he may plead to the affirrig-a t i v e defense and c ross -p lea se t up "by the defendant .

As an a f f i r m a t i v e defense, the defendant makes a number of a l l e -gat ions v i t h re fe rence to knowledge "by the Federal Reserve Bank of the insolvency of the F i r s t na t iona l Bank of Hew Bern; with reference to the p a r t taken by the Federal Reserve Bank in the formation of the F i r s t Nat-iona l Bank of New Bern "by the absorpt ion of a S ta t e "bank "by the National Bank of New Bern and the assumption of the l i a b i l i t i e s of the National Bank of New Bern by the F i r s t National Bank; with reference to the knowl-edge of the Federal Reserve Bank of the improper use in the organiza t ion of the F i r s t National Bank of New Bern of ce r t a in funds of Craven County, North Carolina; and with reference to the taking "by the Federal Reserve Bank of marginal c o l l a t e r a l from the F i r s t National Bank of New Bern to secure rediscounts with the Federal Reserve Bank. Hie defendant a l l e g e s tha t he i s e n t i t l e d to a s e t off aga ins t a deposi t balance in the F i r s t National Bank of New Bern and that he i s e n t i t l e d to have the Federal Re-serve Bank re tu rn to the rece iver of the F i r s t National Bank of New Bern marginal c o l l a t e r a l taken from t h i s bank by the Federal Reserve Bank. The defendant asks the court to require the Federal Reserve Bank to surrender one of h i s notes to him 'and surrender the other to the receiver of the F i r s t National Bank of New Bern in order tha t i t may be se t of f aga ins t h i s deposi t i n t h i s bank. He f u r t h e r asks that the Federal Reserve Bank be requi red to produce i n court repor t s of examinations of the F i r s t Nat-iona l Bank and i t s predecessors , the National Bank of New Bern and the Peoples Bank of New Bern.

I t appears tha t the a l l ega t ions contained in the defendant ' s a f f i r m -a t i v e defense above r e f e r r e d to are not mater ia l to the i ssue involved in t h i s case and I am advised by the Counsel fo r the Federal Reserve Bank of Richmond that he has made a motion to s t r i k e out the defendant ' s a f f i r m -a t ive defense on the ground that the matter se t up i s i r r e l e v a n t and in>-mate r ia l to the i s sue . The court has taken t h i s motion under advisement and probably w i l l r u l e upon i t sometime in November. I f the court sus ta ins t h i s motion and i f the defendant does not appeal on the ru l i ng , the case w i l l involve no question of importance or i n t e r e s t to the e n t i r e Federal Reserve System. I f , however, the court should overrule the motion to s t r i k e out the de fendan t ' s a f f i r m a t i v e defense, or i f the court should sus ta in such motion and the defendant should appeal from such r u l i n g , the case may involve questions of importance to the e n t i r e Federal Reserve System, depending upon whether the appeal turns upon questions of procedure or upon questions of subs tant ive law.

Counsel f o r the defendant in th i s case, ac t ing as counsel fo r ce r t a in stockholders and depos i to r s in the F i r s t National Bank of New Bern and i t s predecessor , the National Bank of New Bern, has demanded tha t the rece iver i n s t i t u t e proceedings agains t the Federal Reserve Bank f o r the re tu rn of a s s e t s of such banks pledged to the Federal Reserve Bank as s e c u r i t y fo r the indebtedness of such banks to the Federal Reserve Bank (other than paper rediscounted with the Federal Reserve Bank without c o l l a t e r a l secur i ty) and a l so fo r the r e tu rn of a s se t s of such banks "not held in accordance

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with the Federal Reserve Act ," i n order tha t the rece iver may obtain for c o l l e c t i o n and d i s t r i b u t i o n among the c red i to r s of the F i r s t National Bank of Hew Bern "items unlawful ly obtained and he ld by the Federal Re-serve Bank of Richmond". The th rea t i s made t h a t , i f the r ece ive r does not i n s t i t u t e such proceedings the stockholders and deposi tors w i l l do so . I am informed tha t the Comptroller of the Currency lias i n s t r u c t e d the rece ive r not to i n s t i t u t e such proceedings; but deposi tors and s tock-holders probably w i l l do so . I f they do, tha t case almost c e r t a i n l y wi l l involve quest ions of System-wide importance.

QUESTIONS WHICH MAY BE INVOLVED

This l i t i g a t i o n probably w i l l produce p u b l i c i t y unfavorable to the Federal Reserve System and may r e s u l t i n ru l ings by the Appellate Courts e s t a b l i s h i n g important precedents on the following quest ions, and pos-s i b l y o thers , which are of importance to a l l Federal reserve banks and some of which axe of importance to the Federal Reserve Board and the Comp-t r o l l e r of the Currency:

1. Whether a Federal reserve bank may be required to produce i n court copies of r epor t s of examinations of na t iona l banks en t rus ted by the Comptroller of the Currency to the Fed-e r a l Reserve Agent f o r h i s con f iden t i a l information in h i s o f f i c i a l capac i ty .

2 . Whether i t i s lawful fo r Federal reserve banks to requ i re or accept pledges of marginal c o l l a t e r a l when making r e -discounts f o r , or loans to, member banks.

3 . Whether the makers of notes rediscounted by member banks with Federal reserve banks may o f f s e t aga ins t t h e i r i ndeb t -edness on such notes the amounts of t he i r deposi ts in such member banks a f t e r the insolvency of the l a t t e r .

4 . To what extent are Federal reserve banks chargeable with not ice of the insolvency of member banks?

5. To what extent are the r i gh t s of Federal reserve banks in g ran t ing c red i t accommodations to member banks a f f e c t -ed by knowledge on the p a r t of the Federal reserve banks of the insolvency of such member banks or of f raudulen t and unlawful t r ansac t ions of such member banks?

Somewhat s imi l a r quest ions were involved in the cases of Federal Re-serve Bank of San Francisco v . Grimm A l f a l f a Seed Growers* Assoc ia t ion , 8 Fed. (2nd) 922, c e r t i o r a r i denied 46 Sup. Ct. 347, and Neoga National Bank v. Federal Reserve Bank of Chicago (unreported); and i n both of those cases Honorable Newton D. Baker was employed as Special Counsel to repre-sen t the i n t e r e s t s of a l l Federal reserve banks i n the l i t i g a t i o n . He was a l so re ta ined by the Governors' Conference to make a spec ia l s tudy of a l l such questions with a view of advis ing the Federal reserve banks how

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t h e i r c r e d i t p r a c t i c e s might be modified to minimize r i s k of loss to the Federal reserve "banks, "but has not yet rendered a r e p o r t . In view of h i s pa s t experience and h i s specia l knowledge of t h i s sub j ec t , he would be e s p e c i a l l y well q u a l i f i e d to represent the i n t e r e s t s of a l l Federal r e -serve "banks i f i t should 'become necessary to employ Special Counsel fo r t h i s purpose.

I am keeping i n close touch with a l l developments in t h i s l i t i -ga t ion through correspondence and telephone conversations with Counsel fo r the Federal Beserve Bank of Richmond; and I am keeping a l l Federal reserve "banks advised of developments through l e t t e r s to t h e i r Counsel* ' I s h a l l , of course, advise the Board of a l l important developments and s h a l l recommend the employment of Special Counsel should fu tu re develop-ments appear to make that advisable .

EXTRAORDINARY CHARGES AGAINST FEDERAL RESERVE BANK.

For the Board's f u r t h e r informat ion, there i s r e s p e c t f u l l y sub-mit ted herewith an analys is of the ext raordinary charges made aga ins t the Federal Reserve Bank by the defendant in t h i s case . I be l ieve tha t these charges are i r r e l e v a n t and immaterial i n t h i s case and tha t they should be s t r i cken out . They may, however, be mater ia l i f repeated in a s u i t brought agains t the Federal Reserve Bank on behalf of the de-p o s i t o r s and other c r ed i to r s of the F i r s t National Bank of New Bern f o r the purpose of requi r ing the r e tu rn to the rece iver of c e r t a i n a s s e t s of the bank f o r the b e n e f i t of i t s deposi tors and c red i to r s on the ground tha t in obtaining such a s se t s the Federal Reserve Bank knowingly p a r t i c i p a t e d i n a f raud on the deposi tors and other c r e d i t o r s . In the exercise of i t s power of general supervision over the Federal r e -serve banks, the Board a l so may des i r e to enquire i n t o the t ru th of these charges. I doubt tha t they are t rue ; bu t , to have such charges a i r e d i n court and poss ib ly passed upon by a p re jud iced ju ry , might r e s u l t i n much unfavorable p u b l i c i t y fo r the Federal Reserve System.

CONCLUSION

This memorandum i s merely for the Board1s information and requi res no ac t ion a t th i s time. Because the a t tached documents are qui te voluminous, I am fu rn i sh ing copies to each ind iv idua l member of the Board, in order that he may consider them a t h i s l e i s u r e .

Respec t fu l ly ,

Walter Wyatt, General Counsel.

Co r resp ondence, e t c ; a t tached .

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