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Federal Reserve Banks of Philidelphia v. Gettleman

Decided: January 22, 1937.


On appeal from the Supreme Court.

For the plaintiff-appellant, Cole & Cole.

For the defendants-respondents, Bolte & Miller.


The opinion of the court was delivered by

BROGAN, CHIEF JUSTICE. The plaintiff appeals from a judgment in favor of the defendants in an action to recover on four promissory notes, amounting to about $9,500. These were the facts: The defendants were answerable on the notes, on two of them as endorsers and on the remaining two as makers. All were payable at the Atlantic City National Bank, which had discounted the paper. The due date of two of the notes was January 30th, 1933, the due date of the others February 20th, 1933, and February 28th, 1933, respectively. The Atlantic City National Bank, the payee, was a member of the Federal Reserve Bank of Philadelphia, the plaintiff herein, and had, before maturity, pledged these notes and others with the Federal Reserve Bank of Philadelphia.

On January 27th, 1933, several days before the due date of any of the obligations, the defendants sent their bookkeeper to the Atlantic City National Bank with checks drawn on their personal or corporate funds on deposit in the payee bank (except one check for $1,000 drawn on another bank) in an amount sufficient to take up these evidences of indebtedness. The note-teller took the checks tendered by the young lady bookkeeper. He was unable to return the notes to her since, as mentioned above, they were lodged with the Federal Reserve Bank of Philadelphia as part pledge for the collateral loan of the payee bank. The bookkeeper did not ask for the notes nor did the teller explain why he did not return them to her. She asked for and received a receipt, however, showing the transaction.

The bank failed to open on the following Monday, which was January 30th, 1933, because of insolvency. It is admitted that the borrowers were never informed that their notes were pledged with the Federal Reserve Bank by the payee bank, but the note-teller testified that upon receipt of defendants' checks on January 27th, 1933, he telephoned to the Federal Reserve Bank and requested that defendants' notes be returned to the payee bank since they had been paid. The person to whom this witness spoke, and whom he didn't identify, refused to do so, saying, "there wasn't sufficient balance to return the notes." What we assume is meant by that statement

is that if the notes in question were returned it would mean a depletion of the collateral security below the requirements in such matters. Continuing his testimony, the noteteller said that upon being told by the Federal Reserve Bank that the defendants' notes in question would not be returned, he didn't put the defendants' checks through, i.e., he did not charge or debit their account in the Atlantic City National Bank, nor did he notify the defendants about the situation.

In due course the Federal Reserve Bank brought suit upon these notes so held. The defense was that the notes were paid to the Atlantic City National Bank as agent of the plaintiff.

At the trial the court rejected plaintiff's motion for a directed verdict, thinking that there was sufficient evidence from which the jury could find an implied agency, because of the course of conduct and custom between these banks, and therefore submitted the case to the jury on this theory. It was not disputed but that from time to time the Federal Reserve Bank sent notes, which it had discounted or held as collateral, to its member bank, Atlantic City National Bank, whether the paper was payable there or at some other bank, some days before maturity, for collection or substitution, with specific instructions in case of payment, non-payment or substitution of security. This practice defendants contend was enough to make out implied agency. Whether it did is the main question in the case.

It is elementary of course that a party who would hold another on the theory of agency must prove it and in this case, therefore, it is clear that the defendants have the burden to show that the payee bank was authorized to receive the payment for the plaintiff. Ordinarily, in the case of negotiable paper, the person answerable does not pay the original payee if he is not in possession of the note, except at his own risk. The contract of the person answerable on negotiable paper is to pay the holder of the note and the place for payment is designated for the convenience of both parties.

"If maturing paper be left with the banker for collection, he becomes the agent of the holder to receive payment; but unless the banker is made the ...

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