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IN THE DISTRICT COURT OF THE UNITED STATES

FOR THE WESTERN DISTRICT OF TEXAS

EL PASO DIVISION

X-4o?6-b

THE CITY OF DOUGLAS 9- Municipal Corporation,

P l a i n t i f f ,

vs

FEDERAL RESERVE B.ANK OF DALLAS,

Defendant.

No. 84? LAW

BRIEF OF DEFENDANT.

In conformity with the request of t i i s honorable <zrurt we submit

brief on the legal question presented by the defendant with reference to the

right of the City of Douglas to maintain th is act ion. I t being our under-

standing that t i e court does not desire any additional law or argument with

reference to the merits of the case, we confine this brief purely to the point

above stated*

The question arises over the d i f ferent holdings of the courts of

this country as to the re lat ionship exist ing between the owner of an item de-

posited for c o l l e c t i o n and the several banks i n the chain of co l lec t ing banks

undertaking to make the co l lect ion. The court has well in mind the dis t inct ion

between the so-called "New York" and "Massachusetts Rule" and we think i t un-

necessary to go into any lengthy d iscussion a.s to the difference i n these rules.

The "New York Rule", b r i e f l y stated , i s that the f i r s t bank under-

taking the co l lec t ion becomes an independent contractor and subseqient banks

in the chain are i t s agent but not the agent of the owner of toe item.

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This rule i s adhered to by the Supreme Court of the United States.

Hoover v . Wise, 91 U. S. 309 Extih. Ntl . Bk. v . Third Ntl . Bk., 112 U.S. 276 Fed. Reserve Bk. v. MaiIcy, U.S. Sup. Ct. Adv.

Opinions, March 15, 192U; 6g L. Rd. 288

In th3 case of Hoover v. Wise, supra, the Supreme Court of the

United States i n an opinion by Mr. Justice Hunt, after discussing various

cases, sgys:

"These cases show that where a bank as a col lect ion agency receives a note for the purpose of co l l ec t ion , i t s pos i t ion i s that of an independent contractor , and_that..the instruments em-

: ployed by such bank in the business contemplated are i t s agents and not the sub-agents of the owner of the note."

In the case of Exchange National Bank v. Third National Bank, supra,

the court in an opinion by Mr. Justice Blatdiford adepts the "New York Rule,"

c i t ing with approval the case of Hoover v . Wise, Supra.

In the case of Federal Reserve Bank cf Richmond v. Mallcy, supra,

the identical question under consideration was presented . Mr. Justice Sutherland

in the opinion summarizes the question as follows;

"Ihe State decisions in respect cf the l i a b i l i t y cf a correspondent bank to the owrer of a check forwarded for c o l -l ec t ion by the in i t ia l bank of deposit are in conf l i c t beyond the p o s s i b i l i t y of reconci l iat ion. A number of States fol lowing the 'New York Rule,' so-cal led, have held that there i s no such direct l i a b i l i t y but that the i n i t i a l bank alons i s responsible to the owndr * * *.

"This court in Exchange National Bank v. Third National Bank, 112 U.S. 276 * * * after reviewing the two l i n e s of decis ions, approved the 'New York Rule.*"

We think the d i s t inct ion between the so-called "New York" and

"Massachusetts Rule" i s so c lear ly drawn by these decisions and others 4iat

there i s no reason to go further into th is question than to ca l l the tiourt1 s

attention to the authorit ies above c i t e d .

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-3 - x-4o?6-b I t i s , of course, elementary that a col lect ing bank may enter into

such a contract as would re l i eve i t of the l i a b i l i t y imposed by the so-called

"New York Rule", for obviously an agent would be l i ab le to i t s principal only

for the discharge of the obligations which i t expressly undertook. And thus,

should the original bank make a contract with i t s principal vAiitih would put i t

clearly within the "Massachusetts Rule,11 that rule would undoubtedly control .

To do t h i s , of course, the original bank should either expressly or impliedly

contract with i t s principal only to act as a forwarding agent. The f a c t s in

the case under consideration are not such as would put the First National Bank

of Douglas in that category. The contract of the First National Bank of BougLas,

as disclosed by the uncontradicted testimony, was to c o l l e c t , there being no

agreement or understanding, express or implied, to the contrary. In other

words, i f the "New York Rule" ever applied to the f a c t s in any given case, i t

undoubtedlyapplied in the case under consideration.

I t i s perfect ly apparent that the conclusion reached in the Malloy

case was forced because of the provisions of fee Florida s ta tute . In principle

the court adhered to i t s former holdings, sustaining the so-called "New York

Rule", but held that the Florida statute was an express contract which changed

the status of the par t i e s .

In t h i s connection we want to direct the attent ion of the Court to

what we deem an important fac t , vthitih i s , that prior to^tiae passage of this

statute the Supreme Court of Florida had adopted as the rule of decis ion in

that State the so-called "New York Rule". Please see Brown v. People's .aarikrs,

52 So. 719. The opinion i s very instructive and i s quite 3 c lear elucidation

on the quest ion. The f a c t s in tha t case are ident ica l , to a l l intents and

purposes, with the f a c t s in our case. The Florida statute in question was erect

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subsequent to the bringing of the action in that case but prior to i t s

decision, and th i s i s commented upon in the opinion. As some question i s

sought to be raised by the p l a i n t i f f herein indicating the contention that

they had a. contract which took the transaction away from the "New York Rule,"

i t may be well in this case to hers sat out t i e Florida statute made basis

of t ie decision i n the Mslloy case.

it* * * ugh en. a check, draf t , note or other negotiable instrument i s deposited in a bank for credi t , or for co l lec t ion , i t diaLl be considered due dil igence on the part of the bank in the co l l ec t ion of any check, draft , note or other negotiable instrument so deposited, to forward en route the sane without delay in the usual commercial way in use according to the regular coarse of business of banks, and that the maker, endorser, guarantor or surety of any check, draf t , note or other negotiable instrument, so deposited, shal l be l i a b l e to the bank u n t i l actual final payment i s received , and that when a bank receives f o r co l lect ion any check, draf t , note or other ne-gotiable instrument aid forwards the same for rollsction, as herein -provided, i t shal l only be l iab le after actual final payment i s r e -ceived by i t , except in case of want of due di l igence on i t s part, as aforesaid.

"All laws which are in c o n f l i c t with th i s act are hereby re -pealed, and t h i s act shal l take e f f e c t immediately upon i t s approval by the Governor."

That is quite a d i f ferent contract to the one re l i ed upon by the

p l a i n t i f f in this case . The pass book, on i t s face had this statement: "Oat

of town items subject to f ir&l payment," which, of coarse, meant nothing and

created no d i f ferent relat ionship between the depositor and the bank than

existed as a matter of la-w. I t is the rnle of law that a depositor assumes

to repay to a baric the amount of any check that i s dishonored. His endorse-

ment of the check f i x e s that l i a b i l i t y . Hence we say that t i e r e c i t a l on the

pass book i n question did not const i tute any d i f f eren t contract than the law

i t s e l f inposed. Please see Brown v . People's Bank, 52 So. 721, aid many other

cases.

I t would be we l l , as we be l i eve , for the court to have constantly

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in mind the fact that in the tr ia l court Judge Connor held the Federal Reserve

Bank l i a b l e because of the Florida, s tatute , c learly indicating that aside from

that statute the rule in the Federal court would deny l i a b i l i t y * We perceive

no good could r e s u l t from an attempt to draw fine-haired d i s t inct ions »s to

vfoa.t was real ly held in Exchange National Bank case because i t i s qui te clsar

from a reading of the various cases wherein t h i s question has been under con-

sideration by the Supreme Court that that court i s committed to an adoption

of the so-called "New York Rule" in the absence of pos i t ive contract to the

contrary in a particular case. We again ask the court to read the Brown case,

supra.

With these preliminary observations we pass to the d irec t question

which the court upon the hearing of the case evidenced some doubt, that i s ,

does the law as announced by the courts of Arizona, Texas, or the Supreme Court

of the United States^ control in this action? We submit that by the uncon-

tradicted authorities the r u l e as laid down by the Supreme Court of the United

States controls in t h i s case . We base this upon the following proposition :

The dec i s ions of a Stats court wi l l be control l ing only whan those decisions interpret the posit ive statutory law of the S ta t s . In questions of general commercial law, each court wi l l be found by i t s own interpretat ion of that law upon the theory that there i s only one common law and each oourt presumes fh at i t s interpretation of that law i s correct.

St . Nicholas Bk. v . Stats Nt l . Bk. 1} L» R- A. 24l Faulkner v . Hart, 62 N. Y. 4 l ) Swift v , Tison, 10 Law Ed. 865 Oats v . Ntl . Batik, 25 Law Ed. 580 Third Ntl . Bk. v . Ntl . Bk. of Commerce, 139 S. W. 6 6 5 Liverpool S.S. Co. v . Phoenix Life Ins* Co. 129 U.S. 397

I t can not bo questioned but that the rule of law with reference to

the re lat ionship between the owner of an item and several banks undertaking

the co l l ec t ion thereof i s a rule of common law. I t i s not dependent upon any

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statute, for admittedly there i s no statute in e i thsr Arizona or Texas.

As far as we have been able to determine the courts of Arizona have not

passed direct ly .upon the question. Four courts of c i v i l appeals i n Texas

have adhered to the "New York Rule" and the Supreme Court of Texas in a

recent decision has followed the "Massachuse11s Rule." With this condition

exist ing the question presented is whether or not th is court should be

guided by the interpretation of the law as laid down by the Supreme Court

of the United States or by the Supreme Court of Texas.

In the case of Liverpool & Great Western S-S. Co. v« Phoenix In-

surance Co., supra, Mr. Justice Gray who delivered the opinion of the court

says: "But on this subject. as on any question depending upon

mercantile law and not upon local statute or usage, i t i s well sett led that the courts of the United States are not bound by decisions of the courts of the s tate , but w i l l exercise their own .judgment, even when their .jurisdiction attaches only by reason of the c i t izenship of the part ies , in an action at lawx of which the courts of the State have concurrent jurisdict ion and upon a contract made and to be perforated within the State."

In the case of St. Nicholas Bank v. State National Bank, supra,

the New York Court of Appeals passed upon the identical question here pre-

sented, The facts of the case are almost identical with those in the case

before this court. The question presented was whether the rale as announced

by the New York courts (the so-called "New York Rule") or the m l e announced

by the courts of Tennessee (the so-called "Massachusetts Rule") controls.

In passing upon the question the court says, a f t er referring to the opinion

of the Supreme.Court of Tennessee upholding the "Massachusetts Rule*:

"That decision was not based upon aiy statute law but upon the principles of the common law, supposed to be applicable to the facts of the case . I t did not make or establish law, but expounded the law airi furnished some evidence of what the law applicable to that case was, evidence which other courts might or might not take and receive as rel iable and suf f i c i ent - And

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ev^n the same ©urt , upon f u l l e r discussion and more mature consideration, mig&t in some subsequent case re fuse to take the same view of the law. There i s no comnon lav/ peculiar to Tennessee. But the common law there i s the same as that which prevails here aid elsewhere, and the judic ia l expositions of the common law there do not bird the courts here. The courts of t h i s State and of other States and of t ie United States would fo l low the courts of that State in the con-struct ion of i t s statute law but the courts of th i s State wi l l fo l low i t s own precedents in the expounding of the general com-mon law applicable to commercial transactions, and so i t has been repeatedly held

We do not care to bother the court with a. long and laborious

brief as we bel ieve the principles of law to be d e f i n i t e l y set t led by

the decisions referred to and the court w i l l undoubtedly l i k e t o read

these decisions and place h i s aim interpretation upon the principles of

law herein set forth. We be l i eve , however, that the authorit ies cited

herein conclusively establ ish, f i r s t : t a t under, the rules la id down by

the Supreme Court of the United States there is no pr iv i ty of contract

between the City of Douglas and the Federal Reserve Bank; second: that

this court, being a Federal court, i s bound by the decisions of the

Supreme Court of the United States; and third: that the question presented,

being a question of general law, the interpretation of t h a t law as la id

down by the Supreme Court of the United States is control l ing.

Respectfully submit ted,

Attorneys "Tor defend ant

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