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U.S. Supreme Court

American Bank & Trust Co. v. federal reserve bank, 256 U.S. 350 (1921)

American Bank & Trust Company v. federal reserve bank

No. 679

Argued April 13, 14, 1921

Decided May 16, 1921

256 U.S. 350




1. A suit against a federal reserve bank and its officers held a suit arising under a law of the United States within the meaning of § 24, cl. 1, of the Judicial Code, such banks being creatures of the Federal Reserve Act. P. 256 U. S. 356.

2. A federal reserve bank is not a national banking association within § 24, cl. 16, of the Judicial Code, which declares that such associations, for the purposes of suing and being sued, shall (except in certain cases) be deemed citizens of the states where they are located. P. 256 U. S. 357.

3. Several country banks of Georgia alleged that they derived an important part of their income from charges on payment of checks drawn by their depositors when sent in, usually through other banks, from a distance; that banks of the Federal Reserve System were

Page 256 U. S. 351

forbidden to make such charge, and that the defendant federal reserve bank and its officer, in pursuance of a policy of the Federal Reserve Board, for the purpose of compelling the plaintiffs and like bank to become members of the system, or to open clearing accounts with the defendant (which would deprive them of the aforesaid charges, reduce their lending power, and drive some of them out of business), intended to accumulate such checks in large amount and then require cash payment at par by presentation over the counter or otherwise, so as to compel plaintiffs to maintain so much cash in their vaults that they must either give up business or submit, if able, to the defendant's scheme. Held that the bill stated a cause for an injunction. P. 256 U. S. 357.

269 F. 4 reversed.

Appeal from a decree of the circuit court of appeals affirming a decree of the district court dismissing, for want of equity a bill brought by divers state banks against a federal reserve bank and its officers for an injunction. The facts are stated in the opinion.

Page 256 U. S. 355

MR. JUSTICE HOLMES delivered the opinion of the Court.

This is a bill in equity brought by country banks incorporated by the State of Georgia against the Federal Reserve Bank of Atlanta, incorporated under the laws of the United States, and its officers. It was brought in a state court but removed to the district court of the United States on the petition of the defendants. A motion to remand was made by the plaintiffs, but was overruled. The allegations of the bill may be summed up in comparatively few words. The plaintiffs are not members of the Federal Reserve System, and many of them have too small a capital to permit their joining it -- a capital that could not be increased to the required amount in the thinly populated sections of the country where they operate. An important part of the income of these small institutions is a charge for the services rendered by them in paying checks drawn upon them at a distance and forwarded, generally by other banks, through the mail. The charge covers the expense incurred by the paying bank and a small profit. The banks in the Federal Reserve System are forbidden to make such charges to other banks in the System. Federal Reserve Act of December 23, 1913, c. 6, § 13; 38 Stat. 263; amended March 3, 1915, c. 93; 38 Stat. 958; September 7, 1916, c. 461; 39 Stat. 752, and June 21, 1917, c. 32, §§ 4, 5; 40 Stat. 234, 235. It is alleged that, in pursuance of a policy accepted by the Federal Reserve Board, the defendant bank has determined to use its power to compel the plaintiffs and others in like situation to become members of

Page 256 U. S. 356

the defendant, or at least to open a nonmember clearing account with defendant, and thereby, under the defendant's requirements, to make it necessary for the plaintiffs to maintain a much larger reserve than in their present condition they need. This diminution of their lending power, coupled with the loss of the profit caused by the above mentioned clearing of bank checks and drafts at par, will drive some of the plaintiffs out of business and diminish the income of all. To accomplish the defendants' wish, they intend to accumulate checks upon the country banks until they reach a large amount, and then to cause them to be presented for payment over the counter or by other devices detailed to require payment in cash in such wise as to compel the plaintiffs to maintain so much cash in their vaults as to drive them out of business or force them, if able, to submit to the defendant's scheme. It is alleged that the proposed conduct will deprive the plaintiffs or their property without due process of law, contrary to the Fifth Amendment of the Constitution, and that it is ultra vires. The bill seeks an injunction against the defendants' collecting checks except in the usual way. The district court dismissed the bill for want of equity, and its decree was affirmed by the circuit court of appeals. 269 F. 4. The plaintiffs appealed, setting up want of jurisdiction in the district court and error in the final decree.

We agree with the court below that he removal was proper. The principal dependant was incorporated under the laws of the United States, and that has been established as a ground of jurisdiction since 22 U. S. 306-307; Texas & Pacific Ry. Co. v. Cody, 166 U. S. 606. See further Smith v. Kansas City Title & Trust Co.,@ 255 U. S. 180. A more plausible objection is that, by the Judicial Code, § 24, sixteenth, except as therein excepted, national banking associations, for the purposes of suits against them, are to be deemed citizens of the states in which they are respectively located. But we agree with the court below that the reasons for localizing ordinary commercial banks do not apply to the federal reserve banks created after the Judicial Code was enacted, and that the phrase "national banking associations" does not reach forward and include them. That phrase is used to describe the ordinary commercial banks, whereas the others are systematically called "federal reserve banks." We see no sufficient ground for supposing that Congress meant to open the questions that the other construction would raise.

On the merits, we are of opinion that the courts below went too far. The question at this stage is not what the plaintiffs may be able to prove, or what may be the reasonable interpretation of the defendants' acts, but whether the plaintiffs have shown a ground for relief if they can prove what they allege. We lay on one side as not necessary to our decision the question of the defendants' powers, and, assuming that they act within them, consider only whether the use that, according to the bill, they intend to make of them will infringe the plaintiffs' rights. The defendants say that the holder of a check has a right to present it to the bank upon which it was drawn for payment over the counter, and that, however many checks

Page 256 U. S. 358

he may hold, he has the same right as to all of them, and may present them all at once, whatever his motive or intent. They ask whether a mortgagee would be prevented from foreclosing because he acted from disinterested malevolence, and not from a desire to get his money. But the word "right" is one of the most deceptive of pitfalls; it is so easy to slip from a qualified meaning in the premise to an unqualified one in the conclusion. Most rights are qualified. A man has at least as absolute a right to give his own money as he has to demand money from a party that has made no promise to him; yet if he gives it to induce another to steal or murder, the purpose of the act makes it a crime.

A bank that receives deposits to be drawn upon by check, of course, authorizes its depositors to draw checks against their accounts, and holders of such checks to present them for payment. When we think of the ordinary case, the right of the holder is so unimpeded that it seems to us absolute. But, looked at from either side, it cannot be so. The interests of business also are recognized as rights, protected against injury to a greater or less extent, and in case of conflict between the claims of business, on the one side, and of third persons, on the other, lines have to be drawn that limit both. A man has a right to give advice, but advice given for the sole purpose of injuring another's business and effective on a large scale might create a cause of action. Banks as we know them could not exist if they could not rely upon averages and lend a large part of the money that they receive from their depositors on the assumption that not more than a certain fraction of it will be demanded on any one day. If, without a word of falsehood, but acting from what we have called disinterested malevolence, a man by persuasion should organize and carry into effect a run upon a bank and ruin it, we cannot doubt that an action would lie. A similar result, even if less complete in its effect, is to be

Page 256 U. S. 359

expected from the course that the defendants are alleged to intend, and to determine whether they are authorized to follow that course, it is not enough to refer to the general right of a holder of checks to present them, but it is necessary to consider whether the collection of checks and presenting them in a body for the purpose of breaking down the petitioner's business as now conducted is justified by the ulterior purpose in view.

If this were a case of competition in private business, it would be hard to admit the justification of self-interest, considering the now current opinion as to public policy expressed in statutes and decisions. But this is not a private business. The policy of the federal reserve banks is governed by the policy of the United States with regard to them, and to these relatively feeble competitors. We do not need aid from the debates upon the statute under which the Reserve Banks exist to assume that the United States did not intend by that statute to sanction this sort of warfare upon legitimate creations of the states.

Decree reversed.

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