Federal Reserve Bank v. . Duffy

Devin, J. Defendants earnestly contend that under the circumstances of this case the action of the Federal Reserve Bank in taking and discounting the note in suit was in-bad faith; that the paper itself was one ineligible for discount under the provisions of the Federal Reserve Act and the rules and regulations of the Federal Reserve Bank, and that plaintiff is not entitled to the position of holder in due course so as to deprive these defendants of the right of set-off to the amount of their deposit in the First National Bank of New Bern. Defendants’ views were fully set out in prayers for instructions tendered in apt time to the presiding judge, and they except to his refusal to give them. The evidence, as it appears in the record before us, fails to sustain defendants’ contentions. There was no evidence of fraud invalidating the note, nor of collusion between the Federal Reserve Bank and the First National Bank of New Bern, nor of wrongful intent to deprive defendants of any legal rights. The note on its face purported to be an ordinary 60-day negotiable note, eligible for discount. The fact that the vice-president of the First National Bank of New Bern had not stated all the facts with reference to the purpose of the loan, or that there was real estate security for the original debt, was not known to plaintiff until after the failure of the New Bern bank. The plaintiff is not now seeking to avail itself of the benefit of any security to this action. There was no evidence of fraud in the transaction. The defendants admit the note was given for a valid debt justly due the New Bern bank. They do not deny that a new note or a renewal note for a preexisting debt was given by them to the New Bern bank, and they do not controvert the fact that this note was by the said bank, before maturity and for value, endorsed to and discounted by the Federal Reserve Bank. But they complain that in the effort to bolster a failing bank, its vice-president was guilty of bad faith in procuring this renewal note from the defendants and misrepresented its character to the Federal Reserve Bank so as to procure its discount; that the Federal Reserve Bank took with notice of these facts, and that its action in discounting the note under the circumstances amounted to bad faith on its part, and that as a result defendants have been wrongfully deprived of their right of set-off against the New Bern bank. Even if the plaintiff had accepted for discount a paper declared ineligible by the act or by its rules, the defendants, who owe the debt, could not complain. *602 As was said by Circuit Judge Parker in a well-considered opinion in Lucas v. Federal Reserve Bank, 59 Fed. (2nd), 617, (involving transactions with the same bank) : “There can be no doubt as to the right and power of the Federal Reserve Banks to take, as collateral security to the indebtedness of member banks, paper which is not eligible for discount. . . . It is given power by the act (12 U. S. C. A., sec. 341, Seventh) to exercise not only the powers expressly granted therein, but also such incidental powers as shall be necessary to carry on the business of banking within the limitations prescribed.” The section of the Federal Reserve Act granting incidental powers to Federal Reserve Banks, is practically the same as the section granting incidental powers to national banking associations (12 U. S. C. A., sec. 24, Seventh). First National Bank v. National Exchange Bank, 92 U. S., 122. These powers are such as are necessary to meet all the legitimate demands of the authorized business and to enable a bank to conduct its affairs within the general scope of its charter, safely and prudently. We quote further from Lucas v. Federal Reserve Bank, supra: “It is well settled that, under those incidental powers, a national banking association may take as security for a loan, collateral of a character in which it is precluded from investing funds.” It was said in Thompson v. Saint Nicholas National Bank, 146 U. S., 240, with reference to national banks: “It would defeat the very policy of the act intended to promote the security and strength of the national banking system if its provisions should be so construed as to inflict a loss upon the banks and a consequent impairment of financial responsibility.” It is equally clear that whatever the power of the Federal Reserve Bank with respect to taking as collateral paper not eligible for discount, no one can complain of such action except the government, the sovereign which created and limited its powers. Kerfoot v. Farmers’ & Merchants’ Bank, 218 U. S., 281. In the last cited case, Mr. Justice Hughes, speaking for the Court, uses this language: “Although the statute by clear implication forbids a national bank from making a loan upon real estate, the security is not void and it cannot be successfully assailed by the debtor or by subsequent mortgagees, because the bank was without authority to take it; and the disregard of the provisions of the Act of Congress upon that subject only lays the bank open to proceedings by the government for exercising powers not conferred by law.” Union National Bank v. Matthews, 98 U. S., 621; Thompson v. Saint Nicholas National Bank, 146 U. S., 240; Bank v. Gadsden, 191 U. S., 621; 12 U. S. C. A., sec. 24 (IX); Oldham v. Bank, 85 N. C., 241. Defendants contend further that the relationship between the Federal Reserve Bank of Richmond, Virginia, and member banks was such as to constitute the latter the agent of the former, and thus impute notice to the principal of all facts known to the member bank. *603 While the evidence here is not such as to establish the relationship o£ principal and agent between plaintiff and the First National Bank of New Bern, there is a well-defined exception to the general rule that knowledge of the agent is imputed to the principal. Where the conduct of the agent is such as to raise a clear presumption that he would not communicate to the principal the facts in controversy, or where the agent, acting nominally as such, is in reality acting in his own business or for his own personal interest and adversely to the principal, or has a motive in concealing the facts from the principal, this rule does not apply. 2 A. J., 298; Bank v. Burgwyn, 110 N. C., 267. Where the agent is dealing in his own behalf or has personal interest to serve, the knowledge of agent is not imputable to the principal. Bank v. Wells, 187 N. C., 515; Grady v. Bank, 184 N. C., 158; Corp. Com. v. Bank, 164 N. C., 357; Brite v. Penny, 157 N. C., 110. Here the First National Bank of New Bern, seeking to secure additional funds to continue a failing business, negotiates a valid paper which, on its face, is entirely proper and eligible for discount by the plaintiff, but fails to disclose facts which might have prevented its discount, and thereby obtains advances from the plaintiff for its own purposes. The New Bern bank was acting in its own interest, adversely to the plaintiff, in selling to the plaintiff the New Bern bank’s property, and hence knowledge of bad faith, if any, on its part cannot in law be imputed to the Federal Reserve Bank. We appreciate the hardship resulting to the defendants from being deprived of the right to set off their deposit in the First National Bank of New Bern against their note given to that bank, but this right may not be invoked to the detriment of the transferee of this note, who by the law merchant was a holder in due course. The defendants’ exceptions on the record before us cannot be sustained, and in the trial, we find No error.