Sowell v. Federal Reserve Bank of Dallas

Background

A man who lived in Texas signed a promissory note payable to a national bank in Texas. Before the note matured, the bank endorsed it to a Texas creditor as collateral for a larger debt the endorser owed that creditor. A Federal Reserve Bank brought suit to collect on the note. The maker challenged the case on three grounds: that the federal court lacked jurisdiction because of the assignment rule, that the holder should have presented the note for payment even though the maker had funds on deposit, and that the suit should be stayed until the holder exhausted other collateral.

Reasoning

The Court first asked whether the so-called “assignee clause” prevents federal courts from hearing suits that arise under federal law. Looking at the clause’s history and how federal jurisdiction was later expanded, the Court held the clause was meant to stop creating federal diversity cases by assignment, not to block suits that arise under federal law. Because the suit was brought by a Federal Reserve Bank, federal-law jurisdiction applied. The note also included a clear waiver of presentment and notice, and Texas law enforces such waivers, so the holder’s failure to present the note did not hurt its claim. Finally, the Court rejected the maker’s request to force the holder to exhaust other collateral first, saying the maker showed no special equitable reason to require that.

Real world impact

Federal banks and similar federal corporations can bring collection suits in federal court even when a note was assigned as collateral. Holders can rely on written waivers of presentment under Texas law, and makers cannot delay collection by demanding creditors first use other collateral without special equitable grounds.