Early v. Federal Reserve Bank of Richmond

Background

A dispute arose between the receiver of a national bank in South Carolina and the Federal Reserve Bank of Richmond. Richmond forwarded checks drawn on the South Carolina bank in cash letters on October 7 and October 8. The agreed transit time for collection was three days and had not expired when the South Carolina bank closed on October 9 as insolvent. After notice of the failure Richmond charged the South Carolina bank’s reserve account on October 11 and 12 for those checks. The receiver sought to recover the reserve balance held by Richmond at close of business on October 9.

Reasoning

The central question was whether Richmond could lawfully charge the reserve before the transit time expired and despite the member bank’s insolvency. Richmond’s circular, agreed by the parties, said cash letters would be chargeable at the end of the transit time and reserved the right to charge a cash letter whenever Richmond deemed it necessary. The Court said this agreement created a right to charge an identified reserve fund to protect the person who deposited the checks, and that no extra overt act was required to make the charge effective. The earlier case the receiver cited did not apply because it did not involve an identified fund.

Real world impact

The Court affirmed the lower court’s judgment and upheld Richmond’s claim to the reserve. The ruling means a regional Federal Reserve Bank with agreed authority can charge a member bank’s reserve for forwarded checks even if the member later becomes insolvent. That protects people who deposit checks sent for collection and limits a receiver’s ability to recover a reserve that the Fed properly charged.