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First American Savings, Fa v. M & I Bank of Menomonee Falls Appeal of First American Savings, F.A, 865 F.2d 561, 1st Cir. (1989)
First American Savings, Fa v. M & I Bank of Menomonee Falls Appeal of First American Savings, F.A, 865 F.2d 561, 1st Cir. (1989)
2d 561
57 USLW 2406, 7 UCC Rep.Serv.2d 609
I.
On January 5, 1987, M & I was presented with the check, and on the next day,
January 6, it dishonored it because the account on which it had been drawn was
closed. M & I, however, did not notify First American that it dishonored the
check although required to do so under Regulation J which provides as follows:
4 A paying bank that receives a cash item in the amount of $2,500 or more directly
(1)
or indirectly from a Reserve Bank and determines not to pay it shall provide notice
to the first bank to which the item was transferred for collection ("depositary bank")
that the paying bank is returning the item unpaid....
5 The paying bank shall provide the notice such that it is received ... by the
(2)
depositary bank by midnight of the second banking day of the paying bank
following the deadline for return of the item as specified in paragraph (a) of this
section ... Notice may be provided through any means, including return of the cash
item so long as the cash item is received by the depositary bank within the time
limits specified in this subparagraph.1
6
12 C.F.R. Sec. 210.12(c)(1) and (2). 2 Instead, M & I merely returned the check
to the Federal Reserve Bank of Chicago.
As the check was making its way back to First American, Martha Bonanni
withdrew a total of $17,000.00 from her account. She withdrew the money on
two separate occasions--$12,000.00 on January 9, 1987 and $5,000.00 on
January 12, 1988 at 11:59 a.m. First American did not receive notification of M
& I's dishonor of the check until later in the day of January 12, 1987, at 1:45
p.m., when its correspondent, Provident National Bank, telephoned with the
information. At that time, Mrs. Bonanni had only $1,800.00 left on deposit,
thereby resulting in an overdraft of $17,000.00 when First American charged
the check back against her account.
Subsequent to M & I's dishonor of the check, it was discovered that the payee's
endorsement was forged. Although M & I dishonored the check because the
account on which it had been drawn was closed, M & I nevertheless disclaimed
any liability to First American for failure to notify because of the existence of
the forgery. To date, First American has recovered only $500.00 of the
overdraft, leaving a principal loss of $16,500.00.
9
First American commenced the present action in the district court to recover the
balance of the overdraft, and moved for summary judgment on the basis of M
& I's Regulation J violation. First American argued that had M & I given proper
notification of dishonor, First American would have learned the check was
being returned no later than midnight on January 8, 1987, and, therefore, could
have prevented both of the withdrawals made by Mrs. Bonanni.
10
In defense, M & I cross moved for summary judgment arguing that First
American was ultimately liable to M & I for breach of warranty of good title
under the UCC and for breach of warranty that the check bore no forged
endorsements under Regulation J. In keeping with prior common law, these
warranties operate to place the loss suffered from a forged endorsement on the
depositary bank as the party that took from the forger. Specifically, the UCC
provides:
The district court granted M & I's cross motion for summary judgment
essentially holding that First American breached its presentment warranty. The
court rejected First American's argument, in response to M & I's cross motion,
that a breach of warranty can occur only when the payor bank honors, or pays,
19
Relying on that language, and on the judicial deference owed to the Board's
interpretation of its own regulations, the court concluded that M & I's warranty
claim should not be defeated by its notification violation. The court held that as
the party closest in the collection chain to the person who forged the
endorsement, First American should suffer the ultimate loss.
20
II.
21
22paying bank that fails to exercise ordinary care in meeting the requirements of
A
[timely notice] shall be liable to the depositary bank for losses incurred by the
depositary bank, up to the amount of the item, reduced by the amount of the loss that
the depositary bank would have incurred even if the paying bank had used ordinary
care.
23
precisely the kind of loss the Federal Reserve Board sought to avoid when it
promulgated the notification rule in 1985. As the Board explained at that time:
24 Board believes that timely notification of nonpayment will enable the institution
The
of first deposit to take steps to protect itself from potential loss. Such measures may
include extending a hold it may have placed on the account or placing a hold on
other funds of the depositor. The Board believes that the proposal would provide
significant public benefits by providing depositary institutions the opportunity to
make funds available sooner to their customers. Accordingly, the Board has
determined to adopt the notification proposal.
25
26
The UCC makes clear that only a payor bank that honors a check later found
containing a forged endorsement can recover for breach of warranty from the
depositary bank. According to Section 4207(a)(1), collecting banks such as
First American warrant good title only to "the payor bank or other payor who in
good faith pays or accepts the item." Because M & I dishonored, and therefore
did not "pay or accept," Mrs. Bonanni's check, it cannot claim that First
American breached its warranty of good title under the UCC. Thus, although
ordinarily a forged endorsement would shift any loss onto the depositary bank,
in this case, the forgery is of no consequence as M & I dishonored the check
and accordingly can not rely on the UCC's warranty provision.
27
We further find, in contrast to the district court, that a payor bank must also
have paid a check in order to recover under Regulation J's warranty provisions.
While no mention is made in Sec. 210.5(a)(2) of such a requirement and by its
terms the section provides that by "sending an item" a bank warrants good title,
we believe the difference in language is one of form and not of substance. In a
context like this, the purpose of casting the rule of liability in terms of warranty
is to make the usual rules of warranty law applicable, including the requirement
that one seeking to recover must demonstrate a loss occasioned by reliance on
the express or implied representation. As the drafters of the comparable UCC
provision note in their Commentary:
28
30
In the situation before us, M & I suffered no loss in reliance on First American's
implied representation that the endorsement was genuine. As a result, it has no
meritorious warranty claim against First American and, accordingly, should not
be permitted a set off against its liability to First American for the loss
occasioned by its breach of duty under Regulation J to give notice of dishonor.
Bailey, Brady on Bank Checks Sec. 26.20 (6th ed. 1987) ("where no loss
results from payment on a forged endorsement, a payor bank has no right of
recovery from a bank that collected on the forged endorsement.") The loss
which M & I will thus be required to assume will be a loss incurred as a result
of its failure to give prompt notice of dishonor, not one resulting from its
reliance of the genuineness of the endorsement.
31
32
notice of dishonor. However, the commentary need not, and should not in our
judgment, be read to take the position that a payor bank who does not pay a
check on presentment has a claim for breach of the UCC's warranty of good
title even though it has incurred no loss.
33
We stress that the Board's opinion refers specifically to the "UCC " warranty.
As we have explained, that warranty, by its express terms, arises only in favor
of a payor bank that has paid or accepted a check. Accordingly, it is clear that
the Board was not thinking of the situation before us when it opined that: "...
the failure of the payor institution to satisfy the notification requirement should
not defeat the claims the institution otherwise would have against the institution
of first deposit for breach of warranty." Amendment of Regulation J, 50
Fed.Reg. 5734 (February 12, 1985).
III.
34
In sum, we hold that M & I violated its obligation under Regulation J to notify
First American that it dishonored the check and is therefore liable for the
balance of the overdraft. Accordingly, we will reverse the judgment of the
district court and remand with instructions that judgment be entered in favor of
First American.
Honorable Clarkson S. Fisher, United States District Judge for the District of
New Jersey, sitting by designation
The parties agree that First American is a "depositary institution" within the
meaning of Regulation J, 12 C.F.R. Sec. 210.2(k)(1), M & I is a "paying bank"
within the meaning of Regulation J, 12 C.F.R. Sec. 210.2(j)(2), and the check is
a "cash item" within the meaning of Regulation J, 12 C.F.R. Sec. 210.2(e)
Pursuant to Sec. 210.6(b)(1), the warranty is passed from the reserve bank to
the subsequent paying bank. First American argues that because Regulation J
contains no provision whereby a sending bank warrants directly to a subsequent
collecting bank that it has good title, no such warranty exists. We find that
argument to be without merit as clearly the two provisions are intended to
operate together