Childs v. Federal Reserve Bank

• Decision Date: 18 November 1983
• Docket Number: No. 82-1598,82-1598
• Citation: 719 F.2d 812
• Parties: 37 UCC Rep.Serv. 515 Bill CHILDS, Plaintiff-Appellant, v. FEDERAL RESERVE BANK et al., Defendants-Appellees.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 812

719 F.2d 812

37 UCC Rep.Serv. 515

Bill CHILDS, Plaintiff-Appellant, v. FEDERAL RESERVE BANK et al., Defendants-Appellees.

No. 82-1598.

United States Court of Appeals Fifth Circuit.

Nov. 18, 1983.

Simon & Simon, Jeff R. Boggess, Fort Worth, Tex., for plaintiff-appellant.

Michael J. Broker, Legal Dept., Federal Reserve Bank of Dallas, William Arthur Tribble, Dallas, Tex., for Federal Reserve.

Colbert N. Coldwell, El Paso, Tex., for Continental Nat. Bank.

Edmund Glen Johnson, Fort Worth, Tex., for Bank of Commerce.

Appeal from the United States District Court for the Northern District of Texas.

Before CLARK, Chief Judge, GEE and POLITZ, Circuit Judges.

PER CURIAM:

At issue in this appeal is the construction and effect of 12 C.F.R. Sec. 210 et seq. ("Regulation J"). We are asked to decide whether the regulation affords immunity to Federal Reserve Banks from liability to the owner of a check that the bank has negligently handled in the collection process. The district court, in dismissing Childs's complaint of negligence against the Federal Reserve Bank of Dallas, held that a Federal Reserve Bank is liable only to its sender bank for negligence in collecting a check. We affirm.

The facts underlying this dispute are not contested. Appellant Childs placed a check payable to him in the amount of $200,000.00 in his checking account at the Bank of Commerce ("Commerce") in Fort Worth, Texas on December 13, 1980. That bank sent the check for collection through the Federal Reserve Bank of Dallas ("Reserve Bank") and the State National Bank of El Paso to the Continental National Bank of El Paso, the payor bank. On or after January 13, 1981, Childs drew various checks on his account at Commerce totaling approximately $200,000. On January 29, 1981, Commerce notified Childs that the payor bank had dishonored and returned for insufficient funds the $200,000 check, and that Childs would have to repay the $200,000 he had withdrawn from Commerce. Childs executed a promissory note to Commerce for $200,000, then sued all four banks involved in the collection process. Childs alleged causes of action under the Uniform Commercial Code and common law negligence principles for failure to give timely notice of return and for failure to make reasonable attempts to collect the $200,000.

In dismissing Childs's complaint for failing to state a claim against the Reserve Bank, ¹ the district court held that Regulation J varies the provisions of the Uniform Commercial Code that establish a bank's liability to remote parties in the collection process. The court held in the alternative that the regulation preempts inconsistent portions of the Texas UCC.

The relevant portion of Regulation J states:

A Reserve Bank shall act only as the sender's agent in respect of an item.... A Reserve Bank shall not act as agent or subagent of an owner or holder of an item other than the sender. A Reserve Bank shall not have or assume any liability to the sender in respect to an item of its proceeds except for the Reserve Bank's own lack of good faith or failure to exercise ordinary care.

12 C.F.R. Sec. 210.6(a)(1) (1981).

Section 210.2(c) defines a "sender" to include banks only; therefore, application of the regulation would preclude Childs from recovering from the Reserve Bank for negligence.

Childs argues that Regulation J does not alter or preempt the provisions of the Texas Business & Commerce Code ("Texas UCC") that establish the rights and duties of a "collecting bank." ² Section 4.201 of the Texas U.C.C. provides that absent contrary intent, a collecting bank is "an agent or subagent of the owner of the item." Tex.Bus. & Comm.Code Sec. 4.201 (Vernon's 1968). ³ Section 4.202 imposes a duty of ordinary care on collecting banks in "(a) presenting an item or sending it for presentment; and (b) sending notice of dishonor or nonpayment...." Section 4.103(a) provides that the Code provisions governing bank deposits and collections can be varied by agreement, except that "no agreement can disclaim a bank's responsibility for its own lack of good faith or failure to exercise ordinary care..." Section 4.103(b) provides that Federal Reserve regulations operate as Sec. 4.103(a) agreements whether or not assented to by all interested parties.

Childs contends that the express terms of Regulation J merely terminate the agency relationship between a reserve bank and a check owner that would exist by virtue of Sec. 4.201, but do not affect the duty of care imposed by Sec. 4.202. The basis of this argument is that a collecting bank's duty of due care exists independently of its agency status. We disagree.

Section 4.201 was drafted to supplant pre-Code law, which determined collection bank liability on the basis of whether variations in the form of endorsements created agency or owner status. The official comments to Sec. 4.201 indicate that to avoid litigation on questions of status (which would resolve issues of rights and duties) the section creates a presumption of agency and seeks to state appropriate limits on the presumption. Tex.Bus. & Comm.Code Ann. Sec. 4.201 Comments 1-6 (Vernon's 1968). Section 4.202's duty of ordinary care is defined in terms of types of actions undertaken by collecting banks. Sec. 4.202 and Comment 3. Similarly, Sec. 1-203 prescribes a duty of good faith in the performance of all duties and agreements. The agency relationship established by Sec. 4.201 is the only basis in the Code for determining to whom the duties imposed on collecting banks run. Once that agency relationship is severed, the duties are no longer owed. More simply stated, liability flows only from agency status. Colonial Cadillac, Inc. v. Shawmut Merchants Bank, 488 F.Supp. 283, 285 (D.Mass.1980); see Citizens First Nat'l Bank v. Cinco Exploration Co., 540 S.W.2d 292, 295-96 (Tex.1976); J. Clark, H. Bailey, C.R. Young, Bank Deposits & Collections 182 (4th ed. 1972); B. Clark, The Law of Bank Deposits, Collections and Credit Cards 4-65 (rev. ed. 1981).

Regulation J severs the agency relationship between a reserve bank and the owner of an item in the collections process. The trial court correctly found that it does so in accordance with the express provisions of Sec. 4.103(a) & (b). Accord Appliance Buyers Credit Corp. v. Prospect National Bank of Peoria, 505 F.Supp. 163, 164 (C.D.Ill.1981); see also J. Clarke, H. Bailey, C.R. Young, Bank Deposits and Collections 182 (4th ed. 1972). In varying Sec. 4.103, the regulation does not run afoul of that section's prohibition of disclaimers of a bank's duties of good faith and ordinary care. The proper interpretation of Sec. 4.103(a) is that if a bank is an agent of a party, it cannot disclaim its duties of good faith and ordinary care to that party. If it is not an agent of a party, it does not owe any duties to that party, and a disclaimer would be superfluous.

Childs argues that if Regulation J operates to immunize reserve banks from liability to owners, it does so in absence of statutory authority, or in the exercise of an invalid delegation of authority. 12 U.S.C.A. Sec. 248(i) (1945) authorizes the Board of Governors...