U.S. v. Hibernia Nat. Bank, 86-3774

• Decision Date: 05 April 1988
• Docket Number: No. 86-3774,86-3774
• Parties: , 5 UCC Rep.Serv.2d 1392 UNITED STATES of America, Plaintiff-Appellee, v. HIBERNIA NATIONAL BANK, Defendant-Third-Party Plaintiff Appellant-Cross- Appellee, v. Joseph M. RAULT, Jr., Third-Party Defendant-Appellee-Cross-Appellant.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 592

841 F.2d 592

96 A.L.R.Fed. 895, 5 UCC Rep.Serv.2d 1392

UNITED STATES of America, Plaintiff-Appellee, v. HIBERNIA NATIONAL BANK, Defendant-Third-Party Plaintiff Appellant-Cross- Appellee, v. Joseph M. RAULT, Jr., Third-Party Defendant-Appellee-Cross-Appellant.

No. 86-3774.

United States Court of Appeals, Fifth Circuit.

April 5, 1988.

Rehearing and Rehearing En Banc Denied May 9, 1988.

Clarnece F. Favret, III, Favret, Favret, Demarest & Russo, New Orleans, La., for Hibernia Nat. Bank.

Joseph M. Rault, Jr., New Orleans, La., pro se.

Virginia Patton Prugh, Robert J. Ashbaugh, Washington, D.C., for U.S.

Appeals from the United States District Court for the Eastern District of Louisiana.

Before CLARK, Chief Judge, REAVLEY, Circuit Judge, and HUNTER, ^* District Judge.

EDWIN F. HUNTER, Jr., District Judge:

Hibernia National Bank appeals the district court's judgment which held that Hibernia is liable to the United States for $220,000. Cross-appellant Joseph Rault appeals the district court's judgment that he is liable to Hibernia for $110,000. The case was briefed and argued and we now affirm the judgment for the United States against Hibernia, but vacate and remand the judgment for Hibernia against Rault.

I.

During 1982 the United States Army contracted with Rault Center Hotel of New Orleans for the hotel to provide lodging to new Army recruits. In the latter part of that year the hotel billed the Army for $24,844.50 for services rendered pursuant to the contract. On December 23, 1982, the Army issued a Treasury check to the hotel which contained two different figures. In the center or body of the check the amount to be paid is typed: " * * * 24844 DOLLARS/50 CENTS." On the right side of the check appears the amount of "$244844.50." The conflicting figures on the check went undetected by the Army.

On December 27, 1982, a hotel employee presented the check to Hibernia National Bank accompanied by a deposit slip for $24,844.50. Hibernia accepted the deposit and credited the hotel account for the amount listed on the deposit slip. The check was then forwarded for processing to the Hibernia operations center. In the operations center all checks are read by proof operators and are then "magnetic ink computer readable" (MICR) encoded which designates the amount of the check and other routing information. MICR encoding allows the check to be read by high-speed automated readers. The check was handled by Hibernia proof operator Monica Green. She apparently entered both the amount of the deposit ($24,844.50) in the proof machine and the amount of the right hand side of the check ($244844.50). As a result, an out of balance condition was created and the proofing machine signaled a $220,000 error.

Looking only at the deposit slip and the figure on the right side of the check, Monica Green determined that the error was the customer's, and prepared a penciled correction slip indicating a $220,000 credit which she sent to the corrections clerk. She did not bring the problem to the attention of a supervisor. Una Poree, the "Corrections Clerk," prepared a typed credit memo from Monica's penciled copy.

The district court found that when hotel employee Herman Taylor received the customer credit notice, he informed a Hibernia employee that the hotel account was credited for $220,000 more than the deposit. James Peterson, Herman Taylor's supervisor, testified that he also advised Hibernia of the overcredit in late December 1982. The overcredit to the hotel account was not adjusted.

Hibernia did not look into the situation despite the initial notification by Taylor and the follow-up telephone call placed by Peterson. Hibernia did not contact the Army, the Treasury Department, or the Federal Reserve Bank, but transferred the Treasury check with an accompanying letter to the New Orleans Branch of the Federal Reserve. Hibernia was given immediate provisional credit by the New Orleans Branch for the $244,844.50 shown on the cash letter. The Treasury check was then transferred to the Federal Reserve Bank of Atlanta where the check was read using an MICR reader. The check, a photo of the check, and the Federal Reserves accounting record of the transaction were then sent to the Treasury for final examination in January 1983.

It generally takes the Treasury six months to reconcile check payment data with drawn checks. Where there is an overpayment on a Treasury check, the Treasury issues an adjustment to the Federal Reserve Bank, which debits the account of the depository bank and sends the depository bank a copy of the adjustment. In the present case, for no known reason, the Treasury did not issue an adjustment.

Hibernia permitted the Rault Hotel to draw against the $244,844.50 deposit almost immediately. By August 31, 1983 the amount on deposit was $102,475.87. In September of 1983 Hibernia permitted Rault to withdraw $100,000 to be used for the purchase of a certificate of deposit in another institution.

In August 1983 the Army Finance Office received notice of a possible overpayment. In February 1984, the Army Finance Office received a copy of the check and noticed the overpayment. The United States demanded repayment of the $220,000 from the hotel and Hibernia; both parties refused these demands.

The United States filed suit alleging that Hibernia National Bank and Rault Petroleum Corporation, which wholly owned Rault Center Hotel, converted the $220,000 overpayment on the Treasury check. Hibernia filed a cross-claim against Rault Petroleum Corporation for fraud and a third-party negligence claim against the United States and the Federal Reserve Bank. Hibernia also filed a third-party claim against Joseph Rault individually alleging that he fraudulently converted the proceeds of the Treasury check. Rault Petroleum Corporation was placed in involuntary bankruptcy and all proceedings against the corporation have been stayed.

The district court held that the Treasury check was a valid $24,844.50 check, and that Hibernia failed to exercise ordinary care by processing the check for $244,844.50. Judgment was entered in favor of the United States and against Hibernia for $220,000. ¹ Judgment was also entered for Hibernia and against Joseph Rault for $110,000.

II. United States v. Hibernia National Bank

Hibernia first contends that the district court erred by applying federal law to the claim against it, insisting that state law rather than federal law controls.

It is well that "[t]he rights and duties of the United States on commercial paper which it issues are governed by federal rather than local law." Clearfield Trust Co. v. United States, 318 U.S. 363, 366-68, 63 S.Ct. 573, 87 L.Ed. 838 (1943). In Bynum v. FMC Corp., 770 F.2d 556, 568 (5th Cir.1985), this Court states that federal common law must be applied where the application of state law would frustrate federal policies or interfere with the United States' duties or authority, the "most obvious example" being "a controversy whose outcome would have an immediate effect on the federal treasury." Because the application of federal law is intended to further federal policies it is immaterial that a particular federal statute is not applicable.

The district court found that Herman Taylor of Rault Center Hotel notified Hibernia of the overpayment in late December 1982, and thus Hibernia had actual notice of the overpayment. Hibernia contends this finding is clearly erroneous because Hibernia employees testified that they did not remember Taylor or any other hotel employee advising them of the overcredit, and because of the large amount involved they would have remembered if they had been advised of the overcredit.

A finding is "clearly erroneous" under Fed.R.Civ.P. 52 when "although there is evidence to support it, the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed." United States v. United States Gypsum Co., 333 U.S. 364, 395, 68 S.Ct. 525, 92 L.Ed. 746 (1948). "[W]hen a trial judges' finding is based on his decision to credit the testimony of one of two or more witnesses, each of whom has told a coherent and facially plausible story that is not contradicted by extrinsic evidence, that finding, if not internally inconsistent, can virtually never be clear error." Anderson v. City of Bessemer City, 470 U.S. 564, 575, 105 S.Ct. 1504, 84 L.Ed.2d 518 (1985). The district court's finding that the hotel gave actual notice of the over-credit to Hibernia is not clearly erroneous.

Section 4-202(1) of the Uniform Commercial Code (West 1977) imposes on all banks a duty of ordinary care in forwarding checks it accepts for collection. The trial court, after reviewing all the evidence, expressly concluded that Hibernia breached its duty. The rationale for this conclusion is emphasized by the trial court's specific findings. (footnote 1, supra)

Hibernia argues that the routine and customary banking practice is to encode deposited checks for the amount on the right of the check, rather than the amount in the body. They insist that there was no breach of duty on its part because "the check was paid according to the instructions of its maker--the Army--for the amount of $244,844.50." which appeared on the right of the check. Section 3-118(c) of the U.C.C. provides that "[w]ords control figures except that if the words are ambiguous figures control." Though the Treasury check does not state an amount expressed in words, the district court held, and we assuredly agree that the figure in the body of the check, in the place customarily reserved for words, is the controlling amount. ² H. Bailey & R. Hagedon, Brady on Bank Checks Sec. 3.17 at 3-19 (5th ed. Supp.1986). Hibernia's reliance on commercial custom is misplaced. Commercial custom does not apply where the U.C.C. provides otherwise. See U.C.C. Sec. 1-103; also U.C.C. Sec. 3-104, Official Comment 2 ("[A] writing cannot be made a negotiable...