AM. TITLE INS. v. Burke & Herbert Bank & Trust

• Decision Date: 09 February 1993
• Docket Number: Civ. No. 92-1064-A.
• Citation: 813 F. Supp. 423
• Court: U.S. District Court — Eastern District of Virginia
• Parties: AMERICAN TITLE INSURANCE COMPANY, Plaintiff, v. BURKE & HERBERT BANK & TRUST COMPANY, Defendant.

813 F. Supp. 423

AMERICAN TITLE INSURANCE COMPANY, Plaintiff, v. BURKE & HERBERT BANK & TRUST COMPANY, Defendant.

Civ. No. 92-1064-A.

United States District Court, E.D. Virginia, Alexandria Division.

February 9, 1993.

R. Peyton Mahaffey, Miles & Stockbridge, Fairfax, VA, for American Title Ins. Co.

John Francis McGinley, McGinley & Elsberg, Marc Elliott Albert, Tyler, Bartyl, Burke and Albert, Alexandria, VA, for Burke & Herbert Bank & Trust Co.

MEMORANDUM OPINION

ELLIS, District Judge.

I.

This diversity suit arises from the failure of defendant Burke & Herbert Bank & Trust Company ("Burke & Herbert") to return three checks presented to it for payment to their respective payees within the time period prescribed by Va.Code § 8.4-302.¹ Plaintiff, American Title Company ("American Title"), contends that Burke & Herbert is strictly liable for the untimely return of the checks, and that it may enforce payment from the bank in its own name as the transferee, assignee, and/or subrogee of the original payees. Burke & Herbert, on the other hand, contends that valid defenses exist to shield it from liability, and that American Title has no standing to maintain an enforcement action under this statute. This matter is properly before the Court on the parties' cross-motions for summary judgment, as no material facts are disputed. For the reasons stated below, the Court grants summary judgment in favor of Burke & Herbert.

II.

American Title, a Florida insurance underwriter, issues title insurance policies, commitments, and endorsements through authorized agents. Landmark Title Corporation ("Landmark") was one of American Title's authorized agents. Specifically, it acted as American Title's agent in Virginia pursuant to a written agency agreement. Acting under this agreement, Landmark issued title insurance policies underwritten by American Title in connection with the sale and financing of Virginia real estate. To facilitate its responsibilities at real estate closings, Landmark maintained a trust account with defendant, Burke & Herbert, a Virginia banking institution located in Alexandria, Virginia. Landmark typically deposited into this account the funds it received in trust in connection with the closings, and then disbursed funds from the account to the appropriate parties.

In late July and early August of 1991, in connection with Virginia real estate closings, Landmark issued three checks that were drawn upon its Burke & Herbert trust account: (1) Check No. 3591, issued on July 31 for the amount of $226,562.12, made payable to HomeFed, F.S.B. of San Diego, California ("HomeFed"); (2) Check No. 3607, issued on August 2 for the amount of $50,110.12, made payable to American General ("American General"); and (3) Check No. 3628, issued on August 5 for the amount of $118,354.07, made payable to Marine Midland Bank ("Marine Midland"). These checks were forwarded by the payees through the Federal Reserve Bank system and presented to Burke & Herbert for payment on August 5 for the HomeFed check and on August 9 for the American General and Marine Midland checks.

Upon receipt of the HomeFed Check on August 5, Burke & Herbert debited the amount of the check from the Landmark trust account. This action caused the trust account to be overdrawn. Burke & Herbert called Landmark the next day and informed it of the deficiency in the trust account. This deficiency apparently arose because Landmark's vice president, Ron Ursano, had been embezzling funds from the trust account for some time. On August 6, in an effort to conceal his illegal activity, Ursano requested that Burke & Herbert not dishonor any checks presented for payment from the trust account. He falsely represented, inter alia, that Landmark had arranged a wire transfer to the trust account that would cover all checks to be drawn on the account, and that this transfer had somehow been misdirected. Later, when it became apparent to all parties that no such wire transfer was forthcoming, Ursano unsuccessfully attempted to secure a personal loan from Burke & Herbert to cover the deficiency in the trust account.

Choosing to rely on Ursano's misrepresentations, Burke & Herbert did not immediately dishonor and return the HomeFed check. In fact, even after it had informed Landmark that there were insufficient funds in the trust account to cover the HomeFed check, Burke & Herbert debited the American General and Marine Midland checks from the Landmark trust account upon their receipt on August 9. Not until August 13, 1991, did Burke & Herbert return all three checks to the respective payees, stamped "Insufficient Funds." In short, Burke & Herbert delayed return and rejection of the HomeFed check for eight days and that of the American General and Marine Midland checks for four days.

In September of 1991, in accordance with its obligations under Closing Protection letters issued to the payees, American Title made payments to HomeFed, American General, and Marine Midland to replace the funds entrusted to Landmark. American Title had issued these Closing Protection letters to the payees in connection with certain real estate transactions for which it had provided title insurance through Landmark. The terms of these Closing Protection letters obligated American Title to reimburse the insured payees, subject to certain enumerated conditions and exclusions, for any actual losses suffered because of fraud or dishonesty on the part of the issuing title agent, Landmark. Pursuant to these letters, American Title was obligated to reimburse the payees for the losses arising from the nonpayment of the dishonored checks. On receiving reimbursement, the original payees delivered the dishonored checks, without endorsement, to the American Title.

American Title, in July 1992, brought this action seeking to recover for an alleged violation of Va.Code § 8.4-302 under a theory of equitable subrogation. Shortly thereafter, the three original payees endorsed the returned checks in favor of American Title, and executed written assignments to American Title of all rights, title, interest and claims arising out of these checks. American Title then successfully sought leave of the Court to amend its original complaint to allege, in addition to equitable subrogation, causes of action under § 8.4-302 as the holder, transferee, and assignee of the returned checks.

III.

Virginia's Commercial Code ("Code") establishes strict time limits within which a bank must take actions on checks presented for payment. See Va. Code § 8.4-302 (Michie 1991). The governing Code section provides, in pertinent part, as follows:

In the absence of a valid defense such as breach of presentment warranty ..., settlement effected or the like, if an item is presented and received by a payor bank the bank is accountable for the amount of

(a) a demand item other than a documentary draft whether properly payable or not if the bank, in any case where is not also the depositary bank, retains the item beyond midnight of the banking day of receipt without settling for it or, regardless of whether or not it is also the depositary bank, does not pay or return the item or send notice of dishonor until after its midnight deadline; ...

It is well established that this provision imposes strict liability on payor banks for failure to meet the "midnight deadline" requirement.² Suttle Motor Corp. v. Citizens Bank of Poquoson, 216 Va. 568, 221 S.E.2d 784 (1976) (recognizing strict liability rule in Virginia).³ Equally well established is that the purpose of § 8.4-302's strict liability rule is to satisfy the "need for finality and certainty in business transactions." Citizens Fidelity Bank & Trust Co. v. Southwest Bank & Trust Co., 238 Neb. 677, 684, 472 N.W.2d 198, 202 (1991). Therefore, liability for the face amount of the check is imposed without regard to whether any damages have been sustained as a result of the payor bank's failure to make a timely return. Id. See generally 22 A.L.R.4th 10, Payor Bank Accountability (1983).

These principles applied here compel the conclusion that Burke & Herbert can be held strictly liable for the face amount of the three checks. It clearly failed to meet the midnight deadline requirement in handling the three checks at issue in this case, as the undisputed record reflects that Burke and Herbert retained the HomeFed check for eight days and the American General and Marine Midland checks for four days from the date of their receipt without paying on or returning these items to the payees. Not until well after the statutorily prescribed time period were the checks dishonored and returned to the payees. Thus, under the well-settled principles just stated, Burke & Herbert is strictly "accountable."

But while the question of Burke & Herbert's strict liability is settled, the law is not settled as to which entities may sue and hold Burke & Herbert liable under § 8.4-302. Burke & Herbert contends that American Title lacks standing to bring this suit and cannot, as a matter of law, enforce payment for the face amount of the returned checks.⁴ American Title, on the other hand, contends that it may enforce payment because (1) it is the assignee of any and all causes of action arising from the checks; (2) it is the transferee and holder of the returned checks; and (3) it stands in the shoes of the original payees pursuant to equitable subrogation principles. The Court ultimately concludes that none of these theories of recovery confers proper standing on American Title. Put another way, American Title is not an entity to which Burke & Herbert is, in the statute's terms, "accountable" for the failure to meet the midnight deadline.

An examination of the nature of the banking industry's check collection and payment process supports this conclusion. For while the scope of standing to sue under § 8.4-302 is not clearly delineated in the Code provisions,⁵ it is nonetheless circumscribed by the practical...