Farm Credit Services v. American State Bank

Decision Date12 August 2003
Docket NumberNo. 02-2641.,02-2641.
Citation339 F.3d 764
PartiesFarm Credit Services of America, Appellant, v. American State Bank, Appellee.
CourtU.S. Court of Appeals — Eighth Circuit

Steven D. Davidson, Omaha, Nebraska, for appellant.

Edward M. Mansfield, Des Moines, Iowa, and Steven R. Jensen, Sioux City, Iowa, for appellee.

Before WOLLMAN, HEANEY, and MELLOY, Circuit Judges.

MELLOY, Circuit Judge.

American State Bank ("American") returned twenty-three payable-through drafts to Farm Credit Services of America ("Farm Credit") which were drawn on Farm Credit and payable-through Wells Fargo Bank Nebraska N.A.("Wells Fargo"). Farm Credit filed suit against American for wrongful claim of late return. In a motion to dismiss, American argued that Farm Credit's complaint was barred by Availability of Funds and Collection of Checks (Regulation CC) 12 C.F.R. Part 229 (2002), which requires the payable-through bank, in this case Wells Fargo, to provide timely notice of nonpayment.1 The district court granted American's motion to dismiss and Farm Credit appealed.2 We affirm.

I. BACKGROUND

Farm Credit is an instrumentality of the United States pursuant to the Farm Credit Act and has its principal office located in Omaha, Nebraska. American is a financial institution incorporated in Iowa with its principal place of business in Sioux Center, Iowa. Wayne Kooistra maintained accounts at both American and Farm Credit, through which he perpetrated an elaborate check-kiting scheme. Kooistra's use of his accounts resulted in the liability that is the subject of this litigation.

Farm Credit extended Kooistra, and entities owned and controlled by Kooistra, a line of credit to finance his cattle business. Kooistra accessed this line of credit through the use of payable-through drafts which were drawn on Farm Credit and payable through Wells Fargo. To secure this line of credit, Farm Credit maintained a security interest in the cattle and the proceeds from the sale of the cattle.

Kooistra also maintained a checking account in his name at American. This account was used as a clearing account in connection with funds advanced from Farm Credit. Kooistra deposited Farm Credit drafts representing advances from his line of credit into his checking account at American and then issued checks from his American account to purchase cattle and other assets subject to Farm Credit's security interest.3 When Kooistra would sell cattle or other interests subject to Farm Credit's security interest, proceeds from the sale would first be deposited into Kooistra's account at American.

On August 22 through August 24, 2001, twenty-three drafts executed by Kooistra, drawn on Farm Credit and payable-through Wells Fargo, were deposited by Kooistra into his American checking account. The drafts at issue total over six million dollars. Kooistra deposited the drafts with American on August 22, 23, and 24, 2001. The daily total for the seven drafts drawn on August 22 was $1,781,116; the daily total for the eight drafts drawn on August 23 was $2,300,499; and the daily total for the eight drafts drawn on August 24 was $2,208,879. American forwarded the drafts to Wells Fargo, and Wells Fargo received the drafts on August 23, 24, and 27, 2001, respectively. Wells Fargo forwarded the drafts to Farm Credit, and Farm Credit received the drafts on August 24, 27, and 28, 2001, respectively. Farm Credit sent the drafts back, en masse, to Wells Fargo, and Wells Fargo received them on August 29, 2001. In turn, Wells Fargo sent the drafts back en masse to American on August 30, 2001. Therefore, American had notice of the return from Wells Fargo on August 30, 2001. This was five, four, and three business days after Wells Fargo had first received the drafts on August 23, 24, and 27, 2001. American returned the drafts to Farm Credit alleging a late return of the items.

Farm Credit filed suit against American asserting three causes of action. First, Farm Credit claimed American made a wrongful claim of late return. Second, Farm Credit alleged conversion against American for the wrongful claim of late return. Finally, Farm Credit claimed American was unjustly enriched from the wrongful claim of late return. American moved to dismiss the complaint on separate grounds. American argued the complaint was barred by Regulation CC, 12 C.F.R. Part 229 (2002), because Wells Fargo's notice of nonpayment to American did not comply with the time requirements of the Regulation. In addition, American claimed the complaint was barred by the Uniform Commercial Code ("U.C.C."). Farm Credit opposed the motion to dismiss and argued that compliance with the U.C.C. deadlines was sufficient, that Regulation C.C. is optional, and that it had the right to make provisional settlements either as a bank or a non-bank drawee.

The district court held that Farm Credit had no basis for a wrongful claim of late return action against American because Wells Fargo did not provide timely notice of nonpayment to American as required by the 4:00 p.m. deadline imposed by 12 C.F.R. § 229.33(a). In addition, the district court rejected Farm Credit's argument that compliance with Regulation C.C. was optional and that compliance with the U.C.C. midnight deadline was sufficient.

II. STANDARD OF REVIEW

"We review de novo [the] district court's grant of a motion to dismiss, applying the same standards as ... the district court." Ballinger v. Culotta, 322 F.3d 546, 548 (8th Cir.2003); Kottschade v. City of Rochester, 319 F.3d 1038, 1040 (8th Cir.2003). "All facts alleged in the complaint are taken as true and construed in the light most favorable to the plaintiff." Kottschade, 319 F.3d at 1040. However, like the district court, we are "free to ignore legal conclusions, unsupported conclusions, unwarranted inferences and sweeping legal conclusions cast in the form of factual allegations." Wiles v. Capitol Indem. Corp., 280 F.3d 868, 870 (8th Cir.2002).

III. ANALYSIS

The Regulations governing this dispute were promulgated under the 1987 Expedited Funds Availability Act, codified at 12 U.S.C. §§ 4001-4010, which was "designed to accelerate the availability of funds to bank depositors and to improve the Nation's check payment system." Bank One Chicago, N.A. v. Midwest Bank & Trust Co., 516 U.S. 264, 266, 116 S.Ct. 637, 133 L.Ed.2d 635 (1996). Congress was seeking a way for depositors to access their deposited funds more quickly while at the same time manage the risks banks faced in allowing depositors expedited access to their funds. S.Rep. No. 100-19 (1987), reprinted in 1987 U.S.C.C.A.N. 489, 515-17. Ultimately, "[t]o reduce banks' risk of nonpayment, the Act grants the Board of Governors of the Federal Reserve System ... broad authority to prescribe regulations expediting the collection and return of checks." Bank One Chicago, N.A. v. Midwest Bank & Trust Co., 516 U.S. 264, 267, 116 S.Ct. 637, 133 L.Ed.2d 635 (1996) (citing 12 U.S.C. § 4008).

The three institutions involved in Kooistra's check-kiting scheme each executed a different role, and thus had different duties under the Regulations. American was the depositary bank, that is, the bank which received the deposits. Farm Credit is the non-bank drawee, from which Kooistra accessed a ready line of credit. As the non-bank drawee, Farm Credit made the ultimate decision whether to honor the drafts.4 Wells Fargo, the payable-through bank, was the paying bank for purposes of Regulation CC. See 12 C.F.R. § 229.2(z) ("Paying bank means — (4) The bank through which a check is payable and to which it is sent for payment or collection, if the check is not payable by a bank[.]")5. The rationale behind this treatment is to speed the return of checks that are payable-through a bank to the depositary bank:

For purposes of Subpart C, the regulation defines a payable-through or payable-at bank (which could be designated the collectible-through or collectible-at bank) as a paying bank. The requirements of § 229.30(a) and § 229.33 are imposed on a payable-through or payable-at bank and are based on the time of receipt of the forward collection check by the payable-through or payable-at bank. This provision is intended to speed the return of checks that are payable through or at a bank to the depositary bank.

12 C.F.R. Part 229, App. E, XXII(A)(1). The commentary to the Regulations goes on to explain:

Allowing the payable-through bank additional time to forward checks to the payor and await return or pay instructions from the payor would delay the return of these checks.... Subpart C places on payable-through and payable-at banks the requirements of expeditious return based on the time the payable through or payable-at bank received the check for forward collection.

12 C.F.R. Part 229, App. E, II(Z)(2).

The thrust of Regulation CC, therefore, is to expedite the processing of financial instruments and give depositors access to their money. To protect the parties involved and to reduce the liabilities, deadlines relative to the processing of the financial instruments are imposed on the depositary bank and the paying bank. Specifically, the payable-through bank must provide the depositary bank with notice of nonpayment of the draft by 4:00 p.m. on the second business day following the banking day on which the check was presented. The Regulation states:

If a paying bank determines not to pay a check in the amount of $2,500 or more, it shall provide notice of nonpayment such that the notice is received by the depositary bank by 4:00 p.m. (local time) on the second business day following the banking day on which the check was presented to the paying bank. If the day the paying bank is required to provide notice is not a banking day for the depositary bank, receipt of notice on the depositary bank's next banking day constitutes timely notice. Notice...

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