First State Bank of McKinney v. American Bank of Sherman, N.A.

• Citation: 732 S.W.2d 404
• Decision Date: 04 June 1987
• Docket Number: No. 05-86-00804-CV,05-86-00804-CV
• Parties: 4 UCC Rep.Serv.2d 659 FIRST STATE BANK OF McKINNEY, Texas, Appellant, v. AMERICAN BANK OF SHERMAN, N.A., Appellee.
• Court: Court of Appeals of Texas

Page 404

732 S.W.2d 404

4 UCC Rep.Serv.2d 659

FIRST STATE BANK OF McKINNEY, Texas, Appellant, v. AMERICAN BANK OF SHERMAN, N.A., Appellee.

No. 05-86-00804-CV.

Court of Appeals of Texas,

Dallas.

June 4, 1987.

John R. Stooksberry, McKinney, for appellant.

John D. Hill, Sherman, for appellee.

Before HOWELL, McCLUNG and McCRAW, JJ.

McCLUNG, Justice.

First State Bank of McKinney, Texas (First State) sued American Bank of Sherman, N.A. (American) alleging late return of two checks in breach of American's statutory duty under SECTION 4.302 OF THE TEXAS BUSINESS AND COMMERCE CODE¹ (Tex.U.C.C.). The trial court held that American timely returned the checks. We disagree. Consequently, we reverse and render judgment for First State.

On March 29, 1982, Donald K. McKinney, a customer of both banks in this litigation, gave First State two checks, one to pay off a debt and the other to buy a certificate of deposit (CD). In the same transaction, First State released security for the debt and delivered the CD to McKinney. The checks were drawn on McKinney's account with American.

Following normal procedures, First State delivered the checks to the Federal Reserve Bank of Dallas (Federal Reserve) for collection. After the checks were processed by the Federal Reserve, they were delivered to Affiliated Computer Systems, Inc. (Affiliated) in Dallas. Affiliated received the checks on March 30, 1982.

American had contracted with Affiliated to provide data processing services, which included maintenance of customer accounts. ² American had the capability to access the data in Affiliated's computer through terminals on American's premises connected to the Affiliated computer by telecommunications equipment and circuits. A large number of other banks also utilized similar data processing services of Affiliated.

A daily report of all transactions, along with the processed checks that went into the compilation of that report, was made available to American each morning. This report included the net account balance of American's customers' accounts after payment of any checks issued on those accounts. In the event that an account did not have a sufficient balance to cover a given check, that check was put on the "cuts list" of the daily report prepared for that day. The checks at issue here were placed on the "cuts list" and delivered to American on March 31, 1982. On that same day, American decided to honor the two checks at issue, and made all the appropriate bookkeeping entries to reflect the overdraft which was thereby created in McKinney's account. The following day, April 1, 1982, American reversed its decision of the previous day and notified First State by phone that the checks would be dishonored.

                In summary
                Date                              Action
                -------  ---------------------------------------------------------
                3/29/82  Checks written and delivered.  First State delivers CD
                         releases lien.  Checks sent to Federal Reserve
                3/30/82  Checks delivered to Affiliated.  Checks put on cuts list
                3/31/82  Checks delivered to American.  American decides to
                         honor them.
                4/01/82  American notifies First State of dishonor.
                

First State asserts that under these facts, American failed to notify it timely under section 4.302 and is therefore accountable for the checks. The provision is set forth below:

§ 4.302. Payor Bank's Responsibility for Late Return of Item

In the absence of a valid defense such as breach of a presentment warranty (Subsection (a) of Section 4.207), settlement effected or the like, if an item is presented on and received by a payor bank the bank is accountable for the amount of

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

(2) any other properly payable item unless within the time allowed for acceptance or payment of that item the bank either accepts or pays the item or returns it and accompanying documents.

Midnight deadline is "midnight on its next banking day following the banking day on which it receives the relevant item...." Section 4.104(a)(8).

The midnight deadline began to run here when the item was "presented on and received by" American. First State asserts that the midnight deadline began to run when Affiliated received the checks. American contends that the midnight deadline should not begin to run until the check arrives at the bank premises. The question of whether the midnight deadline begins to run when a check is received by an off-premise processing center or by the bank itself has not been addressed in Texas. However, the question has been addressed in other jurisdictions: ³, ⁴ Farmers and Merchants Bank of Long Beach v. Bank of America National Trust and Savings Assoc., 20 Cal.App.3d 939, 98 Cal.Rptr. 381 (1971); Capitol City First Nat'l Bank v. Lewis State Bank, 341 So.2d 1025 (Fla.App.1977), cert. denied, 357 So.2d 186 (Fla.1978); North Carolina Nat'l Bank v. Harwell, 247 S.E.2d 720 (N.C.App.1978); Idah-Best, Inc. v. First Security Bank of Idaho, N.A., Hailey Branch, 99 Idaho 517, 584 P.2d 1242 (1978); Go-Tane Service Stations, Inc. v. Sharp, 78 Ill.App.2d 785, 33 Ill.Dec. 916, 397 N.E.2d 249 (1979); Catalina Yachts v. Old Colony Bank, 497 F.Supp. 1227 (D.Mass.1980); Central Bank of Alabama, N.A. v. Peoples National Bank of Huntsville, 401 So.2d 14 (Ala.1981); Bon Bon Productions, Ltd. v. Xanadu Productions, Inc., 32 U.C.C.Rptr. 253 (D.Mass.1981); South Sound Nat'l Bank v. First Interstate Bank, 672 P.2d 1194 (Or.Ct.App.1983); Chrysler Credit Corp. v. First National Bank and Trust Company of Washington, 746 F.2d 200 (3rd Cir.1984) (applying Pennsylvania law). The majority rule is that the deadline begins to run when the check is received by the processor.

The cases supporting American's position do so for several reasons, none of which we find persuasive. One reason given is that under section 4.106, "[a] branch or separate office of a bank is a separate bank for the purpose of computing the time within which and determining the place at or to which action may be taken or notices or orders shall be given...." American cannot seriously argue that Affiliated is a separate bank because its only function was to provide data processing services. Compare this to the situation in Catalina Yachts.

The payor bank in Catalina Yachts was not a member of the Federal Reserve. It entered into an agreement with a member bank and the Federal Reserve specifying how checks would be processed. The agreement allowed the Federal Reserve to settle the non-member checks by charging the member bank's account. The member bank in turn charged an account maintained at the member bank by the non-member bank. Catalina Yachts, 497 F.Supp. at 1230. The agreement further specified that the day of receipt by the non-member bank was the next business day after the checks were delivered to the member bank. Id. at 1234. Under these circumstances, clearly inapplicable here, the court held that the midnight deadline should not begin when the non-member bank's checks were received by the member bank processor.

Another reason sometimes given for not triggering the midnight deadline upon receipt by the processing center...