NC NAT. BANK v. SC NAT. BANK, Civ. A. No. 75-1815.
Decision Date | 26 October 1976 |
Docket Number | Civ. A. No. 75-1815. |
Citation | 449 F. Supp. 616 |
Court | U.S. District Court — District of South Carolina |
Parties | NORTH CAROLINA NATIONAL BANK, Plaintiff, v. SOUTH CAROLINA NATIONAL BANK, Defendant. |
R. Frank Plaxco, Greenville, S. C., for plaintiff.
F. Dean Rainey, Jr., Greenville, S. C., for defendant.
This is an action to determine the accountability of the defendant, South Carolina National Bank (SCN), to the plaintiff, North Carolina National Bank (NCNB), for the full amount of a $160,000 check under the provisions of the Uniform Commercial Code (UCC). It was tried before the Court without a jury on September 9, 1976.
NCNB contends that SCN made final payment of the item under the provisions of § 10.4-213 of the South Carolina Code of Laws 19621 and that it retained the check beyond the "midnight deadline" and is therefore accountable to it under the provisions of § 10.4-302.
Defendant answered alleging that the plaintiff breached its presentment warranty when presenting the check for collection in that it did not have "good title to the item or the authorization to obtain payment or acceptance on behalf of one who has good title" under § 10.4-207(1). The defendant also contends that its delay in returning the check is excusable because of circumstances beyond its control as provided for in § 10.4-108(2).
The Court has weighed the testimony and evidence presented at the trial, reviewed the exhibits introduced into evidence and studied the applicable law. In accordance with Rule 52, Federal Rules of Civil Procedure, the Court now makes the following
1. Summerset Group, Inc., the drawer of the check, Kenway Corporation, the payee, and Futren of St. Pete, Inc. were closely held corporations, the common management of which had been engaged, for at least one month prior to the presentment of the check in question, in a check "kiting" scheme between eight different checking accounts.3
2. On Monday, June 30, 1975, a check was deposited with NCNB by the Kenway Corporation which maintained a demand deposit account with NCNB. The check was made payable to Kenway Corporation, was dated June 30, 1975 and was drawn by Summerset Group, Inc. in the amount of $160,000 upon a demand deposit account which was maintained at SCN's Myrtle Beach branch office in the name of Summerset Group, Inc.
3. After processing by the depository bank, NCNB, it was forwarded through the Regional Check Processing Center of the Federal Reserve System in Columbia, South Carolina on June 30, 1975 for presentment to the payor bank, SCN.
4. The check was received by SCN in its central check processing department in Columbia, South Carolina on Tuesday morning, July 1, 1975. It was sorted by the computer but the account on which it was drawn was not updated because there were not sufficient funds in the account to cover the check. It was "read" by the computer onto a report of insufficient funds (NSF) which is a computer print out of items for which there are not sufficient funds in the account of the drawer to cover the amount of the item. This check, together with the other NSF items, was pulled from the paid items and taken to the returns clerk with the NSF report and the NSF stamp was placed upon the check. The returns clerk then communicated with the Myrtle Beach branch office as to the disposition of the check. By approximately 7:00 p. m. on July 2, 1975, the returns clerk had the check, the NSF report, and the Exception Report which contained the printed instructions from the Myrtle Beach branch office instructing that the check be paid notwithstanding the fact that there were insufficient funds in the account at that time to pay the check. The check was then processed as an overdraft, and it was entered against the account of Summerset Group, Inc., drawer, on magnetic computer tape. On the morning of July 3, 1975, it was stamped paid and submitted to the check processing department. Subsequently, on Wednesday, July 9, 1975, seven days after SCN personnel had decided to pay the check, the paying clerk discovered that the check did not have the indorsement of the payee, Kenway Corporation. She telecopied this information to Myrtle Beach which advised that the check should be returned. The check was then returned to the corrections clerk, who prepared a bookkeeping credit, and the original debit was erased from the computer tape. It was then sent to the returns clerk, who prepared a return letter to the Federal Reserve Bank, and a phone call was then made to the Federal Reserve notifying it of the return. The check was then returned to NCNB.
5. NCNB received the check after its return on Friday, July 11, 1975, at which time its personnel placed the following stamp on the check "Credited to the account of the within named payee", and the check was again forwarded through the Regional Check Processing Center for delivery to SCN.
6. The check was delivered to SCN on Tuesday, July 14, 1975, at which time the SCN computer again produced a report that there were not sufficient funds in the account of Summerset Group, Inc. to pay the check. Upon the advice of SCN personnel in Myrtle Beach that the check should not be processed as an overdraft, it was returned on Wednesday, July 15, 1975.
7. A power failure at approximately 7:00 p. m. on Monday, June 30, 1975 rendered SCN's computer inoperable. Power was restored and the computer was again operable at 6:00 a. m. on Tuesday, July 1, 1975. SCN's operations center prepared and distributed a notice to its correspondent banks stating that
The Court has jurisdiction of this action under 28 U.S.C. § 1332 since there is diversity of citizenship of the parties and since the amount in controversy exceeds $10,000 exclusive of interest and costs.
The "midnight deadline" with respect to a bank is "midnight on its next banking day following the banking day on which it receives the relevant item or notice or from which the time for taking action commences to run, whichever is later." § 10.4-104(1)(h). It is not disputed that SCN failed to return the check within its mid night deadline. The check was received by SCN on the morning of July 1, 1975 so that its midnight deadline was midnight of July 2, 1975. SCN did not return the check until July 9, 1975, the fourth banking day after the expiration of the midnight deadline.4
SCN, however, contends, in addition to its defense that the computer breakdown caused the delay,5 that NCNB breached its presentment warranty of good title under § 10.4-207(1)(a) by presenting a check for payment without the payee's indorsement either directly made by the payee or supplied by the depository bank in accordance with § 10.4-205. If NCNB did breach its presentment warranty, it would be a valid defense to the payor bank's failure to return the check or give notice of dishonor within its midnight deadline. § 10.4-302. This Court does not reach this issue, however, since the defendant made final payment by "completing the process of posting" and thus is "accountable for the amount of the item." § 10.4-213(1)(c).
Here the computer determined that there were insufficient funds in the account and did not debit the account. Nevertheless the returns clerk for SCN examined the check and the NSF report, received advice to pay the item notwithstanding the lack of funds in the drawer's account, physically marked the check paid, and charged the customer's account creating an overdraft. At this time SCN had decided to pay the check and had recorded that decision. In fact, the testimony of SCN's Assistant Vice-President in charge of bookkeeping...
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