Pulaski Bank and Trust Co. v. Texas American Bank/Fort Worth, N.A.

• Decision Date: 13 September 1988
• Docket Number: No. 05-87-00951-CV,05-87-00951-CV
• Citation: 759 S.W.2d 723
• Parties: 7 UCC Rep.Serv.2d 335 PULASKI BANK AND TRUST CO., Appellant, v. TEXAS AMERICAN BANK/FORT WORTH, N.A., Texas American Bank/West Side, N.A., Texas American Services, Inc., Appellees.
• Court: Texas Court of Appeals

Page 723

759 S.W.2d 723

7 UCC Rep.Serv.2d 335

PULASKI BANK AND TRUST CO., Appellant, v. TEXAS AMERICAN BANK/FORT WORTH, N.A., Texas American

Bank/West Side, N.A., Texas American Services,

Inc., Appellees.

No. 05-87-00951-CV.

Court of Appeals of Texas,

Dallas.

Sept. 13, 1988.

Rehearing Denied Nov. 1, 1988.

W. Ralph Canada, Jr., J. Richard Tubb, Dallas, for appellant.

Alan Wilson, Dallas, for appellees.

Before WHITHAM, ROWE and THOMAS, JJ.

THOMAS, Justice.

Appellant, Pulaski Bank and Trust Company, sued Texas American Bank/Fort Worth (TAB/Fort Worth), Texas American Bank/West Side (TAB/West Side) and Texas American Services, Inc. (TASI), appellees, alleging that they were liable for losses suffered by Pulaski when notice of dishonor of a $150,000 check drawn upon TAB/West Side was not timely relayed to Pulaski. After a nonjury trial, the trial court entered a take-nothing judgment against TAB/West Side and TASI and further entered judgment in favor of Pulaski against TAB/Forth Worth for $8,202.14. In three points of error, Pulaski contends that the trial court erred: 1) in concluding that TAB/West Side was not liable for Pulaski's loss, because as a matter of law TAB/West Side did not timely return the check; 2) in using the wrong measure of damages after imposing liability upon TAB/Fort Worth; and 3) in failing to award attorney's fees to Pulaski. We find no merit in any of Pulaski's points of error, and affirm the trial court's judgment.

STATUTORY FRAMEWORK

This action is governed by chapter 4 of the Uniform Commercial Code. ¹ Chapter 4 sets out the method by which a bank in which a check is deposited may be finally paid by the bank upon which the check is drawn. It has been said that chapter 4 provides the "traffic rules" which keep the bank collection process flowing smoothly. Malcolm, How Bank Collection Works--Article 4 of the Uniform Commercial Code, 11 HOW. L.J. 71, 86 (1965) (hereinafter cited as "How Bank Collection Works"). In order to place the facts of this case in context, we must first set out the framework of chapter 4.

To begin the collection process on a check, the person having possession of the item must transfer it to a bank, but not necessarily the bank through which or upon which the check is drawn. See Annot., 84 A.L.R.3d 1073, 1076 (1978). The first bank to which a check is transferred for collection is called the depositary bank. See § 4.105(1); Union Bank of Benton v. First National Bank, 621 F.2d 790, 793 (5th Cir.1980). After the depositary bank has processed the check and entered a provisional credit to the account of its depositor, the bank will transfer the check to another bank which may be the first of many banks that will handle the check before it reaches the bank upon which it is drawn. See Annot., 84 A.L.R.3d at 1077; How Bank Collection Works, 11 HOW.L.J. at 71-74.

The last bank in the chain--the bank by which an item is payable as drawn--is denominated the payor bank. See § 4.105(2); Lockhart Savings & Loan Assn. v. RepublicBank Austin, 720 S.W.2d 193,194 (Tex.App.--Austin 1986, writ ref'd n.r.e.); cf. Hamby Co. v. Seminole State Bank, 652 S.W.2d 939, 941 (Tex.1983) (defining payor bank in case involving documentary draft). The other banks in the chain are intermediary banks and collecting banks. An intermediary bank is any bank to which an item is transferred in the course of collection, except the depositary or payor bank. See § 4.105(3); Annot., 84 A.L.R.3d at 1077. A collecting bank is one which handles the check for collection, but not the payor bank. See § 4.105(4); Ohio Bell Telephone Co. v. BancOhio National Bank, 1 Ohio Misc.2d 11, 440 N.E.2d 69, 71 (1982). These classifications of banks in the collection process are not exclusive. Thus, it is entirely possible that a depositary bank could also be a collecting bank. See § 4.105(1) & (4); Annot., 84 A.L.R.3d at 1076 & n. 5.

As the check moves along the chain from the depositary bank to the payor bank, all the banks in the chain enter provisional debits and credits on the account of the bank from which and to which the check is transferred. These provisional credits are termed provisional settlements under chapter 4. See § 4.104(a)(10); Lockhart Savings & Loan, 720 S.W.2d at 194. As the check passes from the depositary bank to the payor bank through collecting banks, each collecting bank must act seasonably in forwarding the check. A bank acts seasonably if it acts before its midnight deadline following receipt of the check. See § 4.202(b); Wilhelm Foods, Inc. v. National Bank of North America, 388 F.Supp. 1376, 1379 (D.C.N.Y.1974). The midnight deadline is midnight on the next banking day following the banking day on which the bank receives the check. See § 4.104(a)(8); First State Bank of McKinney v. American Bank of Sherman, 732 S.W.2d 404, 405 (Tex.App.--Dallas 1987, no writ).

When the check reaches the payor bank, that bank must decide whether to pay the check or dishonor the check. If the payor bank pays the check, all the provisional settlements among the banks in the collection chain become final. See § 4.213; Riggs v. State, 34 Md.App. 324, 367 A.2d 22, 26 n. 5 (1976). If the payor bank decides to dishonor the check, it must return the item or send notice of dishonor to the intermediary bank from which it received the check. The payor bank must take this step before its midnight deadline. See § 4.301; North Carolina National Bank v. Harwell, 38 N.C.App. 190, 247 S.E.2d 720, 724 (1978), pet. denied, 296 N.C. 410, 267 S.E.2d 656 (1979). If the payor bank does not return the item or send notice of dishonor before its midnight deadline, the provisional settlements become final. See § 4.213(a)(3); Annot., 23 A.L.R.4th 203, 216-18 (1983). Until a check is finally paid, a collecting bank which makes a provisional settlement has the right to charge back the amount of any credit given or to obtain a refund from the bank it credited. See § 4.212. The right of charge-back terminates when a settlement becomes final. Id; Regal Tour, Inc. v. European American Bank, 108 Misc.2d 699, 438 N.Y.S.2d 947, 949 (1981).

A payor bank that does not timely return the check or send notice of dishonor becomes liable to the depositary bank for the full amount of the check. See §§ 4.213(a) & 4.302; Hamby Co., 652 S.W.2d at 941; Pecos County State Bank v. El Paso Livestock Auction Co., 586 S.W.2d 183, 187 (Tex.Civ.App.--El Paso 1979, writ ref'd n.r.e.). A collecting bank becomes liable if it fails to use ordinary care in returning items or giving notice of dishonor by its midnight deadline. See § 4.202; Citizens Bank, Bentonville v. Chitty, 285 Ark. 55, 684 S.W.2d 814, 816 (1985). In such instances, the collecting bank's liability is measured by the amount of the check reduced by an amount which could not have been realized by the use of ordinary care by the collecting bank. See § 4.103(e); Marquette National Bank v. Heritage Pullman Bank & Trust Co., 109 Ill.App.3d 532, 65 Ill.Dec. 178, 181, 440

N.E.2d 1033, 1036 (1982); Whitehall Packing Co. v. First National City Bank, 55 A.D.2d 675, 390 N.Y.S.2d 189, 191 (1976).

FACTUAL BACKGROUND

On February 5, 1985, Laboratory Management, Inc. deposited into its account at Pulaski, a Little Rock, Arkansas bank, a check in the amount of $150,000. The check was made by Fairway Farms, Inc., and was drawn on TAB/West Side, a Fort Worth bank. Lab Management received a provisional credit in the amount of $150,000 at that time. Pulaski immediately transmitted the check for collection to its correspondent bank, Worthen Bank & Trust Company of Little Rock. Immediately upon receiving the check on February 6th, Worthen sent the check for collection to MBank Dallas, Worthen's corresponding bank in Dallas. MBank Dallas, still on February 6th, delivered the check to MBank Fort Worth.

That same day, MBank Fort Worth delivered the check to the Fort Worth Clearinghouse. Since TAB/West Side is not a "clearing member," it could not participate in the exchange of items at the clearinghouse. Therefore, TAB/Fort Worth, a clearing member, received for collection the $150,000 check payable by TAB/West Side. The clearinghouse sent the check to TASI, an off-premises data processing center used by both TAB/Fort Worth and TAB/West Side.

TASI received the check on February 6th. During the computerized processing procedure, the check was sorted into the TAB/West Side reject pocket and was listed on the TAB/West Side rejects list because of insufficient funds in Fairway Farm's account. The rejects list was delivered to TAB/West Side by 8:00 a.m. on February 7th. Barry Smith, the account officer responsible for the Fairway Farms account upon which the $150,000 check was drawn, was notified that there were insufficient funds to cover the check. Smith decided that the check should not be paid and informed the customer service department of TAB/West Side that the check should be returned unpaid. The rejects list was transmitted by courier to TASI between 10:00 a.m. and 11:00 a.m. on February 7th. Thereafter, the check was manually pulled and marked to be returned. The check was then taken to the customer accounting, or bookkeeping, department at TASI. Because of the directions of TAB/West Side that the check should be returned unpaid, the ledger entries previously made were reversed.

The check was then taken to the return item department. The testimony revealed that the return item department represented TAB/Fort Worth in the transaction at this point in time. According to the testimony, once the check was physically pulled and the entries to the general ledgers were reversed, TAB/West Side was "out of the picture." Although it is disputed whether TASI gave MBank Dallas telephone notice of the return on February 7th, it is undisputed that the check was not physically returned to MBank Dallas on February 7th. The check was misrouted by TASI; rather than returning the check to MBank Dallas, TASI sent the check...