Starcraft Co., A Div. of Bangor Punta Operations, Inc. v. C.J. Heck Co. of Texas, Inc., 83-1712

• Decision Date: 17 December 1984
• Docket Number: No. 83-1712,83-1712
• Citation: 748 F.2d 982
• Parties: 40 UCC Rep.Serv. 215 STARCRAFT COMPANY, A DIVISION OF BANGOR PUNTA OPERATIONS, INC., Plaintiff and Third Party Plaintiff-Appellee, v. C.J. HECK COMPANY OF TEXAS, INC., Robert A. Johnson and Carol H. Johnson, Defendants-Appellees, v. TEMPLE NATIONAL BANK, Third Party Defendant-Appellant.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 982

748 F.2d 982

40 UCC Rep.Serv. 215

STARCRAFT COMPANY, A DIVISION OF BANGOR PUNTA OPERATIONS, INC., Plaintiff and Third Party Plaintiff-Appellee, v. C.J. HECK COMPANY OF TEXAS, INC., Robert A. Johnson and Carol H. Johnson, Defendants-Appellees, v. TEMPLE NATIONAL BANK, Third Party Defendant-Appellant.

No. 83-1712.

United States Court of Appeals Fifth Circuit.

Dec. 17, 1984.

Beard & Kultgen, Pat Beard, David B. Kultgen, Waco, Tex., for third-party defendant-appellant.

Clark, Thomas, Winters & Shapiro, Barry Bishop, Michael R. Klatt, Austin, Tex., for Starcraft Co.

Fletcher F. Rhodes, Temple, Tex., for C.J. Heck, Johnson and Johnson.

Appeal from the United States District Court for the Western District of Texas.

Before TIMBERS, ^* POLITZ and RANDALL, Circuit Judges.

RANDALL, Circuit Judge:

In this diversity action, we are called upon to decide whether a drawee bank who has missed the midnight deadline, and is therefore accountable to the payee for the amount of the item under Tex.Bus. & Com.Code Ann. [U.C.C.] Sec. 4.302(1), is liable to the payee when (1) the drawee bank, as a result of an unappealed judgment, has a right of charge back against the maker; and (2) the maker had previously discharged the underlying debt. We hold as a matter of Texas law that the drawee bank, although absolutely liable under Sec. 4.302(1), is equitably subrogated to the maker's right to restitution against the payee for double recovery on a single debt and that the resulting circularity of obligations has the effect of extinguishing the payee's statutory claim against the drawee bank. We, therefore, reverse the judgment of the trial court and remand with instructions that judgment be entered for the drawee bank.

I. Factual and Procedural Background.

Appellees Robert A. Johnson and Carol B. Johnson (the Johnsons) were officers and the sole shareholders of C.J. Heck Company of Texas, Inc. (Heck). Heck was a distributor of recreational vehicles manufactured by appellee Starcraft Company (Starcraft). On or about April 28, 1978, Heck delivered to Starcraft a check, drawn on Heck's account at appellant Temple National Bank (the Bank), to be applied against Heck's open merchandise account with Starcraft. Starcraft deposited the check for collection. It was received for payment by the Bank on May 8, 1978. As a result of disagreements between Heck and Starcraft and at the request of Heck, the Bank stopped payment on the check on May 10, 1978. The Bank, however, failed to return the check to Starcraft by the "midnight deadline," as required by the Texas version of Uniform Commercial Code Sec. 4-302(1), which makes a bank accountable to the payee for the amount of a demand item not acted upon in a timely manner.

On January 31, 1979, Starcraft commenced the instant action in the District Court for the Western District of Texas. Shortly before the trial began on March 23, 1982, the pleadings had emerged so that the following claims were asserted. Starcraft asserted claims, first, against Heck on the debt owed for goods furnished; second, against the Johnsons on a guaranty of Heck's debts; and, third, against the Bank for failure to return to Starcraft the unpaid Heck check by the midnight deadline. The Bank asserted a claim against Heck and the Johnsons for any amount which the Bank might be required to pay Starcraft. Heck and the Johnsons asserted a claim against Starcraft, alleging various wrongs, including breach of warranty, usurious interest, wrongful termination of dealership, and slander. Before the trial began, Starcraft, Heck, and the Johnsons entered into a Stipulation of Partial Dismissal (hereinafter, the "Mutual Release"), pursuant to which these parties mutually released one another of all claims. The Mutual Release acknowledged that the Bank was not a party thereto and that the Mutual Release would not affect any claim asserted by or against the Bank. ¹

Before the trial began, the court instructed the Bank that it was not to present evidence regarding the values given and received by the parties to the Mutual Release. ² The court refused to submit to the jury special interrogatories ³ regarding the Mutual Release as requested by the Bank.

Also before trial, the parties stipulated that in 1975 the Johnsons had executed and delivered to the Bank a guaranty agreement pursuant to which the Johnsons guaranteed all of Heck's debts to the Bank. In 1979, the Bank returned to the Johnsons the guaranty agreement, evidently operating under the assumption that all debts of Heck to the Bank had been paid. This redelivery took place after payment had been stopped on the Starcraft check on May 10, 1978.

In response to a special interrogatory, the jury found that the Bank did not return the check before the midnight deadline. On September 15, 1983, the court entered judgment in favor of Starcraft on its claim against the Bank in the amount of $158,392.15, plus interest, and in favor of the Bank against its customer Heck as a right of charge back in the same amount. The court denied recovery to the Bank on its claim against the Johnsons, stating that the Bank "presented no material evidence and did not request submission of any issues as to relief against [the Johnsons]." The Bank appeals from those portions of the judgment stated above. Heck, presently insolvent although apparently not a party to a bankruptcy proceeding, is not a party to this appeal.

II. Accountability under the Statute.

The Bank contends on appeal that, while Tex.Bus. & Com.Code Ann. Sec. 4.302 imposes a direct obligation on the Bank for missing the statutory midnight deadline, that obligation was discharged by Starcraft's acceptance of the Mutual Release. Section 4.302(1) states:

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 depositary bank, retains the item beyond midnight of the banking day of receipt without settling for it or, regardless of whether it is also the depositary bank, does not pay or return the item or send notice of dishonor until after its midnight deadline. ⁴

This section serves several purposes. First, the provision ensures that the payor or drawee bank will not deliberately act to protect the maker's credit rating to the detriment of the payee. Pecos County State Bank v. El Paso Livestock Auction Co., 586 S.W.2d 183, 186 (Tex.Civ.App.1979, writ ref'd n.r.e.); see also Western Air & Refrigeration, Inc. v. Metro Bank, 599 F.2d 83, 90 n. 8 (5th Cir.1979). Second, the section speeds up the collection of checks through the banking system. Id.; see also Chrysler Credit Corp. v. First National Bank & Trust Co., 582 F.Supp. 1436, 1438 (W.D.Penn.1984). Third, the provision, as part of a strict set of rules relied upon by depositary banks to know when a check has been accepted or dishonored, injects certainty into the check collection process. Bank Leumi Trust Co. v. Bank of Mid-Jersey, 499 F.Supp. 1022, 1026 (D.N.J.1980), aff'd, 659 F.2d 1065 (3d Cir.1981). To effectuate these policies, the Texas courts, along with the majority of jurisdictions across the country, have construed Sec. 4.302 as a strict liability provision. Pecos County State Bank, supra, at 186; Continental National Bank v. Sanders, 581 S.W.2d 293, 295 (Tex.Civ.App.1979, no writ); New Ulm State Bank v. Brown, 558 S.W.2d 20, 25 (Tex.Civ.App.1979, no writ); see generally Annot., 22 A.L.R.4th 10 (1983). In New Ulm State Bank, the Texas court further held that the drawee bank's accountability under the section does not depend upon a showing that the underlying instrument is enforceable:

[The bank's] liability for the late return of an item resulted from the responsibilities imposed upon it under the statute, and a recovery based upon its failure to perform its statutory duty was not dependent upon a showing that the instrument was enforceable against it. 2 Bender, Uniform Commercial Code Service, 7-31, Sec. 7.15(2).

New Ulm State Bank, supra, at 25; see also Northwestern National Insurance Co. v. Midland National Bank, 96 Wis.2d 155, 165, 292 N.W.2d 591, 597 (1980) (liability under the section "is not premised on the instrument itself").

Notwithstanding the above stated principles, however, it is clear that the drawee bank's liability must have some connection with the underlying debt. Section 4.302 does not impose, for example, a fine on the drawee bank for violating the statute. Rather, for failing to act before the midnight deadline, the drawee bank is required to pay the debt evidenced by the check. Indeed, only because the bank is held liable for the actual debt is the bank justly entitled to recover the funds from the original maker. If the bank's payment of the face amount of the check were merely to constitute satisfaction of a fine, the payee would be able to recover an identical amount from the maker. This result surely was not intended by the drafters of the U.C.C. or the Texas legislature when it enacted the statute.

The language of Sec. 4.302 supports this interpretation. Section 4.302 states that the bank will be held "accountable" for the amount of the demand item if the bank misses its midnight deadline. While the Texas courts in other factual contexts have interpreted the statutory term "accountable" to mean merely "liable," the phrase in this context has additional connotations. "Accountable" implies a preexisting object. A person who is accountable is answerable for property (including a debt) that predates the accounting. While a person can be liable for a fine, he can be accountable only for property. See Met Frozen Food Corp. v. National Bank, 89 Misc.2d 1033, 393 N.Y.S.2d 643 (1977) ("A person accounts for property that is...