U.S. Bank Nat. Ass'n v. Hma, L.C.

• Decision Date: 18 May 2007
• Docket Number: No. 20050236.,20050236.
• Citation: 2007 UT 40,169 P.3d 433
• Parties: U.S. BANK NATIONAL ASSOCIATION, Plaintiff, Counterclaim Defendant, and Appellee, v. HMA, L.C., Robert Michael Anderson, and Robert Henry Anderson, Defendants, Counterclaimants, and Appellant.
• Court: Utah Supreme Court

169 P.3d 433

2007 UT 40

U.S. BANK NATIONAL ASSOCIATION, Plaintiff, Counterclaim Defendant, and Appellee, v. HMA, L.C., Robert Michael Anderson, and Robert Henry Anderson, Defendants, Counterclaimants, and Appellant.

No. 20050236.

Supreme Court of Utah.

May 18, 2007.

Rehearing Denied August 2, 2007.

Stephen C. Tingey, Brent D. Wride, Cameron M. Hancock, Salt Lake City, for plaintiff.

Ronald W. Ady, Salt Lake City, for defendants.

NEHRING, Justice:

¶ 1 HMA, the appellant before us, is a business engaged in real estate development. HMA deposited a large check in its account with U.S. Bank. HMA then wrote a check on its U.S. Bank account to pay obligations HMA owed Barnes Bank. U.S. Bank paid the check that HMA wrote to Barnes Bank.

¶ 2 In the meantime, the maker of the check that HMA deposited, a check we will call the Woodson check in honor of its maker, stopped payment on it. When the Woodson check was returned to U.S. Bank, that bank swept remaining funds from HMA's account at the bank. U.S. Bank sued HMA in Salt Lake County for the difference between the amount the bank paid on the Barnes Bank check and the funds seized from HMA's account. U.S. Bank's efforts to recover the overdraft sum included actions to foreclose deeds of trust that secured promissory notes made by HMA.

¶ 3 HMA interposed a wide array of theories in its defense to U.S. Bank's claims, but to no avail. The district court ruled summarily for U.S. Bank. Only two of HMA's theories concern us in this appeal: (1) HMA's contention that U.S. Bank was prohibited from charging-back the Woodson check and placing the HMA account in an overdraft condition because the Woodson check's paying bank, Wells Fargo, failed to timely return it to U.S. Bank; and (2) HMA's assertion that the district court erred when it refused to change venue of the action from Salt Lake County to Utah County. We affirm.

BACKGROUND

¶ 4 When a check is presented to a bank for collection and the account upon which the check is drawn contains insufficient funds to cover it, the paying bank may return the check to the depositary bank without risk of incurring liability for that check if it satisfies three conditions imposed by the Uniform Commercial Code (or the U.C.C.) and federal regulations. First, the check must depart the paying bank on its return trip to the depositary bank before the "mid-night deadline." Next, the paying bank must plan the check's itinerary to assure its "expeditious return" to the depositary bank. See 1 Barkley Clark & Barbara Clark, The Law of Bank Deposits, Collections and Credit Cards ¶ 6.02[1][b], at 6-16 to 6-17 (rev. ed.2006). Finally, the paying bank must, in addition to returning the check in a timely manner to the depositary bank, provide timely notice of its intention to dishonor the check. The dispute in this appeal concerns only whether Wells Fargo met the midnight deadline and whether its return of the Woodson check was expeditious.

¶ 5 Our analysis of the timeliness of the Woodson check's return requires us to delve into the often murky contents of three sources of controlling authority: federal regulations, the Uniform Commercial Code, and the rules governing the operation of the Boise Clearinghouse, which served as a central location where member banks, including Wells Fargo and U.S. Bank, could settle the aggregation of checks written by their customers. Each of these sources has something to say on the subjects of the midnight deadline and the expeditious return. As our discussion will reveal, sorting out which voice to heed poses challenges that often appear to be best overcome by recourse to an analytical tool akin to a game of rock, paper, scissors.

¶ 6 Before we commence our analysis, we pause to take note of a peculiar feature of this appeal. Wells Fargo, the bank upon which the Woodson check was drawn, is the bank whose conduct we are called upon to scrutinize for compliance with the midnight deadline and for its obligation to make expeditious return of the Woodson check. Despite being the focus of our attention, Wells Fargo is not a party to this appeal, nor was it a party at any stage of the proceedings below. HMA's objective is not to seek any direct relief from Wells Fargo for its alleged untimely return of the Woodson check. Instead, HMA desires to exploit the legal consequences that would befall Wells Fargo for its untimeliness, most significantly its obligation to pay U.S. Bank for the Woodson check and defeat U.S. Bank's contentions that it was entitled to declare HMA's account overdrawn, to sweep funds that HMA held in deposit with the bank, to declare HMA's secured notes in default, and to recover a money judgment for any deficiency. We are unaware of any reported case similarly postured. HMA's defense to U.S. Bank's actions is based on the contention that under the U.C.C., Wells Fargo's untimely return of the Woodson check resulted in final payment of the check, see Utah Code Ann. § 70A-4-215(1) (2001), and that final payment or settlement of the Woodson check by operation of law terminated U.S. Bank's rights to recoup its loss from its customer, HMA, see id. § 70A-4-214(1). Although both parties appear to concede that this relief would be available to HMA were we to conclude that Wells Fargo returned the Woodson check late, we have not been asked to review the legal effect of untimely return in this appeal.

ANALYSIS

¶ 7 HMA deposited the $700,000 Woodson check with U.S. Bank on Thursday, August 2, 2001. That same day, HMA wrote a check payable to the Barnes Bank in the amount of $662,147.75. Had the Woodson check cleared without mishap, when U.S. Bank paid the Barnes Bank check, all would have been well. Things went awry when the maker of the Woodson check stopped payment on it, one of three critical events in this saga, which all occurred on August 2.

¶ 8 To properly analyze the legal consequences of the treatment of the Woodson check, we must closely track the check's whereabouts as it made its way along the check processing itinerary. The Woodson check was drawn on Wells Fargo Bank. On August 2, the day on which HMA deposited the Woodson check into its U.S. Bank account, U.S. Bank sent the check to a Wells Fargo check processing center. Wells Fargo processed the check in the late hours of August 2, and the Woodson check therefore became part of the August 3 banking day. HMA contends that it contested the date that the Woodson check left U.S. Bank for presentment to Wells Fargo in opposing U.S. Bank's motion for summary judgment. HMA points to the affidavits of Maureen LaTendresse, the witness U.S. Bank produced to give deposition testimony pursuant to HMA's request under Utah Rule of Civil Procedure 30(b)(6), and challenges as lacking foundation Ms. LaTendresse's testimony that Wells Fargo received the Woodson check as part of the bank's August 3 banking day. Even if HMA were capable of neutralizing Ms. LaTendresse's statements on this question, the result would not affect HMA's concessions in its papers and at oral argument before the district court that Wells Fargo received the Woodson check as part of the August 3 banking day. Although, as we will come to understand, the date on which Wells Fargo received the Woodson check has considerable legal importance and is therefore material, the district court did not err by treating this fact as uncontested when it ruled on U.S. Bank's motion for summary judgment.

¶ 9 On the Friday, August 3 banking day, a number of significant events occurred relating to both the Barnes Bank and Woodson checks. First, Wells Fargo processed the Woodson check, which joined the ranks of other checks that were settled through the interbank procedures of the Boise Clearinghouse. The second significant event of August 3 was U.S. Bank's decision to make available to HMA the funds represented by the Woodson check. U.S. Bank paid the Barnes Bank check without having assurance that the Woodson check would be honored. By doing so, U.S. Bank in essence granted an extension of credit to HMA pending final determination of the fate of the Woodson check.

¶ 10 After the Woodson check was settled through the Boise Clearinghouse and found its way into the hands of Wells Fargo, it began a return trip to U.S. Bank by another route, the Federal Reserve System. This journey was made necessary because Mr. Brent Woodson, the maker of the Woodson check, advised Wells Fargo on the morning of August 2 to stop payment on the check. Just as HMA's deposit of the Woodson check with U.S. Bank placed that check on a trajectory toward Wells Fargo, Mr. Woodson's stop-payment instruction put in motion a series of events that intercepted the Woodson check and sent it on a return journey to U.S. Bank.

¶ 11 Information of Mr. Woodson's intention to stop payment traveled on two parallel tracks. The first channel of check status information passed from Wells Fargo to U.S. Bank through a central hub, Primary Payment Systems (PPS). PPS gathers information about a given day's transactions in each of its participating banks' accounts at the close of each banking day. Much of this information is transmitted electronically using magnetic ink character recognition technology that draws data from the numbers coded on the bottom of checks. As of 2001, PPS had gathered and sorted account information for approximately 184 million accounts. The role of this conduit of information about the status of checks is largely to facilitate compliance with the third condition for return check compliance noted above: the paying bank's prompt notice of dishonor to the depositary bank.

¶ 12 Early in the morning of August 3, PPS connected the information it had received from U.S. Bank disclosing the paying bank (Wells Fargo), the account (Mr. Woodson), and the amount of the check, with the information about Mr. Woodson's stop-payment order sent to PPS by Wells Fargo. PPS then electronically transmitted the stop-payment status of Mr....