Union Bank of Benton, Arkansas v. First Nat. Bank in Mt. Pleasant, Texas, 78-3342
| Decision Date | 18 July 1980 |
| Docket Number | No. 78-3342,78-3342 |
| Citation | 621 F.2d 790 |
| Parties | 29 UCC Rep.Serv. 598 The UNION BANK OF BENTON, ARKANSAS, Plaintiff-Appellant, v. The FIRST NATIONAL BANK IN MT. PLEASANT, TEXAS, Defendant-Appellee. |
| Court | U.S. Court of Appeals — Fifth Circuit |
Ted Boswell, David E. Smith, Bryant, Ark., for plaintiff-appellant.
Norman C. Russell, Texarkana, Tex., Robert Rolston, Mount Pleasant, Tex., for defendant-appellee.
Appeal from the United States District Court for the Eastern District of Texas.
Before RUBIN and POLITZ, Circuit Judges, and SMITH *, District Judge.
Collapse of a scheme to "float" or "kite" drafts occasions our examination of the Uniform Commercial Code (U.C.C.) which is enacted in Texas as the Tex. Bus. & Com. Code Ann. tit. I (Vernon 1968) (hereinafter "BCC"). We must determine upon whom the mantle of financial responsibility settles. Pursuant to submission on stipulated facts and documentary filings, the district court found that all losses should be borne by The Union Bank of Benton, Arkansas. We affirm in part, reverse in part and remand.
In the fall of 1975, Bob Barr of Atlanta, Texas, Freddie Newcomb of Benton, Arkansas, and Kenneth Williams of Mt. Pleasant, Texas, structured a documentary draft kiting scheme based on the auto auction business. Under the plan, Barr would draw drafts on Newcomb's account at Union Bank of Benton, Arkansas ("Benton"). Newcomb would then draw drafts on Williams' account at First National Bank in Mt. Pleasant, Texas ("Mt. Pleasant"). Ostensibly, these drafts were to cover the purchases of automobiles, first by Newcomb from Barr, and then by Williams from Newcomb. Bogus documents of title covering As part of the camouflage, the phoney drafts were mixed in with genuine instruments. Believing all drafts submitted were valid, Benton "honored" them immediately, thus extending credit in that amount to Newcomb. When the scheme was uncovered, each bank, relying on different BCC provisions, sought to shift responsibility for the loss to the other. Finding that Mt. Pleasant had performed as required by the BCC, the district court assigned the total financial loss to Benton.
non-existent vehicles were sent along with the drafts. As relates to the drafts before us, no cars were sold or intended to be sold. The only thing to be "purchased" was time; time for Barr's actual sale of vehicles to generate funds for Williams' use in covering the drafts at Mt. Pleasant.
The focal point of this dispute is that piece of the scenario in which Newcomb drew drafts on Williams' account at Mt. Pleasant. During the early stages of the scheme, Mt. Pleasant presented the drafts to Williams who paid them with funds supplied by Barr. Mt. Pleasant then transmitted the funds to Benton which, having already credited Newcomb's account with the drafts, retained the proceeds.
By December, 1975, the financial house of cards began to tumble. Barr was unable to deliver the funds Williams needed to cover drafts that were accumulating at Mt. Pleasant. Following established pattern and practice, Benton continued to send Mt. Pleasant documentary drafts on Williams' account. Twenty-four drafts, totaling $70,175 were received by Mt. Pleasant between December 15, 1975 and January 5, 1976. Accompanying each draft was a "collection letter" containing these instructions: (1) pay at par, (2) do not protest or wire non-payment unless otherwise instructed, (3) do not hold for convenience of drawee unless otherwise instructed, (4) deliver documents attached only on payment of draft. The directive "pay or return within 24 hours" was stamped on the collection letters and on some of the drafts.
These 24 drafts were returned to Benton, as one unit, on January 7, 1976. Attached to the unpaid drafts was an unsigned notation stating "cannot pay salvage titles."
On January 10, 1976, prior to receipt of this bundle, Benton forwarded two more drafts to Mt. Pleasant. These instruments were mailed with collection letters identical to those sent with earlier drafts. On January 12, 1976, the day these drafts arrived, Mt. Pleasant returned them with a typewritten note stating,
In honoring the 26 drafts, Benton extended $74,375 in credit to Newcomb. Benton mitigated its losses by liquidating $9,298 of collateral pledged by Newcomb.
At first glance, the U.C.C. may appear to be a compendium of confusing and seemingly contradictory rules enacted to govern myriad business transactions. Upon closer scrutiny, the U.C.C. is found to be a finely tuned statutory mechanism containing interlocking provisions designed to provide certainty in commercial transactions. Once the pieces of this puzzle are correctly aligned, the U.C.C. furnishes an answer to almost any question involving the rights and liabilities of the parties to a covered transaction. The present case is no exception.
To facilitate the flow of our analysis, we affix definitional labels, supplied by the U.C.C. (and BCC), to both the instruments and the parties.
The 26 instruments at the center of this dispute are a species of commercial drafts commonly known as checks. A check is a draft signed by the party to be charged (the drawer), ordering a bank (the drawee), to pay a specified sum, on demand, to a party (the payee). BCC, § 3.104. We find in examining the drafts 1 that Kenneth Williams is the drawer 2 who ordered Mt. Pleasant, the drawee, 3 to pay Newcomb Auto Sales, the payee, for vehicles allegedly purchased. Because these checks were accompanied by automobile documents of title deliverable against honor of the drafts, they are documentary drafts. BCC, § 4.104(a)(6). See also Wiley v. People's Bank and Trust Company, 438 F.2d 513 (5th Cir. 1971).
We turn now to the parties involved. Mt. Pleasant is, by definition, a payor bank for it is a bank "by which an item is payable as drawn or accepted." BCC, § 4.105(2). We disagree with the district court's finding to the contrary. Further elucidation on the definition of payor bank is found in the official commentary accompanying this codical provision:
The term payor bank includes a drawee bank and also a bank at which an item is payable if the item constitutes an order on the bank to pay, for it is then "payable by" the bank.
Official Comment 2, U.C.C., § 4.105(2).
Because it is designated as Williams' drawee, Mt. Pleasant is automatically classified as a payor bank. 4 New Ulm State Bank v. Brown, 558 S.W.2d 20 (Tex.Ct.App., 1st Div. Houston, 1977).
Benton served as a "depositary bank" as it was the first bank to which the 26 drafts were transferred for collection by Newcomb. BCC, § 4.105(1). Benton was also a "presenting bank" because it presented 5 the documentary drafts for payment to Mt. Pleasant and is not a payor bank. BCC, § 4.105(5). Finally, Benton is a "collecting bank" because it handled the item for collection and is not a payor bank. BCC, § 4.105(4).
Liability of a payor bank, such as Mt. Pleasant, for late return of an item 6 is set forth in BCC, § 4.302: 7
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 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; 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.
We conclude that the district court erred in determining that Mt. Pleasant could successfully assert "a valid defense such as breach of a presentment warranty (Subsection (a) of Section 4.207)" against Benton under § 4.302. Section 4.207(a) details the warranty of good title owed by customers and collecting banks to payor banks. 8 "Good title" simply means that the drafts bear no forged endorsements or signatures. 9 Since none of the signatures on the drafts are forged, Benton, as a collecting bank, had not breached the good title warranty it owed to Mt. Pleasant.
As our analysis continues, we examine the substantive provisions of § 4.302. Application of subsection (1) is precluded because the instruments at issue are documentary drafts. We find, however, that the provisions of subsection (2) do relate to Mt. Pleasant's liability on these 26 documentary drafts, 10 if they are "properly payable."
Under § 4.104(a)(9) the phrase "properly payable" includes "the availability of funds for payment at the time of decision to pay or dishonor." This definitional requirement is satisfied because the 26 drafts were part of a series of authorized instruments, the first of which had been paid with funds deposited by Williams in his Mt. Pleasant account. 11 The subsequent insufficiency of funds in Williams' account does not deprive the drafts of properly payable status. 12 New Ulm Bank at 26. Appellee's protestations to the contrary are to no avail.
Because the drafts were properly payable, despite the overdraft, Mt. Pleasant was obligated "within the time allowed for acceptance or payment . . . (to) either accept( ) or pay( ) the item or return ( ) it and accompanying documents." BCC, § 4.302(2). The lack of funds did not excuse this performance. In addressing this issue the Texas appellate court observed in New Ulm Bank, supra, at 26:
Furthermore, the insufficiency of the funds in the customer's account would not have relieved the bank of its responsibility to timely return the items...
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