Universal CIT Credit Corp. v. Farmers Bank of Portageville

• Decision Date: 12 March 1973
• Docket Number: No. S 71 C 82.,S 71 C 82.
• Citation: 358 F. Supp. 317
• Parties: UNIVERSAL C. I. T. CREDIT CORPORATION, a Delaware corporation, Plaintiff, v. FARMERS BANK OF PORTAGEVILLE, a Missouri Banking Corporation, Defendant.
• Court: U.S. District Court — Eastern District of Missouri

358 F. Supp. 317

UNIVERSAL C. I. T. CREDIT CORPORATION, a Delaware corporation, Plaintiff, v. FARMERS BANK OF PORTAGEVILLE, a Missouri Banking Corporation, Defendant.

No. S 71 C 82.

United States District Court, E. D. Missouri, Southeastern Division.

March 12, 1973.

COPYRIGHT MATERIAL OMITTED

Walter S. Drusch, Jr., Spradling, Bradshaw & Drusch, Cape Girardeau, Mo., for plaintiff.

James E. Reeves, Ward & Reeves, Caruthersville, Mo., for defendant.

MEMORANDUM AND ORDER

WEBSTER, District Judge.

Plaintiff, a Delaware corporation, brings this action against defendant Farmers Bank of Portageville, a Missouri banking corporation. Jurisdiction is founded upon diversity of citizenship under 28 U.S.C. § 1332. The amount in controversy exceeds $10,000.

Plaintiff's amended complaint is in three counts. In the first count, plaintiff seeks to recover $22,390.19 as the unpaid balance on checks drawn to plaintiff as payee and thereafter endorsed and presented to defendant, which refused payment. In count II plaintiff contends that it had a perfected security interest in the proceeds of sales of certain automobiles, which proceeds were deposited in the debtor's account in defendant bank and which plaintiff contends were thereafter permitted by defendant to be withdrawn with knowledge of plaintiff's claim. The third count, denominated "alternative for improper failure and refusal to honor drafts" was abandoned at the trial.

Facts

Gerald W. Ryan, doing business as Ryan-Chevrolet and Olds Co., a proprietorship, operated an automobile dealership in Portageville, Missouri. On or about June 18, 1968, Ryan entered into an agreement with plaintiff for wholesale financing, commonly known as floor plan financing. Under the terms of this agreement, plaintiff from time to time advanced funds to pay the manufacturer's invoice on new automobiles, acquiring a security in such automobiles. As each automobile was sold by Ryan, he was required to remit plaintiff's advance. These remittances were in the form of checks drawn on Ryan's checking account at defendant's bank. The financing statements filed in New Madrid County reflect the security interest in the proceeds of the sale of the automobiles. Proper filing is not disputed.

Toward the end of 1969, plaintiff decided for reasons of policy, but primarily because it had not been supplied with current financial statements, to terminate the floor plan arrangement. Ryan was notified that the floor plan would be terminated December 31, 1969.

Sometime after 3:00 p. m. on January 15, 1970, Ryan had a conversation with Richard L. Saalwaechter, President of defendant bank. Ryan told Saalwaechter that he was being put out of business by plaintiff since plaintiff had revoked the floor plan, and that he wanted to be sure that the bank got paid. He said "let C.I.T. be last—they put me out of business." Ryan discussed his debt to the bank on a demand promissory note. He told Saalwaechter that he wanted the bank to be safe on its loan. Ryan asked Saalwaechter to debit his account and credit the bank with $12,000 from his checking account. Saalwaechter then verified Ryan's checking account and determined that there was a balance of $16,340.00 When Saalwaechter suggested that Ryan write a check to the bank, Ryan told him that he preferred that the bank run a debit against the account because C.I.T. was after him and he didn't know what they could do to him. Ryan further told Saalwaechter that C.I.T. had checks out, and that he wanted to make a cash withdrawal to keep C.I.T. from getting its checks. Thereupon, although the bank's business day had closed at 3:00 p. m., Saalwaechter debited Ryan's account in the amount of $12,000.00. The next morning, January 16th, Ryan came to the bank and made a cash withdrawal of $3,100.00. Saalwaechter testified that he had no knowledge that any of Ryan's checks to C.I.T. were in the bank until after the debit and the withdrawal.

The funds in dispute derive from the sale by Ryan of six motor vehicles. In some cases, a trade-in was involved with which we are not concerned. In each case, Ryan received a check from the purchaser in payment of the cash portion of the deal. Each check was deposited in Ryan's account with defendant bank and he received full credit therefor. Each automobile sold and the proceeds thereof were subject to plaintiff's security interest. The checks representing the proceeds of the six automobiles sold by Ryan were all deposited on or prior to January 15, 1970 and aggregate $18,112.44.

Ryan executed and delivered to plaintiff five checks pursuant to the security agreement representing remittances for sums advanced by C.I.T. on account of such automobiles pursuant to the security agreement. These checks were deposited by plaintiff in its bank January 13, 1970. The checks were processed through the Federal Reserve System and were forwarded to defendant by Federal Reserve System cash letter January 14, 1970. The cash letters are regularly and customarily delivered by courier from St. Louis the afternoon of the date of the cash letter, are deposited in defendant's bank night box and are opened the next morning for processing. The bank retains no record of the date or time of receipt of the cash letters. Portageville is 190 miles from St. Louis. The court finds from the applicable facts and circumstances in evidence, none of which are controverted, that the five Ryan checks in controversy were received by defendant bank on January 15, 1972 during banking hours.

The Bank of Portageville at that time operated on a deferred posting basis whereby the payor bank sorts and proves items received by it on the business day they are received, but does not post the items to the customer's account or return "not good" items until the next day. The practice typifies "production line" methods currently used in bank collection and is based upon the necessity of an even flow of items through payor banks on a day-by-day basis in a manner which can be handled evenly by employee personnel without abnormal peak-loads, night work, and other practices objectional to personnel. See Uniform Commercial Code Comment following § 400.4-301 R.S.Mo. 1969, V.A.M.S. Mr. Saalwaechter testified that on the day of receipt the cash letter tapes are checked for totals and the checks are individually examined for postdate, stale dates and endorsements. The posting takes place the day after receipt, using as the ledger posting date the actual date of receipt.

At some time on the afternoon of January 16, 1970, the bank discovered that there were insufficient funds with which to pay the five checks presented by plaintiff for payment, the bank having debited Ryan's account for $12,000 and Ryan having withdrawn $3,100 earlier that morning. Payment was refused and the checks were returned by mail through channels. Defendant wired the Federal Reserve office in St. Louis, giving notice of its non-payment.

Under a corresponding bank arrangement in effect at this time, defendant Bank of Portageville made settlement on checks delivered by St. Louis Federal Reserve System cash letter by accepting a debit to its account with Mercantile Trust Company National Association in St. Louis. In this instance, the cash letter charge or debit was in the amount of $213,271.14, and defendant's account at Mercantile was debited by Mercantile on January 16, 1970.

Liability Under Count I

Plaintiff contends that defendant bank failed to give timely notice of dishonor or make timely settlement and is therefore liable for the full amount of the checks under the applicable provisions of the Uniform Commercial Code in force in Missouri.

Plaintiff's reliance upon Central Bank and Trust Company v. First Northwest Bank, 332 F.Supp. 1166 (E. D.Mo.1971), aff'd 458 F.2d 511 (8th Cir. 1972) is misplaced. That case dealt not with failure to give notice of dishonor, but with failure to settle. The "midnight deadline" for returning an item or sending notice of dishonor is "midnight on its next banking day following the banking day on which it receives the relevant item. . . ." § 400.4-104(1)(h) V.A.M.S. The court's reference to a midnight deadline in Central Bank and Trust Company, supra, was directed to the separate requirement that a bank which is not also the depository bank is accountable for the item if it retains the item "beyond midnight of the banking day of receipt without settling for it. . . ." § 400.4-302 V.A. M.S. In any event, the defendant bank in the Central Bank and Trust Company case, supra, had not returned the item at all, and thus was deprived of other defenses. In this case, the items were protested¹ prior to the midnight deadline as defined in V.A.M.S. § 400.4-104(1) (h).

We, therefore, turn to a consideration of plaintiff's second argument—that defendant failed to make settlement, under its deferred posting procedure within the time required by § 400.4-302 V.A. M.S. and must therefore be accountable on this basis, since defendant's account at Mercantile Trust Company National Association was not debited until January 16, 1970, one day after the banking day of receipt.

During the period in question, defendant did not make provisional settlements on cash letters on the day of receipt. Settlement was regularly effected by Federal Reserve Bank of St. Louis drafting defendant's account with Mercantile Trust Company in St. Louis two days after the cash letter was issued. The checks which accompanied the cash letter were surveyed on business day of receipt for indications of trouble, such as endorsements, stale dates and post dates, as well as large checks on an account with an overdraw history. Mr. Saalwaechter testified that the defendant bank does not communicate any provisional credit. It simply waits to be drafted on its Mercantile Trust Company account.

As previously noted, § 400.4-302(a) V.A.M.S. makes a payor bank which is not also the depository bank accountable for the amount of a...