Opinion
Case No. 2:97-CV-0789C.
April 3, 2001
AMENDED FINDINGS OF FACTS, CONCLUSIONS OF LAW AND JUDGMENT
Plaintiff U.S. Bank National Association ("U.S. Bank") has brought this diversity action against Defendant First Security Bank (FSB). The case was tried to the court, sitting without a jury, on August 3, 2000.
The court, having reviewed the exhibits and having heard the testimony of the witnesses, enters its Findings of Fact and Conclusions of Law.
FINDINGS OF FACTS
U.S. Bank and FSB are national banking associations chartered under the laws of the United States. U.S. Bank's principal place of business is Minneapolis, Minnesota; FSB's principal place of business is Salt Lake City, Utah. Jonathan R. Mortimer ("Mortimer") is the president of B.B. Strands, Inc., an Idaho corporation. In 1995, B.B. Strands was the operator of a restaurant in Boise, Idaho.
In November 1995, FSB was a member of the Boise Clearing House Association ("the Clearing House"); U.S. Bank was not. To facilitate U.S. Bank's clearing items through the Clearing House, U.S. Bank and FSB had an agreement under which FSB acted as U.S. Bank's correspondent bank. Under the agreement, U.S. Bank had an account with FSB into which U.S. Bank deposited checks to be cleared through the Clearing House.
Two bank accounts, both controlled by Mortimer, are relevant here. The first is a checking account that was held by Mortimer and his wife, Shara, at Key Bank of Idaho (Key Bank was also a member of the Clearing House). The second, a checking account of Mortimer's corporation, B.B. Strands, that was opened at U.S. Bank. On or about November 30, 1995, Mortimer wrote check No. 1011 ("the Check"), in the amount of $23,000, drawn on his account at Key Bank. The check was made payable to "U.S. Bank" and was deposited into the B.B. Strands account at U.S. Bank.
On November 30, 1995, U.S. Bank processed the Check at its check processing facility. During processing, an encoding error was made by a U.S. Bank employee. The employee magnetically encoded the Check andf the accompanying deposit slip to reflect the amount of $223,000, instead of the correct amount, $23,000. U.S. Bank, in accordance with its agreement with FSB, deposited the Check, along with other checks to be cleared through the Clearing House, into its account at FSB.
When FSB received the Check from U.S. Bank on December 1, 1995, it gave a provisional credit of $223,000 to the U.S. Bank account at FSB. That same day, December 1, 1995, FSB sent the Check to Key Bank seeking payment on it in the sum of $223,000.
The Check was included in a cash letter to Key Bank that detailed the items being sent by FSB to Key Bank. The Cash letter identified the total amounts of the bundles of items that were being sent,$784,281.23. The $223,000 erroneous figure made up approximately 28% of the total amount reflected in the cash letter. The total amount of the bundle in which Check was included was $522,477.75, and the $223,00o accounted for approximately 43% of the bundle amount.
December 4, 1995, was a Monday. The following day, Tuesday, December 5, Key Bank discovered the encoding error made by U.S. Bank. Kendra Rae Olivares, who worked in the Key Bank operations center, prepared a Clearings Adjustment Advice ("the Advice") notifying FSB that there had been a $200,000 encoding error in the bundle of checks FSB had sent Key Bank on December 1. While the Advice did not specifically identify the item that was the source of the error, the following information was provided: the date of the cash letter in which the Check was included; the total of the cash letter, the bundle total; the encoded amount of the Check, the actual face value of the Check, where in the bundle the Check was located; a Key Bank reference number, which could be used to find additional information about the item in the Key Bank computer system; and Ms. Olivares' name and telephone number, in case someone from FSB wanted additional information from Ms. Olivares. (Clearings Adjustment Advice, Defendant's Ex. A). Ms. Olivares testified that it was the policy of Key bank that once the Key Bank's Adjustment Department received a clearings adjustment advice notifying it of an error, it had 48 hours to resolve the problem. If the error was over $10,000, the problem was to be corrected within 24 hours. (See Transcript of Aug. 3, 2000 Bench Trial (hereinafter "Tr.") at 47.)
When FSB first received the Check from U.S. Bank, it debited Key Bank's clearing house account in the amount of $223,000. When FSB received the Advice from Key Bank, it recredited Key Bank's account for $200,000, the amount of the error. Therefore, Key Bank ultimately paid FSB $23,000, the correct face amount of the Check.
On December 6, 1995, FSB received the Advice from Key Bank. The Check was first received by the Return Item Department. However, the department that would do the research to identify the source of the $200,000 error was not the Return Item Department, but the Accounting Services Department. The next day, December 7, the Check was sent to the Accounting Services Department. Key Bank did not send the Check itself to FSB with the Advice because it had already paid the check (in the correct amount, $23,000). And although Key Bank's normal procedure when sending Clearings Adjustment Advices to other banks was to attach all relevant documents, including a copy of the item, on this occasion the documents, including a copy of the Check, had been separated from the Advice and were not received by FSB.
The parties stipulated in the PreTrial Order that FSB received the Advice on December 6. (See Pretrial Order, Uncontroverted Fact No. 11). Now, however, FSB contends that it received the Advice on December 7. U.S. Bank argues that because it relied on the stipulation, it presented no evidence on the question and would be prejudiced if the court now found that FSB received the Advice on December 7. While there is evidence in the record to support FSB's contention that it actually received the Advice on December 7, the court concludes that the correct date is December 6. The court agrees that U.S. Bank would be prejudiced if the court found that the correct was is December 7. In addition, the evidence FSB is now apparently relying on, the testimony of Sharen Carlile, was not convincing on this issue. (See Tr. at 115.)
On December 11, 1995, the Accounting Services Department "created a case" based on the Advice, that is, the information on in the Advice was entered into the FSB computer system, and a researcher was assigned to investigate and identify the source of the $200,000 error. Whereas an experienced researcher could have identified the source of the $200,000 error within one or two days, the researcher who was assigned the case was not experienced and had worked in the Accounting Services Department only a few months.
On December 21, 1995, the FSB researcher erroneously closed the case by offsetting the $200,000 amount against another entry that was not the true source of the $200,000 error. The case remained closed until January, 1996, when FSB realized that the case had been closed in error and reopened the case.
Although the case had been reopened since January, for reasons not explained at trial, it appears that FSB took no further action on the case until October 9, 1996. On that date, the unresolved adjustment was noticed by Sharen H. Carlile, who at the time was Assistant Vice-President and Operations Officer for the FSB Accounting Services Department. Ms. Carlile was an experienced researcher with many years experience in banking. Ms. Carlile immediately began an investigation of the matter and, when she realized that the supporting documents were not with the Advice, she made a telephone call to Ms. Olivares, the Key Bank employee who had prepared the Advice. Ms. Olivares quickly sent Ms. Carlile supporting documents, including a copy of the Check. With these documents, Ms. Carlile was able to correctly identify the cause of the $200,000 error. Ms. Carlile testified that she "would have worked on the case for one to two days." (Id. at 106.) She also testified that had she been the researcher who had initially been assigned the case in December of 1995, she would have taken the same steps to investigate and resolve the case that she did in October of 1996 — including making the telephone call to Ms. Olivares. (Id. at 109-110.)
Once the error was identified, October 9, 1996, Ms. Carlile prepared a $200,000 charge to the U.S. Bank account and sent a an adjustment advice to U.S. Bank, along with supporting documents, notifying U.S. Bank of the $200,000 debit. This was the first notice U.S. Bank was given of the $200,000 error. At the same time it notified U.S. Bank of the error, FSB debited U.S. Bank's account at FSB in the amount of $200,000.
However, by October 1996, nothing remained of the $200,000 amount that U.S. Bank had mistakenly credited to the B.B. Strand account. In fact, the entire $223,000 was quickly withdrawn from that account, apparently by the Mortimers. On December 1, 1995, the account balance was $223,228.32. On December 8, the balance was $225,697.60; by December 11, the balance had shrunk to $63,416.44, and, at the end of December, only $175.69 remained in the account. The account was closed in July 1996.
U.S. Bank has not brought legal action against the Mortimers to recover the $200,000.
Both parties called expert witnesses to testify at trial. Maureen La Tendresse, U.S. Bank's expert, had been in the banking industry for approximately 23 years. At time of trial, she was an assistant vice-president of U.S. Bank, although she had previously been with Crocker National Bank and First Interstate Bank. Ms. La Tendresse described U.S. Bank's routine practice when the adjustment involved a debit in excess of $100,000 to be charged against another bank: "Typically we would call them to say that we had this type of an adjustment coming through. If it was over $100,000, we may call them and ask them to wire funds for an immediate settlement rather than passing paper. Paper would then follow." (Id. at 59.) Ms. Tendresse explained that this procedure of calling the other bank was done to "reduce the risk to both sides." (Id.)
Ms. La Tendresse gave her opinion that even without the supporting documents, FSB with the Advice, FSB should have identified the error and notified U.S. Bank within one to two days of receipt by the Adjustments Department. (Id. at 75, 77.)
In the questioning of Ms. La Tendresse, counsel used the date of December 7 as the date FSB received the Advice from Key Bank. However, the court, as discussed earlier, has concluded that December 6 is the appropriate date.
Michael Fisher testified as an expert for FSB. Mr. Fisher was a vice-president of Global Concepts, a company that, as described by Mr. Fisher, is "an industry expert in the area of payment systems." (Id. at 179). Mr. Fisher had never worked for a private bank. According to Mr. Fisher, because of the number of checks passing through the banking system (63 billion checks were written in 1995), some banks follow a cost-benefit procedure in handling adjustments, that is, these banks will face losses on delayed adjustment items rather than hire additional researchers. It was Mr. Fisher's opinion that based on industry standards, the $200,000 error in this case ordinarily would have been resolved on December 26, 1995. On cross-examination, however, Mr. Fisher admitted that based on his research done through his consulting work, once a researcher in "a typical bank" had been given the Advice, the $200,000 encoding error would have been resolved within one to three days. (Id. at 204.) Mr. Fisher agreed that the size of the error and the size of the bank would also dictate the speed with which the matter was resolved. (Id. at 205.)
CONCLUSIONS OF LAW
This action is between citizens of different states and a claim in excess of $75,000. Therefore, diversity jurisdiction is present under 28 U.S.C. § 1332 (a). Venue is not disputed.
Is U.S. Bank Solely Responsible for its Loss under the Encoding Warranty?
There is no question that under Section 70A-4-209, U.S. Bank had warranted to FSB (and Key Bank) that the $223,000 amount encoded on the Check and the deposit slip was the correct amount. However, U.S. Bank's breach of that warranty does not necessarily mean that it must bear the entire $200,000 loss. U.S. Bank argues that its breach of this warranty does not excuse FSB's delay in discovering the error. According to U.S. Bank, it was FSB's delay that was the proximate cause of FSB's loss, not the encoding error. To hold otherwise, U.S. Bank argues, would make Section 70A-4-209 a strict liability statute and that there is nothing in the language of the statute or the case law that indicates that the drafters intended such a result. The court agrees with U.S. Bank and concludes that U.S. Bank's breach of the encoding warranty does not make it strictly liable for the resulting $200,00 error, but is simply one factor that must be considered.
The relevant portion of Section 70A-4-209(1) reads: "A person who encodes information on or with respect to an item after issue warrants to any subsequent collecting bank and to the payor bank or other payor that the information is correctly encoded."
Was There a Final Settlement between FSB and U.S. Bank?
FSB made a final settlement with Key Bank on December 6, 1995, when it received the Advice notifying it of the $2000,000 error and recredited $200,000 to Key Bank's clearing house account, with the result that the correct amount of the Check, $23,000, was paid by Key Bank to FSB. See Utah Code Ann § 70A-4-215(1) (1997). This final settlement between FSB and Key Bank then triggered a final settlement between FSB and U.S. Bank: "If a collecting bank [fsd] receives a settlement for an item which is or becomes final, the bank is accountable to its customer [U.S. Bank] for the amount of the item and any provisional credit given for the item in an account with its customer becomes final." Utah Code Ann. § 70A-4-215(4).
Although, under Section 70A-4-215(4) there was a final settlement between U.S. Bank and FSB that was triggered by the final settlement between U.S. Bank and Key Bank, it is not clear what the amount of the settlement was. Even though FSB had given U.S. Bank a provisional credit of $223,000, FSB received a final settlement from Key Bank for only $23,000, not $223,000. Further, Section 70A-4-215(4) makes FSB accountable to U.S. Bank "for the amount of the item," which is $23,000, the face amount of the Check. Based on these considerations, the court concludes that there was a final settlement under Section 70A-4-215(4) between U.S. Bank and FSB in the amount of $23,000.
Did FSB Act within a Reasonable Time?
U.S. Bank relies on Section 70A-4-214(1) in support of its contention that FSB lost the right to charge back the $200,000 because FSB unreasonably delayed its notification to U.S.B of the $200,000 error. This statute reads:
If a collecting bank has made provisional settlement with its customer for an item and fails by reason of dishonor, suspension of payments by a bank,
or otherwise to receive settlement for the item which is or becomes final, the bank may revoke the settlement given by it, charge back the amount of any credit given for the item to its customer's account, or obtain refund from its customer, whether
or not it is able to return the item, if by its midnight deadline or within a longer reasonable time after it learns the facts, the bank may revoke settlement, charge back the credit, or obtain refund from its customer, but it is liable for any loss resulting from the delay. These rights to revoke, charge-back, and obtain refund terminate if and when a settlement for the item received by the bank is or becomes final.
Section 70A-4-214(1) (emphasis added).
According to U.S. Bank, when FSB did not receive final settlement from Key Bank for the entire $223,000, FSB had a right to charge-back the $200,000 only if it acted within a "longer reasonable time" after it learned of the error. Because there is no dispute that FSB did not act by the midnight deadline, the only questions remaining are: 1) whether the longer time taken by FSB was "reasonable;" and 2) whether FSB's actions caused loss "resulting from [their] delay."
Based on the evidence that was presented, the court concludes that FSB did not act within a reasonable time in notifying U.S. Bank of the error. And, having considered all the evidence, the court concludes that 48 hours was reasonable period of time, once the Accounting Department of FSB had received the Advice, for FSB to correctly identify the error and notify U.S. Bank. FSB's Accounting Department received the Advice on December 7 (there was no conclusive evidence that the receipt of the Advice by the Return Items Department was due to an error by FSB). Forty-eight hours from that December 7 fell on December 9, a Saturday. Accordingly, the court concludes that FSB should have located the error and contacted U.S. Bank no later than Monday, December 11, 1995. The court found Ms. Olivares' testimony concerning the policy of Key Bank to identify errors over $10,000 within 48 hours as well as the testimony of Ms. La Tendresse, whose testimony that even without the supporting documents, it was her opinion that the error should have been identified by FSB within one to two days, persuasive. Their testimony was supported by the actions that were, in fact, taken by Ms. Carlile, who located the source of the $200,000 error within one to two days of beginning her research.
Did FSB Act Cause U.S. Bank's Loss?
As discussed above, the applicable statute is clear on the fact that FSB "is liable for any loss resulting from the delay." Utah Code Ann. § 70A-4-214(1) (emphasis added). However, the statute's language also implies that section 70A-4-214(1) does not impose strict liability on a collecting bank which fails to act within a "reasonable time." Rather, as official comment 6 to section 4-212 of the Uniform Commercial Code (codified in Utah as section 70A-4-214) observes: "It is clear that the charge-back does not relieve the bank from any liability for failure to exercise ordinary care in handling the item. The measure of damages for such failure is state in § 4-103(5)." Utah's codification of section 4-103(5) states:
The applicability of U.C.C. § 4-103(5) to cases involving a collecting bank's breach of its duty of ordinary care is well established by case law. See, e.g., Marcoux v. Van Wyk, 572 F.2d 651, 653 (8th Cir. 1978) (noting applicability); Appliance Buyers Creditor Corp. v. Prospect National Bank of Peoria, 708 F.2d 290, 294 (7th Cir. 1983) (same);Northpark National Bank v. Banker's Trust Co., 572 F. Supp. 524, 531 (S.D.N.Y. 1983) (same).
The measure of damages for failure to exercise ordinary care in handling an item is the amount of the item reduced by an amount that could not have been realized by the exercise of ordinary care. If there is bad faith, it includes any other damages the party suffered as a proximate consequence.
Utah Code Ann. § 70A-4-103(5).
Taken together sections 70A-4-103(5) and 70A-4-214)(1) require that the plaintiff show not only a breach of the duty of ordinary care, but also causation. Federal courts interpreting state statutes implementing the same sections of the U.C.C. have observed:
Thus, to recover from a bank for the mishandling of a check, the claimant must show two things: first, that the bank mishandled the check, and second, that the claimant would have had a reasonable chance of collecting the amount owed if not for the bank's mishandling.Alioto v. U.S., 593 F. Supp. 1402, 1417 (N.D.Cal. 1984). In essence, then, an action against a collecting bank under section 70A-4-214 is a negligence action. See, e.g., Marcoux, 572 F.2d at 653 (when bank handles an item carelessly, it is liable for damages caused by its negligence).
As in any negligence action, a plaintiff in a section 4-103(5) action bears the burden of proving causation. Appliance Buyers, 708 F.2d at 294. The test for damages under U.C.C. section 4-103(5) (codified in Utah as Utah Code Ann. § 70A-4-103(5)) has been referred to as a "but for" test. Northpark National, 572 F.Suypp. at 531. To meet the "but for" test, plaintiff must prove that it "would have had a reasonable chance of collecting the amount owed if not for the bank's mishandling."Alioto, 593 F. Supp at 1417. As one court has noted, there must be a "clear causal relation between the bank's action and the plaintiff's loss." Whalen Sons Grain Co. v. Missouri Delta Bank, 596 F. Supp. 211, 215 (E.D.Mo. 1980). Finally it must be noted that: "The standard under the [U.C.C.] is not a particularly liberal one in terms of plaintiff recovery; it is set up to protect banks from liability for customers' debts unless there is a clear causal connection between the bank's action and the plaintiff's loss." Marcoux, 572 F.2d at 656.
In the present case, Plaintiff has presented no evidence regarding causation. Although the court has determined that FSB should have contacted U.S. Bank no later than Monday, December 11, 1995, U.S. Bank has presented no evidence that it would have responded on that date to recover the amount in the account at that time. All that is before the court is evidence that came out on cross-examination of Ms. LaTendresse, which demonstrates that in October of 1996 it took U.S. Bank approximately thirteen days to address the matter. (See Tr. at 94-5.) U.S. Bank never asserted that its measure of damages caused should use this response time in damage calculation. Indeed, counsel for U.S. Bank merely asserts, without pointing to any evidence, that had U.S. Bank been informed, U.S. Bank "would have immediately been able to freeze the account and seek redress for the monies already siphoned from the account." (U.S. Bank's Mem. in Opp. to FSB's Mem in Supp. of Mot. to Amend Findings of Fact and Conclusions of Law, p. 2.) No evidence was received at trial that proves the element of causation in this case. This leaves only speculation about what might have happened if FSB had given notice on December 11, 1995. Speculation does not satisfy U.S. Bank's burden of proving causation. See Appliance Buyer's, 708 F.2d at 294 n. 3 (plaintiff/depositor must prove damages "to reasonable degree of certainty").
Accordingly, U.S. Bank has failed to prove the necessary element of causation in its case, and its claims against FSB are therefore DISMISSED.