Opinion ID: 3013502
Heading Depth: 2
Heading Rank: 3

Heading: Regulation CC, Reserve Bank Operating

Text: Circulars, and Variation By Agreement The Pennsylvania UCC provisions governing checkreturn procedures do not operate in a vacuum. Federal law forms part of the legal framework within which checkprocessing activities take place. Of particular relevance to this appeal are the 1988 regulations adopted by the Federal Reserve implementing the Expedited Funds Availability Act, 12 U.S.C. §§ 4001-4010. See 12 C.F.R. Pt. 229. These regulations, referred to collectively as “Regulation CC,” complement but do not necessarily replace the requirements of Article 4 of the UCC. See 12 C.F.R. § 229.41. Subpart C of Regulation CC, 12 C.FR. §§ 229.30- 229.43, applies to and governs the collection, processing, and return of checks. See 12 C.F.R. § 229.1(b)(3). The provisions of subpart C “supersede any inconsistent 7 Under Pennsylvania law, the official comments of a drafting commission may be given weight in the construction of a statute. See Young v. Kaye, 279 A.2d 759, 765 n.3 (Pa. 1971). 15 provisions of the UCC as adopted in any state, or of any other state law, but only to the extent of the inconsistency.” 12 C.F.R. § 229.41; see also 13 Pa. Cons. Stat. Ann. § 4103, cmt. 3. Regarding encoding, subpart C provides: A paying bank may convert a check to a qualified return check. A qualified returned check must be encoded in magnetic ink with the routing number of the depositary bank, the amount of the returned check, and a ‘2’ in position 44 of the MICR [Magnetic Ink Character Recognition] line as a return identifier. 12 C.F.R. § 229.30(a)(2)(iii). Subpart C of Regulation CC also contains its own liability standard and its own remedy provision for a failure to comply with its requirements: A bank shall exercise ordinary care and act in good faith in complying with the requirements of this subpart [,which includes the encoding requirements referenced above]. A bank that fails to exercise ordinary care or act in good faith under this subpart may be liable to the depositary bank, the depositary bank’s customer, the owner of a check, or another party to the check. The measure of damages for failure to exercise ordinary care is the amount of the loss incurred, up to the amount of the check, reduced by the amount of the loss that party would have incurred even 16 if the bank had exercised ordinary care. 12 C.F.R. § 229.38(a). Along with Regulation CC, the Federal Reserve has adopted Operating Circulars utilized by Reserve Banks in connection with their check-processing services. Both Regulation CC and Federal Reserve Operating Circular No. 3 (which contains provisions relevant to this appeal), “apply to the handling of all cash items that [Reserve Banks] accept for collection and all returned checks that [Reserve Banks] accept for return.” See Federal Reserve Op. Circ. No. 3 (Jan. 2, 1998), at 1, ¶ 1.1. The opening section of Operating Circular No. 3 also states: This Circular is issued pursuant to Sections 4, 13, 14(e), and 16 of the Federal Reserve Act, the Expedited Funds Availability Act, and related statutes and in conformance with Regulations J and CC. It is binding on each party interested in an item we handle. The provisions of this Circular vary by agreement any inconsistent provisions of the Uniform Commercial Code or of Regulation CC, but only to the extent of the inconsistency. Id. Operating Circular No. 3 is not the original source of the encoding requirement at the center of this appeal, which 17 instead is set forth in subpart C of Regulation CC, as noted above. However, Operating Circular No. 3 emphasizes that in handling a “qualified return check” the Reserve Bank may rely on the accuracy of “the identification of the depositary bank by routing number in magnetic ink.” See Federal Reserve Op. Circ. No. 3, at 10, ¶ 15.6. Circular No. 3 further provides that the payor bank will indemnify the Reserve Bank for any loss or expense incurred by the Reserve Bank arising from an encoding error by the payor bank. See id. Circular No. 3 also notes that if for any reason a returned check is mistakenly forwarded by the Reserve Bank to the wrong depositary bank, the recipient should either send the returned check directly to the proper depositary bank or promptly return it to the Reserve Bank. See id. at 11, ¶ 15.12. The Pennsylvania UCC also addresses the applicability of the federal regulatory provisions contained in Regulation CC and Operating Circular No. 3. Section 4103(a) of the UCC directs that the terms of the UCC may be varied by agreement, although parties cannot disclaim the duty to act in good faith and exercise ordinary care or limit the measure of damages for a failure to exercise ordinary care. Section 4103(b) states that “Federal Reserve regulations and operating circulars, clearinghouse rules and the like have the effect of agreements under subsection (a), whether or not specifically assented to by all parties interested in items handled.” Section 4103(c) notes that a bank’s compliance with Federal Reserve regulations and operating circulars constitutes prima facie 18 evidence of the exercise of ordinary care. In sum, under the UCC, the provisions of Regulation CC function as a binding agreement between the parties with respect to check-return transactions. This agreement supersedes any inconsistent provisions of the UCC itself, but only to the extent of the inconsistency. Similarly, the provisions of Operating Circular No. 3 are also binding on the parties in connection with the check-return activities at issue here. The rights and obligations granted and imposed by Operating Circular No. 3 overlap to a certain extent with the parties’ rights and obligations under the UCC’s statutory provisions and under Regulation CC. The provisions of Operating Circular No. 3 take precedence over any inconsistent portions of Regulation CC, but only to the extent of the inconsistency.