Opinion ID: 3013502
Heading Depth: 2
Heading Rank: 5

Heading: The Damage Limitations Included In

Text: Regulation CC And Incorporated In Operating Circular No. 3 Preclude NBT From Recovering On Its UCC Claim NBT argues that under § 4301(d) of the UCC, FNCB’s encoding error effectively nullifies FNCB’s efforts to “return” the Disputed Check. NBT contends that Regulation CC’s encoding requirement for qualified return checks is a clearinghouse rule or transferor instruction concerning the manner in which the Disputed Check was to be returned. NBT argues that FNCB’s failure properly to comply with such a rule or instruction means that (1) FNCB did not revoke its provisional settlement in the “manner permitted by statute, clearinghouse rule or agreement[,]” as required by § 4215; 24 and (2) the Disputed Check was not returned prior to the midnight deadline as required under § 4301. Thus, according to NBT, FNCB is strictly accountable for the full amount of the Disputed Check pursuant to § 4302. FNCB counters that, because all of Regulation CC is binding on the parties (pursuant to both Regulation CC’s own terms, and as an “agreement” under § 4103 of the UCC), NBT may not rely on FNCB’s encoding error as a basis for recovering the amount of the Disputed Check. FNCB notes that Regulation CC specifies that damages for a bank’s failure to exercise ordinary care in fulfilling its obligations under Regulation CC must be calculated based upon the actual loss caused by such failure. Implicit in FNCB’s position is the concession that it failed to exercise ordinary care in encoding the Disputed Check. FNCB argues that, even if NBT’s reading of the UCC is correct (a proposition FNCB disputes), Regulation CC has effectively amended §§ 4215, 4301, and 4302 of the UCC to preclude strict accountability where a payor bank’s failure to return an item by the midnight deadline is based solely on the payor bank’s noncompliance with an obligation imposed by Regulation CC. Instead, according to FNCB, where a payor bank’s violation of a clearinghouse rule or transferor instruction arises solely from its failure to exercise ordinary care in executing its obligations under Regulation CC, Regulation CC’s clause tying the measure of damages to a claimant’s actual loss is incorporated into the UCC by operation of section 4103. FNCB contends 25 this analysis precludes imposition of strict accountability in situations where, as here, the claimant seeking recovery concedes it suffered no loss as a result of the payor bank’s actions. We believe the District Court’s analysis of this issue, which is largely consistent with FNCB’s position, is correct. Regulation CC indisputably binds the parties, pursuant to both its own terms, see 12 C.F.R. § 229.1(b)(3), as well as § 4103 of the UCC, which indicates that “Federal Reserve regulations” are to be treated as agreements that may vary the terms of the UCC, see 13 Pa. Cons. Stat. Ann. § 4103(a)-(b). Such agreements are binding “whether or not specifically assented to by all parties interested in items handled.” 13 Pa. Cons. Stat. Ann. § 4103(b). Thus, the District Court properly held that “[i]n this case, Regulation CC forms part of the agreement among the parties with respect to the disputed check.” NBT Bank, 287 F. Supp. 2d at 574. Because Regulation CC as a whole is binding on the parties, and because Regulation CC is the source of the encoding requirement invoked by NBT, the extent of FNCB’s liability for its encoding error must be measured by the standards set forth in Regulation CC. See Bank of Wyandotte v. Woodrow, 394 F. Supp. 550, 556-57 (W.D. Mo. 1975) (noting that Federal Reserve regulations are “controlling and enforceable” as agreements under the UCC, and, that the measure of damages for violation of such regulations is “the 26 amount of the item reduced by an amount which could not have been realized even if all [applicable] requirements had been met”) (internal quotations omitted). Regulation CC states that a bank that fails to exercise ordinary care in complying with the provisions of subpart C of Regulation CC (which includes the encoding requirement referenced above) “may be liable” to the depositary bank. Then, in broad, unrestricted language, Regulation CC states: 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 the [plaintiff bank] would have incurred even if the [defendant] bank had exercised ordinary care. 12 C.F.R. § 229.38(a). This provision does not provide an exception to this standard for measuring damages in instances where noncompliance with Regulation CC is alleged to have resulted in noncompliance with the UCC’s midnight deadline rule. Here, the parties have stipulated that NBT suffered no loss as a result of FNCB’s encoding error. Thus, under the plain language of Regulation CC, NBT may not recover from FNCB for the amount of the Disputed Check.