Opinion ID: 3013502
Heading Depth: 2
Heading Rank: 4

Heading: Construing The UCC’s Check-Return

Text: Provisions NBT’s claim raises a number of difficult questions of statutory construction under the UCC. An understanding of these issues aids in assessing the underlying theory of NBT’s claim. Nonetheless, we ultimately conclude that even if these questions were to be resolved in NBT’s favor, it would not change the outcome here. Thus, while our discussion may provide additional clarity concerning the issues implicated by NBT’s appeal, we need not definitively resolve all the 19 disputes between the parties concerning the construction of the UCC’s check-return provisions. As noted above, NBT invokes three interrelated UCC provisions governing the circumstances under which a bank may return a dishonored check. Section 4301(d) defines the acts that constitute “return” of an item. The parties dispute whether it is § 4301(d)(1) or § 4301(d)(2) that applies under the facts in this case. The District Court found that § 4301(d)(2) applied, ruling that the Reserve Bank was a “transferor” rather than a “clearinghouse.” We need not resolve this issue, because our analysis concerning the encoding requirement invoked by NBT is the same, regardless of whether the encoding requirement is viewed as a clearinghouse rule under § 4301(d)(1) or a transferor instruction under § 4301(d)(2). Under § 4301(d)(1), an item is deemed returned “when it is delivered . . . to the clearinghouse or is sent or delivered in accordance with clearinghouse rules.” 13 Pa. Cons. Stat. Ann. § 4301(d)(1) (emphasis added). Under § 4301(d)(2), an item is returned “when it is sent or delivered to the bank’s . . . transferor or pursuant to his instructions.” 13 Pa. Cons. Stat. Ann. § 4301(d)(2) (emphasis added). The phrasing of these sections is disjunctive, and here the parties agree that the Disputed Check was dispatched by FNCB on March 13, 2001, and was physically delivered to the Reserve Bank prior to the March 13 midnight deadline. Under one reading of § 20 4301(d), this would end the inquiry, because the Disputed Check was “delivered” to the clearinghouse or transferor prior to the midnight deadline. NBT challenges this reading, arguing that § 4301(d)’s references to simple delivery as constituting a valid “return” are relevant only where there are no applicable clearinghouse rules or transferor instructions that govern sending or delivery. NBT argues that only this construction gives effect to all the terms of § 4301(d), including the simple delivery option as well as delivery “in accordance with clearinghouse rules” or “pursuant to [transferor] instructions.” However, at least two other possible interpretations would give effect to § 4301(d)’s references to clearinghouse rules and transferor instructions while also maintaining the viability of the simple delivery option. First, the phrases “sent or delivered in accordance with clearinghouse rules” and “sent or delivered . . . pursuant to [transferor] instructions” could be read as referring to instances where a disputed item is to be returned to some address other than the clearinghouse or transferor from which it was initially received. Second, these phrases may also be meant to account for situations in which a payor bank attempts to deliver a disputed item to the clearinghouse or transferor, but through negligence of the clearinghouse or transferor the disputed item does not actually 21 arrive at the proper location.8 The multiple possible readings of § 4301(d) illustrate that even when the UCC’s check-return provisions are considered in isolation from Regulation CC, NBT is not bound to recover on its claim for strict accountability. Similarly, even if NBT is correct in arguing that FNCB was obligated to comply with certain clearinghouse rules or transferor instructions in order to satisfy § 4301(d), it is not clear that the encoding requirement for returned checks is a rule that relates to “sending” or “delivery” under the UCC. Indeed, the District Court found that “the midnight deadline rule focuses on timing and a physical transfer.” NBT Bank, 287 F. Supp. 2d at 571. The UCC defines “delivery” as “voluntary transfer of possession.” 13 Pa. Cons. Stat. Ann. § 1201. Even if the encoding requirement is a rule or instruction that FNCB was bound to follow, such a rule does not necessarily relate to the question of whether FNCB voluntarily transferred possession of the Disputed Check from itself to the Reserve Bank prior to the midnight deadline.9 8 The most obvious example of such a situation would be where a clearinghouse or transferor had provided a payor bank with an inaccurate return address. 9 Likewise, § 4215's requirement that a provisional settlement be revoked in the “time and manner permitted by statute, clearinghouse rule or agreement” does not necessarily support 22 Thus, FNCB’s failure to comply with such a rule or instruction would not necessarily preclude a finding under § 4301(d) that FNCB returned the Disputed Check prior to the midnight deadline. While the foregoing issues concerning the proper construction of the UCC’s check-return provisions need not be definitively resolved, it is clear that NBT’s interpretation poses numerous difficulties. We may nonetheless assume that if the UCC provisions are read in isolation from Regulation CC, FNCB was obligated to encode the Disputed Check correctly in order to effectively “return” it within the meaning of § 4301(d). We may further assume that a failure to do so by FNCB would mean FNCB had not properly revoked its provisional settlement in a manner permitted under § 4215. the position taken by NBT. The encoding requirement invoked by NBT arises in the context of Regulation CC’s instructions for preparing a check as a “qualified return check.” Regulation CC’s encoding provision does not specifically indicate that accurate encoding is a prerequisite for proper revocation of a provisional settlement under the UCC. See Col. Nat’l Bank, 459 F. Supp. at 1371-73 (citing the absence of language concerning revocation and strict accountability in the Federal Reserve regulation requiring wire advice of nonpayment, and holding that the payor bank’s failure to comply with wire advice requirement was not sufficient grounds for imposing strict accountability under § 4302 of the UCC); Yeiser v. Bank of Adamsville, 614 S.W.2d 338, 342-43 (Tenn. 1981) (same). 23 This assumption would lead to the conclusion that under the UCC, the Disputed Check was “finally paid” by FNCB, thus rendering FNCB accountable to NBT for the full amount of the Disputed Check pursuant to § 4302. In the end, however, such assumptions do not change the result, because, as set forth in part III.E below, the UCC’s check-return provisions do not operate in a vacuum. Even if NBT’s interpretation of the UCC’s check-return provisions is correct, Regulation CC and Operating Circular No. 3 preclude NBT from holding FNCB strictly accountable for the Disputed Check where NBT suffered no actual loss as a result of FNCB’s encoding error.