The depositary bank deposited a check (for over $180,000) with drawee and drawer names that were not associated with the routing and account numbers listed. Those routing and account numbers belonged to a different customer of the payor bank. Besides the routing and account number, the check appeared not to have any connection to the payor bank or its customer. The same day the depositary bank deposited the check, the payor bank issued payment to the depositary bank by debiting its customer’s account, and subsequently, the customer complained that the payor bank had mistakenly posted the check to its account. The payor bank returned the check to the Federal Reserve Bank (FRB), the FRB credited the payor bank’s FRB account, and the payor bank returned the funds to the customer’s account. However, the depositary bank contested the return of the check, and in turn, the FRB debited the funds from the payor bank’s account. Consequently, the payor bank sued, alleging a “(1) material breach of warranty under the N.Y. UCC §§ 3-416, 3-417, 4-207, and 4-208; (2) material breach of 12 C.F.R. § 229 in violation of N.Y. UCC § 4-103, and (3) negligence.” The depositary bank responded with a motion for judgment on the pleadings.
In Cmty. Bank, N.A. v. JPMorgan Chase & Co., 5:24-cv-00363, 2024 WL 5212818, 2024 Dist. LEXIS 232152 (N.D. N.Y. Dec. 23, 2024) (opinion not yet released for publication), the court denied the motion for judgment on the pleadings for the first cause of action and granted it concerning the second and third causes of action. First, the court addressed the payor bank’s breach of warranty cause of action. N.Y. UCC § 4-207(c) establishes that a customer or collecting bank that obtains payment of an item warrants to the payor bank that “the item has not been materially altered.” The payor bank claimed that the check had been “materially altered;” therefore, the depositary bank breached the warranty under § 4-207(c). In response, the depositary bank claimed that the check was forged and that “where a check contains a forged signature, liability generally rests with the payor bank.” Thompson v. First Bank Americano, 518 F.3d 128, 131 n.2 (2d Cir. 2008). Further, the court explained that 12 C.F.R. § 229.38 created a rebuttable presumption that the “electronic check contains an alteration.” Therefore, the court denied the depositary bank’s motion because there were no “allegations in the pleadings concerning the authenticity of the signature of the drawer.” The unresolved material facts concerning the check led the court to conclude that the presumption had not been rebutted. Second, the court granted the depositary bank’s motion regarding the payor bank’s second cause of action, claiming a material breach of 12 C.F.R. § 229. Section 229.38(a) requires “ordinary care” and “good faith” standards. The payor bank alleged that the depositary bank failed to meet this standard. However, § 229.38(a) requires a showing that the condition of the check “adversely affects the ability of the bank to indorse the check legibly.” Because the payor bank failed to allege factual allegations about its ability to indorse the check, the court granted the defendant’s 12(c) motion concerning § 229.38. The court also disagreed with the payor bank’s § 229.13(b) argument that the depositary bank had violated the statute by “fail[ing] to exercise ordinary care or act in good faith… by making the funds available too soon.” Section 229.13(b) permitted banks to “delay the availability of funds deposited in an account” for a “reasonable period” if the deposit is greater than $5,525. However, the court found that § 229.13(b) does not create an obligation to delay the availability of funds and found insufficient factual allegations to support the payor bank’s claim. Finally, the court granted the depositary bank’s motion regarding the negligence cause of action. The depositary bank responded to the negligence claim, citing Article 4 of the N.Y. UCC, which “precludes common law claims that would impose liability inconsistent” with Article 4. The court found that the payor bank did not adequately respond to the depositary bank’s motion as to whether it sought to base its claim on N.Y. UCC § 4-202, and there was no case law supporting its claim that the cause of action was sufficient, whether construed as a common law claim of negligence or a breach of the N.Y. UCC.
By Jace Brown: [email protected]
Edited By Kristin Meurer: [email protected]
Edited By Ashley Boyce: [email protected]
Edited By Hayden Mariott: [email protected]