Filed: July 13, 2011
Opinion by Judge Ronald B. Rubin
Held: A bank that elected to accept rather than contest the improper dishonor of its customer's check and to proceed against the customer for sums "charged back," waived its right to recover against the dishonoring bank after its attempt proved unsuccessful.
Facts: A broker was hired to sell a 1960 Aston Martin DB4 as the agent of its owner. The buyer contacted the broker and agreed to purchase the car for $345,000. The buyer sent two checks to the broker. The broker deposited both checks without endorsement. The broker sent part of the proceeds to the owner, but an officer of the broker stole the rest and absconded.
The buyer's bank began an investigation and determined that the checks were deposited without proper endorsement. The bank returned the check to the broker's bank stamped "Return Reason -- endorsement irregular." The broker's bank debited the broker's account and the amount was credited back to the buyer's bank account. The broker's bank returned a copy of the check to the broker; the original check was destroyed upon processing and replaced with a copy.
After that, the car's owner contacted the buyer and asked him to wire the purchase money directly to the owner. Before proceeding, the buyer wanted to ensure that the broker would not re-deposit the original check. The broker returned to the buyer the copy it had received from its bank.
The buyer then wired the purchase money directly to the owner. He also placed a stop payment on the original check. The owner released the car to the buyer and signed the title over to him.
More then a month later, the broker's bank asserted a late return claim against the buyer's bank and argued that it was entitled to be paid on the check. The claim was made through the Federal Reserve and resulted in an automatic adjustment of accounts, reversing the flow of funds so that the buyer was now without the money. It appeared that the broker's bank's actions were precipitated by the inability to recover the funds from the broker.
The buyer's bank assigned its rights to the buyer, who filed suit against the broker and the broker's bank to recover his money. The parties filed cross motions for summary judgment.
Analysis: The court began with the general rule that where there are contesting parties who are relatively blameless, it is necessary to examine the conduct to determine who had more control and which party was in a position to prevent the loss.
Regarding the missing endorsement: the court noted that case law indicates that a bank is not at fault for transferring an item with a missing endorsement if the same transaction of funds would have resulted, regardless of the missing endorsement. Applying this principle, the court concluded that the failure to recognize the lacking endorsement was irrelevant to the question of fault in the case.
Regarding the return of the check to the broker's bank, pursuant to section 4-104(a)(10) of the Commercial Law article, an item is finally paid when the payor bank makes provisional settlement and fails to revoke the settlement in the time and manner permitted by statute, clearing house rule, or agreement. The court found that the buyer's bank violated the rule when it sought to dishonor the check 15 days late under an improper endorsement theory.
The court also found that the buyer's bank violated Federal Reserve protocol by returning the check through the Federal Reserve rather than by dealing directly with the broker's bank.
The court further found, however, that the broker's bank returned the substitute check to the broker, along with a debit advice, and fined the broker a returned check fee. Based upon this, the court concluded that the broker's bank had the opportunity to review the returned check and decide the appropriate next steps. This was critical.
The court concluded that when the broker's bank made the election to collect from its customer, it no longer was entitled to use the copy of the check because it was then "owned" by the broker. Because the strategy elected by the broker's bank was unsuccessful, the court concluded, the bank was no longer entitled to a second bite of the apple against the buyer's bank, nor may it legally do so without title to the check copy. By making the election pursue and debit its customer, the broker's bank waived further claim against the buyer's bank.
On this basis, the court held that the broker's bank had more control and was in a better position to prevent the financial loss. As a result, the court granted summary judgment for the buyer.
The full opinion is available in pdf.