Chapter 27



Chapter 27

Checks and Banking in the Digital Age

Case 27.1

2004 WL 628783 (Ohio App. 6 Dist.), 53 UCC Rep.Serv.2d 916, 2004-Ohio-1660

Court of Appeals of Ohio,

Sixth District, Ottawa County.

Robert NESPER, Appellee

v.

BANK OF AMERICA, Appellant.

No. OT-03-012.

Decided March 31, 2004.

KNEPPER, J.

{¶ 1} This is an appeal from a judgment of the Ottawa County Municipal Court, Small Claims Division, in which the trial court ordered appellant, Bank of America, N.A. ("Bank of America"), to reimburse appellee, Robert Nesper, funds paid out of appellee's bank account as a result of a forgery by appellee's wife. For the reasons that follow, we affirm the judgment of the trial court.

{¶ 2} On July 5, 2002, appellee filed a complaint against Bank of America in the Small Claims Division of the Ottawa County Municipal Court. In the complaint, appellee alleged that his wife, Patricia Nesper, had forged appellee's name to a check ("check no. 275") in the amount of $2,000, which was honored by Bank of America. Appellee sought the return of $2,000 to his account, plus an additional $40 in filing fees. On August 1, 2002, Bank of America filed an answer and, on that same day, a hearing was held by magistrate Jeffrey Vild.

{¶ 3} Appellee testified at the hearing that he has bank accounts in only his name at both Bank of America and Huntington Bank. Appellee further testified that in early 2002, he became aware that his wife had stolen blank checks for both accounts and forged his name to several checks. Appellee also testified that, as of the time of hearing, he was only seeking the return of $2,000 for Bank of America check no. 275; however, he might seek the return of other moneys in the future.

{¶ 4} Appellee stated that he kept the check pads for his two accounts hidden in different places in a room which could be locked; however, the room was not locked all of the time. Appellee further stated that he knew his wife had engaged in financial misconduct both before and after their marriage, which included forging his name on applications for credit cards and a contract to purchase a vehicle.

{¶ 5} On cross-examination, appellee testified that he and his wife continued to live together, in spite of her financial misconduct. Appellee further stated that, when confronted, his wife refused to discuss the forgery issue with him.

{¶ 6} On its own behalf, Bank of America presented the affidavit of bank investigator Karyn R. King. King stated in her affidavit that she attempted to contact appellee's wife regarding appellee's claim; however, Mrs. Nesper refused to speak with King. King also stated that local authorities refused to prosecute Mrs. Nesper for forgery, because they considered it to be a "civil matter" between a husband and wife. Based on the foregoing information, King concluded that appellee's claim for reimbursement should be denied.

{¶ 7} On September 26, 2002, the magistrate filed his report and recommendations, in which he found that requiring Bank of America to reimburse appellee for money allegedly stolen through forgery by appellee's wife "seems to border on unjust enrichment." The magistrate further found that the circumstances of this case raise issues of potential abuse that could cause banks in general to be reluctant to cash checks between spouses. Accordingly, the magistrate recommended that appellee's claim for reimbursement be denied.

{¶ 8} On October 8, 2002, appellee filed objections to the magistrate's report, in which he argued that, as a matter of law, he is not responsible for his wife's financial misconduct. Appellee further argued that banks have a responsibility to refuse to honor forged checks, regardless of the marital status of the forger. On March 19, 2003, the trial court, after reviewing the entire record, which included a transcript of the hearing in

{¶ 9} small claims court, filed a judgment entry in which it found that Bank of America failed to establish that appellee's failure to exercise ordinary care substantially contributed to the forgery of his signature on check no. 275. Accordingly, the trial court found appellee's objections to the magistrate's report well-taken and granted judgment to appellee in the amount of $2,000, plus court costs and statutory interest. A timely notice of appeal was filed.

{¶ 10} On appeal, Bank of America sets forth the following assignment of error:

{¶ 11} "The trial court abused its discretion in sustaining plaintiff-appellee Robert Nesper's objections to the magistrate's Report and Recommendation, and in entering judgment in favor of Mr. Nesper (Judgment Entry March 19, 2003)."

{¶ 12} In support of its assignment of error, Bank of America argues that the trial court ignored evidence of appellee's negligence, as well as evidence that appellee ratified his wife's forgery. Bank of America further argues that the magistrate correctly determined that allowing appellee to recover in this case would cause banks to be reluctant to cash any checks between a husband and wife "because of the potential problem of abuse."

{¶ 13} It is well-settled that the trial court has the authority to determine whether or not to adopt a magistrate's report and recommendations, and that decision will not be overturned on appeal absent a finding of abuse of discretion. Wade v. Wade (1996), 113 Ohio App.3d 414, 419, 680 N.E.2d 1305. An abuse of discretion connotes more than a mere error of law or judgment, instead requiring a finding that the trial court's decision was unreasonable, arbitrary, or unconscionable. Blakemore v. Blakemore (1983), 5 Ohio St.3d 217, 219, 450 N.E.2d 1140. [FN1]

FN1. We note that, in making such a limited determination, we are not free to agree or disagree with the trial court's ultimate allocation of the loss due to appellee's forged signature.

{¶ 14} Generally, in Ohio, a husband is not answerable for the acts of his spouse, absent some other applicable theory of liability. See R.C. 3103.08; National City Bank, Norwalk v. Stang (1992), 84 Ohio App.3d 764, 768, 618 N.E.2d 241; Society Natl. Bank v. Kienzle (1983), 11 Ohio App.3d 178, 182, 463 N.E.2d 1261. In this case, portions of the Uniform Commercial Code, as adopted by the Ohio Legislature in R.C. Chapter 1303, are applicable to appellee's claim.

{¶ 15} Pursuant to R.C. 1304.24, a check that bears a forged drawer's signature is not "properly payable" and, if the bank pays a check under such circumstances, the bank is generally liable to its customer. Id.; RDH Enterprises, Inc. v. Farmers & Merchants Bank, 2nd Dist. No. 19934, 2003- Ohio-6247, ¶ 8. Nevertheless, Bank of America seeks to show that appellee should be held responsible for his wife's forgery pursuant to R.C. 1303.49 which states, in relevant part, that:

{¶ 16} "(A) A person whose failure to exercise ordinary care substantially contributes to an alteration of an instrument or to the making of a forged signature on an instrument is precluded from asserting the alteration or the forgery against a person who, in good faith, pays the instrument or takes it for value or for collection. * * * "

{¶ 17} R.C. 1303.49(A) can be used as a defense to a claim of improper payment due to forgery. Micro Experts, Inc. v. Edison Technologies, Inc. (1997), 122 Ohio App.3d 394, 404, 701 N.E.2d 1033, citing Fifth Third Bank of Toledo, N.A. v. Dziersk, (6th Cir.1993), 12 F.3d 600. Pursuant to R.C. 1303.49(C), the burden of demonstrating lack of ordinary care under R.C. 1303.49(A) falls on the person or entity that is asserting the preclusion. {¶ 18} The relationship between a bank and its customer is based on both statutory and contractual principles. R.C. 1301.03; Village Leasing, Inc. v. Society Natl. Bank of Cleveland (1984), 15 Ohio App.3d 126, 128, 473 N.E.2d 830. The definition of "ordinary care" on the part of a bank is statutorily defined in R.C. 1303.01(A)(9) as the observance of "reasonable commercial standards that are prevailing in the area * * * ".

In contrast, "ordinary care" on the part of a bank's customer, while not statutorily defined, has been described by Ohio courts as the duty of the customer to perform his or her obligations to the bank "with care, skill, reasonable expedience, and faithfulness * * *." Shamansky v. Massachusetts Fin. Servs. Co. (1988), 127 Ohio App.3d 400, 405, 713 N.E.2d 47. This duty has been applied in cases where a party who has notice that his signature has been forged in the past is negligent in failing to prevent further forgeries by the same person. Ed Stinn Chevrolet, Inc. v. National City Bank (1986), 28 Ohio St.3d 221, 232, 503 N.E.2d 524, citing Official Comment 7 to former analogous section R.C. 1303.42. {¶ 19} In addition to its statutory remedies, Bank of America seeks to invoke the common-law defense of ratification. Ratification occurs when a party, by his conduct, affirms "a prior act which did not bind him but which was done or professedly done on his account whereby the acts, * * * is given effect as if it was originally authorized by him. Uhlenbrock v. Keybank, (Jan. 23, 2001), 10th Dist. No. 00AP-721, citing Restatement of the Law 2d, Agency (1958), Section 82, Comment b. Affirmance can be established by showing that the party had knowledge of the facts and manifested his intent to approve the transaction. Id. [1] {¶ 20} As to the issue of ordinary care, the record demonstrates that appellee knew his wife was capable of financial misconduct, including forgery. The record also shows that appellee attempted to keep his wife from having access to his checkbooks by keeping them hidden in a room that was usually, although not always, locked. As set forth above, testimony was presented that Mrs. Nesper refused to respond when she was confronted by both appellee and Karyn King about the forgery.

The record contains no evidence as to how Mrs. Nesper actually obtained the blank checks. [2] {¶ 21} As to the issue of ratification, Bank of America directs our attention to that portion of the record which shows that appellee unsuccessfully attempted to discuss the forgery with his wife.

The rest of the record shows that appellee notified both banks and the police of his wife's actions, filled out police reports, and filed the complaint herein seeking return of his funds. In addition, contrary to Bank of America's assertion, the magistrate did not specifically find that appellee had ratified his wife's actions, but rather found that reimbursing appellee for his wife's forgery would "border on unjust enrichment" and may make banks reluctant to cash checks between a husband and wife in the future.

{¶ 22} This court has reviewed the entire record of proceedings in this case and, upon consideration thereof, we cannot say that the trial court abused its discretion by finding that the record contains insufficient evidence to show that appellee's failure to exercise ordinary care substantially contributed to the forging of his signature on check no. 275, or by not finding that appellee ratified his wife's forgery. Accordingly, the trial court did not err by refusing to adopt the magistrate's report and recommendations. Accordingly, Bank of America's assignment of error is not well-taken {¶ 23} The judgment of the Ottawa County Municipal Court, Small Clams Division, is affirmed. Court costs of these proceedings are assessed to appellant, Bank of America.

JUDGMENT AFFIRMED.

Case 27.2

927 So.2d 645, 59 UCC Rep.Serv.2d 621, 40,718 (La.App. 2 Cir. 4/12/06)

BANK ONE, NA, Plaintiff-Appellee,

v.

Floyd DUNN, Jr. d/b/a Dunn Electric, Defendant-Appellant.

No. 40,718-CA.

April 12, 2006.

, J.

This case involves an international scam and allegations which can only be described as bizarre. Floyd Dunn appeals a judgment granting Bank One's motion for summary judgment against his reconventional demand. We affirm.

JP Morgan Chase Bank, N.A. acquired Bank One after this suit was filed.

FACTS

Floyd Dunn, an electrician by trade, had the good fortune, or misfortune as the case may be, of making the acquaintance of the son of the President of Zaire, Mobutu Sese Seko, while traveling to California in the 1980s. Dunn took up the son's invitation to visit Zaire and met with President Mobutu. Dunn asserted that he was hired as a lobbyist for Zaire in the United States, and registered with the Justice Department as a foreign agent. Among Dunn's actions on behalf of Zaire was an attempt to establish a consulate office for Zaire in Shreveport.

Zaire is now known as the Democratic Republic of the Congo. Originally a Belgian colony, the Republic of the Congo gained its independence in 1960. Col. Joseph Mobutu, who declared himself president in a November 1965 coup, changed the name of the country to Zaire, and his own name to Mobutu Sese Seko. Mobutu was toppled in 1997, and the country was given its present name. cia/publications/ factbook/geos/cg.html

Dunn stated that he lobbied for Zaire for approximately three years. Seeking compensation for his efforts, he sent a bill for $500,000 to Zaire, which was not paid. Dunn explained that after he met with the leader of Nigeria, General Sani Abacha, it was then arranged that he would also begin lobbying in the United States on behalf of Nigeria, although Dunn never registered as a lobbyist for Nigeria. In order to pay Dunn for his lobbying, Zaire agreed to trade computers to Dunn, who would then sell these computers to Nigeria for $32,100,000. Dunn added that he was given a contract number for the transaction.

Dunn estimated that he lobbied for Nigeria until 2000, when there was a change in the government of Nigeria. Afterwards, he visited Nigeria and Zaire in hopes of receiving his money, but he was unsuccessful. Dunn claimed that he was later contacted by a “Senator Frank” from Nigeria, whom Dunn did not know. Senator Frank, who apparently knew Dunn's *647 contract number, told Dunn that he owed back taxes to Nigeria which had to be paid before Dunn would receive his $32,100,000. Senator Frank offered to send Dunn a check for $315,000 in order to pay these taxes. As requested, Dunn provided Senator Frank with the number of his checking account at Bank One. Senator Frank told Dunn that $315,000 would be deposited into the account, but he did not tell Dunn the payor of the check. Dunn stated that he never personally deposited the check and never saw the check before it was deposited.

Floyd Dunn had opened a checking account at Bank One in August of 1997 in the name of Floyd Dunn d/b/a Dunn Electric. On August 1, 2001, a check in the amount of $315,000 was deposited into the account. Prior to that time, the account balance had never exceeded $5,000. The check was payable to Dunn Electric Co. and was drawn on the account of Argenbright Security Incorporated at First Union National Bank of Georgia. Provisional credit was given for this amount. On August 2, 2001, Dunn wrote a check on his Bank One bank account for $250,000 to First Guaranty Bank in Oil City, where Dunn had another account. Pursuant to Senator Frank's instructions, Dunn then wired $250,000 to an account at a Virginia bank held by a Walter Cleves, whom Dunn did not know.

Bank One gave credit for this check on August 6.

On August 2, 2001, the $315,000 check was sent out in transit to the Federal Reserve, which attempted to process the check to First Tennessee Bank. This check was returned to the Federal Reserve and then to Bank One on August 7. Believing that the check contained an incorrect routing number, Bank One wrote the routing number of First Union National Bank of Georgia on the check and sent the check back to the Federal Reserve on August 9. First Union returned the check as counterfeit to the Federal Reserve on or about August 15. The check was returned to Bank One on August 16, and Bank One charged back the check to the account of another customer on that date.

On August 23, 2001, Dunn completed a wire transfer of $27,000 from his Bank One account to an account held by Cleves in Virginia. Dunn had originally attempted to wire this amount two days earlier, but it had been sent to an incorrect location.

On September 21, 2001, Bank One was alerted that it had charged back the counterfeit check against the wrong account. On September 24, the counterfeit check was charged back against Dunn's account.

Dunn claimed that he eventually received a cashier's check payable on a Citi Bank account for $32,100,000. That check was sent by courier. Apparently still hopeful that he would receive his windfall, Dunn took the check to First Guaranty Bank and asked for it to be verified. Dunn stated that he contacted the FBI after discovering the scam.

Bank One filed suit against Dunn on June 6, 2003, alleging that Dunn owed $281,019.11, together with legal interest and attorney fees, for the overdraft of the checking account. Dunn filed an answer and reconventional demand in which he sought, among other damages, an offset of any amount rendered against him in judgment on the original demand. Dunn alleged that Bank One was negligent in giving credit for the counterfeit check when its fraudulent nature could have been determined through due diligence and reasonable prudence.

Bank One filed a motion for summary judgment as to the original and reconventional demands. The trial court granted the motion for summary judgment on the *648 original demand, but held the motion for summary judgment on the reconventional demand in abeyance to allow the parties to make additional filings. Bank One's motion for summary judgment on the reconventional demand was later granted. Dunn appealed the judgment dismissing the reconventional demand.

DISCUSSION

Dunn's first assignment of error is that the trial court erred in granting Bank One's motion for summary judgment against his reconventional demand. Dunn has not appealed the judgment granting Bank One's motion for summary judgment as to the main demand.

The summary judgment procedure is designed to secure the just, speedy, and inexpensive determination of every action, and the procedure is favored and shall be construed to accomplish these ends. . Summary judgment shall be rendered forthwith if the pleadings, depositions, answers to interrogatories and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to material fact and that the mover is entitled to judgment as a matter of law. .

Appellate courts review summary judgments de novo under the same criteria that govern the district court's consideration of whether summary judgment is appropriate. .

Dunn asserts that a genuine issue of material fact remains regarding whether the damages sustained were caused by Bank One's negligence. Dunn's argument is that contrary to Bank One's deposit policy, Bank One immediately gave his account credit for the $315,000 before verifying that the check was legitimate. Dunn contends that had he known that his account was being credited for the $315,000 before Bank One verified the check, then he would not have transferred the money from his account. In essence, his argument is that Bank One should have protected him from himself. Under the circumstances of this case, Bank One owed Dunn no such duty.

The facts of this case would be incredibly comical were it not for the huge amounts of money involved. It is apparent from Dunn's deposition testimony that he was at least cognizant that such fraud schemes existed in the world:

Q: Before this time did you have any familiarity with what we commonly call Nigerian fraud schemes?

A: I had heard about it, yes.

Q: Were you aware of it prior to August 1, 2001?

A: No.

Q: So it's only after the $315,000 check was deposited that you became aware of the Nigeria fraud schemes?

A: I saw something pertaining to this on TV at one time, but I never thought I would be involved in it.

Q: Was that prior to this check being deposited or after?

A: Prior to that.

At the very least, Dunn's suspicions should have been raised when his $500,000 lobbying fee was suddenly increased to $32,100,000 through a scheme involving a computer transaction. Certainly, Dunn would have had to ask himself why Zaire would part with computers worth over $32 million when the country only owed less than 1/50th of that amount to Dunn in the first place.

More importantly, Dunn should have recognized a red flag when he first heard the details of the arrangement concocted by Senator Frank, whom he had never met *649 prior to their one telephone conversation. Dunn's trust of Senator Frank was premised on Senator Frank's knowledge of Dunn's contract number. Dunn should have wondered why Senator Frank, acting either as a private citizen or on behalf of Nigeria, would offer to pay back taxes supposedly owed by Dunn.

Perhaps Dunn was simply naïve for trusting someone he did not know with his bank account information and then by actively participating in the scheme by wiring money on three occasions. Perhaps Dunn lost all common sense once he spied the $32,100,000 pot of gold at the end of the rainbow. Regardless, under these circumstances, Bank One owed no duty to protect Dunn from his notably poor judgment.

Dunn also contends that Bank One is liable for damages because it acted unreasonably by its delay in determining the counterfeit nature of the check. In making this argument, Dunn relies on , which provides:

If a collecting bank has made provisional settlement with its customer for an item and fails by reason of dishonor, suspension of payments by a bank, or otherwise to receive settlement for the item which is or becomes final, the bank may revoke the settlement given by it, charge back the amount of any credit given for the item to its customer's account, or obtain refund from its customer, whether or not it is able to return the item, if by its midnight deadline or within a longer reasonable time after it learns the facts it returns the item or sends notification of the facts.

If the return or notice is delayed beyond the bank's midnight deadline or a longer reasonable time after it learns the facts, the bank may revoke the settlement, charge back the credit, or obtain refund from its customer, but it is liable for any loss resulting from the delay. These rights to revoke, charge back, and obtain refund terminate if and when a settlement for the item received by the bank is or becomes final.

Emphasis added.

A bank is required to exercise ordinary care in sending notice of dishonor after learning that the item has not been paid or accepted. . Notifying the customer of dishonor after the bank's midnight deadline may constitute the exercise of ordinary care if the bank took proper action within a reasonably longer time, but the bank has the burden of establishing timeliness. Id.

Comment six to states that the right of charge back does not relieve the bank from any liability for failure to exercise ordinary care in handling the item, and the measure of damages for such failure is stated in , which provides:

The measure of damages for failure to exercise ordinary care in handling an item is the amount of the item reduced by an amount that could not have been realized by the exercise of ordinary care. If there is also bad faith it includes any other damages the party suffered as a proximate consequence.

Comment six to explains, “When it is established that some part or all of the item could not have been collected even by the use of ordinary care the recovery is reduced by the amount that would have been in any event uncollectible.”

Dunn's liability is not diminished because of Bank One's delay in notifying Dunn that the check was counterfeit. Even if Dunn had received earlier notice from Bank One that the check was counterfeit, he still had no recourse against Argenbright Security. The $315,000 was *650 uncollectible against Argenbright Security. We emphasize that Dunn showed great alacrity in moving most of the funds from his account, as indicated by Dunn's $250,000 check to First Guaranty that was dated the day after the $315,000 deposit. The motion for summary judgment was properly granted on the reconventional demand.

Dunn next argues that the trial court erred in holding him personally liable for the judgment rendered against Dunn Electric. This argument, which is raised for the first time on this appeal, is without merit. Dunn testified that his company was incorporated. Nevertheless, his account was opened up under the name of Floyd Dunn, Jr. d/b/a as Dunn Electric. We also note that in August of 2001, although his Bank One checks bore the name of Dunn Electric Company, his Bank One account statements still listed “Floyd Dunn, Jr. dba Dunn Electric” as the account owner.

DECREE

At appellant's costs, the judgment is AFFIRMED.

Case 27.3

393 F.3d 404

United States Court of Appeals,

Third Circuit.

NBT BANK, NATIONAL ASSOCIATION, Appellant

v.

FIRST NATIONAL COMMUNITY BANK.

No. 03-4231.

Argued Sept. 28, 2004.

Filed Dec. 30, 2004.

SMITH, Circuit Judge.

This is an appeal from an order of the District Court denying the motion of Appellant NBT Bank, N.A. ("NBT") for summary judgment, and granting summary judgment in favor of Appellee First National Community Bank ("FNCB"). At issue is a claim by NBT under Article 4 of Pennsylvania's Uniform Commercial Code ("UCC"), 13 Pa. Cons.Stat. Ann. § § 4101-4504, seeking to recover the face value of a $706,000 check (the "Disputed Check") that was drawn on an FNCB account and deposited at NBT by a participant in a check-kiting scheme. In accordance with its established practice, NBT forwarded the Disputed Check to the Federal Reserve Bank of Philadelphia ("Reserve Bank"), which serves as a clearinghouse or transferor for checking transactions involving a number of banks, including both NBT and FNCB. When the Disputed Check was presented by the Reserve Bank to FNCB for payment, FNCB recognized that the drawer had overdrawn its account. Thus, FNCB sought to dishonor the Disputed Check and to return it to the Reserve Bank. Under the UCC, FNCB was required to return the Disputed Check to the Reserve Bank prior to the "midnight deadline," defined as midnight of the following banking day after the day the check was first presented to FNCB. The parties agree that the Disputed Check was physically delivered to the Reserve Bank prior to the midnight deadline. The parties also agree that FNCB prepared the Disputed Check as a "qualified return check," meaning it was to be encoded with a magnetic strip containing information that would facilitate automated processing by the Reserve Bank. However, FNCB erroneously encoded the magnetic strip with the routing number for PNC Bank (which otherwise has no connection to this appeal), rather than NBT. The parties agree that NBT did not suffer damages as a result of this encoding error. Nonetheless, NBT seeks to hold FNCB accountable for the full amount of the Disputed Check, pursuant to the strict accountability provisions of § § 4301 and 4302 of the UCC. The key issue in this appeal is whether FNCB's violation of a Federal Reserve regulation requiring proper encoding provides a basis for imposing strict accountability on FNCB under § 4302 of the UCC, despite the fact that NBT incurred no actual loss as a result of FNCB's error. Because we believe the District Court correctly concluded that NBT may not recover on the facts presented here, we will affirm the District Court's order granting summary judgment in favor of FNCB.

I. FACTUAL BACKGROUND

A. The Disputed Check

In the proceedings before the District Court, the parties stipulated to the facts. The dispute arises out of a check-kiting scheme under which a small group of Pennsylvania business entities arranged to write checks on one account, drawing on non-existent funds, and then cover these overdrafts with checks drawn on another account that also lacked sufficient funds. In this manner, the perpetrators of the scheme sought to obtain funds to which they were not entitled. The scheme collapsed when three checks initially deposited at NBT, and subsequently presented for payment to FNCB, were discovered by FNCB to have been drawn on an FNCB account that lacked sufficient funds. [FN1] There is no dispute between the parties that two of these three checks were properly returned by FNCB to the Reserve Bank prior to the applicable midnight deadline.

FN1. The record does not provide additional information concerning the details of the check-kiting scheme and the fate of the scheme's perpetrators. However, at oral argument, counsel for NBT indicated that the funds that were fraudulently obtained by the scheme's perpetrators have not been recovered by NBT.

The Disputed Check (i.e., the third check, for $706,000), was drawn on an FNCB account and drafted by an entity called Human Services Consultants, Inc. On March 8, 2001, the Disputed Check was proffered for deposit at NBT by an entity called Human Services Consultants Management, Inc., d/b/a "PA Health." Thus, in relation to the Disputed Check, NBT was the "depositary bank" (the first to receive the item), and FNCB was the "payor bank," meaning that the Disputed Check was drawn on an FNCB account held by a participant in the check-kiting scheme.

B. The Provisional Settlement

After the Disputed Check was presented for deposit at NBT, the bank gave provisional credit to the depositor, PA Health, for the amount of the Disputed Check. NBT also transmitted the Disputed Check to the Reserve Bank for presentment to FNCB. Upon transmission to the Reserve Bank, NBT was given a provisional credit from FNCB's Reserve Bank account for the face amount of the Disputed Check. [FN2] The Reserve Bank then forwarded the Disputed Check to FNCB, and FNCB received it on March 12, 2001. Under the UCC, if FNCB wished to refuse payment on the Disputed Check, FNCB was obligated to revoke the provisional settlement granted to NBT by 11:59 p.m. on March 13, 2001. [FN3] See 13 Pa. Cons.Stat. Ann. § § 4301, 4215.

FN2. The Reserve Bank was acting as a clearinghouse or transferor bank for items moving between other banks, including FNCB and NBT. The Reserve Bank's services are used to facilitate prompt payment, accurate accounting, and expedited availability of funds.

FN3. A brief summary of the provisional credit process under the UCC may aid understanding of the issues raised in this appeal. Article 4 of the UCC provisionally assumes that when a check is deposited for payment, it will be paid by its drawer. See 13 Pa. Cons.Stat. Ann. § § 4201(a), 4214(a), 4215(a)(2), 4301. See generally 1 Barkley Clark & Barbara Clark, THE LAW OF BANK DEPOSITS, COLLECTIONS AND CREDIT CARDS, § 6.01 (5th ed.1999) (hereinafter "Clark & Clark") (outlining the provisional credit process). Based upon this assumption, the depositary bank provisionally places the value of the check into the payee's account and forwards the check to the clearinghouse or transferor bank for collection. The clearinghouse provisionally shifts the value of the check from the clearinghouse account of the payor bank to the clearinghouse account of the depositary bank. Unless the payor bank revokes the provisional credit in accordance with § 4301 of the Pennsylvania UCC, the payor bank is deemed to have finally paid the check and is accountable to the depositary bank for the full amount of the check. See 13 Pa. Cons.Stat. Ann. § § 4215, 4302; see also Colorado Nat'l Bank v. First Nat'l Bank & Trust Co., 459 F.Supp. 1366, 1368-69 (W.D.Mich.1978) (discussing provisional credit process); Channel Equip. Co. v. Cmty. State Bank, 996 S.W.2d 374, 377- 78 (Tex.Ct.App.1999) (same).

C. FNCB's Efforts To Return The Disputed Check

On March 13, 2001, FNCB determined it would not pay the Disputed Check because of the absence of sufficient funds in the account on which the check was drawn. That same day, FNCB sought to return the Disputed Check to NBT through the Reserve Bank. The parties agree that the Disputed Check was physically delivered to the Reserve Bank prior to 11:59 p.m. on March 13. In addition to sending the Disputed Check back to the Reserve Bank on March 13, FNCB also sent a notice of dishonor to NBT via the FedLine, [FN4] in which FNCB indicated that it did not intend to pay the Disputed Check. NBT received this notice prior to the close of business on March 13. In addition, on the morning of March 14, 2001, FNCB executives telephoned NBT officials and telefaxed a letter to NBT, advising NBT that FNCB had decided to dishonor the Disputed Check.

FN4. The FedLine is a telecommunications service provided by the Federal Reserve for the purpose of, among other things, sending notices of dishonor.

D. FNCB's Encoding Error

When FNCB sent the Disputed Check to the Reserve Bank on March 13, 2001, FNCB included a letter designating it as a "Qualified Return Check" prepared for high speed processing. [FN5] In so doing FNCB communicated to the Reserve Bank that it had attached to the Disputed Check a strip of paper encoded with magnetic ink that would permit the check to be processed through the Reserve Bank's automated processing system. However, FNCB erroneously encoded the strip with the routing number for PNC Bank instead of the routing number for NBT.

FN5. Banks may convert checks to qualified return checks in order to expedite processing and save on per-check processing fees. See 12 C.F.R. § 229.30(a).

In sum, the Reserve Bank physically received the Disputed Check complete with the wrongly encoded strip prior to 11:59 p.m. on March 13, 2001. Because the Disputed Check was improperly encoded, NBT did not receive it back from the Reserve Bank until March 16, 2001. With proper encoding the Disputed Check likely would have been received on March 14, 2001. The parties have stipulated, however, that NBT suffered no damages or actual loss as a result of the encoding error, inasmuch as NBT had actual notice from FNCB on March 13 that the Disputed Check had been dishonored. [FN6]

FN6. After receiving the Disputed Check on March 16, 2001, NBT sent it back to the Reserve Bank as a "Late Return" on March 26, 2001. Upon receiving notice of NBT's actions, FNCB submitted to the Reserve Bank a "Paying Bank Response to Claim of Late Return," in which it certified that it had returned the Disputed Check prior to the applicable March 13, 2001 midnight deadline. Following this exchange, the Reserve Bank reversed the provisional credit of $706,000 that it had originally given to NBT when NBT first forwarded the Disputed Check to the Reserve Bank on March 13.

II. THE DISTRICT COURT PROCEEDINGS

NBT instituted this action against FNCB on May 25, 2001. The only claim before the District Court was a claim under the Pennsylvania UCC. NBT claimed that FNCB's encoding error meant FNCB had failed to return the Disputed Check prior to the midnight deadline as required by the UCC, and that FNCB was therefore accountable to NBT for the full amount of the Disputed Check. The parties stipulated to the facts and filed cross-motions for summary judgment. The District Court granted FNCB's motion and denied NBT's motion. See NBT Bank v. First Nat'l Comm. Bank, 287 F.Supp.2d 564 (M.D.Pa.2003). The District Court found that FNCB had returned the Disputed Check by the March 13 midnight deadline as required by § 4301, that FNCB's encoding error did not negate or nullify what otherwise constituted proper return as defined in § 4301(d), and that, in any event, NBT could not recover where it suffered no actual loss resulting from FNCB's conduct. The District Court reasoned that (1) the Reserve Bank was not a "clearinghouse" as that term is used in § 4301(d)(1), thus rendering that particular UCC provision inapplicable; (2) FNCB's encoding error did not negate FNCB's compliance with the UCC midnight deadline rule under § 4301(d)(2), which provides that an item is returned by a payor bank "when it is sent or delivered to the bank's customer or transferor [here, the Reserve Bank] or pursuant to his instructions[;]" and (3) NBT could not recover where it suffered no loss as a result of FNCB's conduct, and where, by operation of law, NBT and FNCB were parties to a binding agreement that incorporated federal regulations indicating that the measure of damages for a failure to exercise ordinary care in encoding was to be measured by the actual loss incurred. NBT appeals.

III. DISCUSSION

A. Jurisdiction and Standard of Review

[1] Federal court jurisdiction over this diversity action is proper under 28 U.S.C. § 1332. We have appellate jurisdiction pursuant to 28 U.S.C. § 1291. We review the District Court's decision to grant summary judgment under our plenary standard of review. See Curley v. Klem, 298 F.3d 271, 276 (3d Cir.2002); Chase Manhattan Bank, N.A. v. Government of the Virgin Islands, 300 F.3d 320, 322 (3d Cir.2002). Affirming the grant of summary judgment is proper where there are no genuine issues of material fact and the moving party is entitled to judgment as a matter of law. See Curley, 298 F.3d at 276-77 (quoting Fed.R.Civ.P. 56).

B. Pennsylvania UCC Provisions Governing Check-Return Procedures

Article 4 of the UCC as adopted by Pennsylvania defines the rights between parties with respect to bank deposits and collections involving banks located in Pennsylvania. See 13 Pa. Cons.Stat. Ann. § 4102(b). To the extent not preempted or superseded by federal law, Article 4 governs the process by which banks present checks for payment, settle on checks, and, if necessary, dishonor and return checks. NBT notes three interrelated UCC provisions that establish the circumstances under which a bank may return a dishonored check. The first key provision is § 4301. Section 4301(a) provides that a bank may dishonor or return a check or other disputed item if, before the bank's midnight deadline, it either (1) returns the item; or (2) sends written notice of dishonor or nonpayment if the item is unavailable for return. 13 Pa. Cons.Stat. Ann. § 4301(a)(1)-(2). Section 4301(d) defines the ways in which a bank may "return" an item for purposes of compliance with § 4301(a)(1). Section 4301(d) provides:

Acts constituting return of item.--An item is returned:

(1) as to an item presented through a clearinghouse, when it is delivered to the presenting or last collecting bank or to the clearinghouse or is sent or delivered in accordance with clearinghouse rules; or

(2) in all other cases, when it is sent or delivered to the bank's customer or transferor or pursuant to his instructions.

13 Pa. Cons.Stat. Ann. § 4301(d)(1)-(2). Notably, the UCC defines the terms "delivery" and "send." "Delivery" with respect to "instruments, documents of title, chattel paper or certificated securities means voluntary transfer of possession." 13 Pa. Cons.Stat. Ann. § 1201. "Send,"

[i]n connection with any writing or notice, means to deposit in the mail or deliver for transmission by any other usual means of communication with postage or cost of transmission provided for and properly addressed and[,] in the case of an instrument[,] to an address specified thereon or otherwise agreed, or[,] if there be none[,] to any address reasonable under the circumstances. The receipt of an item or notice within the time at which it would have arrived if properly sent has the effect of a proper sending. Id.

[2] The second key UCC provision with respect to a payor bank's attempt to dishonor a check is § 4302. Section 4302 provides in relevant part that: [i]f an item is presented to and received by a payor bank[,] the bank is accountable for the amount of [the item], whether properly payable or not, if the bank ... retains the item beyond midnight of the banking day of receipt without settling for it or ... does not pay or return the item or send notice of dishonor until after its midnight deadline.

13 Pa. Cons.Stat. Ann. § 4302(a)(1). Section 4302 thus imposes strict accountability on a payor bank (subject to two enumerated defenses not relevant here) that fails to revoke its provisional settlement on a dishonored check prior to the midnight deadline. See Chrysler Credit Corp. v. First Nat'l Bank & Trust Co. of Wash., 746 F.2d 200, 201 (3d Cir.1984) (per curiam ) (interpreting Pennsylvania law); Lombardo v. Mellon Bank, N.A., 454 Pa.Super. 403, 685 A.2d 595, 598 (1996); Nat'l Check v. First Fid. Bank, 442 Pa.Super. 211, 658 A.2d 1375, 1378 (1995);; see also First Union Nat'l Bank of Fla. v. First Fla. Bank, N.A., 616 So.2d 1168, 1171 (Fla.Dist.Ct.App.1993) (noting that in most states "it is well established that sections 4-301 and 4-302 of the Uniform Commercial Code create a statutory doctrine of strict accountability by the payor bank to the presenting bank if notice is not accomplished within the midnight deadline") (citing L.A. Nat'l Bank v. Bank of Canton of California, 229 Cal.App.3d 1267, 280 Cal.Rptr. 831 (1991); First State Bank of Sherwood v. Twin City Bank of North Little Rock, 290 Ark. 399, 720 S.W.2d 295 (1986); Northwestern Nat'l Insurance Co. v. Midland Nat'l Bank, 96 Wis.2d 155, 292 N.W.2d 591 (1980)).

[3] The third UCC provision invoked by NBT is § 4215, which addresses when a check is "finally paid." Upon "final payment" a provisional settlement by the payor bank becomes final, and the payor bank is accountable for the face amount of the check. Under § 4215, a check "is finally paid by a payor bank when the bank has ... made a provisional settlement for the item and fail[s] to revoke the settlement in the time and manner permitted by statute, clearinghouse rule or agreement." 13 Pa. Con. Stat. Ann. § 4214(a)(3). Official Comment 4 to § 4215 states that "[a] primary example of a statutory right on the part of the payor bank to revoke a settlement is the right to revoke conferred by Section 4-301." [FN7]

FN7. Under Pennsylvania law, the official comments of a drafting commission may be given weight in the construction of a statute. See Young v. Kaye, 443 Pa. 335, 279 A.2d 759, 765 n. 3 (1971).

C. Regulation CC, Reserve Bank Operating Circulars, and Variation By Agreement

The Pennsylvania UCC provisions governing check-return procedures do not operate in a vacuum. Federal law forms part of the legal framework within which check-processing 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 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 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 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 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.

D. Construing The UCC's Check-Return 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 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). [4] 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 § 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 arrive at the proper location. [FN8]

FN8. 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.

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. [FN9] 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.

FN9. 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 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).

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. 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.

E. The Damage Limitations Included In 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; 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 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. [5] 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 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.

This analysis is reinforced by Appendix E to Regulation CC, which contains the Federal Reserve Board's commentary interpreting the provisions of Regulation CC and providing examples "to aid in understanding how a particular requirement is to work." 12 C.F.R. Part 229, App. E, § I, A, 1. Appendix E states:

Generally, under the standard of care imposed by § 229.38, a paying or returning bank would be liable for any damages incurred due to misencoding of the routing number, the amount of the check, or return identifier on a qualified return check.... A qualified return check that contains an encoding error would still be a qualified return check for purposes of the regulation.

Id. at § II, BB, 2 (emphasis added). This Reserve Board commentary is significant, because as noted above, both Regulation CC and the UCC indicate that Regulation CC's provisions are binding on the parties, and that Regulation CC's provisions supersede any inconsistent provisions of the UCC. The fact that Appendix E specifically contemplates the possibility that a payor bank could encode a returned check with the wrong routing number, and yet states that the remedy for such an error is to be calculated based upon the damages caused by the error, strongly indicates that encoding errors do not give rise to strict accountability for a payor bank. Notably, Appendix E also states that a wrongly encoded check is still considered a qualified return check. This statement illustrates that there is a distinction between whether a check has been properly encoded and whether a check has been properly returned. NBT's attempt to incorporate the proper encoding of a routing number as an essential element in determining whether a check has been "returned" under § 4301 of the UCC is contrary to the approach required under Regulation CC. Thus, FNCB's encoding error, while constituting a violation of Regulation CC's encoding requirements, does not provide an adequate basis for imposing strict accountability on FNCB pursuant to the UCC's midnight deadline provisions. NBT offers two reasons why it believes it should recover the full amount of the Disputed Check notwithstanding the measure of damages specified in Regulation CC. We find that these arguments lack merit. NBT's primary argument challenges the applicability of the Regulation CC provision concerning calculation of damages based upon actual loss. NBT believes this provision has no relevance because NBT's claim is brought under the UCC rather than under Regulation CC. NBT states, "[w]hether or not [FNCB] would have been liable on a claim under Regulation CC is wholly irrelevant to the issue presented here. The issue here is whether [FNCB] is accountable under the UCC[.]" There are several problems with NBT's attempt to draw a sharp distinction between a claim "under the UCC" and a claim covered by Regulation CC. It is obvious that NBT's UCC claim is at least partially dependent on Regulation CC, in that Regulation CC is the source of the encoding requirement that directs a payor bank to include the routing number of the depositary bank in magnetic ink on all qualified return checks. Indeed, to the extent the UCC itself addresses encoding, it specifically provides that the measure of damages for an encoding error is the actual loss incurred by the claimant. See 13 Pa. Cons.Stat. Ann. § 4209(a), (c). NBT's position also overlooks the fact that, pursuant to § 4103 of the UCC, all of Regulation CC is binding on the parties. Moreover, to the extent there is a conflict between Regulation CC's broadly worded "actual loss" remedy and the provisions of the UCC that create a strict accountability regime with respect to the midnight deadline rule, such a conflict must be resolved in favor of Regulation CC. Support for this result flows from subpart C of Regulation CC itself, which states that "the provisions of this subpart supersede any inconsistent provisions of the UCC as adopted in any state...." See 12 C.F.R. § 229.41. This result is also supported by § 4103 of the UCC, which, as set forth above, indicates that Federal Reserve regulations are binding on all parties operating under the UCC and that such regulations are considered "agreements" that may vary the effect of the UCC's provisions. See 13 Pa. Cons.Stat. Ann. § 4103(a)-(b). In sum, where NBT's claim is dependent upon FNCB's noncompliance with the encoding requirements imposed by Regulation CC, NBT cannot render the Regulation CC damages clause inapplicable merely by characterizing its claim as an effort to hold FNCB accountable under the UCC.

NBT offers a second argument in support of its view that Regulation CC's ordinary care liability standard and "actual loss" remedy provision do not alter the UCC's regime of strict accountability for noncompliance with the midnight deadline rule in the circumstances presented here. NBT asserts that § 4301(d) of the UCC requires a payor bank to comply with clearinghouse rules or transferor instructions in order effectively to return an item prior to the midnight deadline. NBT points out that the rules or instructions governing the Reserve Bank's check-processing services are contained in Federal Reserve Operating Circular No. 3. NBT argues that Operating Circular No. 3's references to encoding requirements, when read in conjunction with § 4301 of the UCC, create an independent obligation on the part of FNCB to encode the Disputed Check with the correct routing number, and that FNCB's failure to do so means that the Disputed Check was not "returned" within the meaning of the midnight deadline rule. While NBT correctly states that Operating Circular No. 3 binds the parties, NBT incorrectly asserts that the Circular's references to encoding requirements somehow negate Regulation CC's requirement that damages be measured with reference to actual loss. Operating Circular No. 3 does not contain an independent encoding requirement. Instead, it incorporates subpart C of Regulation CC in its entirety, including both the encoding requirement as well as ordinary care liability standard and the remedy provision stating that the measure of damages for failure to comply with subpart C of Regulation CC is to measured by the claimant's actual loss. See Fed. Reserve Op. Circ. No. 3, at 1, ¶ 1.1. While Operating Circular No. 3 does state that its own provisions supersede any inconsistent provisions of the UCC and Regulation CC, nothing in Operating Circular No. 3 contradicts or is inconsistent with the Regulation CC provision calling for measurement of damages based upon actual loss. Nor does Operating Circular No. 3 impose an encoding requirement separate or apart from its incorporation of the encoding provisions of Regulation CC. The Circular's references to encoding simply emphasize that Reserve Banks retain the right to rely on the routing number encoded on a qualified return check, while stating that a payor bank that erroneously encodes a routing number agrees to indemnify the Reserve Bank for any loss suffered as a result of the error. See id. at 10, ¶ 15.6. These encoding references in Operating Circular No. 3 do not impose a separate encoding obligation apart from the encoding requirement imposed by Regulation CC, and they in no way alter or conflict with Operating Circular No. 3's incorporation of the Regulation CC provision requiring that damages resulting from noncompliance be measured with reference to the claimant's actual loss. Thus, to the extent Regulation CC's encoding requirement is deemed a "clearinghouse rule" or "transferor instruction" by virtue of its incorporation into Operating Circular No. 3, it is a rule or instruction with a specific remedy attached. Moreover, to the extent that this remedy (damages based upon actual loss) conflicts with the strict accountability remedy available under the UCC's check-return provisions, the conflict must be resolved in favor of the former. As discussed above, this result is dictated by Operating Circular No. 3, which states that the Circular's provisions supersede any inconsistent provisions of the UCC. See id. at 1, ¶ 1.1. This result is also supported by the UCC itself, which provides that clearinghouse rules are binding on the parties involved in a checking transaction, and that such a binding agreement may vary the UCC so long as it does not purport to disclaim a bank's obligation to act in good faith and exercise ordinary care. See 13 Pa. Cons.Stat. Ann. § 4103(a)-(b).

IV. CONCLUSION

NBT has consistently emphasized that it seeks recovery pursuant to § § 4215, 4301, and 4302 of the UCC. The UCC itself directs that its provisions, including those that create a strict accountability regime in connection with the midnight deadline rule, may be altered by agreement. The UCC also provides that Federal Reserve regulations and operating circulars are by operation of law deemed binding agreements governing all parties subject to Article 4 of the UCC. The encoding requirements invoked by NBT are found in subpart C of Regulation CC. Subpart C indicates that compliance with its provisions is to be measured by a standard of ordinary care. Subpart C also states that the measure of damages for a failure to exercise ordinary care in complying with its requirements is the actual loss a claimant suffers as a result of such failure. In the present case, the parties stipulated that NBT did not suffer any actual damages as a result of FNCB's encoding error. The parties are bound by Regulation CC in its entirety, including its remedy provision, which supersedes any inconsistent provisions of the UCC. NBT thus may not invoke § § 4215, 4301, and 4302 of the UCC to require that FNCB be held strictly accountable for the Disputed Check based upon FNCB's failure to comply with Regulation CC's encoding requirement. The fact that the parties are also bound by Federal Reserve Operating Circular No. 3 does not change the result. To the extent Operating Circular No. 3 incorporates the encoding requirement of Regulation CC, it also incorporates Regulation CC's liability standard and remedy provision. As with Regulation CC, the provisions of Operating Circular No. 3 by operation of law form an agreement that binds the parties and that varies any inconsistent UCC provisions. NBT's attempt to invoke UCC provisions that create strict accountability in connection with the midnight deadline rule fails to acknowledge that, in this case, these provisions have been effectively amended by Operating Circular No. 3's incorporation of Regulation CC's "actual loss" remedy provision. Accordingly, because the facts are not in dispute, and because NBT's claim fails as a matter of law, we affirm the order of the District Court granting summary judgment in favor of FNCB

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