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BANK LEUMI TRUST CO. v. BANK OF MID-JERSEY

October 10, 1980

BANK LEUMI TRUST COMPANY OF NEW YORK, Plaintiff,
v.
BANK OF MID-JERSEY, a New Jersey Corporation, Defendant



The opinion of the court was delivered by: ACKERMAN

This is a case arising under Articles 3 & 4 of the Uniform Commercial Code, N.J.S.A. 12A:3-101 et seq. and 12A:4-101 et seq., and, more particularly, Article 4's "midnight deadline" for the processing of checks. N.J.S.A. 12A:4-302. The focus of the case is the adventures of a certain check, number 1028, drawn on the account of Century Buick, Inc. at the defendant Bank of Mid-Jersey for the amount of $ 48,470.00, and made payable to Grand Prix, a customer of the plaintiff Bank Leumi Trust Company of New York, Inc. This check was held by Mid-Jersey beyond its midnight deadline. The case is before me today on plaintiff's motion for summary judgment on the first count of its complaint, which I have decided to grant.

Since on a motion for summary judgment the party opposing the motion is entitled to have all factual inferences drawn in its favor, Janek v. Celebrezze, 336 F.2d 828 (3d Cir. 1964), I have analyzed this motion upon the facts as presented by Mid-Jersey in the "Statement of Facts" of its brief opposing Leumi's motion. The facts, therefore, appear as follows:

 The check was drawn on October 2, 1978. Grand Prix initially deposited the check in Leumi for collection. It was routed to Mid-Jersey, which returned the check on October 4, 1978, due to insufficient funds in Century Buick's account to cover the check. On October 13, 1978, Century Buick telephoned a stop order on the check to Mid-Jersey. Sometime after October 13, 1978, Grand Prix once again deposited the check at Bank Leumi for collection from Mid-Jersey. When Leumi processed the check on the beginning of its second trip through the collection route it apparently made an error in encoding the computer readable figures that are printed at the bottom right hand corner of most checks that are presented for collection in this day and age. This encoding, along with other modern wonders, speeds the usual check through the usual channels. We are not dealing in this case with the usual check, however, due to Leumi's encoding error. Leumi encoded the check as being for $ 48,470.72 instead of for an even $ 48,470 and no cents. Leumi noticed this error, however, and crossed out the encoded sum with a lead pencil and, with the same pencil, wrote the corrected figure above the one that had been previously encoded. Leumi failed to encode the corrected figure, however, and its pencilled number, while quite legible to the human eye, could not be read by a computer.

 So it was that check number 1028 entered the collection channels for a second time, with the rubber stamp scars of its first trip and without a properly encoded sum. It was in this humble state that the check arrived at Mid-Jersey on October 20, 1978, a Friday.

 Upon arrival, Mid-Jersey determined that the check could not be processed by its high speed computer system due to the incorrect encoding and accompanying pencil marks. This check, it was determined, would have to be processed by human beings. Mid-Jersey then processed the check, posting it on the next business day, October 23, 1978, a Monday, and returning it on the following day, October 24, 1978, a Tuesday, when it determined that a stop order had been placed by its customer, which, in any event, had insufficient funds in its account to cover the check. This Tuesday return, however, was subsequent to the Bank's usual "midnight deadline," which is created by N.J.S.A. 12A:4-104 and 12A:4-302 and will be discussed in greater detail subsequently. Due to this late return, Leumi made a claim to the Federal Reserve Bank, which had presented the check to Mid-Jersey, for payment pursuant to N.J.S.A. 12A:4-302, which provides for strict liability on the part of the payor bank, in this case Mid-Jersey, to pay the amount of any check held past its midnight deadline. When the Federal Reserve Bank made its usual inquiries about the late return, Mid-Jersey submitted a "Disclaimer of Late Return" in which it denied liability. The Federal Reserve Bank took no further action against Mid-Jersey, but sent Leumi the following debit advice:

 
... Paying bank has denied the item was returned late .... Future action in this matter must be between you and the paying bank.

 Plaintiff's Exhibit 9. The debit advice also charged the $ 48,470.00 back to Leumi in accordance with Federal Reserve Bank procedures.

 Accepting all of these facts, Leumi argues that it is entitled to summary judgment because Mid-Jersey held the check beyond its midnight deadline. As I mentioned earlier, N.J.S.A. 12A:4-302 clearly provides that, in the absence of a limited class of valid defenses, a payor bank that holds a check beyond its midnight deadline without either paying or returning it becomes strictly liable to the presenting bank for payment of the check in full. In the present case it is uncontroverted that the check was held beyond the midnight deadline. N.J.S.A. 12A:4-104 defines the midnight deadline as "midnight on (a bank's) next banking day following the banking day on which it receives the relevant item ..." The present check was received, according to Mid-Jersey, on Friday, October 20, 1978; Mid-Jersey's next banking day was on Monday, October 23, 1978 and before the second hand reached 12:01 A.M. on Tuesday, October 24, 1978, its midnight deadline for handling the check had passed. As Mid-Jersey admits, the check was not dishonored until sometime later in the day on Tuesday.

 Leumi's argument is a sound one, and they seem to be entitled to payment from Mid-Jersey in accordance with the provisions of N.J.S.A. 12A:4-302. Mid-Jersey, however, has made four arguments in an attempt to avoid the operation of section 4-302. I will discuss these arguments in the order presented in the brief opposing the present motion.

 First, Mid-Jersey argues that it is excused from meeting its midnight deadline because the delay was caused by circumstances beyond its control, namely the pencil marks and encoding error on the check. In support of this argument Mid-Jersey relies on N.J.S.A. 12A:4-108(2). That section of Article 4 provides that delay past the midnight deadline

 
is excused if caused by interruption of communication facilities, suspension of payments by another bank, or, emergency conditions or other circumstances beyond the control of the bank provided it exercises such diligence as the circumstances require.

 Mid-Jersey argues that the circumstance that check number 1028 had to be manually processed, instead of being handled by a computer, is so anomalous in "the civilized world today" that it should qualify as "other circumstances beyond the control of the bank." Defendant's Brief at 4. To state this argument is to reject it. Both the Uniform Commercial Code Comment and the New Jersey Study Comment make it clear that this section is designed to permit delay only in extreme situations. In the words of the U.C.C. Comment:

 
Examples of these situations include blizzards, floods, or hurricanes, and other "Act of God" events or conditions, and wrecks or disasters, interfering with mails; suspension of payments by another bank; abnormal operating conditions such as substantial increased volume or substantial shortage of personnel during war or emergency situations.

 U.C.C. Comment to 4-108, P 4, set out following N.J.S.A. 12A:4-108. The eventuality of a check being impossible to run through a computer is simply not in this class of events. Moreover, nothing in the Code requires a check to be computer encoded or computer readable. To the contrary, the definition of a check contained in 12A:3-104 does not even require it to be written upon the customary bank form, or even upon paper. Even in what Mid-Jersey calls "the civilized world" a bank must be prepared to handle a check properly even when it is not fit to be run through a computer. The provisions of Article 4 of the Code nowhere make a distinction in time limits ...


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