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MELLON BANK, N.A. v. SECURITIES SETTLEMENT CORP.

April 4, 1989

MELLON BANK, N.A., Plaintiff,
v.
SECURITIES SETTLEMENT CORP., et al., Defendants


Clarkson S. Fisher, United States District Judge.


The opinion of the court was delivered by: FISHER

Before the court are the motions of plaintiff, Mellon Bank ("Mellon"), and defendant, Securities Settlement Corporation ("SSC"), for summary judgment. At oral argument, the parties agreed that the facts are not in dispute. The transaction underlying this case is relatively simple. SSC performed clearing services in connection with securities transactions in the accounts of one of its customers, Kobrin Securities ("Kobrin"). One of Kobrin's clients was another entity, Barrett Consultants ("Barrett"), to whom SSC sent monthly statements regarding Barrett's account with Kobrin. On the morning of June 4, 1985, SSC, at Kobrin's request, instructed Mellon to wire transfer $ 113,080.50 to Barrett's account with the Franklin State Bank ("FSB"). Within several hours after Mellon had sent the wire, SSC learned that Kobrin was incapable of paying the securities' purchase price. Although SSC instructed Mellon to cancel the wire transfer, the money went through to Barrett's account. Mellon filed the instant complaint in October of 1987 in the Superior Court of New Jersey, Law Division, Somerset County, seeking reimbursement for the funds it had sent to FSB. SSC removed the case to this court in November of the same year.

 The court will first address SSC's motion, viewing the evidence in the light most favorable to Mellon. Adickes v. S.H. Kress & Co., 398 U.S. 144, 157, 26 L. Ed. 2d 142, 90 S. Ct. 1598 (1970); United States v. Diebold, Inc., 369 U.S. 654, 655, 8 L. Ed. 2d 176, 82 S. Ct. 993 (1962). SSC's motion does not empower the court to assume the function of the factfinder: The court need only determine whether the record would permit "a fair-minded jury" to return a verdict in Mellon's favor. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 250, 91 L. Ed. 2d 202, 106 S. Ct. 2505 (1986). These standards are unchanged by the fact that both parties have moved under Rule 56. Daburlos v. Commercial Ins. Co., 367 F. Supp. 1017, 1020 (E.D. Pa. 1973).

 The threshold issue is whether Pennsylvania's version of the U.C.C. applies to this action. *fn1" SSC has cited several cases for the proposition that the U.C.C. does not govern wire transfers, see e.g., Walker v. Texas Commerce Bank, N.A., 635 F. Supp. 678, 681 (S.D. Tex. 1986), and contends that this case must be decided without reference to the statute. Mellon counters that the U.C.C. has been applied by analogy in other jurisdictions, see e.g., Delbrueck & Co. v. Manufacturers' Hanover Trust Co., 609 F.2d 1047, 1051 (2d Cir. 1979), and urges the court to do the same. Unfortunately neither party has cited, nor has the court found, decisions from the Pennsylvania state courts which address this question.

 There are merits to both positions. On one hand it might be noted that the U.C.C. covers only "items," which 13 Pa. C.S.A. section 4103 defines as "any instrument for the payment of money even though it is not negotiable." Id. With this definition as a starting point, it might be pointed out that an instrument is a signed writing which expresses an agreement regarding rights, while the instant case involves an unsigned and electronically-transmitted instruction. It could be asserted that this difference is not merely semantic; it illustrates that the U.C.C. was designed to address paper transactions rather than high-speed financial distributions. Evra Corp. v. Swiss Bank Corp., 673 F.2d 951, 955 (7th Cir.1982) (holding U.C.C. inapplicable because wire transfers were not in the drafters' contemplation). According to this argument Pennsylvania's trial courts would not adjudicate this case under 13 Pa. C.S.A. section 4101 et seq. See Walker, 635 F. Supp. at 681; Central Coordinates, Inc. v. Morgan Guaranty Trust Co., 129 Misc. 2d 804, 494 N.Y.S.2d 602, 604 (N.Y.Sup.Ct., 1985) (both cases considering the term "item" to preclude application of the U.C.C. to wire transfers).

 On the other hand, a "check is no more than an order on the bank to pay a stated amount . . . from the maker's account." Thomas v. First Nat'l. Bank, 173 Pa. Super. 205, 96 A.2d 196, 197 (1953) rev'd. on other grounds, 376 Pa. 181, 101 A.2d 910 (1954). Although checks are negotiable instruments, Urick Foundry Co. v. Workmen's Compensation Appeal Bd., 91 Pa. Commw. 24, 496 A.2d 883, 885 n. 2 (1985), it could be argued that Thomas's definition exactly fits a wire transfer, which is nothing more than an order directing the bank to pay money from one account to another. See Delbrueck, 609 F.2d at 1050 (likening wire transfer to cashier's check); and see Miracle Hills Centre Ltd. v. Nebraska Nat'l Bank, 230 Neb. 899, 434 N.W.2d 304, 306 (1989) (applying U.C.C. to bank's distribution of wire transfer funds among accounts). Moreover, it could be argued that the total exclusion of the U.C.C. from this case would leave the court with little current law upon which to base its decision.

 Thus the court must sail between the Scylla of common law and the Charybdis of statute in an attempt to predict what Pennsylvania's highest court would do if confronted with this situation. Radwan v. Beecham Laboratories, 850 F.2d 147, 151 (3d Cir. 1988); Blum v. Witco Chem. Corp., 829 F.2d 367, 377 (3d Cir. 1987). The court must bear in mind that neither party should be "'penalized for [the presence of their suit in] a federal forum by being deprived of the flexibility that a state court could reasonably be expected to show.'" Safeco Ins. Co. v. Wetherill, 622 F.2d 685, 688 (3d Cir. 1980) (quoting Becker v. Interstate Properties, 569 F.2d 1203, 1206 (3d Cir. 1977), cert. denied, 436 U.S. 906, 56 L. Ed. 2d 404, 98 S. Ct. 2237 (1978)). The court concludes that it should follow those decisions which have applied the common law while at the same time borrowing appropriate rules from the governing version of the U.C.C. Delbrueck, 609 F.2d at 1051 (applying common law but partially justifying holding by reference to U.C.C. sections 3-410, 4-303); Bradford Trust Co. v. Texas American Bank-Houston, 790 F.2d 407, 409 (5th Cir. 1986) (using both common and statutory law); Walker, 635 F. Supp. at 684 & n. 8 (applying the common law but addressing affirmative defense taken from U.C.C. section 4-406).

 Mellon's first theory of recovery relies on the Service Agreement with SSC. That contract provides, in pertinent part, that SSC will:

 
assume full responsibility for all transfers made by the Bank in good faith and in accordance with these procedures, and agree that the Bank shall be conclusively deemed to have discharged its duties to act in good faith and to exercise ordinary care if it has followed these transfer procedures or if [SSC] has not followed them.

 Service Agreement Letter, Annexed at p. 3a to Mellon's Brief in Support (henceforth "Agreement"). The "transfer procedures" are contained in in camera documents which detail Mellon's scheme for making and cancelling wire transfers. In addition, the Agreement provides that Mellon:

 
will not be liable to [SSC] with respect to any aspect of its performance under this Agreement, except for the Bank's lack of good faith or failure to exercise ordinary care.

 Id. The parties dispute whether Mellon used ordinary care in cancelling the wire transfer, thereby placing it within the benefits and protections of the Agreement. Because the Agreement is silent about the cancellation of wire transfers, the parties' rights and duties are governed by Pennsylvania's common and statutory law. See Hardex-Steubenville Corp. v. Western Pennsylvania Nat'l. Bank, 446 Pa. 446, 285 A.2d 874, 879 (1971) (holding that where contract is silent, the U.C.C. will govern).

 SSC had a right to stop the Mellon-MHT-FSB wire transfer, Aljax Corp. v. Connecticut Mut. Life Ins. Co., 458 Pa. 57, 333 A.2d 469, 471 (Pa. 1975); 13 Pa. C.S.A. section 4403(a), and Mellon was under a corresponding duty to use ordinary care in handling SSC's request. Simply put, ordinary care is non-negligence. See Hardex, 285 A.2d at 879 (identifying lack of ordinary care with negligence); 13 Pa. C.S.A. section 4103, comment 4 (stating that the Code uses "'ordinary care' . . . with its normal meaning and not in any special sense"). In this regard, behavior which is "consistent with clearing house rules and the like or with a general banking usage," raises a presumption that the bank used ordinary care. 13 Pa. C.S.A. section 4103(c). Before the court can determine whether Mellon is entitled to this presumption, or whether Mellon actually used ordinary care, it must examine the wire transfer at issue here.

 The transfer was made under BankWire, a system maintained by Mellon and roughly 100 other banks. Deposition of K.L. Schultz, 89, 95-96; Deposition of David Taddeo, p. 35. BankWire procedure requires a customer's authorized representative to instruct Mellon to transfer money from the customer's account to the recipient's account in another bank. After receiving and verifying an instruction, Mellon personnel would when necessary select a "correspondent" bank. The correspondent bank would then serve as a conduit for the transfer to the recipient's bank. Taddeo Deposition, pp. 23-25.

 This process does not transmit the funds themselves; rather, upon making the transfer Mellon would debit the customer for the the amount of the transfer, and credit the correspondent bank's account with Mellon. Schultz Deposition, pp. 86-87. Unlike another system called FedWire, which makes transferred funds immediately available to the recipient, BankWire funds become available on the day following the transfer. *fn2" Schultz Deposition, p. 85; Taddeo Deposition, pp. 28-29.

 Because BankWire funds are not immediately obtainable, a cancellation does not require the bank to recapture the wired funds. *fn3" Deposition of Schultz at 86, 96-97. Essentially, a BankWire cancellation requires two steps. First, Mellon sends a cancellation notice to the "correspondent" bank, which in turn instructs the recipient bank to disregard the transfer. Second, Mellon reverses the credit/debit notation which it made upon receiving the transfer order; the customer's account is recredited and the correspondent bank's account is debited, thereby returning the balances to their pre-transfer sums. Id. at pp. 86-87. Mellon's objective regarding cancellations is to "make every effort to get the funds back for [its] customer." Id. at 85. Mellon apparently handles a large volume of wire transfer transactions: In 1985 the bank handled over 1,000 requests of all kinds per day, of which eight to ten sought cancellation. Id. at 84, 90-91.

 Mellon's customers would be informed of a successful cancellation in one of two ways. Mellon might give a specific notice to the customer that the transaction had been recalled, or it might simply allow the re-crediting of the customer's account to function as a notice. Id. at 112; Deposition of Kehoe, pp. 49-50. As to Mellon, correspondent banks would notify it only if there were problems in effecting the cancellation. Schultz Deposition, p. 99, Taddeo Deposition, pp. 31-32.

 SSC instructed Mellon to cancel the wire on the same day it learned that the funds were not covered. SSC representative Michael Kehoe telephoned the bank shortly before four in the afternoon and asked:

 
KEHOE: Okay would you ask them to cancel this transaction?
 
MELLON: Okay we can. Okay and who am I speaking to again?
 
KEHOE: This is Mike.
 
MELLON: Okay, Mike, we'll take care of it.
 
KEHOE: Okay how will I know it will be cancelled?
 
MELLON: Well the only thing I can do is send them a service telling ...

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