708 F.2d 290 | 3rd Cir. | 1983
Lead Opinion
This is an appeal from the district court’s dismissal of the plaintiff’s claim under section 4-212 of the Uniform Commercial Code on the grounds that the plaintiff failed to establish its damages. Affirmed.
The Appliance Buyers Credit Corporation, a Delaware corporation with its principal place of business in Michigan, is a finance company that provides wholesale “floor-plan financing” to appliance dealers.
The district court dismissed the plaintiff’s claim under section 4-202
“Because the plaintiff has not demonstrated that it had a reasonable chance to collect all or part of the amount of the checks, the amount plaintiff was actually damaged, if any, as a result of the bank's failure to exercise ordinary care in notification is pure speculation. The court will not indulge in such speculation. [Appliance Buyers] has not produced any evidence that if it had known of the dishon- or on October 24,1979, it might have had a reasonable chance to collect any part of the money represented by the checks that it can’t recover in the bankruptcy proceeding. Because the court is unable to determine what an appropriate award of damages would be in this case, if any, none can be awarded.” (Footnote and citations omitted).
The district court denied the Appliance Buyers Credit Corporation’s motion to modify the above quoted court order regarding the corporation’s failure to prove its damages:
“The court is not convinced, however, that § 4-212 gives a depositor a complete and automatic windfall if the bank is late in notification of dishonor of deposited and provisionally-credited items, when it is not proved that such lateness made any financial difference to the depositor, or, if so, within reasonable limits, how much difference it made. The court is not willing to adjudicate such an inconsistency of consequences between two sections of the Uniform Commercial Code dealing with the same subject, especially in a case where plaintiff took large checks it had substantial reason to suspect might ‘bounce,’ and now seeks thereby to saddle its bank with liability thereon after its debtor’s bankruptcy.”
The plaintiff (Appliance Buyers Credit Corp.) appealed.
Appliance Buyers does not “seek review ... of the trial court’s dismissal of [its] section 4-202 claim,” recognizing that “the trier of fact’s weighing of the evidence is not an appropriate subject for appellate review in this case.” Because there is no challenge to the district court’s application of section 4-202, the question in this case is one of first impression: is a bank strictly liable as the plaintiff contends for the face value of a check under section 4-212 of the Uniform Commercial Code if, after failing to give the depositor timely notice of the check’s dishonor, the bank charges back the depositor’s account?
Appliance Buyers Credit Corp. asserts that section 4-212 makes a bank liable for the face value of a check when the bank breaches its duty to give a depositor timely notice of the check’s dishonor, as under section 4-212 timely notice of dishonor is a pre-condition to the bank’s right to charge-back. While it is clear that the drafters of section 4-212 of the Uniform Commercial Code intended to condition a bank’s right to charge-back upon the giving of timely notice of dishonor, section 4r-212 fails to set forth language holding a bank “accountable” for the face value of a dishonored check if and when the bank fails to give timely notice of dishonor.
Ill.Rev.Stat. ch. 26 § 4-212 provides:
“(1) If a collecting bank has made provisional settlement with its customer for an item and itself fails by reason of dishon- or, suspension of payments by a bank or otherwise to receive a 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 items 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. 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 (subsection (3) of section 4-211 and subsections (2) and (3) of section 4-213).”
Because section 4-212 is silent concerning a depositor’s measure of damages arising out of an improper charge-back, we will examine the Code and case law to determine the proper standard to be applied when deciding what Appliance Buyers must establish in order to recover under section 4-212. Ill.Rev.Stat. ch. 26 § 4-103(5), the general damages section of the Uniform Commercial Code, 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 which could not have been realized by the use of ordinary care, and where there is bad faith it includes other damages, if any, suffered by the party as a proximate consequence.”
The official comment to section 4-103 states that “[w]hen 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 which would have been in any event uncol-lectible.” In applying this standard to the instant dispute, the district court ruled that there was serious question as to whether Appliance Buyers could have recovered any of the disputed $65,736.78 even if it had received timely notice of the checks’ dishon- or, as Nevius Appliance was in severe financial difficulty during the period in question and filed for bankruptcy just nine days after the checks were dishonored. Indeed, the district court found that the “fact of bankruptcy within two weeks of issuance of the first check and other evidence concerning Nevius’ [insolvency] during the relevant period ... raise serious doubt that [Appliance Buyers] could have collected any part of the amount of the checks, even if notified of the checks’ dishonor in timely fashion.” When evidence at trial demonstrated that “some or all of the item could not have been collected” had Appliance Buyers re
A depositor bears the burden of establishing its actual damages under section 4-103 in order to recover damages arising out of the negligence of a bank for failing to give a timely notice under other sections of the Code. See generally Marcoux v. Van Wyk, 572 F.2d 651 (8th Cir.1978); Whalen & Sons Grain Co. v. Missouri Delta Bank, 496 F.Supp. 211 (E.D.Mo.1980); and Bank of Wyandotte v. Woodrow, 394 F.Supp. 550 (W.D.Mo.1975). It is the Appliance Buyers’ position that the bank’s failure to give timely notice of dishonor has caused their difficulty in proving damages since Nevius’ business records do not reveal whether Appliance Buyers could have recovered a measure of damages from Nevius Appliance by repossessing those items in which Appliance Buyers had a security interest. Thus, under the plaintiff’s analysis, the bank must prove the amount Appliance Buyers could not have collected even had the bank given timely notice of dishonor and if it is unable to meet this burden, Prospect National should be held liable for the face value of the checks. However, Appliance Buyers has failed to cite any sections of the Code or case law that do in fact shift the burden of proof from the depositor to the bank to prove the extent of a depositor’s loss.
In the absence of “accountability” under other Uniform Commercial Code sections such as section 4—02, courts have required depositors to prove the extent of their actual damages. For example, in Marcoux v. Van Wyk and the other cases cited herein dealing with untimely notice, courts clearly place the burden on a depositor seeking recovery to prove the amount “they would have had at least a reasonable chance to collect.... It is not enough to show that by a fortuitous combination of unlikely events there was a dim hope of collection.” 572 F.2d at 655. Furthermore, the bank will not be held liable “unless there is a clear causal relationship between the bank’s actions and the plaintiff’s loss.” Whalen & Sons Grain Co., 496 F.Supp. at 215. In a similar, pre-Code case, one court held “the burden [is] on the [depositor] not only to prove negligence on the part of the defendant [bank] but also the amount of loss in fact sustained as a result of that negligence. The defendant is not liable unless it is made to appear that collection could have been made, and was not made, because of want of reasonable effort and diligence on defendant’s part.” Schooler Motor Co. v. Bankers' Trust, 216 Iowa 1147, 247 N.W. 628, 630 (Iowa 1933). A fair reading of the Code and relevant case law reveals that since depositors must prove untimely notice and actual damages as conditions precedent to recovery under section 4-202, under section 4-212 depositors must also prove that they received untimely notice as well as the amount of actual damages suffered as a result of the untimely notice.
The only decision that has been cited to the court in support of the Appliance Buyers’ position is a case from the Civil Court
The district court in its decision noted that when Appliance Buyers accepted Nevi-us’ checks, Appliance Buyers “had substantial reason to suspect [the checks] might ‘bounce’ . ... ” Indeed, testimony was presented at trial that a representative of Appliance Buyers was told by Ken Nevius that he (Nevius) was unsure whether “we have enough money to cover this check.” Moreover, one of Appliance Buyers’ employees testified that although Nevius Appliance had agreed to make weekly payments on its account to Appliance Buyers, Nevius had not done so in the last month and a half prior to the time they issued the two NSF checks in question. Now, Appliance Buyers is attempting to shift the loss, caused by their own lax financial policy, to Prospect National Bank. Finance companies such as Appliance Buyers Credit Corporation have the obligation to actively police the floor plans of participating dealers and to ensure that dealers are current in their payments. When a finance company fails to develop a sound financial policy and allows dealers to fall behind in their payments, the finance company must bear the burden if the dealers fail to pay their bills when due. It is apparent from the record that having failed in its duty to protect its investments by keeping tighter reins on Nevius’ account, absent proof that Prospect National Bank’s untimely notice actually damaged the corporation, Appliance Buyers cannot now shift the responsibility for their own negligence to the bank.
We agree with and affirm the district court’s decision and hold that in order for the plaintiff in this case to recover for damages arising out of Prospect National Bank’s alleged failure to give timely notice of dishonor as required by section 4-212 of the Uniform Commercial Code, the burden is on the depositor (Appliance Buyers) to establish that Prospect National failed to give timely notice, and the amount of damage Appliance Buyers actually suffered as a result of Prospect National’s untimely notice.
. As a “floor-plan financier,” Appliance Buyers finances the inventory of various appliance dealers and maintains a security interest in the merchandise so financed.
. Ill.Rev.Stat. ch. 26 § 4-202 reads, in pertinent part:
“(1) A collecting bank must use ordinary care in
(b) sending notice of dishonor or non-payment .. . after learning that the item has not been paid or accepted, as the case may be; and
s}s sf: sfc Ht jfc
(2) A collecting bank taking proper action before its midnight deadline following receipt of an item, notice or payment acts seasonably; taking proper action within a reasonably longer time may be seasonable but the bank has the burden of so establishing.”
. Contrary to the dissent’s assertion, the language of section 4-103 does not place the burden on the bank to prove what “would have been uncollectible even if timely notice had been given.” Rather, if the evidence at trial raises a question that some or all of the item was in any event uncollectible, under section 4-103 and the cases construing it, the burden remains on the plaintiff/depositor to prove their actual damages. This result is consistent with the time-honored principle of law that a party bringing a claim has the burden of proving their damages to a reasonable degree of certainty. The position advocated by the dissent is apparently based solely on policy considerations.
Dissenting Opinion
dissenting.
The plain language of the statute in question here preconditions a collecting bank’s
Numerous courts which have been called upon to interpret section 4-212(1) have concluded that a bank which fails to send notice of dishonor before its midnight deadline loses the right to charge back against the customer’s account; among these cases is one from the Illinois appellate court which should be especially influential upon a federal court sitting in a diversity case. Wells Fargo Bank v. Hartford National Bank & Trust Co., 484 F.Supp. 817, 822 (D.Conn. 1980); Dozier v. First Alabama Bank of Montgomery, 363 So.2d 781, 783 (Ala.Civ. App.1978); Salem National Bank v. Chapman, 64 Ill.App.3d 625, 21 Ill.Dec. 414, 381 N.E.2d 741, 743 (5th Dist.1978); Fromer Distributors v. Bankers Trust Co., 36 A.D.2d 840, 321 N.Y.S.2d 428, 430 (1971); Manufacturers Hanover Trust Co. v. Ak-pan, 91 Misc.2d 622, 398 N.Y.S.2d 477, 479 (N.Y.Civ.Ct.1977); First Security Bank of Utah v. Lundahl, Inc., 22 Utah 2d 433, 454 P.2d 886, 888 (1969); see also 6 J. Reitman, H. Weisblatt, W. Schlichting, T. Rice & J. Cooper, Banking Law § 138.06[2] (1981 and Supp.1982) and cases cited therein. Quite clearly, the intent of the Code’s drafters, reflected in its plain language, was to precondition the right of charge-back under section 4-212 upon timely notice of dishon- or.
The majority argues that this conclusion gives rise to a species of strict liability under section 4-212 which is inconsistent with section 4-103(5). This focus upon a supposed contradiction between strict liability and liability based upon negligence is, in my opinion, wide of the mark. Our task here is to construe together three provisions of Article 4. One is a provision granting banks a right of charge-back under certain conditions, Ill.Rev.Stat. ch. 26, § 4-212(1). One is a provision imposing a duty of ordinary care upon banks, which includes a duty to send notice of dishonor before midnight of the next banking day, Ill.Rev.Stat. ch. 26, § 4—202.
Attempting to read these three provisions together so as to do the least violence to the language of each, however, I would conclude that section 4-212 raises a presump
The measure of damages for failure to exercise ordinary care in handling an item is the amount of the item reduced by an amount which could not have been realized by the use of ordinary care....
Ill.Rev.Stat. ch. 26, § 4-103(5). This section incorporates a rule of causation, that is, a bank will not be held responsible for losses which its conduct did not cause. The section also suggests a procedure, involving the use of a presumption, for excluding damages not caused by failure to notify. In the case at hand, this reading of the statutory provisions requires that we presume Prospect National’s default has injured Appliance Buyers and that the amount of that injury was equivalent to the face value of the check. However, this presumption could be rebutted by evidence that the item in question would have been uncollectible even if timely notice had been given. The language of section 4-103(5), moreover, by prescribing the face amount of an item as a baseline to be “reduced,” seems to support placement of the burden of persuasion on this issue upon the bank.
I realize that to shift the burden of persuasion to the bank will require banks to rely on information which may be more immediately accessible to their customers, but this is a hurdle which may be surmounted by discovery. I believe it is more significant that failure to shift the burden would leave the onus entirely upon the depositor even though it is the bank’s breach of duty which may have brought about the alleged harm. Judge Morgan seems to have left the burden of persuasion on the depositor rather than on the bank. I would therefore remand this case for further findings, based on a shift of the burden of persuasion as I have indicated, and for a determination of what damages, if any, the plaintiff suffered due to receipt of the notice of dishonor on October 29 rather than on the date statutorily prescribed; in order to limit its responsibility for the loss suffered, the bank would be required to show by a preponderance of the evidence that earlier notice of dishonor would not have permitted the plaintiff to mitigate its damages.
I therefore respectfully dissent.
. The Illinois Code Comment indicates that a bank’s sole remedy prior to section 4-212 was to hold the depositor liable upon his contract of indorsement. Ill.Rev.Stat. ch. 26, § 4-212, comment 1.
. Section 4-202 provides in relevant part that:
(1) A collecting bank must use ordinary care in
(b) sending notice of dishonor or nonpayment or returning an item
(2) A collecting bank taking proper action before its midnight deadline following receipt of an item, notice or payment acts seasonably; taking proper action within a reasonably longer time may be seasonable but the bank has the burden of so establishing.
Ill.Rev.Stat. ch. 26, § 4-202.
. Whether the liability is one based on negligence or is liability without fault (“strict liability”) is not really relevant here.
. One court has described this provision as “a shield in the hands of a negligent defendant,” rather than “a sword in the hands of a plaintiff.” Wells Fargo Bank v. Hartford National Bank & Trust Co., 484 F.Supp. at 822 (concluding that section 4-103(5) was thus irrelevant to an action based on section 4-212).