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CHRYSLER CREDIT CORP. v. FIRST NATL. BANK & TRUST

March 27, 1984

CHRYSLER CREDIT CORPORATION, a Delaware corporation, Plaintiff,
v.
FIRST NATIONAL BANK AND TRUST COMPANY OF WASHINGTON, a national banking association incorporated under the laws of the Commonwealth of Pennsylvania, Defendants



The opinion of the court was delivered by: ZIEGLER

 This case presents the question whether presentment of a check at the data processing center of a payor bank requires the bank to give notice of dishonor or return the check prior to midnight of the next banking day. The issue is one of first impression under Pennsylvania law and the decisions from other jurisdictions are sparse. We conclude that the Supreme Court of Pennsylvania, if confronted with the question, would hold that when a check is received at the data processing center of the payor bank, where the bookkeeping services for the branch offices are conducted, the bank's failure to send notice of dishonor or return the check before midnight of the next business day renders the bank liable for the amount of a worthless check pursuant to 13 Pa.C.S.A. § 4302.

 I.

 Plaintiff, Chrysler Credit Corporation, instituted this diversity action to recover the sum of $53,337.75 from First National Bank and Trust of Washington County, Pennsylvania (First National). Plaintiff also seeks money damages for conversion and fraud. Pennsylvania law is controlling.

 The evidence established during the bench trial that Chrysler Credit and Al Barry, Inc., executed financing agreements whereby plaintiff agreed to finance the purchase of new and used vehicles for sale by the dealer. Barry granted a security interest in all vehicles financed under the agreements, and also agreed to remit to Chrysler Credit the proceeds from the sale of all vehicles on the date of sale. *fn1"

  Plaintiff presented evidence, which is not disputed, that Al Barry drew 10 checks on January 18 and 19, 1979, payable to Chrysler Credit Corporation in the total sum of $53,337.75. *fn2" The checks were drawn on the Barry account at the Charleroi branch office of First National. Chrysler deposited the checks in its account at the Monroeville branch of Mellon Bank on January 19, 1979. The checks were routed through the Federal Reserve and received at the main branch and data processing center of First National at Washington, Pennsylvania on January 22, 1979.

 The checks were processed by employees at the processing center, placed in a reader-sorter memory machine, and posted in a reject journal because they were drawn on uncollected funds. The checks were then withdrawn or pulled by employees of central operations.

 On January 23, 1979, at approximately 10:30 a.m., the Charleroi branch received a copy of the posting reject journal by courier from the main branch. The branch manager made a decision to pay the checks the same day. However, on January 24, the branch manager reversed the decision, dishonored the checks and notified the processing center. The central operations department returned the checks to plaintiff.

 Chrysler Credit instituted this 11-count civil action contending that the data processing center of First National is an integral part of each branch office and therefore the checks were "presented on and received by" the Charleroi branch within the meaning of the Uniform Commercial Code on January 22, 1979. Thus, according to plaintiff, the bank is liable for the amount of each check because it failed to dishonor within 24 hours of presentment. Plaintiff also argues that First National engaged in conversion and fraud when it paid checks drawn on the account of Al Barry in January, 1979 because it knew or should have known that the dealer was engaged in a check kiting scheme.

 We find that plaintiff has established by a preponderance of the evidence that First National failed to timely dishonor the checks at issue and therefore judgment will be entered for Chrysler Credit at counts one through ten, with interest at 6 percent from January 23, 1979. We further find that plaintiff has failed to establish the tort of conversion by a preponderance of the evidence. Finally, we find that plaintiff has failed to establish fraud by clear and convincing evidence as required by state law, Snell v. State Examining Bd., 490 Pa. 277, 416 A.2d 468, 470 (1980), and therefore judgment will be entered for First National at count eleven.

 II.

 The Uniform Commercial Code has been adopted in Pennsylvania and Section 4302 provides that a payor bank must pay, return or dishonor a check within the midnight deadline following presentment to or receipt by the bank. 13 Pa.C.S.A. § 4302(1). The Code defines midnight deadline as "midnight on its next banking day following the banking day on which it receives the relevant item." 13 Pa. C.S.A. § 4104(a). These limitations require that payor banks make decisions on demand items to insure prompt payment to a chain of individuals and institutions in a fluid commercial transaction. Otherwise, a situation is created where a series of banks are extending credit to each other. Leary, Check Handling Under Article Four of the Uniform Commercial Code, 49 Marq.L.Rev. 330 (1965). And as one commentator has noted:

 
If payor banks delay too long the rights of others may be compromised. Often the depositor may be a seller whose rights will be impaired if he must wait too long to discover if the check has been paid.

 Note, Liability of Payor Banks for Checks Retained Beyond the Midnight Deadline, The U.C.C. As It Affects Bank Transactions (1978).

 The foregoing policy determinations make clear that First National was required to pay, return or dishonor the 10 checks before midnight on the day following presentment. Failure to act renders the bank accountable. 13 Pa. C.S.A. § 4302. First National contends that the checks were "presented on and received by" the payor bank when the Charleroi branch received the posting reject journal on the morning of January 23, because the branch is treated as a separate bank for the purpose of computing the time within which action must be taken under the Commercial Code. See 13 Pa. C.S.A. § 4106. Thus, according to defendant, the bank had until midnight on January 24 to meet its deadline. We disagree.

 First, the weight of authority is to the contrary. South Sound Natl. Bank v. First Interstate Bank, 65 Ore. App. 553, 672 P.2d 1194 (1983); Central Bank of Alabama v. Peoples Nat. Bank of Huntsville, 401 So.2d 14 (Ala. 1981); Capital City First Nat. Bank v. Lewis State Bank, 341 So.2d 1025 (Fla.Ct.App. 1977); Farmers and Merchants Bank v. Bank of America N.T. & S.A., 20 Cal.App.3d 939, 98 Cal.Rptr. 381 (1971). The only contrary authority is Idah-Best, Inc. v. First Sec. Bank, 99 Idaho 517, 584 P.2d 1242 (1978), but we find that case distinguishable because (a) the operations of the processing center were limited; (b) the checks were physically delivered to the branch before any action was taken; and (c) state law required that presentment be made at the location designated on the face of the check.

 Second, the commentators also subscribe to the view that presentment at a processing center operated by a bank, rather than the banking office where the check is drawn, is effective to trigger the time limits of the midnight deadline. Brady, for example, concludes that the Code "cleared up any doubt that presentment at a processing center is good presentment, so long as it is of an item handled by banks in the collection process . . . ." H. J. Barkley, Brady on Bank Checks, § 13.10 (5th Ed. 1979). Finding no reason for a contrary rule so long as the bank has the equipment to process the check, the author concludes that presentment at the processing center complies with the Code provision that "presentment may be made . . . to any person who has authority to make or refuse the acceptance or payment." Id. at § 13.10, pp. 13-17 through 13-19; 13 Pa.C.S.A. § 3505(c)(2). Clark and Leary are in accord. Clark, The Law of Bank Deposits, § 3.4 (Rev.Ed. 1981); Leary, Deferred and Delayed Returns -- The Current Check Collection Problem, 62 Harv.L.Rev. 905 (1949).

 Third, the official comments to the Commercial Code support our conclusion. Comments 4 and 5 to § 4-106 provide:

 
4. Assuming that it is not desirable to make each branch a separate branch for all purposes, this Section provides that a branch or separate office is a ...

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