On Appeal From the United States District Court for the Eastern District of Pennsylvania, D.C. Civil Action No. 87-4412.
Stapleton, and Mansmann, Circuit Judges, and Fisher, District Judge*fn*
STAPLETON, Circuit Judge:
In this appeal we must determine the relationship between a paying bank's liability for failure to notify a depositary bank of a check's dishonor as required by Federal Reserve Regulation J, 12 C.F.R. § 210:1 et seq. ("Regulation J"), and a depositary bank's liability for breach warranty under the Uniform Commercial Code, 13 Pa. C.S.A. § 4207(a)(1) ("UCC"), and Regulation J, 12 C.F.R. § 210.5(a)(2). The district court held that the paying bank's warranty claim defeated the depositary bank's notification claim. We will reverse.
On January 2, 1987, the appellant, First American Savings ("First American"), received a check for deposit by its customer, Martha Bonanni, drawn on the appellee, M & I Bank of Menomonee Falls ("M & I"). The check, in the amount of $18,800.00, was made payable to Henry Skorr and contained the purported endorsement of Henry Skorr, followed by the endorsement of Martha Bonanni. First American provisionally credited Mrs. Bonanni's account with $18,800.00, and then forwarded the check through the federal reserve system for presentment to M & I.
On January 5, 1987, M & I was presented with the check, and on the next day, January 6, it dishonored it because the account on which it had been drawn was closed. M & I, however, did not notify First American that it dishonored the check although required to do so under Regulation J which provides as follows:
(1) A paying bank that receives a cash item in the amount of $2,500 or more directly or indirectly from a Reserve Bank and determines not to pay it shall provide notice to the first bank to which the item was transferred for collection ("depositary bank") that the paying bank is returning the item unpaid. . . .
(2) The paying bank shall provide the notice such that it is received . . . by the depositary bank by midnight of the second banking day of the paying bank following the deadline for return of the item as specified in paragraph (a) of this section . . . Notice may be provided through any means, including return of the cash item so long as the cash item is received by the depositary bank within the time limits specified in this subparagraph.*fn1
12 C.F.R. § 210.12(c)(1) and (2).*fn2 Instead, M & I merely returned the check to the Federal Reserve Bank of Chicago.
As the check was making its way back to First American, Martha Bonanni withdrew a total of $17,000.00 from her account. She withdrew the money on two separate occasions -- $12,000.00 on January 9, 1987 and $5,000.00 on January 12, 1988 at 11:59 a.m. First American did not receive notification of M & I's dishonor of the check until later in the day of January 12, 1987, at 1:45 p.m., when its correspondent, Provident National Bank, telephoned with the information. At that time, Mrs. Bonanni had only $1,800.00 left on deposit, thereby resulting in an overdraft of $17,000.00 when First American charged the check back against her account.
Subsequent to M & I's dishonor of the check, it was discovered that the payee's endorsement was forged. Although M & I dishonored the check because the account on which it had been drawn was closed, M & I nevertheless disclaimed any liability to First American for failure to notify because of the existence of the forgery. To date, First American has recovered only $500.00 of the overdraft, leaving a principal loss of $16,500.00.
First American commenced the present action in the district court to recover the balance of the overdraft, and moved for summary judgment on the basis of M & I's Regulation J violation. First American argued that had M & I given proper notification of dishonor, First American would have learned the check was being returned no later than midnight on January ...