UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA
March 10, 1993
ALNOR CHECK CASHING
JEFF KATZ AND SOLAR RESEARCH CORPORATION, et al.
The opinion of the court was delivered by: BY THE COURT; HERBERT J. HUTTON
MEMORANDUM AND FINAL JUDGMENT
March 10, 1993
Presently before the Court is third-party defendant United States of America's Motion to Dismiss under Fed. R. Civ. P. 12(b)(6) and plaintiff Alnor Check Cashing Company's ("Alnor") response.
I. FACTS AND PROCEDURAL DEVELOPMENTS
A. The Underlying Financial Transactions
The material facts are not in dispute. On November 29, 1991, the United States Treasury issued Treasurer's Check Number 3007-7994192 in the amount of $ 9,390.90. The check identified the payee as:
the Order of SOLAR RESEARCH CORP
ATTN JEFF KATZ
230 SOUTH BROAD STREET
PHILADELPHIA, PA 19102
(Alnor Exhibit C, photocopy of check and Government's Exhibit A). On December 19, 1991, Jeff Katz ("Katz") presented the check to Alnor for negotiation of the check to cash. Alnor is a check cashing company. Katz represented to Alnor that he was a corporate officer of Solar Research Corporation ("Solar Research") and that he had the authority to cash the check.
Alnor cashed the check and gave Katz the cash value of the check less Alnor's customary service fee. Alnor subsequently endorsed the check over to its bank, the Philadelphia Savings Fund Society ("PSFS"). On September 23, 1992, PSFS issued a notice to Alnor that it was debiting Alnor's account in the amount of $ 9,390.90 and that PSFS was issuing a check no. 2372912, for the same amount, to the United States Federal Reserve Bank. (Alnor Exhibit G). PSFS explained that the transfer from Alnor's account to the Federal Reserve was because of a "forged endorsement." Id.
Although Solar Research does not indicate the actual date, there is no dispute that prior to September 23, 1992, the Treasury was notified that Jeff Katz no longer had the authority to negotiate treasury notes for Solar. (Alnor Exhibit C, Solar's undated request for new Treasury Check based on Katz's cashing Treasury Check No. 3007-7994192).
B. Litigation in State Court and the Government's Subsequent Removal to Federal Court
On November 4, 1992, Alnor filed suit against Solar Research and Katz in the Court of Common Pleas of Philadelphia County. Alnor's complaint alleges that Solar Research and Katz violated Pennsylvania's version of the Uniform Commercial Code ("U.C.C.") on negotiable instruments. 13 Pa. Con. Stat. §§ 3302-05 (U.C.C. §§ 3-302 to 3-305) (Holders in Due Course).
On December 8, 1992, Solar Research filed its answer including a counterclaim against Alnor for negligently failing to confirm Katz's status as an authorized Solar Research officer. (Alnor Exhibit I, New Matter Cross-Claim and Counter-Claim). Subsequently, on December 16, 1992, Alnor filed a two count "Complaint in Joinder" (Third-Party Complaint) against the United States. Count one seeks indemnification from the United States in the event Solar Research prevails on its counter claim against Alnor. Count two seeks direct reimbursement from the United States on the theory that the United States wrongfully dishonored a government check of which Alnor was the Holder in Due Course of a properly endorsed "pay to the order" commercial instrument.
The United States received service of Alnor's Third-Party Complaint on December 29, 1992, and on January 27, 1993, removed the case to federal court. 28 U.S.C. § 1441 (removal provision); 28 U.S.C. § 1346 (federal question jurisdiction where United States is a defendant). On February 2, 1993, the United States filed the present Motion to Dismiss and Solar Research responded on February 17, 1993.
The United States has moved to dismiss both counts of Alnor's complaint under Fed. R. Civ. P. 12(b)(6). In support of its motion the government argues that the United States has not waived sovereign immunity to be sued over a commercial instrument. If this Court does have jurisdiction, the United States argues in the alternative that Alnor's endorsement of the treasury check constitutes a guarantee that any previous endorsements are valid under existing treasury regulations. 31 C.F.R. § 240 (Endorsement and Payment of Checks Drawn on the United States Treasury).
A. Whether the United States has Waived Sovereign Immunity
The government's first argument is that this Court lacks subject matter jurisdiction because the United States has not waived sovereign immunity to be sued. Fed. R. Civ. P. 12(b)(1). It is axiomatic that "the United States, as sovereign, is immune from suit" unless it consents to be sued. United States v. Sherwood, 312 U.S. 584, 586, 85 L. Ed. 1058, 61 S. Ct. 767 (1941); Balmaceda v. United States, 1992 WL 395696, *2 (E.D. Pa. Dec. 29, 1992). Further, Congress can only waive the defense of sovereign immunity if it does so expressly by statute. United States v. Mitchell, 445 U.S. 535, 538, 63 L. Ed. 2d 607, 100 S. Ct. 1349 (1980).
Any party attempting to sue the United States bears the burden of proving that Congress has waived sovereign immunity. Holloman v. Watt, 708 F.2d 1399, 1401 (9th Cir. 1983) (per curiam). In the present case it is Alnor that bears the burden of proof. The United States alleges that Alnor has failed in its burden by failing to state any statute or legal theory in their Third Party Complaint that waives sovereign immunity. (Government's Brief at 4; see also Alnor's Third-Party Complaint at PP 5-20, citing only 13 Pa. Con. Stat. §§ 3302-05; U.C.C. §§ 3-302 to 3-305, state law provisions as basis for relief).
In response to the government's motion, however, Alnor argues that Congress has waived sovereign immunity under the Tucker Act (sometimes "Little Tucker Act"), 28 U.S.C. § 1346(a), which provides in relevant part:
(a) The district courts shall have original jurisdiction, concurrent with the United States Claims Court, of:
(2) Any other civil action or claim against the United States, not exceeding $ 10,000 in amount, founded either upon the Constitution, or any Act of Congress, or any regulation of an executive department, or upon any express or implied contract with the United States, or for liquidated or unliquidated damages in cases not sounding in tort . . . .
§ 1346(a)(2). Case law interpreting this provision has held that § 1346(a) both provides subject matter jurisdiction and is a waiver of sovereign immunity.
In C.H. Sanders Co. v. BHAP Housing Dev. Fund Co., 903 F.2d 114, 119 (2d Cir. 1990), the Second Circuit held:
The Tucker Act provides both subject matter jurisdiction and sovereign immunity for non-tort claims "against the United States . . . founded either upon the Constitution, or any Act of Congress, or any regulation of an executive department, or upon any express or implied contract with the United States.
Id. at 119.
Similarly, in National Bank of Fairhaven v. United States, 660 F. Supp. 125, 127-28 (D. Mass. 1987), the district court's discussion made clear that contract claims may be brought against the United States where there are allegations of wrongful government collection on Treasury checks. Id. at 128 (citing State of Tennessee Ex Rel. Leech v. Dole, 749 F.2d 331, 335 (6th Cir. 1984, cert. denied, 472 U.S. 1018, 87 L. Ed. 2d 615, 105 S. Ct. 3480 (1985)).
Accordingly, this Court now turns to the question of whether Alnor's endorsement of the treasury check, as outlined by Treasury Regulation 31 C.F.R. § 240, requires this Court to dismiss the third-party complaint against the United States.
B. Dismissing Alnor's Claim Under Treasury Reg. 31 C.F.R. § 240
When the United States issues commercial paper or any other negotiable instruments, federal law governs all subsequent transactions, regulations and disputes. Clearfield Trust Co. v. United States, 318 U.S. 363, 87 L. Ed. 838, 63 S. Ct. 573 (1943); Francis H. Fox, Forgery and Government Checks, 27 Drake L. Rev. 458 (1977-78) (Alnor Exhibit B). In Clearfield Trust the Supreme Court held:
We agree with the [Third] Circuit Court of Appeals that the rule of Erie Ry. Co. v. Tompkins, 304 U.S. 64, 82 L. Ed. 1188, 58 S. Ct. 817 (1937), does not apply to this action. The rights and duties of the United States on commercial paper which it issues are governed by federal rather than local law. When the United States disburses its funds or pays its debts, it is exercising a constitutional function or power.
318 U.S. at 366. The Clearfield court then determined that when Congress issued a check under the Federal Emergency Relief Act of 1935, 15 U.S.C. §§ 721-28 (1935), it did so under authority "which had its origin in the Constitution and the statutes of the United States and was in no way dependent on the laws of Pennsylvania or of any other state." Id. Further, addressing the government's specific power to make payments the Court stated:
The issuance of commercial paper by the United States is on a vast scale and transactions in that paper from issuance to payment will commonly occur in several states. The application of state law, even without the conflict of laws rules of the forum, would subject the rights and duties of the United States to exceptional uncertainty. It would lead to great diversity in results by making identical transactions subject to the vagaries of the laws of the several states. The desirability of a uniform rule is plain.
Id. at 367.
Clearfield Trust is still the law of the land. See e.g., Boyle v. United Technologies, 487 U.S. 500, 508, 101 L. Ed. 2d 442, 108 S. Ct. 2510 (1988) (discussing areas of protected federal common law); United States v. Spears, 859 F.2d 284 (3d Cir. 1988) (FmHA contract not subject to state law); Bank of America Nat'l Trust & Sav. Ass. v. United States, 552 F.2d 302 (9th Cir. 1977); United States v. City Nat'l Bank & Trust Co., 491 F.2d 851 (8th Cir. 1974). The inescapable application of Clearfield is that where a federal treasury note is involved, federal law preempts the Uniform Commercial Code, even where state law would otherwise directly regulate the financial transactions in question.
1. Alnor's Indemnification Claim Under
31 C.F.R. § 240.5
Alnor argues in its claim for indemnification or contribution that Katz's indorsement was unauthorized and that the United States Treasury is liable. The Treasury rules promulgated in Chapter 31 of the Code of Federal Regulations set forth a bank's responsibilities when handling federal commercial paper. See 31 C.F.R. § 240. Most significantly, § 240.5 provides:
Guaranty of indorsements. The presenting bank and the indorsers of a check presented to the Treasury for payment are deemed to guarantee to the Treasury that all prior indorsements are genuine, whether or not an express guaranty is placed on the check. When the first indorsement has been made by one other than the payee personally, the presenting bank and the indorsers are deemed to guarantee the Treasury, in addition to other warranties, that the person who so indorsed had unqualified capacity and authority to indorse the check on behalf of the payee.
Id. Under § 240.5 any subsequent endorsers of a treasury check warrant that the initial endorsement was both valid and made under unqualified capacity of the signor.
Alnor's secondary endorsement guaranteed to PSFS, and ultimately the Treasury, that Katz's signature was valid and that he had the "unqualified capacity" to sign as an agent or officer of Solar Research. As such, the Treasury enjoys an absolute right of guarantee against PSFS that when PSFS deposited the check with the Federal Reserve Bank, the cashed check was properly redeemed by all previous endorsers. Therefore, under 31 C.F.R. § 240.5, Alnor cannot assert an indemnification claim against the Treasury on Check No. 3007-7994192 as a matter of law. See Fed. R. Civ. P. 12(b)(6).
2. The United States Wrongfully Debiting Alnor's Account
Alnor argues that the United States has improperly prevented Alnor from enforcing its check as a holder in due course under 13 Pa. Con. Stat. § 3302 (U.C.C. § 3-302). (Alnor's Third-Party Complaint at PP 17-20). However, the relevant Treasury regulations and Alnor's own exhibits indicate that the government has never prevented Alnor's rights as a holder in due course. Alnor's Exhibit G makes clear that it was PSFS that debited Alnor's account on September 24, 1992 as a state law "set-off" against PSFS having to pay the United States. Id.
This Court finds that Alnor cannot assert a claim against the United States where PSFS had a state law or contractual right to remedy its balance sheets against Alnor. To hold otherwise would be to elevate state law commercial rights over the federal treasury regulations in violation of the Federal Supremacy Clause. U.S. Const. art. VI, cl. 2.
When the Treasury discovers that it has honored a check cashed under forgery or other fraudulent circumstances, it may recover the funds from the bank that presented the check to the Federal Reserve Bank. 31 C.F.R. § 240.6. Section 240.6 provides:
Reclamation of amounts of paid checks.
(a) If, after a check has been paid by Treasury, it is found to:
(1) Bear a forged or unauthorized indorsement; or
(2) Contain any other material defect or alteration which was not discovered upon first examination, then, upon demand by the Treasury in accordance with the procedures specified in § 240.7 of this part, the presenting bank or other indorser shall refund the amount of the check payment.
§ 240.6(a). See also § 240.6(d) (Secretary may recover costs and balance from any previous endorser). In this case, the Treasury acted within its regulatory power under § 240.6(a) and demanded repayment from PSFS. As the presenting bank PSFS acquiesced in the Treasury's request and refunded the $ 9,390.90, all in complete compliance with Federal Treasury Regulations.
3. Elevating the U.C.C. over Clearfield Trust v. United States of America
In addition, Alnor argues that it is entitled to relief against the United States because the government wrongfully interfered with its rights as a holder in due course under Pennsylvania state commercial law. Alnor argues that the Uniform Commercial Code, and not Clearfield Trust Co. v. United States, 318 U.S. 363, 87 L. Ed. 838, 63 S. Ct. 573 (1943), should govern Treasury checks in Pennsylvania. See Francis H. Fox, Forgery and Government Checks, 27 Drake L. Rev. 458 (1977-78) (urging Supreme Court to revisit Clearfield Trust and modify holding to comport with the U.C.C.).
This Court finds the reasoning in United States v. City Nat'l Bank & Trust Co., 491 F.2d 851 (8th Cir. 1974) persuasive and rejects Alnor's argument. In City Nat'l Bank, the court examined facts identical to the present dispute. In 1967, Fletcher Davis's widow forged Fletcher's signature and deposited over $ 16,000.00 worth of retired soldier disability checks issued to her deceased husband at Grand Avenue Bank. Grand Avenue subsequently endorsed the checks to City National Bank which in turn endorsed and presented the checks to the United States Treasury.
At the time these transactions took place, both Grand Avenue and City National Banks' endorsements were governed by Treasury Regulation 31 C.F.R. § 202.27(a) (1946) (precursor to present 31 C.F.R. § 240.5 (endorsement guarantee)). City Nat'l Bank, 491 F.2d at 853 n.3. The government filed suit against City National Bank to recover the $ 16,413 that Mrs. Davis had fraudulently cashed over the previous six years. Id. at 852. The Eighth Circuit affirmed the district court's entry of judgment for the United States holding that the Treasury regulations controlled the outcome of the case. Id. at 853.
In reaching its decision the City Nat'l Bank court held that Federal Treasury regulations, and not the U.C.C., gave the United States the right to collect. Id. at 853. Most significantly, the City Nat'l Bank decision discussed the significance of forty-nine of the fifty states having adopted the U.C.C. In rejecting the identical argument that Alnor raises before this Court, the Eighth Circuit held:
We are not persuaded that the authority of National Metro. Bank v. United States, 323 U.S. 454, 89 L. Ed. 383, 65 S. Ct. 354 (1945), with respect to the problem here, has been eroded by the passage of time or the adoption of the U.C.C. by forty-nine states.
491 F.2d at 854. The court concluded:
We accept the general proposition that the federal government, in its commercial transactions, should be treated as other business entities, but we cannot extend such treatment here in the light of the Treasury regulations and the decision of the Supreme Court. If a change is desired, Congress can enact a new statute, the Treasury regulations can be revised or the Supreme Court can overrule National Metro. Bank.
Id. (citations omitted). This Court concludes that it is Congress or the Treasury's responsibility to conform existing law to the Uniform Commercial Code, not the district court. Accordingly, because Alnor is attempting to assert a cause of action under 13 Pa. Con. Stat. § 3305 (U.C.C. § 3-305) that does not exist under federal common law or the Treasury Regulations, the United States's Motion to Dismiss is GRANTED.
4. Public Policy that is Consistent with the Treasury Department's Regulations
Finally, Alnor's policy argument is that a holding in favor of the United States will send a "clear public policy" message that the United States does not stand behind its Treasury checks and discourage check cashing businesses from honoring government checks. (Alnor Brief at 8, n.11, citing Some Check it Out, But Don't Bank On It, Philadelphia Daily News, May 28, 1991, at 23; Congressional Report by Thomas Folietta, July 11, 1991). To the contrary, this Court's holding reinforces the policy goals implicit in Treasury regulation 31 C.F.R. § 240 (1992) and Uniform Commercial Code Articles 3 and 4, that the party most capable of protecting the public from fraud by verifying the authenticity of an endorsement should bear the consequences for breaching that duty. See United States v. City Nat'l Bank & Trust Co., 491 F.2d 851, 852 (8th Cir. 1974); 31 C.F.R. § 240.6 (Treasury may collect from any bank that guarantees a previous endorsement). This Court's decision only reiterates that the United States will not be held accountable when financial institutions fail to properly authenticate or guarantee prior endorsements.
The United State's Motion to Dismiss is GRANTED. As such, the removal of the United States as a defendant, there are no further federal statutes or questions before the Court. 28 U.S.C. § 1346(a) (United States as a defendant). Without a federal question, this Court lacks subject matter jurisdiction to resolve the remaining state law claims under Pennsylvania's Uniform Commercial Code, 13 Pa. Con. Stat. §§ 3302-05 (1992). 28 U.S.C. § 1331 (1982 & Supp. 1992). Therefore, this case is dismissed and shall be remanded to the Court of Common Pleas of Philadelphia County.
All outstanding motions, including defendant Jeff Katz's Motion for Leave to File an Amended Complaint and Alnor's Motion to Strike Defendant Solar Research's Counter-Claim, are denied, without prejudice, so that the parties may file any motions they deem appropriate upon remand to the Court of Common Pleas of Philadelphia County.
An appropriate Order follows.
AND NOW, this 10th day of March, 1993, upon consideration of Third-Party Defendant United States of America's Motion to Dismiss under Fed. R. Civ. P. 12(b)(6) and Plaintiff Alnor Check Cashing Company's ("Alnor") response thereto, IT IS HEREBY ORDERED that the United States's Motion is GRANTED.
IT IS FURTHER ORDERED that:
(1) this case is DISMISSED and REMANDED to the Court of Common Pleas of Philadelphia County;
(2) Defendant Jeff Katz's Motion for Leave to File a Third Party Complaint is DENIED without prejudice; and
(3) Plaintiff Alnor Check Cashing's Motion to Strike Defendant Solar Research's Counter-Claim is DENIED without prejudice.
BY THE COURT:
HERBERT J. HUTTON, J.