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ALNOR CHECK CASHING v. KATZ

UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA


April 22, 1993

ALNOR CHECK CASHING
v.
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

 HUTTON, J.

 April 22, 1993

 Presently before the Court is the plaintiff Alnor Check Cashing's ("Alnor") Motion for Reconsideration and to Vacate this Court's Memorandum and Order of March 10, 1993, the third-party defendant United States of America's response, Alnor's reply and Motion for Oral Argument.

 I. BACKGROUND

 The relevant facts and procedural developments are set forth in full in this Court's opinion dated March 10, 1993. This Court reaffirms its earlier opinion in its entirety, but issues this memorandum to discuss two arguments that Alnor now raises in its Motion for Reconsideration. *fn1"

 II. DISCUSSION

 A. Count I: Indemnification

 Alnor urges this Court to vacate its earlier Order dismissing count I on the basis that the Court misunderstood Alnor's original position. Alnor argues:

 

Alnor now seeks reconsideration and reversal of this Court's prior Order based upon what Alnor perceives to be a misapprehension both by the Government and this Court as to the nature of Plaintiff's claim. For this reason, Plaintiff wishes to clarify its position. . . .

 ...

 

At the outset, Plaintiff's indemnification Count is not based upon the premise that Katz' signature was uttered without authority. To the contrary, it is based in common law contract principles of unjust enrichment.

 (Alnor Memorandum at 2-3) (emphasis in original). In the March 10, 1993 opinion, this Court dismissed Alnor's claim against the United States because under Treasury Regulation 31 C.F.R. § 240.5, Alnor had guaranteed the authenticity of Jeff Katz's signature to Mellon P.S.F.S. ("PSFS"), and ultimately the Treasury. Alnor Check Cashing v. Katz, No. 93-0424 (E.D. Pa. Mar. 10, 1993) at 8, 1993 U.S. Dist. LEXIS 3046. *fn2" When this Court dismissed count I of Alnor's complaint, the Court assumed that Alnor was challenging Jeff Katz's authority to cash the check. Id. This assumption was not due to a lack of clarity or understanding on the part of the Court. As the following discussion indicates, if Alnor is proceeding on a theory that Jeff Katz had authority to cash the check, this Court lacks subject matter jurisdiction to entertain Alnor's claim under 28 U.S.C. § 1346(a). Fed. R. Civ. P. 12(b)(1).

 Simply stated, Alnor only has two logical positions in this case: (1) Jeff Katz did not have the authority to cash the Solar Research Check; or (2) Jeff Katz did have the authority to cash the Solar Research Check. No matter which theory Alnor decides to proceed upon, this Court's earlier decision properly dismissed the United States as a party. See 28 U.S.C. § 1346.

 If Jeff Katz did not have the authority to cash the Solar Research Check, then Alnor cannot assert a claim against the United States because Alnor guaranteed Katz's signature to the Treasury Department under 31 C.F.R. § 240.5. As this Court discussed in its March 10, 1993 opinion:

 

§ 240.5 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 Check Cashing v. Katz, No. 93-0424 (E.D. Pa. Mar. 10, 1993) at 8, 1993 U.S. Dist. LEXIS 3046. Alnor has presented no legal authority or alternative Treasury Regulation to the Court that warrants reversing the earlier decision that regulation 31 C.F.R. § 240.5 precludes Alnor's claim because Alnor has "guaranteed" the authenticity of Katz's signature. As such, the Treasury Regulations preclude any challenge by Alnor that Jeff Katz did not have the authority to cash the Solar Research check.

 Apparently conceding this point, Alnor now argues in its present motion that this Court "misinterpreted" Alnor's original position and that Jeff Katz's actually did have authority to cash the Solar Research Check. (Alnor Memorandum at 2-3). The government responds that Alnor cannot assert this position because Alnor's indemnification claim exists only if Solar Research prevails against Alnor for wrongfully cashing an unauthorized check. In other words, Alnor is judicially estopped from seeking indemnification for wrongfully cashing a check if its theory of liability is that Jeff Katz actually had the authority to cash the Solar Research Check.

 It is well settled law that a district court lacks jurisdiction under the Tucker Act (or "Little Tucker Act"), 28 U.S.C. § 1346 to entertain claims against the United States based upon principles of "quasi" or "implied-in-law" contracts. Army and Air Force Exchange Serv. v. Sheehan, 456 U.S. 728, 738, 72 L. Ed. 2d 520, 102 S. Ct. 2118 (1982); Hatzlachh Supply Co. v. United States, 444 U.S. 460, 465 n.5, 62 L. Ed. 2d 614, 100 S. Ct. 647 (1980) GAF Corp. v. United States, 932 F.2d 947 (Fed. Cir. 1991); Weisberg v. United States Dep't of Justice, 240 U.S. App. D.C. 339, 745 F.2d 1476, 1493 (D.C. Cir. 1984) (refusing to adopt 1 Corbin on Contracts, § 95, at 407-08 (1963 & Supp. 1984) (quasi contractual relief)); Kunkler v. Fort Lauderdale Hous. Auth., 764 F. Supp. 171 (S.D. Fla. 1991).

 In Army and Air Force Exchange Serv. v. Sheehan, 456 U.S. 728, 738, 72 L. Ed. 2d 520, 102 S. Ct. 2118 (1982), the United States Supreme Court stated:

 

Claims grounded on implied-in-fact contracts may be brought under the Tucker Act, but the Act does not confer jurisdiction with respect to contracts implied in law.

 Id. at 738 n.10 (citing Hatzlachh Supply Co. v. United States, 444 U.S. 460, 465 n.5, 62 L. Ed. 2d 614, 100 S. Ct. 647 (1980)). Adopting the Supreme Court's reasoning, the United States Court of Appeals for the District of Columbia has held that the district courts lack subject matter jurisdiction to hear claims for quasi-contractual or implied-in-law contracts. Weisberg v. United States Dep't of Justice, 240 U.S. App. D.C. 339, 745 F.2d 1476, 1493 (D.C. Cir. 1984) (refusing to adopt 1 Corbin on Contracts, § 95, at 407-08 (1963 & Supp. 1984) (quasi contractual relief)). Recently, the Federal Circuit held:

 

The Claims Court may not do by judicial fiat what Congress has not done by legislation. The trial court may not enforce a warranty implied in law. The Tucker Act does not grant the Claims Court jurisdiction to enforce contracts implied-in-law.

 GAF Corp. v. United States, 932 F.2d 947, 951 (Fed. Cir. 1991) (citing Hatzlachh Supply Co., 444 U.S. at 465 n.5)). *fn3"

 Count I of Alnor's suit against the United States for unjust enrichment is an implied-in-law contract claim. (See Alnor's Memorandum at 2) ("Plaintiff's claim based on common law principles of unjust enrichment"); see also Corbin on Contracts, Ch. 1, § 19 (quasi-contract defined). Accordingly, this Court lacks jurisdiction to entertain Alnor's indemnification claim against the United States on the theory that Jeff Katz did have the authority to cash the Solar Research Check. 28 U.S.C. § 1346(a); Army and Air Force Exchange Serv. v. Sheehan, 456 U.S. at 738; Weisberg, 745 F.2d at 1494. *fn4"

 In summary, Alnor's argument that Katz lacked authority is barred by Treasury Regulation 31 C.F.R. § 240.5. Alnor Check Cashing v. Katz, No. 93-0424 (E.D. Pa. Mar. 10, 1993), 1993 U.S. Dist. LEXIS 3046. Conversely, if Alnor seeks "quasi-contractual relief" for common law "unjust enrichment," because Jeff Katz had the authority to endorse the check, this Court lacks subject matter jurisdiction to consider this claim. See Army and Air Force Exchange Serv. v. Sheehan, 456 U.S. 728, 738, 72 L. Ed. 2d 520, 102 S. Ct. 2118 (1982); Fed. R. Civ. P. 12(b)(1). Therefore, Alnor's Motion for Reconsideration and to Vacate this Court's Order Dismissing Count I is DENIED.

 B. Count II: Interference with a Pay to the Order Instrument

 Count II of Alnor's complaint seeks direct relief against the United States on the theory that the United States has interfered with Alnor's rights as a holder in due course under 13 Pa. Con. Stat. § 1302. Alnor's complaint against the United States alleges:

 

17. Plaintiff cashed said check for the payee in good faith and without notice of any claims or defenses against said check.

 

18. Plaintiff in cashing said check was a holder in due course under Section 3-302 of the U.C.C. and entitled to enforce the same under Section 3-305 of the U.C.C.

 

19. The Department of Treasury returned the same to the Plaintiff payment stopped together with a claim that Katz lacked the authority to negotiate the check and/or forged Solar Corp.'s name.

 

20. Defendants, Solar Corp. and Katz, despite their obligations as payee of said check, have each refused to pay all or any part thereof.

 (Alnor Third-Party Complaint at PP 17-20). With the exception of paragraph 18, which refers to Alnor's rights under 13 Pa. Con. Stat. § 3305, the complaint does not set forth the specific relief Alnor seeks from the United States. In its Motion for Reconsideration of this Court's dismissal of Count II, Alnor expands on its complaint and asserts its position as:

 

The fact is that Plaintiff's theory of liability against the Government is that the Government as a maker of a negotiable instrument, like any other maker of a "pay to the order" instrument, engaged in a contract to pay that instrument to the properly titled owner.

 (Alnor Memorandum at 9) (emphasis in original). This Court reviewed Alnor's argument that the Treasury has interfered with its rights as a holder in due course in its March 10, 1993 opinion:

 

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.

 Alnor Check Cashing v. Katz, No. 93-0424 (E.D. Pa. Mar. 10, 1993) at 9, 1993 U.S. Dist. LEXIS 3046. This Court reaffirms its earlier decision that Alnor has no direct cause of action against the United States. Simply put, Alnor's argument is incorrectly premised upon its conclusion that the United States is "like any other maker of a 'pay to the order' instrument." (Alnor Memorandum at 9).

 1. Federal Common Law, and Federal Regulations Govern this Case, Not the Uniform Commercial Code

 This Court has already discussed in full how Clearfield Trust Co. v. United States, 318 U.S. 363, 87 L. Ed. 838, 63 S. Ct. 573 (1943) requires that federal common law controls the outcome of this case. As Professor Brady stated in his hornbook on bank checks and commercial paper:

 

In particular, "federal common law" has been applied in cases involving the rights or liability of the federal government on one of its own checks. This has been true since enactment generally of the UCC in the states.

 Henrey J. Bailey, Brady on Bank Checks, The Law of Bank Checks § 1.3 at 1-4 to 1-6 (6th ed. 1979 & Supp. 1990). To the extent that the Treasury's rights pre-empt Alnor's rights under Pennsylvania's UCC § 3302, the Constitution's Supremacy Clause requires that the treasury regulations prevail.

 The Treasury did not interfere with Alnor's rights when it properly reclaimed the Solar Research Check from PSFS pursuant to its authority under Treasury Regulation 31 C.F.R. § 240.6. Alnor argues that the Treasury's reclamation action has nothing to do with the present case:

 

Plaintiff's claim which is plainly intended to enforce the Government's contractual promise to pay the check to a proper endorsee according to its original tenor, and which has nothing to do with reclamation liability.

 

Merely because the check was reclaimed by P.S.F.S., does not negate the fact that Plaintiff claims to be a holder under federal contract common law. So long as Plaintiff is titled to hold the Treasury check, the Government's contractual obligations to pay the check "to the order of" the payee's endorser, remain valid.

 (Alnor Memorandum at 9) (no authority cited). This Court disagrees. First, the Treasury's right to implement a reclamation action is directly an issue in this case because it is the reason that the Solar Research Check no longer has any value. And, second, Alnor is not a properly titled holder of valid government commercial paper.

 2. The Treasury's Reclamation Action

 As this Court discussed in its original opinion, Treasury Regulation 31 C.F.R. § 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.

 Id. This Court has determined that the Treasury was acting within the regulatory scheme when it demanded repayment from PSFS. Alnor Check Cashing v. Katz, No. 93-0424 (E.D. Pa. Mar. 10, 1993) at 10, 1993 U.S. Dist. LEXIS 3046. Under the Constitution's Supremacy Clause, the Treasury must be able to implement reclamation actions, under 31 C.F.R. § 240.6, without potential liability under state law UCC provision, 13 Pa. Con. Stat. § 3302. Contrary, to Alnor's position, the Treasury's reclamation action is directly relevant to Alnor's status as a holder in due course.

 Unlike any other private commercial lender, the United States Treasury operates under its own specific regulations for the issuance and negotiability of federal commercial paper. See 31 C.F.R. Part 240. This Court's prior discussion of Clearfield Trust Co. v. United States, 318 U.S. 363, 87 L. Ed. 838, 63 S. Ct. 573 (1943) was intended to underscore the difference between federal negotiable instruments and those governed exclusively by the UCC. Alnor Check Cashing v. Katz, No. 93-0424 (E.D. Pa. Mar. 10, 1993) at 6, 1993 U.S. Dist. LEXIS 3046.

 Further, PSFS, not the United States, debited Alnor's account. The United States's decision to reclaim the Solar Research Check did not affect Alnor until PSFS sent Alnor the September 28, 1992 debit notice.

 In Powderly v. Schweiker, Sec. of Health and Human Services, 704 F.2d 1092 (9th Cir. 1983) (Fletcher, J., concurring), Judge Fletcher stated that Sea-First Bank's efforts to collect fraudulently cashed social security check's from the payee's widow were properly within the Treasury regulations.

 

It was not the government that debited Powderly's account. It was the bank.

 . . .

 

The federal government itself neither debited nor directed the bank to debit her account. The Treasury determined only that, pursuant to 31 C.F.R. § 240.5(a) (1982), Sea-First was liable to the Treasury for return of the amount paid by the Treasury to the bank on a check bearing an unauthorized endorsement. The Treasury made no determination as to who ultimately received the funds from the Treasury nor did it direct the bank to recover any funds from appellant.

 Id. at 1099 (Fletcher, J., concurring). On the issue of whether the court should attribute the bank's conduct to the government, Judge Fletcher determined:

 

Nor can the actions of Sea-First . . . be imputed to the federal government on some theory of agency. Sea-First's ability to debit appellant's account in the amount of the forged check derives not from some delegation of federal authority to the bank by the Treasury but from appellant's own depository contract with the bank and the self-help remedies authorized by Washington state law . . . .

 Id. This Court will not re-categorize PSFS's right to "set-off" its obligation to the Treasury as an interference claim by the United States. While Alnor may have a state law claim against PSFS, it does not have a federal cause of action against the United States. Id.

 3. Alnor is Not a Properly Endorsed Party Under Federal Law

 Alnor asserts:

 

So long as Plaintiff is titled to hold the Treasury check, the Government's contractual obligations to pay the check "to the order of" the payee's endorser, remain valid.

 (Alnor Memorandum at 9) (no authority cited). Alnor claims that it is a "holder in due course" under Pennsylvania law because it can prove the following:

 

(a) General Rule. - A holder in due course is a holder who takes the instrument:

 

(1) for value;

 

(2) in good faith;

 

(3) without notice that it is overdue or has been dishonored or of any defense against or claim to it on the part of any person.

 13 Pa. Con. Stat. § 3302(a); See Alnor Complaint at P 18.

 Again, Alnor's argument misinterprets the significance of the UCC when there are conflicting Treasury Regulations on point. Alnor's failure to comply with Treasury Regulation 31 C.F.R. § 240.11 (1993) precludes Alnor from bringing any claim against the United States based on these facts. Regulation § 240.11 provides in relevant part:

 

The indorsement by a person who purports to indorse for the named payee(s) with an indorsement consisting of the name(s) of the payee(s), whether as purported signature(s) or otherwise, and the indorsing person's signature and no indication of the indorsing person's representative capacity, will create a rebuttable presumption that the indorsing person was not authorized to indorse for the named payee(s). In these circumstances it is the responsibility of the individual or institution accepting a check from a person other than the named payee(s) to determine that such person is authorized and has the capacity to indorse and negotiate the check.

 § 240.11 (emphasis added). When Jeff Katz took the Solar Research check to Alnor, he endorsed the check "Solar Research Inc." (Government's Exhibit A, photocopy of endorsement). Katz did not sign his name nor designate his title or position. Alnor then accepted the check without any further investigation. Alnor's failure to investigate Katz's authority violated 31 C.F.R. § 240.11 whether or not Alnor would have had a duty to investigate Katz's authority under UCC § 3-302.

 As § 240.11 of the Treasury Regulations indicates, it was Alnor's "responsibility to determine" that Jeff Katz had the proper authority to cash the Solar Research check. Id. Alnor's failure to confirm Katz's status cannot now be converted into a claim against the United States. 31 C.F.R. § 240.5; see also Alnor Check Cashing v. Katz, No. 93-0424 (E.D. Pa. Mar. 10, 1993), 1993 U.S. Dist. LEXIS 3046. *fn5"

 C. Hearing on the Merits

 Finally, because Alnor cannot prevail on its indemnification theory (Count I) nor its holder in due course claim (Count II), as a matter of law, the Court does not need a hearing to further clarify which position Alnor now seeks to advance. (See Alnor Memorandum in Support of Oral Argument at 2-3) (Court "misunderstood" Alnor's position). Accordingly, Alnor's Motion for a Hearing is DENIED.

 An appropriate Order follows.

 FINAL JUDGMENT

 AND NOW, this 22nd day of April, 1993, upon consideration of the Plaintiff Alnor Check Cashing's Motion for Reconsideration and to Vacate this Court's Memorandum and Order of March 10, 1993, the Third-Party Defendant United States of America's response, Alnor's reply and Motion for Oral Argument, IT IS HEREBY ORDERED that Alnor's Motion for Reconsideration and to Vacate this Court's Memorandum and Order of March 10, 1993 is DENIED.

 BY THE COURT:

 HERBERT J. HUTTON, J.


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