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Regulation
CC
Availability Of Funds And Collection Of Checks - Appendix E
XXIII. Section 229.37 Variations by Agreement
A. This section is similar to U.C.C.
4-103, and permits consistent treatment of agreements varying
Article 4 or Subpart C, given the substantial interrelationship
of the two documents. To achieve consistency, the official comment
to U.C.C. 4-103(a) (which in turn follows U.C.C. 1-201(3)) should
be followed in construing this section. For example, as stated
in Official Comment 2 to section 4-103, owners of items and other
interested parties are not affected by agreements under this section
unless they are parties to the agreement or are bound by adoption,
ratification, estoppel, or the like. In particular, agreements
varying this subpart that delay the return of a check beyond the
times required by this subpart may result in liability under Sec.
229.38 to entities not party to the agreement. This section is
consistent with the limits on truncation agreements in Sec. 229.36(c).
B. The Board has not followed U.C.C.
4-103(b), which permits Federal Reserve regulations and operating
letters, clearinghouse rules, and the like to apply to parties
that have not specifically assented. Nevertheless, this section
does not affect the status of such agreements under the U.C.C.
C. The following are examples of situations
where variation by agreement is permissible, subject to the limitations
of this section:
1. A depositary bank may authorize another
bank to apply the other bank's indorsement to a check as the depositary
bank. (See Sec. 229.35(d).)
2. A depositary bank may authorize returning
banks to commingle qualified returned checks with forward collection
checks. (See Sec. 229.32(a).)
3. A depositary bank may limit its liability
to its customer in connection with the late return of a deposited
check where the lateness is caused by markings on the check by
the depositary bank's customer or prior indorser in the area of
the depositary bank indorsement. (See Sec. 229.38(d).)
4. A paying bank may require its customer
to assume the paying bank's liability for delayed or missent checks
where the delay or missending is caused by markings placed on
the check by the paying bank's customer that obscured a properly
placed indorsement of the depositary bank. (See Sec. 229.38(d).)
5. A collecting or paying bank may agree
to accept forward collection checks without the indorsement of
a prior collecting bank. (See Sec. 229.35(a).)
6. A bank may agree to accept returned
checks without the indorsement of a prior bank. (See Sec. 229.35(a).)
7. A presenting bank may agree with a
paying bank to present checks for same-day settlement at a location
that is not in the check processing region consistent with the
routing number on the checks. (See Sec. 229.36(f)(1)(i).)
8. A presenting bank may agree with a
paying bank to present checks for same-day settlement by a deadline
earlier or later than 8:00 a.m. (See Sec. 229.36(f)(1)(ii).)
D. The Board expects to review the types
of variation by agreement that develop under this section and
will consider whether it is necessary to limit certain variations.
9. A presenting bank and a paying bank
may agree that presentment takes place when the paying bank receives
an electronic transmission of information describing the check
rather than upon delivery of the physical check. (See § 229.36(b).)
10. A depositary bank may agree with a
under this part. Except to the extent that other parties interested
in the check assent to or are bound by the variation of the notice-in-
lieu provisions of this part, banks entering into such an agreement
may be responsible under this part or other applicable law to
other interested parties for any losses caused by the handling
of a returned check under the agreement. (See §§ 229.30(f), 229.31(f),
229.38(a).)
XXIV. Section 229.38 Liability
A. 229.38(a) Standard of care; liability; measure of damages
1. The standard of care established
by this section applies to any bank covered by the requirements
of Subpart C of the regulation. Thus, the standard of care applies
to a paying bank under Secs. 229.30 and 229.33, to a returning
bank under Sec. 229.31, to a depositary bank under Secs. 229.32
and 229.33, to a bank erroneously receiving a returned check or
written notice of nonpayment as depositary bank under Sec. 229.32(d),
and to a bank indorsing a check under Sec. 229.35. The standard
of care is similar to the standard imposed by U.C.C. 1-203 and
4-103(a) and includes a duty to act in good faith, as defined
in Sec. 229.2(nn) of this regulation.
2. A bank not meeting this standard of
care is liable to the depositary bank, the depositary bank's customer,
the owner of the check, or another party to the check. The depositary
bank's customer is usually a depositor of a check in the depositary
bank (but see Sec. 229.35(d)). The measure of damages provided
in this section (loss incurred up to amount of check, less amount
of loss party would have incurred even if bank had exercised ordinary
care) is based on U.C.C. 4-103(e) (amount of the item reduced
by an amount that could not have been realized by the exercise
of ordinary care), as limited by 4-202(c) (bank is liable only
for its own negligence and not for actions of subsequent banks
in chain of collection).
3. Under this measure of damages, a depositary
bank or other person must show that the damage incurred results
from the negligence proved. For example, the depositary bank may
not simply claim that its customer will not accept a charge-back
of a returned check, but must prove that it could not charge back
when it received the returned check and could have charged back
if no negligence had occurred, and must first attempt to collect
from its customer. (See Marcoux v. Van Wyk, 572 F.2d 651 (8th
Cir. 1978); Appliance Buyers Credit Corp. v. Prospect Nat'l Bank,
708 F.2d 290 (7th Cir. 1983).) Generally, a paying or returning
bank's liability would not be reduced because the depositary bank
did not place a hold on its customer's deposit before it learned
of nonpayment of the check.
4. This paragraph also states that it
does not affect a paying bank's liability to its customer. Under
U.C.C. 4-402, for example, a paying bank is liable to its customer
for wrongful dishonor, which is different from failure to exercise
ordinary care and has a different measure of damages.
B. 229.38(b) Paying Bank's Failure To Make Timely Rreturn
1. Section 229.30(a) imposes requirements
on the paying bank for expeditious return of a check and leaves
in place the U.C.C. deadlines (as they may be modified by Sec.
229.30(c)), which may allow return at a different time. This paragraph
clarifies that the paying bank could be liable for failure to
meet either standard, but not for failure to meet both. The regulation
intends to preserve the paying bank's accountability for missing
its midnight or other deadline under the U.C.C., (e.g., sections
4-215 and 4-302), provisions that are not incorporated in this
regulation, but may be useful in establishing the time of final
payment by the paying bank.
C. 229.38(c) Comparative negligence
1. This paragraph establishes a ``pure''
comparative negligence standard for liability under Subpart C
of this regulation. This comparative negligence rule may have
particular application where a paying or returning bank delays
in returning a check because of difficulty in identifying the
depositary bank. Some examples will illustrate liability in such
cases. In each example, it is assumed that the returned check
is received by the depositary bank after it has made funds available
to its customer, that it may no longer recover the funds from
its customer, and that the inability to recover the funds from
the customer is due to a delay in returning the check contrary
to the standards established by Secs. 229.30(a) or 229.31(a).
2. Examples.
a. If a depositary bank fails to use
the indorsement required by this regulation, and this failure
is caused by a failure to exercise ordinary care, and if a paying
or returning bank is delayed in returning the check because additional
time is required to identify the depositary bank or find its routing
number, the paying or returning bank's liability to the depositary
bank would be reduced or eliminated.
b. If the depositary bank uses the standard
indorsement, but that indorsement is obscured by a subsequent
collecting bank's indorsement, and a paying or returning bank
is delayed in returning the check because additional time was
required to identify the depositary bank or find its routing number,
the paying or returning bank may not be liable to the depositary
bank because the delay was not due to its negligence. Nonetheless,
the collecting bank may be liable to the depositary bank to the
extent that its negligence in indorsing the check caused the paying
or returning bank's delay.
c. If a depositary bank accepts a check
that has printing, a carbon band, or other material on the back
of the check that existed at the time the check was issued, and
the depositary bank's indorsement is obscured by the printing,
carbon band, or other material, and a paying or returning bank
is delayed in returning the check because additional time was
required to identify the depositary bank, the returning bank may
not be liable to the depositary bank because the delay was not
due to its negligence. Nonetheless, the paying bank may be liable
to the depositary bank to the extent that the printing, carbon
band, or other material caused the delay.
D. 229.38(d) Responsibility for Certain Aspects of Checks
1. Responsibility for back of check.
The indorsement standard in Sec. 229.35 is most effective if the
back of the check remains clear of other matter that may obscure
bank indorsements. Because bank indorsements are usually applied
by automated equipment, it is not possible to avoid pre-existing
matter on the back of the check. For example, bank indorsements
are not required to avoid a carbon band or printed, stamped, or
written terms or notations on the back of the check. Accordingly,
this provision places responsibility on the paying bank or depositary
bank, as appropriate, for keeping the back of the check clear
for bank indorsements during forward collection and return.
2. Responsibility for payable-through
checks.
a. This paragraph provides that the bank
by which a payable-through check is payable is liable for damages
under paragraph (a) of this section to the extent that the check
is not returned through the payable-through bank as quickly as
would have been necessary to meet the requirements of Sec. 229.30(a)(1)
(the 2-day/4-day test) had the bank by which it is payable received
the check as paying bank on the day the payable-through bank received
it. The location of the bank by which a check is payable for purposes
of the 2-day/4-day test may be determined from the location or
the first four digits of the routing number of the bank by which
the check is payable. This information should be stated on the
check. (See Sec. 229.36(e) and accompanying Commentary.) Responsibility
under paragraph (d)(2) does not include responsibility for the
time required for the forward collection of a check to the payable-through
bank.
b. Generally, liability under paragraph
(d)(2) will be limited in amount. Under Sec. 229.33(a), a paying
bank that returns a check in the amount of $2,500 or more must
provide notice of nonpayment to the depositary bank by 4:00 p.m.
on the second business day following the banking day on which
the check is presented to the paying bank. Even if a payable-through
check in the amount of $2,500 or more is not returned through
the payable-through bank as quickly as would have been required
had the check been received by the bank by which it is payable,
the depositary bank should not suffer damages unless it has not
received timely notice of nonpayment. Thus, ordinarily the bank
by which a payable-through check is payable would be liable under
paragraph (a) only for checks in amounts up to $2,500, and the
paying bank would be responsible for notice of nonpayment for
checks in the amount of $2,500 or more.
3. Responsibility under paragraphs (d)(1)
and (d)(2) is treated as negligence for comparative negligence
purposes, and the contribution to damages under paragraphs (d)(1)
and (d)(2) is treated in the same way as the degree of negligence
under paragraph (c) of this section.
E. 229.38(e) Timeliness of Action
1. This paragraph excuses certain delays.
It adopts the standard of U.C.C. 4-109(b).
F. 229.38(f) Exclusion
1. This paragraph provides that the
civil liability and class action provisions, particularly the
punitive damage provisions of sections 611(a) and (b), and the
bona fide error provision of 611(c) of the Act (12 U.S.C. 4010(a),
(b), and (c)) do not apply to regulatory provisions adopted to
improve the efficiency of the payments mechanism. Allowing punitive
damages for delays in the return of checks where no actual damages
are incurred would only encourage litigation and provide little
or no benefit to the check collection system. In view of the provisions
of paragraph (a), which incorporate traditional bank collection
standards based on negligence, the provision on bona fide error
is not included in Subpart C.
G. 229.38(g) Jurisdiction
1. The Act confers subject matter jurisdiction
on courts of competent jurisdiction and provides a time limit
for civil actions for violations of this subpart.
H. 229.38(h) Reliance on Board Rulings
1. This provision shields banks from
civil liability if they act in good faith in reliance on any rule,
regulation, or interpretation of the Board, even if it were subsequently
determined to be invalid. Banks may rely on the Commentary to
this regulation, which is issued as an official Board interpretation,
as well as on the regulation itself.
Subpart A - General
Subpart B -
Availability of Funds and Disclosure of Funds Availability Policies
Subpart C -
Collection of Checks
Appendices A
& B
Appendices C
& D
Appendix F
Credit
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