Article

Factual Summary: To satisfy a loan commitment that was overdue, Drawer issued a post dated check payable to French Payee drawn on a Florida bank and sent it together with a letter to its correspondent for collection through the federal reserve system providing that Drawer had "agreed to retain the cheque and not deposit same."

Payee sent the check to its French bank three and one half months later, along with a letter stating that this "confirm[s] our telephone conversation of today whereby we instructed you to send for collection the [Drawer]'s ... check ... ." Remitting Bank did not credit Payee's account or extend credit or payment, but separated the check from others drawn on US banks sent under a cash letter and sent it individually to the bank on which it was drawn as presenting bank with the Drawer of the check listed as the Drawee of the Collection Letter along with a Collection Letter identifying the transaction as a "Collection Payable Abroad." The letter was not subject to the URC.

Although Remitting Bank knew that Drawee's International Department was in Miami, it sent the collection letter via air courier addressed to Drawee at "Sarasota, Florida 34236" without a street address, as that was the only address on the check. Presenting Bank maintained two branches at the zip code identified and, as a result, the package was delivered not to the branch where Drawer opened an account, but to another, separately operated branch. Due to human error, the check was not forwarded to the International Operations department by the recipient branch. After several SWIFT messages between the banks, the check was located, forwarded to the International Operations department, and, nine banking days after receipt of the check, Presenting Bank informed Remitting Bank the check was being returned unpaid due to a stop payment order on the check previously entered by Drawer (Drawee of the Collection Letter) and a discrepancy between the written and numerical amounts on the check.

Payee subsequently sued Presenting Bank for the face amount of the check on the theory that as Drawee of the Check Presenting Bank had failed to pay or return the check by the statutory "midnight deadline" under local law. The trial court ruled in favor of the Drawee/Presenting Bank, finding that the check was sent for collection rather than payment, and therefore, was not subject to the midnight deadline rule and Presenting Bank's handling of the check had caused no loss to Payee. On appeal, the appellate court affirmed.

Legal Analysis:

1. Collection vs. Payment; Midnight Deadline Rule; UCC § 4-302: In affirming the decision of the trial judge, the appellate court noted that the dispositive question was whether the parties submitted the check to Presenting Bank for collection or payment. The check was presented for collection if the parties agreed "that [Presenting Bank] was to pay upon the check if and when there were sufficient funds in [Drawer]'s account to cover the check." Checks that are presented for payment, on the other hand, are subject to the midnight deadline rule, which "provides that a payor bank that is presented a check must return the check before midnight of the following banking day in order to revoke settlement; otherwise, the payor bank is liable for the amount of the check. ... This rule, by its own terms, applies only to (1) payor banks (2) that are presented checks for payment. It does not apply to collecting banks."

Payee claimed "that the plain language of the Check, which unambiguously designates [Presenting Bank] as the drawee, combined with the plain language of Article 4, which defines 'payor bank' as the 'bank that is the drawee of the draft,' ..., and 'collecting bank' as any bank handling a check for collection 'except the payor bank,' ..., necessarily suggests that [Presenting Bank] is the payor bank and therefore subject to the midnight deadline rule." The appellate court disagreed, stating that this analysis ignores the ability of parties to vary the provisions of the UCC by agreement.

2. Usage of Trade; "Clean Collections": The appellate court concluded that the trial court was justified in its conclusion that the parties had agreed to handle the check as a collection rather than a payment item. The appellate court then quoted the definition of "Agreement" from the UCC, "the bargain of the parties in fact as found in their language or by implication from other circumstances including course of dealing or usage of trade or course of performance as provided in this code," in allowing consideration of course of dealing, usage of trade, and course of performance to determine whether the parties agreed to vary the provisions of the UCC. The appellate court decided that the trial court had properly allowed the evidence that "when a check and a collection letter are transmitted together, they are readily recognized in the banking industry as an item known as a "clean check collection." Because it is a collection item, the bank to whom it is sent is a collecting bank and therefore not subject to the midnight deadline rule ..." as usage of trade to determine that the check was sent for collection.

The appellate court rejected Payee's claim that if evidence of usage of trade is permitted to vary the provisions of the UCC "(1) no matter what a collection letter says, a check will never be subject to the midnight deadline rule if presented by a foreign bank, and (2) no foreign bank can ever present a check as a demand item by mail directly to a payor bank because the direct presentment of the check would change the nature of the check and constitute a 'clean check collection.'" The appellate court ruled that only if the parties agree that the check is being sent for collection does it become a "clean check collection" item. The appellate court concluded that since the check was not submitted alone, but instead submitted with a collection letter, the usage of trade supported the conclusion that the parties reached an agreement that the check was submitted for collection. Therefore the midnight deadline rule was not applicable because the parties agreed the check was sent as a collection item and not presented for payment.

[JEB/lhd]

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