APPEAL from the Circuit Court of Cook County; the Hon. WALTER
J. KOWALSKI, Judge, presiding.
MR. JUSTICE WILSON DELIVERED THE OPINION OF THE COURT:
This is an appeal from a judgment finding defendant, First National Bank of Blue Island (hereinafter "Bank"), liable for the amount of three checks which plaintiff, Available Iron and Metal Company (hereinafter "Available"), presented for collection. The only issue raised on appeal is whether the Bank breached the duty imposed upon it by section 4-302 of the Uniform Commercial Code (hereinafter "Code") (Ill. Rev. Stat. 1975, ch. 26, par. 4-302), to either pay, return, or send notice of dishonor of these checks in a timely manner. We affirm.
Available collected scrap metal from various industries and delivered it to scrap yards. Reuben R. Graff Company (hereinafter "Graff Co.") operated a scrap yard which processed such scrap metal and sold it to mills. For 10 or 12 years prior to 1972 Graff Co. provided Available with a rent free office at its yard and serviced some of Available's customers by picking up their scrap in its trucks and transporting the scrap to its yard. During this period Graff Co. paid Available by check on a weekly basis for both the scrap its trucks brought in from Available's customers and and the scrap Available's trucks delivered to its yard. At times one of Graff Co.'s employees, Jane Duhick, requested that Available wait awhile before cashing these checks. Both companies were customers of the Bank in 1972.
On several occasions prior to 1972 Graff Co. had borrowed money from the Bank. By early 1972 the company owed the Bank approximately $500,000. Most of this debt was secured by Graff Co.'s inventory, accounts receivable, fixed assets and land under the provisions of several security agreements signed by Reuben R. Graff, Graff Co.'s president, on behalf of the company. The remainder was secured by stocks and a certificate of deposit owned by Mrs. Reuben R. Graff. The security agreements gave the Bank the right to apply all proceeds from inventory sales and all collections on accounts receivable to the reduction of the secured indebtedness upon default.
In late March of 1972 discrepancies between Graff Co. accounts receivable schedules held by the Bank and Graff Co.'s books were discovered. Audits disclosed that the company's accounts receivable were significantly overstated in the schedules. Because the overstatement meant Graff Co. had less in the way of assets to secure its loans than the Bank thought was available, the Bank became concerned about its loans and sent its senior vice president and controller, Fred W. Mansfield, to Graff Co.'s yard for the purposes of watching assets, converting inventory into cash and generally protecting the Bank's interest. Mansfield arrived in late March of 1972 and remained at the yard until late April or early May of 1972. While he was there, Mansfield picked up the mail each day, watched as it was opened by a Graff Co. employee and reviewed the checks that were received. He also reviewed the company's books and took physical control of Graff Co.'s unused checks. He kept these checks locked up and he had the only key to the lock. Consequently, the company could not issue a check without his permission. He frequently reported to the Bank about the amounts of money Graff Co. received and about the company's operations.
In late March of 1972 one of the owners of Available, Harold Silvers, noticed that Mansfield was at the Graff Co. yard every day and asked him why he was there and what he was doing. The controller responded that the company had problems and that he was there to straighten some things out. Later that month Harold Silvers and the other owner of Available, Arnold Silvers, met with Reuben R. Graff. During this meeting the president of Graff Co. told them he was in trouble but he also told them not to worry as he had enough inventory at the yard to straighten things out. Then on either April 3, 4, or 5, the two Silvers met with Mansfield in Available's office. The Silvers were concerned about the money, approximately $70,000 at this point, that Graff Co. owed them and asked Mansfield how bad things were. Mansfield was evasive and told them only that Graff Co. had little problems which the Bank was trying to straighten out. The controller suggested that they should "sit tight" and told them not to "rock the boat."
Graff Co. gave Available the three checks in issue on or about the date they were dated. One of these checks was dated March 17, 1972, and was in the amount of $8,556.50. The second check was dated March 24, 1972, and was for $9,139.15. The third check was dated April 5, 1972, and was for $9,399.15. On April 6, 1972, Harold Silvers took the third check to the Bank. He went to a teller and submitted the check for deposit. Instead of accepting it the teller told him to take it to Boyd A. Wagener, a vice president of the Bank. He went over to Wagener's desk and asked Wagener how he could get the check taken care of. Wagener said: "We'll put it in for collection now and we'll see that you get your money just as soon as there is money in the bank." Then Wagener took the check to another Bank employee and told her to put it in for collection and make out a receipt. While Silvers was sitting at her desk waiting for the receipt, Rueben R. Graff walked up. Silvers told Graff he was there to put some money in the Bank. Graff said: "Oh, I'm making a big deposit now. There should be plenty of money to cover that check." Then the employee gave Silvers a receipt for the check.
On or about April 13, 1972, the Silvers met with a number of Bank officials at the Bank, including Hugh M. Driscoll, the president of the Bank, Vincent C. Yager, the executive vice president, Mansfield and Wagener. At this meeting the Silvers expressed concern about getting paid by Graff Co. and they were told that Graff Co. was on the verge of bankruptcy, that the Bank was a secured creditor and that the Bank's interests were going to come first.
On April 17, 1972, Harold Silvers took the March 17 and March 24 checks to the Bank and apparently went directly to Wagener's desk upon entering the Bank. He asked Wagener if he should put these checks in for collection and Wagener responded in the affirmative. Then Silvers went through basically the same procedure as he did with the April 5 check. He had not taken these checks to the Bank earlier because of a request made by Jane Duhick to hold them.
On April 25, 1972, Harold Silvers received the April 5 check and a notice indicating that it was returned unpaid because of insufficient funds. On April 27, 1972, he received the other two checks and two notices indicating that they were also returned because of insufficient funds.
On or about May 1, 1972, Graff Co. went bankrupt. When it went into bankruptcy Graff Co. owed Available approximately $74,000. Available received approximately $11,100 of this amount. The Bank, on the other hand, did not lose any money.
The court below found that the Bank had violated section 4-302 of the Code (Ill. Rev. Stat. 1975, ch. 26, par. 4-302). The Bank argues that it gave Available timely notice of dishonor and that it "returned" the checks in question before the midnight deadline set forth by section 4-302, thus it did not violate section 4-302.
Section 4-302 provides in pertinent part:
"In the absence of a valid defense * * *, if an item is presented on and received by a payor bank the bank is accountable for the amount of
(a) a demand item * * * whether properly payable or not if the bank * * * does not pay or return the item or send notice of dishonor until after its midnight deadline * * *."
Section 4-104(1)(h) of the Code (Ill. Rev. Stat. 1975, ch. 26, par. 4-104(1)(h)) defines "midnight deadline" as midnight of the banking day following the banking day on which the item is received.
In connection with the "returned" leg of its argument, the Bank accurately points out that section 4-301(4)(b) of the Code (Ill. Rev. Stat. 1975, ch. 26, par. 4-301(4)(b) provides that an item is "returned" when it is delivered to the bank's customer, and correctly adds that this provision is controlling in the instant case. Then the Bank asserts that the following testimony of Harold Silvers establishes that he gave the teller the three checks in question and she gave them back to him and thereby "returned" them to him:
"Q. You went to the teller, is that correct?
Q. Did you submit the check for payment ...