United States District Court, Central District of Illinois
January 15, 1981
APPLIANCE BUYERS CREDIT CORPORATION, A DELAWARE CORPORATION, PLAINTIFF,
PROSPECT NATIONAL BANK OF PEORIA, A NATIONAL BANKING CORPORATION, AND FEDERAL RESERVE BANK OF CHICAGO, DEFENDANTS.
The opinion of the court was delivered by: Robert D. Morgan, Chief Judge.
DECISION AND ORDER ON MOTIONS TO DISMISS
Plaintiff filed this action seeking damages for alleged
negligence in the handling for collection of two checks it
deposited with defendant Prospect National Bank (PNB). Count I of
the Amended Complaint alleges direct negligence on the part of
PNB. Count II alleges direct negligence on the part of defendant
Federal Reserve Bank of Chicago (FRBC). Count III alleges
imputed negligence against defendant PNB. Defendant PNB has filed
a cross-claim against defendant FRBC alleging direct negligence.
Now pending are motions to dismiss Counts II and III and the
cross-claim. All parties have briefed the motions, and pursuant
to Local Rule 12(b), the court finds that oral arguments on the
motions are not necessary. For the reasons developed herein, the
motions to dismiss Counts II and III must be allowed, and the
motion to dismiss the cross-claim will be denied.
Both defendants are banking institutions. Plaintiff is a
depositor of PNB. The two checks in question were deposited by
plaintiff with PNB, which sent the checks, through regular
banking channels, to FRBC for collection. They were returned
unpaid. Plaintiff alleges that negligence in the handling of the
checks and the notification process caused it damage.
Defendant FRBC is a Federal Reserve bank whose banking
operations are governed by Regulation J, 12 C.F.R. § 201 et seq.
(1980). 12 C.F.R. § 210.6(a) states in relevant part:
"A Federal Reserve bank will act only as the agent of
the sender in respect of each cash item or noncash
item received by it from the sender,. . . . A
Federal Reserve bank will not act as the agent or
subagent of any owner or holder of any such item
other than the sender. . . ."
Plaintiff is not a "sender" as defined in 12 C.F.R. § 210.2(e).
It is clear the intent of that regulation is to limit liability
of a Federal Reserve bank, so as to exclude all remote parties,
such as a depositor of a sending bank, from obtaining damages
directly from a Federal Reserve bank for its negligence in
Plaintiff argues that there is a conflict between 12 C.F.R. § 210
and § 4-202(3) of the Illinois Commercial Code. The court can find no
such conflict. Section 4-103 of the Illinois Commercial Code (Ill.Rev.Stat.
ch. 26) states in relevant part:
"(1) The effect of the provisions of this Article may
be varied by agreement. . . . (2) Federal Reserve
regulations and operating letters, clearinghouse
rules, and the like, have the effect of agreements
under subsection (1), whether or not specifically
assented to by all parties interested in items
By its own terms, the Illinois Code is modified by Federal
Reserve regulations. Therefore, the rights and duties of the
parties with respect to defendant FRBC are defined by
12 C.F.R. § 210.6(a), and under that section FRBC owes no duty to plaintiff
in this case. Count II of the Amended Complaint must be
As to Count III, the allegations are directed toward defendant
PNB. Plaintiff seeks to hold PNB as the agent of FRBC and liable
for FRBC's alleged negligence in this matter. The banking
operations of PNB are governed in this respect by the Illinois
Commercial Code. Plaintiff's complaint states an action between
a bank and its depositor. The duty of a bank in this situation is
governed by Ill.Rev.Stat. ch. 26, § 4-202(3), which states in
"Subject to subsection (1)(a) [which deals with using
ordinary care in selecting a collecting bank and
transmittal to it] a bank is not liable for the
insolvency, neglect, misconduct, mistake or default
of another bank or person or for loss or destruction
of an item in transit or in the possession of
Clearly, this section limits the liability of a bank to its
customer to its own negligence. Any relationship or duty between
the bank and its depositor ends when the bank properly transmits
the item to a collecting bank. Since Count III charges PNB with
the alleged negligence of FRBC, Count III must be dismissed.
Defendant FRBC's motion to dismiss the cross-claim must be
denied. As a matter of party alignment or designation, since FRBC
is dismissed as a defendant, the claim of PNB must be considered
a third-party claim under F.R.Civ.P. 14(a). Third-party plaintiff
PNB alleges direct negligence on the part of third-party
defendant FRBC. This claim is maintainable under Regulation J.
The negligence so alleged is independent of any direct negligence
against defendant PNB. If defendant PNB is found negligent for
breach of its duty to plaintiff, PNB may pursue any alleged
breach of duty to it by FRBC and thereby seek to recover any
damages it may be ordered to pay to plaintiff.
Accordingly, IT IS ORDERED that the motion by defendant Federal
Reserve Bank of Chicago to dismiss Count II of the Amended
Complaint is ALLOWED.
IT IS FURTHER ORDERED that the motion by defendant Prospect
National Bank to dismiss Count III of the Amended Complaint is
IT IS FURTHER ORDERED that the motion by defendant Federal
Reserve Bank to dismiss the cross-claim is DENIED; that said
claim is redesignated a third-party claim; that defendant
Prospect National Bank is designated as Third-Party Plaintiff;
and that the Federal Reserve Bank of Chicago is designated as
© 1992-2003 VersusLaw Inc.