Appeal from the United States District Court for the Northern District of Illinois, Eastern Division, No. 83 C 2422 -- George N. Leighton, Judge.
Bauer, Chief Judge, and Flaum and Easterbrook, Circuit Judges.
EASTERBROOK, Circuit Judge.
Manus, Inc., gave the Los Angeles office of Merrill Lynch, Pierce, Fenner & Smith, Inc., a check for $647,250 payable to Merrill Lynch's order. The check was drawn on Devon Bank in Chicago. Merrill Lynch immediately deposited the check with Crocker National Bank in Los Angeles; a clearing house presented the check to Devon for payment at 9:30 a.m. on Wednesday, August 1, 1979. The clearing house and Devon provisionally settled for the check immediately. Under § 4-301(1) of the Uniform Commercial Code, Devon had to decide no later than midnight of the next banking day whether to make final payment. See Ill. Rev. Stat. ch. 26 [para.] 4-301(1). Devon gave notice of dishonor at 4:22 p.m. on August 3. If this is too late, Devon is liable on the check even though Manus cannot cover the instrument. The district court though the dishonor timely, 654 F. Supp. 506 (N.D. Ill. 1987), and granted summary judgment to Devon in this diversity litigation.
The initial question is whether Devon gave notice of dishonor before the deadline on midnight of the "banking day" after it received the instrument. Under § 4-104(1)(c) of the UCC, a "'banking day' means that part of any day on which a bank is open to the public for carrying on substantially all of its banking functions". On Wednesday, August 1, 1979, Devon's lobby was closed to the public. It offered services, essentially limited to deposits and withdrawals, at a walk-up window. No one could open an account or arrange for a loan; so far as the record reveals, no one could draw down a line of credit previously arranged. Merrill Lynch observes that on Wednesdays Devon processed checks and made inter-bank loans, but neither those nor related activities made it "open to the public" for "substantially all of its banking functions".
Devon is an Illinois bank, and a "bank" in Illinois is "any person doing a banking business whether subject to the laws of this or any other jurisdiction." Ill. Rev. Stat. ch. 17 [para.] 302 (1986). So a person doing a "banking business" but not subject to anyone's laws is not a "bank", but the statute does not illuminate on "banking business". Perhaps the statute uses a circular definition because the elements of banking are not particularly obscure. Making loans is a necessary part of "banking"; consider the definition of a "bank" in the Bank Holding Company Act, the only federal statute defining the term: "an institution . . . which both (i) accepts demand deposits or deposits that the depositor may withdraw by check or similar means for payment to third parties or others; and (ii) is engaged in the business of making commercial loans." 12 U.S.C. § 1841(c)(1)(B) (1987); see Board of Governors v. Dimension Financial Corp., 474 U.S. 361, 106 S. Ct. 681, 88 L. Ed. 2d 691 (1986). Banks are financial intermediaries, facilitating transactions between those who want to lend and those who want to borrow. Cf. Arthur Allen Leff, The Leff Dictionary of Law, 94 Yale L.J. 1855, 2127 (1985). Devon, which was open to the public for only the deposit side of the banking business on August 1, 1979, was not open for "substantially all" of the services of a bank. Its services on August 1 were less extensive then those offered by a "nonbank bank" for purposes of the Bank Holding Company Act. Devon's walk-up window may have been a "branch bank", for both state and federal law define branches as places where deposits are received or money lent. 12 U.S.C. § 36(f); Ill. Rev. Stat. ch. 17 [para.] 302 (1986). One of these is not "substantially all" of the bank's functions, however. The district court properly resolved this question by summary judgment. It would unacceptably disrupt commercial relations to put to a jury, case-by-case, the question whether a given day was a "banking day". Billions of dollars in transactions must be processed by every midnight deadline, and everyone has an interest in having this time defined with precision. The record supplies enough information to make decision possible. Devon's midnight deadline was 11:59 p.m. on Friday, August 3, 1979.
The midnight deadline is only the outside limit, however, Section 4-301(1) allows a bank to return an item if it acts "before it has made final payment (subsection (1) of Section 4-213) and before its midnight deadline" (emphasis added). Section 4-213(1) says that a settlement becomes final "when the bank has done any of the following, whichever happens first". The only subsection we need consider is § 4-213(1)(c), which provides that payment becomes final when the bank has "completed the process of posting the item to the indicated account of the drawer, maker, or other person to be charged therewith". Section 4-109 defines the process of posting, to which we return after stating some undisputed facts.
Manus, the maker of the check, had a subsidiary, Cash Reserve Management, Inc. Cash Management maintained an account in Boston. Manus gave its check to Merrill Lynch on July 26; on July 27 Manus deposited in Devon a check for an identical sum of which Cash Management was the maker. Devon promptly submitted that check for payment. Devon places a "hold" of three or four business days on uncollected funds. The Manus check was presented for payment on August 1, the fourth business day (the fifth if Devon counted Saturday, July 28).
When Devon receives a bundle of checks from its clearing house, its computers tally the checks to ensure that the clearing house has debited Devon the correct amount. During the evening, reader/sorter machines read the account code on each check and compute the balance in each active account; a computer compares the balance and activity information with information the bank maintains to facilitate the decision whether to pay checks. The computer prepares, by the morning of the next business day, several reports for the bank's staff. One report lists checks that have caused overdrafts in the account; another report lists checks that are subject to stop payment orders; a third report lists accounts in which uncollected funds are essential to cover the latest checks; there are more. The morning of the second business day, Devon returns most of the checks that appear on these lists -- though its staff may elect to pay some of them. The bookkeeping department stamps checks "paid" and photographs them. Devon then examines the signatures on substantial checks. If the signature appears genuine (or if the bank elects not to examine the signature), Devon places the check in the customer's file. This process usually is completed in the afternoon.
Manus's check was processed in the ordinary course. The account contained about $1.2 million, more than enough to cover the check. About $650,000 of this represented the Cash Management check deposited on July 27. Devon's computer treated these as "collected" funds because the check had been deposited four or more business days ago. The uncollected funds reports of August 1 and 2 do not flag the Manus check. Devon verified the signature and placed the Manus check in the file during the afternoon of August 2. There is remained until 4:10 p.m. on August 3, when Continental Illinois National Bank told Devon by telephone that Cash Management's bank in Boston had dishonored the check of July 27. At 4:22 p.m. Devon gave telephonic notice of dishonor of the Manus check. Crocker Bank resubmitted the Manus check, which was dishonored a second time; Manus was placed in receivership on August 28.
Merrill Lynch, was prefers collecting from a solvent Devon Bank to standing in line as one of Manus's creditors, maintains that Devon "completed the process of posting the item" within the meaning of § 4-213(1)(c) during the afternoon of August 2, when it placed the check in the file. Devon had carried out all the steps in its ordinary process and placed to do nothing further. The process was free from operational error; no steps had been omitted, no judgmental blunders made along the way. Devon replies that it does not intentionally pay checks written against uncollected funds, to which Merrill Lynch responds that Devon made a business judgment to pay checks written against instruments that had been on deposit for four business days. Devon ...