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BANK ONE, MERRILLVILLE, NA v. NORTHERN TRUST BANK/

October 3, 1991

BANK ONE, MERRILLVILLE, NA, Plaintiff,
v.
NORTHERN TRUST BANK/DuPAGE, Defendant


James F. Holderman, United States District Judge.


The opinion of the court was delivered by: HOLDERMAN

JAMES F. HOLDERMAN, UNITED STATES DISTRICT JUDGE

 Plaintiff, Bank One, Merrillville, NA ("Bank One"), brought this diversity action against defendant, Northern Trust Bank/DuPage ("Northern"), claiming wrongful dishonor of a cashier's check. Northern asserted affirmative defenses and a counterclaim based on fraud, bad faith and misconduct. Bank One has moved, pursuant to Fed. R. Civ. P. 56, for partial summary judgment on the issue of Northern's wrongful dishonor. For the reasons stated in this opinion, Bank One's motion is granted.

 FACTS

 This case concerns two banks, Bank One of Merrillville, Indiana ("Bank One") and Northern Trust Bank/DuPage of Oak Brook, Illinois ("Northern"), and two of their customers, Zaragoza Motors Inc. ("Zaragoza") and Sakoff Media Enterprises, Inc. ("Sakoff"). In June 1990, Zaragoza had a checking account at Bank One, while Sakoff had one at Northern.

 On or before June 7, 1990 Sakoff wrote a check for $ 98,581.40 ("the Sakoff check") on its account at Northern, payable to the order of Zaragoza. Zaragoza deposited the Sakoff check in its account at Bank One on June 7, 1990. Bank One sent the Sakoff check to Northern for payment. On June 13, 1990, it was returned to Bank One, as the funds in Sakoff's account were insufficient to cover the amount of the Sakoff check.

 Kenneth Dykstra, a Bank One employee, telephoned Northern upon receiving the returned Sakoff check on June 13, and was told that Sakoff's account did contain sufficient funds to cover the check. On the same day, Dykstra drove to Northern's offices and exchanged the Sakoff check for a Northern cashier's check for $ 98,581.40. When Bank One sent the endorsed cashier's check through the Federal Reserve Bank to Northern for payment, however, Northern refused to honor the check.

 The reasons for Northern's refusal to pay relate to another check ("the Zaragoza check"), drawn on Zaragoza's account at Bank One, for $ 103,200, which Zaragoza presumably transferred to Sakoff at about the same time that Zaragoza received the Sakoff check for $ 98,581.40. At some point before June 12, 1990, Sakoff deposited Zaragoza's check into Sakoff's account at Northern. Northern then sent the Zaragoza check to Bank One for collection. Bank One received the check on June 12 but, on June 13, issued notice to Northern, through the Federal Reserve Bank, that it was dishonoring the Zaragoza check, because of insufficient funds in Zaragoza's account. This notice did not reach Northern until after Dykstra had obtained the cashier's check. As a result of Bank One's rejection of the Sakoff check, the funds in Sakoff's account were insufficient to cover the Sakoff check for which Northern had issued its cashier's check.

 DISCUSSION

 Under Fed. R. Civ. P. 56(c), summary judgment is proper "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." According to Bank One, Illinois law forbids a bank from dishonoring its cashier's checks for any reason. On the basis of this understanding of the law, Bank One contends that it is entitled to summary judgment, since any arguments Northern might make and any factual issues they might raise are immaterial to the issue of wrongful dishonor.

 The transaction in this case involved an official of an Indiana bank coming into Illinois and receiving a cashier's check from an Illinois bank. Plaintiff, in its brief, assumed the application of Illinois law. Defendant, while citing cases from other jurisdictions, raised no explicit protest. Because the outcome of the case hinges on the applicability of Illinois law, the court must first confirm the parties' implicit choice of law.

 In a diversity case, the court must apply the conflict of law rules of the state in which it sits. Klaxon Co. v. Stentor Electric Mfg. Co., 313 U.S. 487, 61 S. Ct. 1020, 85 L. Ed. 1477 (1941). This case involves a negotiable instrument, so it implicates the Illinois version of the Uniform Commercial Code ("the Code"). Ill. Rev. Stat. ch. 26 para. 1-101 et seq. The relevant choice of law provision is therefore Ill. Rev. Stat. ch. 26 para. 1-105, which provides that the Illinois Code applies to "transactions bearing an appropriate relation to this state." The cashier's check in this case was issued by an Illinois bank to a person in Illinois. The relation of this transaction to Illinois therefore calls for the application of Illinois law.

 Although the Illinois Code does not specifically address the subject of a bank's cashier's checks, the Illinois Appellate Court interpreted the Code's application to the issue in Able & Associates, Inc. v. Orchard Hill Farms of Illinois, Inc., Etc., 77 Ill. App. 3d 375, 395 N.E.2d 1138, 32 Ill. Dec. 757 (1st Dist. 1979). In Able & Associates, the court rejected defendant Union National Bank's argument that a failure of consideration justified its refusal to honor a cashier's check. The court instead employed a line of analysis under the Code which led it ...


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