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FIRST NATL. BANK IN HARVEY v. COLONIAL BANK

August 27, 1993

FIRST NATIONAL BANK IN HARVEY, Plaintiff,
v.
COLONIAL BANK and FEDERAL RESERVE BANK, Defendants.



The opinion of the court was delivered by: JOHN F. GRADY

 This diversity action is before the court on plaintiff's motion for summary judgment on Count V of the complaint. As explained below, the court denies the motion.

 BACKGROUND

 On February 10, 1992, First National Bank in Harvey ("First National") received for deposit to the checking account of Shelly International Marketing, Inc. ("Shelly") thirteen checks drawn on the account of World Commodities, Inc. ("World Commodities") at Colonial Bank ("Colonial"). The next day, Colonial received these checks, totalling $ 1,523,892.49 (the "Colonial checks"), for payment. Under § 4-302 of the Uniform Commercial Code ("UCC"), 810 ILCS 5/4-302 (S.H.A. 1993), if Colonial wanted to deny payment, it had until midnight of February 12 to return the checks. After this "midnight deadline," the bank is deemed to have made payment. On February 13, Colonial decided to dishonor the checks and returned them through the Federal Reserve Bank. Although Colonial does not dispute that it failed to meet the midnight deadline, the Federal Reserve Bank debited First National's account in the amount of $ 1,523,892.49.

 The checks at issue were part of a kiting scheme. A kiter withdraws funds to which he is not entitled by drawing checks against deposits which have not yet cleared through the banks. In other words, a kiter takes advantage of the "float," the time elapsing between the deposit of a check in one bank and its collection at another. According to Colonial, World Commodities and Shelly are related entities which took advantage of the float by shuffling funds back and forth between the their accounts at First National and Colonial. Most if not all of the deposits into the World Commodities account were drawn on the Shelly account, and vice versa. See Affidavit of Joanne Topham P 3.

 In this action against Colonial and the Federal Reserve Bank, First National seeks recovery of the amount debited from its Fed account. The complaint alleges breach of contract and causes of action under Federal Reserve Regulation CC and Article 4 of the Illinois UCC. Before the court is First National's motion for summary judgment against Colonial on Count V of the complaint, which is based on UCC § 4-302. First National asks the court to enter judgment in its favor for the face amounts of the checks.

 Colonial urges us to deny summary judgment because First National has presented no evidence of loss. According to Colonial, the Federal Reserve Bank credited First National's account for $ 1,523,892.49, the amount of the disputed checks, on February 10. In addition, it is unclear whether Shelly withdrew the disputed funds from its account, and if it did, whether it repaid those funds to First National.

 Colonial also argues the midnight deadline rule should be relaxed because of confusion created by First National's return of several checks drawn on Shelly's account (the "First National checks") and deposited into World Commodities' account at Colonial. At 9:30 a.m. on February 12, First National notified a Colonial employee that it would be returning certain checks, but it notified the wrong employee and did not specify the number or dollar amounts of those checks. When Colonial attempted to contact First National a few hours later to obtain more information, it was advised by a pre-recorded message that First National's offices were closed. Although First National sent wire notices to Colonial later that day stating seventeen checks totalling $ 1,518,642.86 were being returned "refer to maker," First National did not explain the basis for rejection.

 The same day, Andrew Schiller, a vice president at Colonial, contacted Charles Patterson, World Commodities' comptroller, to ask about the seventeen checks. Patterson told Schiller that First National was returning the checks because it was reneging on an increase in Shelly's line of credit. Patterson assured Schiller that the line of credit would be re-approved and asked him to redeposit the checks. Alan Jay Goldstein, the attorney for Shelly and World Commodities, apparently confirmed this explanation. Only after concluding First National would continue to dishonor the checks and thereby decrease the balance in the World Commodities account did Colonial find it necessary to dishonor the Colonial checks.

 DISCUSSION

 Summary judgment "shall be rendered forthwith 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." Fed. R. Civ. P. 56(c); Celotex Corp. v. Catrett, 477 U.S. 317, 322, 91 L. Ed. 2d 265, 106 S. Ct. 2548 (1986). "A genuine issue of material fact exists only where 'there is sufficient evidence favoring the nonmoving party for a jury to return a verdict for that party.'" Dribeck Importers, Inc. v. G. Heileman Brewing Co., 883 F.2d 569, 573 (7th Cir. 1989) (quoting Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249, 91 L. Ed. 2d 202, 106 S. Ct. 2505 (1986)). In considering such a motion, the court must view all inferences in the light most favorable to the nonmoving party. See Regner v. Chicago, 789 F.2d 534, 536 (7th Cir. 1986). Once the moving party has supported its motion for summary judgment, "an adverse party may not rest upon the mere allegations or denials of the adverse party's pleadings;" rather, the adverse party must set forth facts showing that there is a genuine issue for trial. Fed. R. Civ. P. 56(e).

 Excusable Delay Under UCC § 4-109(b)

 Section 4-109(b) of the UCC excuses certain violations of the midnight deadline:

 
Delay by a collecting bank or payor bank beyond time limits prescribed or permitted by this Act or by instructions is excused if (i) the delay is caused by interruption of communication or computer facilities, suspension of payments by another bank, war, emergency conditions, failure of equipment, or other circumstances beyond the control of the bank, and (ii) the bank exercises such ...

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