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Troy Bank & Trust Co. v. Citizens Bank

Supreme Court of Alabama

September 30, 2014

Troy Bank and Trust Company
v.
The Citizens Bank

Released for Publication June 10, 2015.

Appeal from Geneva Circuit Court. (CV-11-0049). Kenneth W. Quattlebaum, Trial Judge.

For Appellant: Marc James Ayers and J. Paul Compton, Jr., of Bradley Arant Boult Cummings LLP, Birmingham; and Allen C. Jones, Troy.

For Appellee: Edward A. Dean, Thomas Patrick Oldweiler, and Lindsay S. Hurt of Armbrecht Jackson LLP, Mobile, and Jeffery D. Hatcher, Geneva.

PARKER, Justice. Moore, C.J., and Stuart, Bolin, Main, and Bryan, JJ., concur. Shaw, J., concurs in the result. Murdock, J., dissents.

OPINION

Page 58

PARKER, Justice.

Troy Bank and Trust Company (" Troy Bank" ) appeals a summary judgment entered in favor of The Citizens Bank (" Citizens Bank" ) by the Geneva Circuit Court (" the circuit court" ). We reverse the circuit court's judgment and remand the cause.

Facts and Procedural History

In its order entering a summary judgment in favor of Citizens Bank, the circuit court set forth the following relevant, undisputed facts:

" 1. On 12/10/09 Ronnie Gilley Properties, LLC, ('Gilley' hereinafter) issued a check in the amount of $100,000.00 payable to Cile Way Properties, LLC, ('Cile' hereinafter). The check was drawn on the account held by Gilley at Troy Bank.
" 2. On 12/16/09, Cile deposited the check to its account at Citizens Bank.
" 3. Citizens Bank presented the check for payment through the Federal Reserve Board ('FRB' hereinafter) and mis-encoded/under-encoded[1] the amount of $1000.00 instead of $100,000.00.
" 4. On the date [the check was] presented to Troy Bank[,] Gilley's account[,] which contained a balance of $199,083.39[,] was debited $1000.00 instead of $100,000.00 because of Citizens Bank's encoding error. Cile's account was credited $1000.00 at Citizens Bank.
" 5. On 01/22/10 Citizens Bank discovered the mistake and sent an adjustment through the FRB for the under-encoded amount of $99,000.00.
" 6. Upon receipt of the adjustment notice, Troy Bank honored the notice and made final payment of $99,000.00 which was credited to Cile's account at Citizens Bank.[2]
" 7. Troy Bank never returned the item or sent written notice of dishonor to Citizens Bank.
" 8. On 03/17/10, Troy Bank sent a letter to Citizens Bank demanding payment in the amount of $98,436.43 for damages it claimed to have suffered as a result of the encoding error because Gilley's account held insufficient funds on the date final payment of the $99,000 was made."

On April 20, 2011, Troy Bank sued Citizens Bank seeking to recover damages Troy Bank claimed to have suffered as a result of the encoding error made by Citizens Bank. Troy Bank alleged that it was entitled to recover damages under Alabama's check-encoding warranty, which is

Page 59

set forth in § 7-4-209, Ala. Code 1975, and states, in pertinent part:

" (a) A person who encodes information on or with respect to an item after issue warrants to any subsequent collecting bank and to the payor bank or other payor that the information is correctly encoded. If the customer of a depositary bank encodes, that bank also makes the warranty.
" ....
" (c) A person to whom warranties are made under this section and who took the item in good faith may recover from the warrantor as damages for breach of warranty an amount equal to the loss suffered as a result of the breach, plus expenses and loss of interest incurred as a result of the breach."

On May 15, 2013, Citizens Bank filed a motion for a summary judgment and a brief in support of its motion, which it later amended. Citizens Bank argued that it was not strictly liable for its encoding error under § 7-4-209 but that Troy Bank " had an obligation to mitigate its damages and attempt to avoid loss altogether. [Troy Bank] failed to do this when it sent no written notice of dishonor or nonpayment before its midnight deadline and it allowed final payment to be made from [Gilley's] account ...."

On August 6, 2013, Troy Bank filed a response to Citizens Bank's summary-judgment motion. Troy Bank argued:

" Troy Bank had already become accountable for the full amount of the item when the under encoded check was initially presented for payment and paid in the amount for which it was under encoded. The issue no longer is whether Troy Bank is liable for the full amount of the check. Instead, the issue is whether Troy Bank was able to mitigate its losses by charging the drawer's account for the remaining balance of the check (and Citizens [Bank] does not dispute that there were not sufficient funds in the account to pay the $99,000.00 when Troy Bank received the adjustment notice), and if not, whether Troy Bank is entitled to shift the loss to the depositary bank (Citizens [Bank]) who under encoded the check. UCC § [7-]4-209 says Troy Bank is entitled to shift that loss."

Troy Bank also noted that Citizens Bank's motion for a summary judgment could have been " read to suggest that Federal Operating Circular No. 3 preempts the Uniform Commercial Code or imposes additional obligations on payor banks with respect to under encoded checks." Troy Bank argued in its response to Citizens Bank's summary-judgment motion:

" [T]he scope provisions of the UCC[3] and Operating Circular 3 make it clear

Page 60

that the operating procedure which allows the parties to resubmit items back through the Fed[eral Reserve Bank] when there has been an encoding error is not inconsistent with the ability of a bank to pursue a warranty claim against an encoding bank under ... § [7-]4-209. There is no inconsistency. The procedure for remitting items through the Fed[eral Reserve Bank] to correct errors operates in a narrow 'sphere' to provide a shorthand procedure for resolving issues where a check has been under encoded and funds remain available to pay the proper amount of the check. It is not intended to undo the effect of ... § [7-]4-209, which was adopted to place losses on the depositary bank that under encodes a check. Citizens [Bank's] use of the short-hand procedure in an effort to obtain payment of the additional $99,000.00 shortfall caused by its encoding error did not obligate Troy Bank to utilize that shorthand procedure to reject the payment request. There is nothing inconsistent with an expedited procedure for determining who holds the funds when there is a dispute and a separate mechanism under the UCC that determines the liability of the parties and resolves the matter in favor of Troy Bank."

Troy Bank also attached to its response the affidavit of Gayla Kinney, an employee of Troy Bank with personal knowledge of the facts and circumstances related to the encoding error made by Citizens Bank, which had attached to it " documents relating to the Federal Reserve Circular dealing with under encoded items." A page of Operating ...


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