SECTION
229.38—Liability
A. 229.38(a) Standard
of Care; Liability; Measure of Damages 1. The standard of care established by this section applies to any
bank covered by the requirements of subpart C of the regulation. Thus,
the standard of care applies to a paying bank under sections 229.31,
to a returning bank under section 229.32, to a depositary bank under
sections 229.33, to a bank erroneously receiving a returned check
or written notice of nonpayment as depositary bank under section 229.33(f),
and to a bank indorsing a check under section 229.35. The standard
of care is similar to the standard imposed by UCC 1-203 and 4-103(a)
and includes a duty to act in good faith, as defined in section 229.2(nn)
of this regulation.
2. A bank not meeting this standard of care is liable
to the depositary bank, the depositary bank’s customer, the owner
of the check, or another party to the check. The depositary bank’s
customer is usually a depositor of a check in the depositary bank
(but see section 229.35(d)). The measure of damages provided
in this section (loss incurred up to amount of check, less amount
of loss party would have incurred even if bank had exercised ordinary
care) is based on UCC 4-103(e) (amount of the item reduced by an amount
that could not have been realized by the exercise of ordinary care),
as limited by 4-202(c) (bank is liable only for its own negligence
and not for actions of subsequent banks in chain of collection). This
subpart does not absolve a collecting bank of liability to prior collecting
banks under UCC 4-201.
3. Under this measure of damages, a depositary bank or
other person must show that the damage incurred results from the negligence
proved. For example, the depositary bank may not simply claim that
its customer will not accept a charge-back of a returned check, but
must prove that it could not charge back when it received the returned
check and could have charged back if no negligence had occurred, and
must first attempt to collect from its customer. (See Marcoux v.
Van Wyk, 572 F.2d 651 (8th Cir. 1978); Appliance Buyers Credit
Corp. v. Prospect Nat’l Bank, 708 F.2d 290 (7th Cir. 1983)). Generally,
a paying or returning bank’s liability would not be reduced because
the depositary bank did not place a hold on its customer’s deposit
before it learned of nonpayment of the check.
4. This paragraph also states that it does not affect
a paying bank’s liability to its customer. Under UCC 4-402, for example,
a paying bank is liable to its customer for wrongful dishonor, which
is different from failure to exercise ordinary care and has a different
measure of damages.
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B. 229.38(b) Paying
Bank’s Failure to Make Timely Return1. Section
229.31(b) imposes requirements on the paying bank for expeditious
return of a check and leaves in place the UCC deadlines (as they may
be modified by section 229.31(g)), which may allow return at a different
time. This paragraph clarifies that the paying bank could be liable
for failure to meet either standard, but not for failure to meet both.
The regulation intends to preserve the paying bank’s accountability
for missing its midnight or other deadline under the UCC (e.g., sections
4-215 and 4-302), provisions that are not incorporated in this regulation,
but may be useful in establishing the time of final payment by the
paying bank.
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C. 229.38(c) Comparative Negligence1. This paragraph establishes a “pure” comparative
negligence standard for liability under subpart C of this regulation.
This comparative negligence rule may have particular application where
a paying bank or returning bank delays in returning a check because
of difficulty in identifying the depositary bank, where the depositary
bank has failed to exercise ordinary care in applying its indorsement.
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D. 229.38(d) Responsibility for Certain Aspects
of Checks1. ANS X9.100-140 provides that
an image of an original check must be reduced in size when placed
on the first substitute check associated with that original check.
(The image thereafter would be constant in size on any subsequent
substitute check that might be created.) Because of this size reduction,
the location of an indorsement, particularly a depositary bank indorsement,
applied to an original paper check likely will change when the first
reconverting bank creates a substitute check that contains that indorsement
within the image of the original paper check. If the indorsement was
applied to the original paper check in accordance with ANS X9.100-111’s
location requirements for indorsements applied to existing paper checks,
and if the size reduction of the image causes the placement of the
indorsement to no longer be consistent with ANS X9.100-111’s requirements,
then the reconverting bank bears the liability for any loss that results
from the shift in the placement of the indorsement. Such a loss could
result either because the original indorsement applied in accordance
with ANS X9.100-111 is rendered illegible by a subsequent indorsement
that a reconverting bank later applies to the substitute check in
accordance with ANS X9.100-140, or because a subsequent bank receiving
a substitute check cannot apply its indorsement to the substitute
check legibly in accordance with ANS X9.100-111 as a result of the
shift in the previous indorsement.
2. Responsibility under paragraph (d)(1) is treated as
negligence for comparative negligence purposes, and the contribution
to damages under paragraph (d)(1) is treated in the same way as the
degree of negligence under paragraph (c) of this section.
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E. 229.38(e) Timeliness of Action1. This paragraph excuses certain delays. It adopts the
standard of UCC 4-109(b).
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F. 229.38(f) Exclusion1. This paragraph
provides that the civilliability and class-action provisions, particularly
the punitive-damage provisions of sections 611(a) and (b), and the bona fide error provision of 611(c) of the EFA Act (12 U.S.C.
4010(a), (b), and (c)) do not apply to regulatory provisions adopted
to improve the efficiency of the payments mechanism. Allowing punitive
damages for delays in the return of checks where no actual damages
are incurred would only encourage litigation and provide little or
no benefit to the check-collection system. In view of the provisions
of paragraph (a), which incorporate traditional bank collection standards
based on negligence, the provision on bona fide error is not
included in subpart C.
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G. 229.38(g) Jurisdiction1. The EFA Act confers subject-matter jurisdiction
on courts of competent jurisdiction and provides a time limit for
civil actions for violations of this subpart.
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H. 229.38(h) Reliance on Board Rulings1. This provision shields banks from civil liability if they act
in good faith in reliance on any rule, regulation, or interpretation
of the Board, even if it were subsequently determined to be invalid.
Banks may rely on the commentary to this regulation, which is issued
as an official Board interpretation, as well as on the regulation
itself.
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I. 229.38(i) Presumption of Alteration1. This paragraph applies to disputes between banks
where one bank has sent an electronic check or a substitute check
for collection to the other bank. The presumption of alteration does
not apply to a dispute between banks where one bank sent the original
check to the other bank, even if that check is subsequently truncated
and destroyed. The presumption of alteration applies with respect
to claims that the original check or to the electronic check
or substitute check was altered or contained an unauthorized signature.
2. The presumption of alteration applies when the original
check is unavailable for review by the banks in context of the dispute.
If the original check is produced, through discovery or other means,
and is made available for examination by all the parties, the presumption
no longer applies.
3. This paragraph does not alter the transfer and presentment
warranties under the UCC that allocate liability among the parties
to a check transaction with respect to an item that has been altered
or that was issued with an unauthorized signature of the drawer. The
UCC or other applicable check law continues to apply with respect
to other rights, duties, and obligations related to altered or unauthorized
checks. In addition, the presumption does not apply if it is contrary
to another Federal statute or regulation, such as the U.S. Treasury’s
rules regarding U.S. Treasury checks. The presumption of alteration
may be varied by agreement to the extent permitted under section 229.37.
4. As stated in section 229.2, terms that are not defined
in that section have the meanings set forth in the Uniform Commercial
Code. “Alteration” is defined in UCC 3-407 and includes both (i) an
unauthorized change in a check that purports to modify in any respect
the obligation of a party, and (ii) an unauthorized addition of words
or numbers or other change to an incomplete check relating to the
obligation of a party. Alterations could include, for example, an
unauthorized change to a payee name or a change to the date on a post-dated
check that purports to make the check currently payable. “Unauthorized
signature” is defined in UCC 1-201 and further discussed in UCC 3-403.
An unauthorized signature could include a forgery as well as a signature
made without actual or apparent authority.
