Banknorth v. Zeeman, No. 173-3-04 Wncv (Katz, J., Dec. 20, 2004)

[The text of this Vermont trial court opinion is unofficial. It has been reformatted
from the original. The accuracy of the text and the accompanying data included
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STATE OF VERMONT                                          SUPERIOR COURT
Washington County, ss.:                              Docket No. 173-3-04 Wncv


BANKNORTH N.A.

v.

JOHN H. ZEEMAN


                           FINDINGS OF FACT
                         CONCLUSIONS OF LAW
                        AND NOTICE OF DECISION


      This matter came on for trial on October 19, 2004. Based on the
evidence presented, the following decision is announced.

                             FINDINGS OF FACT

      1. Defendant John Zeeman endorsed and deposited at Banknorth’s
Waitsfield branch an apparent certified check, issued by J. P.
Morgan/Chase for $400,000.

       2. The check proved a forgery.

       3. Defendant acquired the check from some unknown person who
had previously contacted him by telephone. Defendant’s deal with the
source was that he would receive this “bank” check, deposit it, and then
obtain a wire transfer for $345,000 to some bank in Austria.
       4. Defendant carried out his instructions and directed Plaintiff
Banknorth to issue the wire transfer on the strength of the endorsed
instrument.

        5. When Defendant inquired as to when he would be able to draw
on the funds represented by the check, he was given an answer. It was
based upon the bank’s “funds availability” policy, which provided,
generally, that “[f]unds from the following deposits are available on the
first (1st) Business Day after the day of your deposit: . . . Cashier’s,
certified, treasurer’s and teller’s checks, including out-of-state checks that
are payable to you if you use a special deposit slip . . . .” Additional
language stated “In some cases, we will not make all the funds you deposit
by check available at the times shown in this Policy. Depending on the
type of check that you deposit, funds may not be available until the fifth
(5th) Business Day after the day of your deposit. . . . We will also tell you
when the funds will be available.”

        6. Defendant deposited the check on October 8, 2003, informing
bank employee O’Grady that he wished to have a wire transfer issued out
of the funds it represented. She advised that he would have to wait at least
two business days. On October 10, O’Grady told Defendant he could have
the wire transfer accomplished. So, Defendant gave his instructions to
O’Grady to issue the $345,000 wire transfer to Austria.

       7. The transfer was made. Banking laws in Austria turn out to
afford the recipient a high degree of confidentiality, such that the money is
quite lost to both Banknorth and Defendant Zeeman.

        8. A few days later, the bank learned that the check was a forgery,
and so informed defendant customer. It attempted to recall the transfer
through its intermediary bank, American Express, but was unable to do so.
It then charged back against his account the sum of $18,874, which was all
it had in it. Banknorth brings this lawsuit to recover the balance of the wire
transfer, which it made to the Austrian bank, as instructed.


                         CONCLUSIONS OF LAW




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       A.      At the conclusion of the evidence, the court inquired of
counsel whether Defendant Zeeman’s endorsement of the check should
have any significance. That was the first mention of endorsement. Not
surprisingly, Banknorth immediately seized on the issue. Defendant
Zeeman now argues that he is confronted with an unfair alteration of
theories of recovery, the original complaint “having been pled in contract.”
Defendant argues that, in effect, the switch would require an amendment of
the complaint, which itself would be unfair now that the evidence is closed.

        We disagree. The adoption of the Federal Rules of Civil Procedure,
particularly Rule 8, which is identical to Vermont’s later adoption of the
rule, effectively abolished the restrictive theory of the pleadings doctrine.
See 5 C. Wright & A. Miller, Federal Practice and Procedure (2d ed. 1990)
§ 1219, at 189-90. “[T]he theory of the pleadings mentality has no place
under [modern] practice. Rule 8(a) eliminates the concept of ‘cause of
action.’” Id. at 190. As a heading in a footnote aptly suggests, “Pleading
legal theory unnecessary.” Id. at 190 n.7.

       B.     Moreover, “[p]articular theories of counsel yield to the
court’s duty to grant the relief to which the prevailing party is entitled,
whether demanded or not.” Gins v. Mauser Plumbing Supply Co., 148
F.2d 974, 976 (2d Cir. 1945) (Clark, J.), quoted in Wright & Miller, supra,
at 191-92.

               The real issue, of course, is not whether legal theories
       may be pleaded but whether the original theory may be
       discarded and recovery had on some other theory. The
       federal rules, and the decisions construing them, evince a
       belief that when a party has a valid claim, he should recover
       on it regardless of his counsel’s failure to perceive the true
       basis of the claim at the pleading stage, provided always that
       a late shift in the thrust of the case will not prejudice the other
       party in maintaining his defense upon the merits.

Wright & Miller, supra, at 192-94.




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       Here, the court inquired of counsel regarding the legal effect of an
endorsement and invited response in post-trial memos. The evidence had
been completed. No one now seriously suggests that some additional
evidence would have been relevant. There has been ample time to respond
on the law. There is no need for any amendment of pleadings.

       C.      Provisions of Article 3 of the Uniform Commercial Code
(UCC), Negotiable Instruments, apply to the check at issue in this case to
the extent those provisions do not conflict with Article 4, Bank Deposits
and Collections. See 9A V.S.A. § 4–102(a). Under Article 3, the paper
Defendant deposited into his account at Banknorth, Def. Ex. B, was a
negotiable instrument – it meets all the requirements of 9A V.S.A. § 3-104.
The fact that it was a forgery does not detract from the conclusion that it
was a negotiable instrument. See, e.g., Official Comment, 9A V.S.A. § 3–
302 (holder in due course doctrine extends so long as instrument is not so
irregular as to reflect negatively on its authenticity). Defendant signed the
instrument on its rear, at the usual place, marked as well for “endorsement,”
indicating “For Deposit Only.”

        D.    A person such as Defendant who endorses an instrument “is
obliged to pay the amount due on the instrument [] according to the terms
of the instrument at the time it was [e]ndorsed.” 9A V.S.A. § 3–415(a).
“The obligation of the [e]ndorser is owed to a person entitled to enforce the
instrument.” Id. Endorsement guarantees that the endorser will pay the
instrument should it be dishonored. Brown v. Pilini, 128 Vt. 324, 330
(1970). Thus, under Article 3, by endorsing the check and depositing it,
Mr. Zeeman acquired liability for any losses arising when it was
dishonored.

       E.      This result is consistent with the more specific provisions of
Article 4 of the UCC, Bank Deposits and Collections. When Defendant
Zeeman deposited the check into his Banknorth account, Banknorth began
acting as a collecting bank, meaning that it would handle the check for the
purpose of collection. See 9A V.S.A. § 4–105(5); see also id. § 4–205(1)
(Banknorth also became an Article 3 holder in due course). With respect to
that check, until final settlement, Banknorth was no more than Defendant
Zeeman’s agent for collection and any settlement was provisional only.
See id. § 4–201(a). By “transferring” the check to Banknorth for




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collection, Mr. Zeeman made § 4–207(a) transfer warranties and agreed, in
parallel with his obligations under § 3–415, to pay the amount due on the
check if it eventually was dishonored. See 9A V.S.A. § 4–207(b).

       F.      Awaiting final settlement, Banknorth provisionally settled the
collection by crediting Mr. Zeeman’s account and making those funds
available to him. During this time, the “risk of non-collection” of the
deposited check, generally, was with Mr. Zeeman. Call v. Ellenville Nat.
Bank, 774 N.Y.S.2d 76, 78 (N.Y. App. Div. 2004). The payor bank, J.P.
Morgan/Chase, see 9A V.S.A. § 4–105(3), of course, never paid because
the check was dishonored as counterfeit. With no final payment, there was
no final settlement.

        G.    The final settlement never occurring, Banknorth retained the
right to revoke the provisional settlement, charge back the related credit to
Mr. Zeeman, and seek a refund. Those rights are plainly stated at § 4–
214(a):

               If a collecting bank has made provisional settlement
       with its customer for an item and fails by reason of dishonor,
       suspension of payments by a bank, or otherwise to receive
       settlement for the item which is or becomes final, the bank
       may revoke the settlement given by it, charge back the
       amount of any credit given for the item to its customer’s
       account, or obtain refund from its customer, whether or not it
       is able to return the item, if by its midnight deadline or within
       a longer reasonable time after it learns the facts it returns the
       item or sends notification of the facts. If the return or notice
       is delayed beyond the bank’s midnight deadline or a longer
       reasonable time after it learns the facts, the bank may revoke
       the settlement, charge back the credit, or obtain refund from
       its customer, but it is liable for any loss resulting from the
       delay. These rights to revoke, charge back, and obtain refund
       terminate if and when a settlement for the item received by
       the bank is or becomes final.

This, of course, is exactly what happened in this case; when the payor bank
declined to honor the check, Banknorth properly went looking for the return




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of its provisional credit. Mr. Zeeman, unfortunately, had already
transferred the bulk of it away irretrievably. Although Banknorth may be
unlikely, ultimately, to recover all of its loss, it is secure in its ability to
establish Mr. Zeeman’s liability for it, which it has done here.

        H.     Mr. Zeeman poses, substantially, three arguments in
opposition to this result. First, he argues that Banknorth failed to provide
timely notice that the check was dishonored. The facts, however, do not
support that claim. After it first received notice that the check would not be
honored, Banknorth promptly notified Mr. Zeeman. Moreover, the full
extent of the loss was complete at the moment of the wire transfer.
Banknorth first learned that the check was dishonored several days later.
At most, untimely notice can support the bank’s liability only to the extent
that the loss was caused by the delay. See 9A V.S.A. § 4–214(a). Here,
delay had nothing to do with the loss.

       I.      Mr. Zeeman also argues that, in fact, the wire transfer itself
means that there was a final settlement. As § 4–214(a) provides, final
settlement would extinguish Banknorth’s ability to charge back the
provisional credit and seek a refund. Of course, the wire transfer to which
Mr. Zeeman refers is the one he executed out of his account, not one that
put funds into his account as a result of the collection of the check. The
wire transfer has nothing to do with whether final settlement of the
collection of the deposited check ever occurred. The provisional settlement
simply never became final.

        J.     Third, Mr. Zeeman argues that as a matter of contract or tort,
the “availability” of funds in his account, or representations related to the
availability of funds in his account, support Banknorth’s liability. At the
outset, we note that the “availability” of funds under Article 4 of the UCC
has nothing to do with final settlement. Final settlement is what fixes the
depositor’s right to the funds, not availability. Id. § 4–215(e). Mr. Zeeman
expounds on his misunderstanding about “availability” by requesting a
finding to the effect that a statement about availability was reasonably
understood by him to mean that the check had “cleared,” implying that he
had a final right to the funds. (Defendant’s Proposed Findings of Fact and
Law at 4, ¶ 19.) The term “cleared,” however, is not used in the UCC at all




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and no evidence suggests that it should mean (or that bank staff used it to
mean) “final settlement,” which, again, is what mattered.

       K.     Nevertheless, Mr. Zeeman claims that “funds availability”
provisions of the Personal Deposit Account Agreement (PDAA), the
account agreement between Banknorth and Mr. Zeeman, are ambiguous as
to the meaning of “availability” and support his final right to the
provisionally credited funds. Though banks must comply with federal rules
about, among other things, funds availability, generally speaking, relevant
provisions of the Article 4 may be varied by agreement. 9A V.S.A. § 4–
103(a). The “funds availability” provisions of the PDAA, however, do not
meaningfully blur the distinction between a provisional and a final
settlement. Quite to the contrary. For example, one such provision states:

       Checks Returned Subsequent to Funds Being Made
       Available: If a check you deposited to your Account is
       returned to us unpaid after the funds have been made
       available to you, the amount of the check will be charged to
       your Account. If there are insufficient funds in your Account,
       we reserve the right to demand payment directly from you
       and may charge you for insufficient funds as posted in our
       most recent Fee Schedule.

PDAA at 33. This language has no ring of ambiguity: availability does not
mean final settlement.

        L.     Lastly, Mr. Zeeman claims that his misunderstanding, or lack
of awareness, of the importance of final settlement was caused by
misrepresentations by bank staff. The only “misrepresentations” he cites,
however, are accurate representations about funds availability. Objectively
speaking, no facts suggest that any bank staff improperly led Mr. Zeeman
to think that final settlement had occurred, and Banknorth did not have an
affirmative duty to ensure that Mr. Zeeman grasped the significance of
“final settlement” prior to permitting him to execute the wire transfer.

       M.    Given Defendant Zeeman’s responsibility for the loss,
Banknorth had the right to seize deposited funds to reduce or eliminate
debts owed to it by its depositor. See O’Donnell v. Bank of Vermont, 166




                                      7
Vt. 221, 225 (1997). In Vermont, the right to setoff derives from the
contractual relationship between the depositor and the bank. See Hale v.
Windsor Sav. Bank, 90 Vt. 487, 494 (1916) (bank account is basis for
contractual relationship between depositor and bank). By placing funds in
an ordinary account, a depositor gives the bank legal title to them, and,
absent a specific agreement to the contrary, becomes the bank’s creditor up
to the amount of the deposit. Caledonia Nat'l Bank v. McPherson, 116 Vt.
328, 330 (1950). As titleholder, the bank has the right to apply the
depositor’s money to extinguish a matured preexisting debt. Goodwin v.
Barre Sav. Bank & Trust Co., 91 Vt. 228, 235 (1917). In Goodwin, the
Vermont Supreme Court described the bank’s position as that of a
lienholder on the customer’s deposit. By virtue of this lien, the banker “has
the right to set off any matured debt against such funds without direction or
authority from such customer.” Id. at 235.


                         NOTICE OF DECISION


       For the foregoing reasons, Plaintiff BankNorth is entitled to have
judgment entered against Defendant for the principal amount it is due on
the endorsed instrument, and to have the counterclaim dismissed. Counsel
for Plaintiff to submit proposed form of judgment.



    Dated at Montpelier, Vermont, __________________________, 20___.



                                            __________________________
                                                                 Judge




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