Oak Brook Bank v. Northern Trust Company

In the
United States Court of Appeals
For the Seventh Circuit
No. 00-3309
Oak Brook Bank,
Plaintiff-Appellant,
v.
Northern Trust Company,
Defendant-Appellee.
Appeal from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 98 C 1849--James B. Zagel, Judge.
Argued February 26, 2001--Decided July 6, 2001
Before Bauer, Posner, and Kanne, Circuit
Judges.
Posner, Circuit Judge. A bank that
dishonors a check presented to it for
payment must return the check to the bank
in which the check had been deposited
(the "depositary" bank), either directly
or via a "returning bank," which acts as
a transmitting agent. (The bank to which
the check is presented for payment is
called, even if it dishonors the check,
the "payor" bank--a confusing usage in
this context since it has refused to pay
the check.) Like the other federal
reserve banks, the Federal Reserve Bank
of Chicago is a returning bank; indeed,
returning checks is the major
conventional banking activity in which
federal reserve banks engage. In the case
at hand, a check kiter who had accounts
in both Oak Brook Bank and Northern Trust
Company deposited in his Oak Brook
account checks (none for less than
$2,500) totaling some $450,000 drawn on
his Northern account, which had only a
minute balance (exactly how much, the
record does not disclose). The checks
were presented to Northern for payment
the next day, February 11, 1998. On
February 13, Northern decided to dishonor
them and it informed Oak Brook of that
decision by phone shortly before 4 p.m.
By that time, however, Oak Brook had
credited the kiter’s account and he had

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withdrawn all but about $7,000 of the
money in the account. At 4:30 p.m.,
Northern sent the dishonored checks by
courier to the Federal Reserve Bank,
which received them sixteen minutes
later.
Oak Brook sued the kiter and the kiter’s
company in federal district court under
RICO and added a claim under the
supplemental jurisdiction of the district
court (28 U.S.C. sec. 1367(a)) against
Northern, charging that the dishonor was
ineffective because the return of the
checks was untimely and concluding that
therefore Northern must make good Oak
Brook’s loss. The district court granted
summary judgment for Northern and entered
a Rule 54(b) judgment enabling Oak Brook
to take an immediate appeal. The claim
against the kiter and his company remain
pending in the district court. The issue
in this appeal, a novel one, is the
meaning of "banking day" in regard to
federal reserve banks.
The banking article of the Uniform
Commercial Code requires the payor bank
that wishes to dishonor a check to
dispatch it (for example by putting it in
the mail), either to the depositary bank
or to a "returning" bank for forwarding
to the depositary bank, by midnight on
the next banking day after the banking
day on which the payor bank had received
the check; and failure to make the
deadline requires the payor bank to pay
the check. UCC sec.sec. 4-104 (a)(10), 4-
302(a)(1), 810 ILCS 5/4-104(a)(10),
302(a)(1). Northern missed this deadline,
for remember that it received the checks
on February 11 but didn’t dispatch them
to the Federal Reserve Bank until the
thirteenth. No matter. In 1987, concerned
about delay in depositors’ access to
funds that they deposited by check,
Congress, in the Expedited Funds
Availability Act, 12 U.S.C. sec.sec.
4001-10, shortened the "hold period" of
depositary banks, that is, the period
after a check is deposited before the
depositor can withdraw the money from his
account. 12 U.S.C. sec. 4002. The
shortening of the hold period increased
the risk of nonpayment to these banks,
and to deal with that problem the Act
authorized the Federal Reserve Board to
issue regulations governing the system of
bank payments. 12 U.S.C. sec. 4008(c)(1).
Pursuant to this grant of authority the

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Board issued Regulation CC, 12 C.F.R. pt.
229, which contains two provisions that
bear on this case. The first requires
prompt notice of dishonor in the case of
any check for more than $2,500, such as
the kiter’s checks that Northern
dishonored. 12 C.F.R. sec. 229.33(a). It
is conceded that this provision was
satisfied by Northern’s phone call to Oak
Brook on the thirteenth. But second--and
this is critical--the regulation extends
the UCC’s deadline from midnight to when
the payor bank dispatches the dishonored
check on its return journey, provided the
bank "uses a means of delivery that would
ordinarily result in receipt by the bank
to which it is sent . . . on or before
the receiving bank’s next banking day
following the otherwise applicable
deadline." 12 C.F.R. sec. 229.30(c)(1).
It may seem odd that delay in returning
the checks should make the payor bank
have to pay them in a case such as this,
when it had notified the depositary bank
that the checks had been drawn against
insufficient funds in time for that bank
to prevent any money from being
withdrawn. Oak Brook seems to have been
careless in allowing the kiter to
withdraw "his" money so fast. Of course
it didn’t know he was a kiter. But
because of the size of the deposit, it
could have refused withdrawal for seven
business days, see 12 C.F.R. sec.sec.
229.13(b), (h)(1), (h)(4), and thus until
February 20; and had it done so it
wouldn’t have been left holding the bag,
since it received notice of the dishonor
on the thirteenth and the checks
themselves back on the seventeenth. But
all that is irrelevant. If Northern
missed the extended deadline in
Regulation CC, it must pay the checks.
The reason for this severe sanction is
that the depositary bank could get into
serious trouble if it refused to allow a
depositor to withdraw his money, or took
other action against a depositor, without
proof that the depositor had no right to
the money. See UCC sec. 4-402, 810 ILCS-
5/4-402.
And now we come at last to the nub of
the case. The provision that we quoted
from Regulation CC extending the deadline
requires that the method of delivery used
be calculated to get the check to the
depositary or, as here, the returning
bank by that bank’s "next banking day

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following the otherwise applicable
deadline." The "otherwise applicable
deadline" was the UCC’s deadline of
midnight on February 12, the day after
Northern received the checks. The "next
banking day" was the thirteenth, and so
Northern had to get the checks to the
Federal Reserve Bank, the returning bank,
by the end of the Federal Reserve Bank’s
"banking day" on the thirteenth; and the
question is whether it made this
deadline.
Regulation CC defines "banking day" as
"that part of any business day on which
an office of a bank is open to the public
for carrying on substantially all of its
banking functions." 12 C.F.R. sec.
229.2(f) (emphasis added). (The UCC’s
definition of "banking day" is materially
identical. See UCC sec. 4-104(a)(3).) Oak
Brook argues that by 4:46 p.m. on
February 13, the Federal Reserve Bank of
Chicago was no longer carrying on
"substantially all of its banking
functions." More precisely, it argues
that whether it was or not is a
contestable issue and so the grant of
summary judgment for Northern was
premature.
The Federal Reserve Bank of Chicago is
open 24 hours a day, but that is neither
here nor there. Federal reserve banks
perform many functions for the banking
system that are not banking functions.
The question is whether at 4:46 p.m. on
February 13, 1998, it was still carrying
on substantially all of its banking
functions. The bank’s main banking
function is check processing (including
returns) for other banks--and it turns
out that we need not consider what if any
other banking functions the Federal
Reserve Bank of Chicago, or any other
federal reserve bank, performs. For that
matter, it is of no significance that
check processing is the Chicago reserve
bank’s main banking activity. Regulation
CC states that a federal reserve bank is
a bank within the meaning of the
regulation only insofar as it is a
"paying bank," the definition of which,
so far as pertains to federal reserve
banks, appears to be limited to a bank
that processes checks. See 12 C.F.R.
sec.sec. 229.2(e), (z). Given that
definition and the fact that Regulation
CC is concerned solely with check
processing, we think that for purposes of

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the regulation "all of [a federal reserve
bank’s] banking functions" means check
processing. For it is irrelevant to the
purpose of the regulation whether the
bank is performing some other banking
function on a particular day or at a
particular time of day; and it would
impair the utility of the extended
deadline if a payor bank (Northern
here), in order to determine what the
deadline was, had to familiarize itself
with the daily schedule of a bank’s
banking operations unrelated to check
processing. This point is not logically
limited to federal reserve banks, but we
need not decide its applicability to
banks that provide a broader range of
conventional banking services and, unlike
federal reserve banks, are not defined in
the regulation as limited-purpose banks.
So the issue narrows to whether the
Federal Reserve Bank of Chicago was open
to the public (Oak Brook concedes that
this means to other banks, which are a
federal reserve bank’s only "public") at
4:46 p.m. on February 13 for processing
checks. The bank’s check-processing
department employs about 100 persons,
with half or even more working during the
peak hours of midnight to 9 a.m. Between
4 and 5 on a Friday afternoon, however
(February 13, 1998, was a Friday), only
one or two persons are on duty in
thedepartment. The processing of returned
checks includes receipting the checks,
sorting them by type and region,
dispatching them to the depositary bank,
and confirming the amount returned. When
only one or two employees are on duty in
the department, only receipting is
completed; sorting is begun but not
completed; dispatching, crediting, and,
of course, confirming are not even begun.
If, therefore, as Oak Brook argues, all
these are separate functions, it cannot
be said that the Federal Reserve Bank of
Chicago performs substantially all of its
banking functions on Friday afternoons
after 4, and therefore Northern missed
the deadline and must pay the checks.
We reject the argument, primarily on
practical grounds. It would be
impractical for payor banks to monitor
the internal operations of returning
banks in order to make sure that sending
a check by courier at a given hour on a
given day would be an occurrence that was
within the returning bank’s "banking

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day." It is telling in this regard that
Oak Brook’s lawyer was unable to pinpoint
the end of the Federal Reserve Bank’s
banking day on February 13, 1998. The end
was earlier than 4:46 p.m., he told us,
but he was unable to say how much
earlier, though he thought it might have
been at 2 p.m. To fix the precise time
would require, he told us, an in-depth
inquiry, and therefore a trial.
Faced with such uncertainty, payor banks
would tend to go back to the old UCC
deadline, which Regulation CC does not
supersede but merely supplements. Had
Northern placed Oak Brook’s checks in the
mail to the Federal Reserve Bank of
Chicago shortly before midnight on
February 12 (the old UCC deadline), the
checks probably wouldn’t have gotten to
that bank until the seventeenth (Monday
the sixteenth was a federal holiday), and
processing would have begun then rather
than been completed then and therefore
Oak Brook might not have received the
checks as soon as it did. The added delay
would have made no difference in this
case but could make a difference in other
cases.
We hold, therefore, that a federal
reserve bank is open to the public for
substantially all of its banking
functions whenever the check-processing
department is open for the receipt of
checks, which in the case of the Federal
Reserve Bank of Chicago is 24 hours of
every day that the bank is open. The few
cases dealing with the meaning of
"banking day" under the materially
identical definition of the term in the
UCC are in accord with our position,
United Bank of Crete-Steger v. Gainer
Bank, N.A., 874 F.2d 475 (7th Cir. 1989);
Merrill Lynch, Pierce, Fenner & Smith,
Inc. v. Devon Bank, 832 F.2d 1005, 1007
(7th Cir. 1987), the latter emphasizing
as do we today the practical objections
to the fact-intensive, case-by-case
approach urged by Oak Brook. (Neither
case involved a federal reserve bank.)
Northern’s employment of a means of
delivery calculated to get the checks to
the Federal Reserve Bank by any time up
to midnight on February 13 therefore beat
the deadline, and so summary judgment in
Northern’s favor was rightly granted. We
leave open the implications of our
analysis for returning banks other than
federal reserve banks, who we were told

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dominate the check-return function.
Affirmed.

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