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.
In its order entering a summary judgment in favor of Citizens Bank, the circuit court set forth the following relevant, undisputed facts:
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
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 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:
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 Circular 3 was attached to Kinney's affidavit, which states, in pertinent part:
Also attached to Kinney's affidavit was a "Claim of Damage Due to Underencoding Adjustment" form, which, Kinney stated in her affidavit, "is [a form] used in connection with underencoded items and it states that a bank which suffered a loss due to an encoding error has twenty (20) banking days to submit a claim through the Federal Reserve system." The pertinent portion of the form reads:
(Emphasis added.)
On August 28, 2013, following a hearing, the circuit court entered a summary judgment in favor of Citizens Bank, stating:
Troy Bank appealed.
Troy Bank and Citizens Bank agree that the underlying facts are not in dispute. See Troy Bank's brief, at p. 9, and Citizens Bank's brief, at p. 6. This Court has held that when "the underlying facts are not disputed and [the] appeal focuses on the application of the law to those facts, there can be no presumption of correctness accorded to the trial court's ruling, and this Court must review that application of the law de novo." Beavers v. County of Walker, 645 So.2d 1365, 1373 (Ala.1994) (citing First Nat'l Bank of Mobile v. Duckworth, 502 So.2d 709 (Ala.1987), and Barrett v. Odom, May & DeBuys, 453 So.2d 729 (Ala.1984)).
This case involves Alabama's check-encoding warranty ("the encoding warranty") set forth above. Troy Bank argues that the encoding warranty "makes clear that any party that encodes a check warrants the correctness of that information and is liable for any loss due to an encoding error." Troy Bank's brief, at pp. 13-14. Troy Bank argues that the summary judgment in favor of Citizens Bank was in error based on the plain language of the encoding warranty.
As set forth above, in drafting the form to be used to initiate the claim procedure, the Federal Reserve Bank clearly stated that the claim procedure was not the exclusive recovery method for a bank that had suffered a loss due to an encoding error made by another bank but expressly recognized that recovery could be pursued by the bank that had suffered the loss outside the claim procedure by dealing directly with the misencoding bank. In fact, as Troy Bank notes, Operating Circular No. 3 states in subsection 20.1 that "[a] bank may need to pursue other kinds of claims directly with another bank or by making a legal claim rather than, or in addition to, an adjustment request." (Emphasis added.) As Troy Bank argues on appeal, it was not required to use the claim procedure but, instead, chose to pursue recovery under the encoding warranty.
We note that § 7-4-103(a), Ala.Code 1975, states that "[t]he effect of the provisions of this article may be varied by agreement" and that § 7-4-103(b) states that "Federal Reserve regulations and operating circulars ... have the effect of agreements under subsection (a)." However, § 7-4-103 should not be read to obviate the encoding warranty. Under § 7-4-103, it is only "when the customer uses the system" that the customer, "in effect, agrees to use the system's rules." 5 Thomas M. Quinn, Quinn's Uniform Commercial Code Commentary and Law Digest § 4-103[A][1] (rev.2d ed.2010) (emphasis added). Had Troy Bank pursued recovery under the claim procedure, it would have been bound by the applicable federal regulations. As set forth above, however, Troy Bank chose not to use the claim procedure but sought recovery under the encoding warranty. Therefore, because Troy Bank filed its action under § 7-4-209 and Citizens Bank has failed to direct this Court's attention to any authority indicating that the claim procedure was the exclusive method of recovery available to Troy Bank, the encoding warranty alone controls this case.
William H. Lawrence, Changes in Check Collection and Access to Funds: Regulation CC and Revised UCC Article 4, 61 J. Kan. B.A. 26, 32-33 (July 1992). Lawrence's Anderson on the Uniform Commercial Code states that "U.C.C. § 4-209 [Rev.] provides rules for determining which party will suffer the loss resulting from payment of an erroneously encoded item. It allocates the loss through the encoding warranties." 7 Lary Lawrence, Lawrence's Anderson on the Uniform Commercial Code § 4-209:5 (3d ed.2007); see also James J. White & Robert S. Summers, Uniform Commercial Code § 20-6c. (4th ed. 1995)("[R]evised 4-209 ... gives a claim against the `person who encodes.'").
However, before we turn our attention to the issue whether the encoding warranty shifts liability for the encoding error from Troy Bank to Citizens Bank, we first consider Troy Bank's liability for the full $100,000 amount of the check. It is important to note that the parties agree that Troy Bank became liable for the full $100,000 amount of the check; the parties disagree, however, as to when Troy Bank became liable for the full amount of the check. The circuit court — apparently applying the "final-payment" and "midnight-deadline" rules set forth in §§ 7-4-215 and 7-4-301, Ala.Code 1975, respectively (which are set forth below) — determined that Troy Bank became liable for the full amount of the check when the adjustment notice was paid and Troy Bank failed to "return the [adjustment notice] or send written notice of dishonor before the midnight deadline." Citizens Bank agrees with the circuit court's conclusion. Troy Bank argues that it became liable for the full amount of the check at the time the check was presented to Troy Bank, and it paid the underencoded amount and did not dishonor the check by its midnight deadline. For the reasons set forth below, we agree with Troy Bank.
However, § 7-4-215 must be read in conjunction with § 7-4-301, which sets forth the "midnight-deadline rule":
Paragraph 3 of the Official Comment to § 7-4-301 explains the relationship between § 7-4-215 and § 7-4-301:
The final-payment rule and the midnight-deadline rule operated to make Troy Bank, the payor bank, liable for the full face amount of the check when it paid the underencoded amount of the check pursuant to § 7-4-215 (setting forth the final-payment rule) and did not dishonor the check within the time prescribed in § 7-4-301 (setting forth the midnight-deadline rule). This conclusion is supported by the following secondary authorities and cases.
Lawrence's Anderson on the Uniform Commercial Code states:
§ 4-209:6 (emphasis added); see also 1 Henry J. Bailey & Richard B. Hagedorn, Brady on Bank Checks: The Law of Bank Checks § 21.04 (rev. ed. 2011) ("[U]nder the UCC, it is clear that a payor bank remitting an insufficient amount on an underencoded check would be accountable for the full amount."); and Lawrence, Changes in Check Collection, 61 J. Kan. B.A. at 33 ("If the encoding is for less than the amount of the check, the payor bank is liable for the full amount of the check."). This is in accord with the Official Comment to § 7-4-209, which states, in pertinent part:
§ 7-4-209, ¶ 2 (emphasis added); see also White & Summers, Uniform Commercial Code § 20-6c. ("The comment and [§ 4-209] seem to adopt the proposition that a payor who pays an underencoded amount has made final payment on the check or has liability for the full face amount to other parties. However, the payor can recover or set off any difference that it cannot get from its customer from the encoding depositary bank. Thus, the payor would first have to attempt to charge its depositor's account for the amount of the
Moreover, in Azalea City Motels, Inc. v. First Alabama Bank of Mobile, 551 So.2d 967, 976 (Ala.1989), this Court held, under the then existing version of Alabama's UCC, relying upon Georgia Railroad Bank & Trust Co. v. First National Bank & Trust Co. of Augusta, 139 Ga.App. 683, 684-85, 229 S.E.2d 482, 484 (1976), as follows:
See also First Nat'l Bank of Boston v. Fidelity Bank, 724 F.Supp. 1168, 1172 (E.D.Pa.1989) ("I reject the argument that the amount of the item for § 4-213(1) [pre-revised UCC] purposes is the encoded amount, rather than the face amount, of the check."); and Georgia R.R. Bank & Trust Co., 139 Ga.App. at 685, 229 S.E.2d at 484 (a case cited in the Official Comment to § 7-4-209 finding that "posting of the item, although in a smaller amount than the true amount of the item, was sufficient to constitute final payment [and] the payor bank became accountable for the amount of the item").
Having concluded that Troy Bank became liable for the full amount of the check when it paid the underencoded amount of the check and did not revoke its settlement of the check by the midnight deadline, we now turn to whether the encoding warranty shifts liability from Troy Bank to Citizens Bank. Based on the principles set forth above, we conclude that the encoding warranty shifts liability to Citizens Bank.
Citizens Bank discovered its encoding error after Troy Bank had honored the check and had paid the underencoded amount. Citizens Bank then submitted to the Federal Reserve Bank the adjustment notice requesting that $99,000 be transferred from Troy Bank to Citizens Bank to cover the full amount of the check. At the time the Federal Reserve Bank transferred $99,000 from Troy Bank's Federal Reserve Bank account to Citizens Bank's Federal Reserve Bank account, Gilley's account no longer had sufficient funds to pay the full amount of the check. After receiving notice that the Federal Reserve Bank had paid Citizens Bank's adjustment notice, Troy Bank discovered that Gilley's account no longer had sufficient funds to cover the full amount of the check and realized damage in the alleged amount of $98,436.43.
It is important to note that had Citizens Bank properly encoded the check there would have been no damage. As set forth above, Gilley's account had sufficient funds to cover the full amount of the check when Troy Bank was presented with the check. However, Gilley all but emptied the checking account after the underencoded amount of $1,000 was withdrawn from its account so that, when Citizens Bank realized its error and sent the adjustment notice, there were no longer sufficient funds in Gilley's account to cover the full amount of the check. Citizens Bank's encoding error caused Troy Bank to incur damage.
Under the encoding warranty — and in accordance with the Official Comment to § 7-4-209 and the above-quoted cases and secondary authorities — it was error for the circuit court to enter a summary judgment in Citizens Bank's favor. As the Official Comment ¶ 2 to the encoding warranty
The encoding warranty protects Troy Bank from any damage resulting from Citizens Bank's encoding error. Although Troy Bank did not incur any damage at the time it honored the check by paying the underencoded amount of $1,000, Troy Bank certainly incurred damage when the adjustment notice was paid because Gilley's account no longer contained sufficient funds to cover the full amount of the check. The damage Troy Bank incurred was the result of Citizens Bank's encoding error. Had Citizens Bank properly encoded the check, Gilley's account would have contained sufficient funds to cover the full amount of the check when it was first presented to Troy Bank.
We note that Citizens Bank argues that its breach of the encoding warranty does not make it strictly liable for the alleged damage to Troy Bank but that its breach of the encoding warranty must have actually caused Troy Bank's alleged damage in order for Citizens Bank to be liable for the alleged damage. We agree and, as set forth above, have concluded that Citizens Bank's breach of the encoding warranty caused Troy Bank's alleged damage. Citizens Bank makes a strained argument that Troy Bank was under an obligation to "dishonor" the adjustment notice. See Citizens Bank's brief, at pp. 29-32. However, as set forth above, Troy Bank was already liable for the full amount of the check when Citizens Bank sent the adjustment notice to the Federal Reserve Bank. Payment of the adjustment notice did not make Troy Bank liable for the full amount of the check; Troy Bank's payment of the underencoded amount of $1,000 made Troy Bank liable for the full amount of the check.
In this case, the encoding warranty, which is applied to determine liability as between banks, operates to shift the liability to Citizens Bank. To hold that Citizens Bank is not liable for the damage it caused Troy Bank based on Citizens Bank's encoding error would render the encoding warranty useless and strip Troy Bank of a legislatively enacted protection.
Based on the foregoing, we conclude that the circuit court erred in its application of the law to the undisputed facts of this case. Citizens Bank's initiation of the claim procedure did not deprive Troy Bank of its statutory right to seek damages under the encoding warranty. Under the encoding warranty, Citizens Bank is liable for the alleged damage to Troy Bank. Accordingly, we reverse the circuit court's summary judgment and remand the cause for the circuit court to enter a summary judgment in favor of Troy Bank in the amount of damages supported by the substantial evidence.
REVERSED AND REMANDED.
MOORE, C.J., and STUART, BOLIN, MAIN, and BRYAN, JJ., concur.
SHAW, J., concurs in the result.
MURDOCK, J., dissents.
Troy Bank's brief, at p. 5 n. 1.
Citizens Bank's argument is wrong for two reasons.
First, as set forth above, Troy Bank filed this action under § 7-4-209, not under 12 C.F.R. § 229 et seq. Therefore, the one-year statute of limitations has no relevance or applicability to this case.
Second, Citizens Bank did not assert this affirmative defense in the circuit court; thus, we cannot consider this argument for the first time on appeal. Ameriquest Mortg. Co. v. Bentley, 851 So.2d 458, 465 (Ala.2002) ("This Court can affirm the judgment of a trial court on a basis different from the one on which it ruled, Smith v. Equifax, 537 So.2d 463 (Ala. 1988), but the constraints of procedural due process prevent us from extending that principle to a totally omitted affirmative defense.").
Troy Bank's brief, at p. 22 (footnote omitted). Citizens Bank relies upon U.S. Bank National Association v. First Security Bank, N.A., (No.2:97-CV-0789C, April 3, 2001) (D.Utah 2001) (not reported in F.Supp.2d), to argue that any delay caused by Troy Bank in discovering that Gilley's account had insufficient funds to cover the full amount of the check should be taken into consideration in determining liability. That factor, however, is irrelevant in this case. In U.S. Bank, a payor bank's delay in looking to a drawer's account to cover the full amount of an underencoded check played a significant role in the court's decision because it was the payor bank's delay that allowed the drawer to empty his account. In this case, if any delay is relevant, it is Citizens Bank's delay in discovering its encoding error, which allowed Gilley time to empty its account before the adjustment notice was sent. By the time Troy Bank received the adjustment notice, Gilley's account had been all but emptied. Therefore, U.S. Bank is inapplicable to this case. Moreover, U.S. Bank is an unreported decision decided by the United States District Court of Utah; it is lacking in precedential value. Citizens Bank also relies upon First National Bank of Boston v. Fidelity Bank, National Association, 724 F.Supp. 1168 (E.D.Penn.1989), for a similar principle. However, First National was decided by the United States District Court for the Eastern District of Pennsylvania in 1989, a year before the UCC was revised to include the check-encoding-warranty provisions, which Alabama later adopted. In First National, the court was dealing with a court-created equitable doctrine, not a statutory provision. Therefore, this Court will not consider U.S. Bank and First National.