The opinion of the court was delivered by: LASKER
This action arises from a stop payment order on three checks, which, apparently as a result of clerical error, did not get "stopped." The payee, Teltronics Services, Inc. ("Teltronics") is now in bankruptcy, and the payor's bank, Continental Illinois National Bank and Trust Company of Chicago ("Continental") brings this action against Teltronics' bank, Sterling National Bank & Trust Company ("Sterling") to recover the funds in question, which totalled $61,057.
The pertinent facts are undisputed. The fateful checks were drawn by Borg-Warner Leasing on its account at Continental on February 28, 1979. The checks were made payable to Teltronics, which deposited them in its account at Sterling on March 2, 1979. The same day, Borg-Warner requested that Continental stop payment on the checks. In accordance with ordinary banking procedure, Sterling sent the checks through the Federal Reserve banking system to Continental for payment. Continental dishonored the checks on March 6, 1979 by refusing payment and sending the checks back through the Federal Reserve system to Sterling.
All was well until the Federal Reserve Bank of New York ("FRB-NY") routed the checks to the wrong bank. As a result, Sterling did not receive the dishonored checks until March 14th, which is undisputedly past the so-called "midnight deadline", the time by which FRB-NY was required to notify Sterling of the dishonor. N.Y.U.C.C. § 4-212(1) (McKinney 1964). However, although Sterling did not receive the dishonored checks until March 14th, they did receive telephonic notice of the dishonor on March 8th, which the parties agree is within the midnight deadline, although they disagree as to whether telephonic notice is adequate.
Upon receipt of the returned checks, Sterling issued an "Affidavit of Late Return," also referred to as a "Challenge," which states that the checks were returned after the midnight deadline. Sterling sent the checks back to the FRB, which returned them to Continental.
Continental received Sterling's Challenge on March 22, 1979. On June 7, 1979, Continental responded to the Challenge with a "Letter of Disclaimer", in which it denied responsibility for the late return of the checks to Sterling.
On September 18, 1979, Teltronics filed a Petition under Chapter 11 of the Bankruptcy Act, and on May 29, 1980 Sterling was directed by order of the Bankruptcy Court to turn over to the Bankruptcy Trustee all of the funds in Teltronics' account, which, on that date, totalled $89,686.81 (the "turnover order"). A copy of the turnover order was sent to Continental's main office, and received in Continental's legal department on June 5, 1980. Continental never filed a claim with the Bankruptcy Court to recover funds from the Teltronics estate.
On June 17, 1981, Continental filed this action to recover the funds for the three checks, which Continental had been required to credit to its customer, Borg-Warner Leasing.
Sterling and Continental cross-move pursuant to Fed. R. Civ. Pr. 56 for summary judgment. Continental asserts that it is entitled to the funds because, in a timely and proper fashion, it satisfied all of its obligations to effectively dishonor the checks.
Sterling concedes that Continental properly dishonored the checks (Sterling Reply Memorandum of Law at 2). However, Sterling contends: (a) that it was entitled to use the "Challenge" procedure because it did not receive timely written notice that the checks had been dishonored; and (b) that Continental is estopped from asserting its claim because (i) its Letter of Disclaimer in response to Sterling's Challenge was not timely issued, and (ii) it failed to assert a claim for the funds with the Teltronics Bankruptcy Trustee.
A. Did Sterling Receive Timely Notice of Dishonor?
The parties vigorously dispute whether Sterling received timely notice of dishonor (in particular, whether telephonic notice of dishonor is adequate) and whether, even if Sterling had not received timely notice, it was entitled to use the Challenge procedure.
These arguments miss the point. First, even if the notice received by Sterling was untimely, that was concededly the fault of FRB-NY, which misrouted the checks, and in no way attributable to Continental, which Sterling concedes acted in a proper and timely fashion in dishonoring the checks. Sterling has not advanced any reason why FRB-NY's error should be chargeable to Continental, nor has it responded to Continental's assertion that Sterling could and should have sought recourse against FRB-NY.
Moreover, the parties agree that the Challenge procedure is simply that: a procedure by which one bank may challenge another bank's refusal to honor checks. (Sterling's Reply Memorandum at 3; Continental's Memorandum in Support of Summary Judgment at 20-24).
The Challenge procedure does not create any substantive rights; thus, even if it had been proper for ...