## Facts

- A check-kiting participant deposited a $706,000 check drawn on an account at First National Community Bank (FNCB) into an account at NBT Bank, N.A. (NBT).
- NBT forwarded the check through the Federal Reserve Bank of Philadelphia (the Reserve Bank), which acted as a clearinghouse and was FNCB’s transferor for presentment and return.
- After presentment, FNCB discovered the drawer’s account was overdrawn and decided to dishonor the check.
- Under Pennsylvania UCC Article 4, FNCB was required to return the dishonored item or send notice of dishonor by its “midnight deadline” (midnight of the next banking day after presentment).
- The parties agreed FNCB physically delivered the dishonored check to the Reserve Bank before the midnight deadline.
- FNCB sent the item as a “qualified return check” but mis-encoded the magnetic routing information with another bank’s routing number rather than NBT’s.
- The miscoding caused misrouting and delay of the physical return, but the parties agreed NBT received timely actual notice of dishonor and suffered no damages from the encoding error.
- NBT sued seeking the check’s face amount under Article 4 “strict accountability” provisions, claiming the encoding violation triggered liability despite timely return and no loss.

## Issues

1. Whether a payor bank that physically returns a dishonored check to its transferor before the UCC midnight deadline is strictly accountable for the check’s face amount under UCC § 4-302 due solely to mis-encoding that violates Federal Reserve requirements, where the depositary bank suffered no actual loss.

## Decision

- The Third Circuit affirmed summary judgment for FNCB and the denial of NBT’s summary judgment motion.
- FNCB was not strictly accountable for the face amount under UCC § 4-302 because it met the midnight-deadline return requirement.
- A Federal Reserve encoding violation, without untimely return and without damages, did not convert a timely return into a § 4-302 violation.

## Legal Principles

- UCC § 4-302 strict accountability attaches when a payor bank fails to pay, return the item, or send notice of dishonor by the midnight deadline; timely return to the bank’s transferor satisfies the statute’s timing condition.
- Federal Reserve regulations and operating circular requirements may supplement check-collection practices but do not expand UCC § 4-302 to impose face-amount liability absent the statute’s midnight-deadline trigger.
- Where strict accountability does not apply, recovery for processing errors generally requires a compensable loss; a harmless technical defect does not justify face-amount recovery.

## Conclusion

Because FNCB returned the dishonored check to the Reserve Bank before the midnight deadline and NBT suffered no loss from the miscoding, UCC § 4-302 did not impose strict face-amount liability based solely on a Federal Reserve encoding violation.


NBT Bank, N.A. v. First Nat'l Cmty. Bank, 393 F.3d 404 (3d Cir. 2004)