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CUNA, INC. v. BOARD OF GOVERNORS OF THE FED. RESER

July 27, 1988

CREDIT UNION NATIONAL ASSOCIATION, INC., ET AL., Plaintiffs,
v.
BOARD OF GOVERNORS of the FEDERAL RESERVE SYSTEM, Defendant



The opinion of the court was delivered by: GASCH

 OLIVER GASCH, SENIOR UNITED STATES DISTRICT JUDGE.

 I. INTRODUCTION

 The case concerns the application of the challenged provision to credit union share drafts with respect to determining whether they are local or nonlocal for purposes of the maximum "check-holds" set forth in the Act. Rather than basing that determination on the location of the credit union on which the share draft is drawn, the Board concluded that the location of the credit union's "payable through" bank would determine whether a share draft was local or nonlocal for purposes of the Act. The Court agreed to hear this matter on an expedited basis, because the challenged regulation will go into effect on September 1, 1988.

 II. BACKGROUND

 A. The Check Collection System

 Traditional checks, as opposed to share drafts, that are deposited or cashed in a bank are processed or cleared through a check collection process. As a general rule, the bank that receives a check for deposit drawn on a different depository institution processes it for payment in one of two ways: (1) it sends the check directly for presentment to the bank on which a check is drawn; or (2) it sends the check through a clearinghouse, a corresponding bank or the Federal Reserve System for presentment to the bank on which the check is drawn. If the bank on which the check is drawn (the "payor" or "drawee" bank) refuses to honor the check for insufficient funds or some other reason, the check will be returned to the bank of first deposit along the same path it followed to be presented.

 The check clearing process takes time, particularly when checks deposited are drawn on accounts not located within the depository institution. There is some risk of nonpayment to the depository institution if the funds deposited are made available to its customer before the check has cleared. As a result, some banks have imposed "holds" on checks not drawn on their accounts, making funds available to their depositors only after sufficient time has elapsed for notification that the check has cleared. In the case of those banks that currently impose holds, checks drawn on banks located within the same city as the depository institution are usually made available more promptly than those drawn on nonlocal banks. Some banks currently impose no holds on any of their customers' deposits. Other banks do not impose holds on deposits made to certain customers' accounts, depending on the nature of the customer and their relationship with the bank. The Expedited Funds Availability Act does not require holds to be imposed; it only limits the duration of check holds based on whether the check is local to the depository institution or not.

 B. Share Draft Accounts

 Credit unions, unlike banks, are cooperative and nonprofit depository institutions, which provide to their members, among other bank-like services, share draft accounts. *fn1" Share draft accounts are the equivalent of checking accounts, in that they are used by members in the same manner that bank customers employ their checking accounts. *fn2" Share drafts are drawn on the credit union by a member, payable to a specific payee out of the share draft account maintained by the member of the credit union.

 Most credit union share drafts are "payable through" one of five banks nationally ("payable through banks") that specialize in the processing of share drafts. About seventy-five percent of the 6000 credit unions offering share draft accounts use payable through banks for collection and processing. Over 3000 of these credit unions use one of the five national payable through banks. Payable through banks are an efficient and cost effective method of collecting and processing share drafts.

 A share draft, although it looks like an ordinary bank check, normally carries both the credit union's name and the name of its payable through bank on its face. See B. Clark, The Law of Bank Deposits, Collections and Credit Cards para. 10.9[1](a) (rev. ed. 1981). Usually the routing number of the payable through bank is imprinted with machine-readable magnetic ink characters at the bottom of the share draft, providing for expeditious processing. The payable through bank functions as a collecting bank to present the share draft to the credit union as drawee, but is not authorized to pay the item. Id. The payable through bank serves as the credit union's vital link to the Federal Reserve System for collection purposes. Id.

 When a share draft is deposited or cashed, it is sent through the check collection system to the payable through bank for presentment to the credit union on which it is drawn. The payable through bank presents the share draft electronically to the credit union on the same day it is received. On the next day, the credit union responds electronically to the payable through bank that it will either honor or dishonor the share draft. *fn3" If the credit union refuses to pay the share draft, it is sent back through the check collection system to the depository bank.

 C. The Expedited Funds Availability Act

 The Expedited Funds Availability Act (the "Act") was passed as part of the Competitive Equality Banking Act of 1987, Pub. L. No. 100-86. In the Act, Congress addressed a perceived abuse by depository institutions in delaying their customers' access to funds deposited by check into their accounts. The Act seeks to ensure prompt availability of funds and to expedite the return of checks. The Act creates maximum time periods within which depository institutions must make funds deposited by check available for withdrawal. Under the statutory scheme, the availability of funds depends on whether the check is "local" or "nonlocal."

 The Act provides for a transitional period between September 1, 1988 and August 31, 1990, during which time "not more than 2 business days shall intervene between the business day on which funds are deposited in an account at a depository institution by a check drawn on a local originating depository institution and the business day on which such funds are available for withdrawal." 12 U.S.C. § 4002(c)(1). *fn4" The Act further provides that during the transitional period, not more than six business days shall intervene between the date of deposit of a check drawn on a nonlocal originating depository institution and the business day on which such funds are available for withdrawal. 12 U.S.C. § 4002(c)(2). *fn5" ...


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