Bankers soon will know where to go to settle bounced-check disputes with other financial institutions.
The Supreme Court agreed last month to decide who has jurisdiction over these interbank squabbles: federal courts, state courts, or the Federal Reserve Board.
A court ruling should settle a legal question that banks have been grappling with since Congress passed the Expedited Funds Availability Act of 1987.
The act set a federal standard governing how long banks and thrifts can wait before crediting a check after it is deposited. Now banks can hold a local check for only two days, and an out-of-town one for five days.
The law also standardized how banks process checks, ensuring that they are handled quick enough to meet the funds availability deadlines.
But what happens when a bank deviates from this standardized process?
That's what Banc One Corp.'s Chicago unit wants the court to decide in its dispute with Midwest Bank and Trust over a $40,000 check that a Midwest customer bounced.
The case began when Midwest refused to pay Bank One for the check because of a questionable endorsement. Bank One confirmed the signature, and then released the funds when the two-day wait expired.
Midwest returned the check again, this time for insufficient funds. By that point, however, the customer already had withdrawn the funds, and Bank One was stuck with a $40,000 loss.
Bank One did what many businesses would do - it sued, charging Midwest violated the expedited funds act by failing to list the first time all the reasons why the check wasn't good.
This type of interbank suit was not uncommon before Congress passed the 1987 act. But those were all state court cases involving state laws.
Bank One, however, chose federal court, arguing that Midwest violated a federal statute.
Now here's where the case gets tricky. The federal appeals court in Chicago rejected Bank One's suit, saying the Federal Reserve Board should use its enforcement powers to settle these disputes.
That set off alarm bells at the Fed, and it convinced the Solicitor General to file a brief this spring insisting that the high court hear the case.
Richard M. Ashton, the Fed's associate general counsel, said the appeals court ruling just doesn't make sense.
First, the Fed doesn't have jurisdiction over national banks, so it couldn't use its enforcement powers to compel a national bank to follow a Fed decision.
Second, he said, Congress didn't give the Fed the power to handle these claims. Finally, the Fed lacks a forum for settling the disputes, and it doesn't want to create one.
Mr. Ashton said the industry would benefit more if banks could sue each other in federal court, rather than having to appear before a Fed-created check tribunal.
"These are federal rules that are set up nationwide by us that should be enforced by the federal courts," Mr. Ashton said. "That's why we have the federal courts."
The banking industry would benefit most from the federal court option, agreed Robert C. Ballen, a partner at Schwartz & Ballen.
"I vote for the federal courts," he said. "A lot of (banks) operate in more than one state, and it is very important for them to have the same rules apply regardless of where they operate."
State court decisions don't fit that bill because they aren't binding on other states, he said.
Also he said the Fed shouldn't settle these cases because it competes with many banks for check clearing business. Allowing it to settle these complaints would give it another competitive advantage, he said.
Oral arguments should occur late this fall, with a decision likely this winter.