Who can sue whom for an encoding error?
France v. Ford Motor Credit Company
Arkansas Supreme Court, 1996
This case is almost a comedy of errors, but you can bet none of the parties were laughing. France bought a tractor and obtained financing from Ford Motor Credit Company (Ford Credit) for it. France decided to prepay the debt, but because of encoding errors on the first check and errors in drawing the second check, France’s account was only debited for a fraction of the amount due. He refused to pay the balance, Ford Credit sought to replevy the tractor.
Here’s the good part. What makes this case really interesting (besides the holding) is its fact situation. It’s a classic case of “What can go wrong will go wrong.” The amount owed on the tractor, including finance charges, was $9,845.76. Prior to the due date of the first payment, France decided to pay off the tractor. He would have owed $8,506.19 at that time (after deducting unearned interest, etc.). France’s wife, an attorney, wrote out check #2224 on their joint account at Bank of Eureka Springs for that amount and mailed it to the lockbox for Ford Credit which was monitored by Mellon Financial Services (Mellon). Mellon MICR-encoded the amount of the check and sent it to Ford Credit’s depositary bank. There was an error in the encoding, however: the amount was shown as $506.19, rather than $8,506.19.
Texas Commerce Bank credited France with a payment of $506.19. The check was forwarded to the payor bank, which debited the France account for $506.19. The encoding error was discovered and the wife wrote a second check, #2313, about a month after the first check was written. Her goal was to pay off the remaining $8,000 balance. Unfortunately, although she wrote $8,000.00 on the check where the numerical amount appears, she wrote “Eight dollars and 00/100” where the amount is spelled out in words.
This time there was another encoding error! Mellon didn’t encode the check for $8.00 (which would have been the correct amount, due to the way the check was written.) It didn’t encode it for $8,000 (which would have been an easy mistake, considering the fact that the numerical amount was $8,000). Instead, it inexplicably encoded the item for $800. Texas Commerce Bank credited $800 to the France account with Ford Credit and sent the check to the payor bank. The payor bank debited the France account $8.00, then notified Texas Commerce of the error and Texas Commerce reversed the $800.00 credit and substituted $8.00. That meant Ford Credit was still owed $7992, but France thereafter refused to pay the balance.
One of France’s arguments was that Ford Credit’s remedy is against its agent which made the encoding error and not against Mr. France. The Trial Court, disagreed, holding replevin was proper. The Arkansas Supreme Court affirmed, saying “The [UCC encoding warranties] statute provides warranties to collecting banks and payors but not to a payee such as Ford Credit.”