Clarks' Bank Deposits and Payments Monthly

  • September 18, 2017

    Limits On Shifting Losses By Deposit Account Agreement

    Although the UCC permits the provisions of Article 4 to be varied by agreement, the parties to the agreement cannot disclaim a bank’s responsibility for its lack of good faith or failure to exercise ordinary care.  UCC 4-103(a).  Even in the context of an agreement between a commercial customer and a bank, the principles underlying this section continue to apply.  A recent decision from the Sixth Circuit, applying Ohio law, highlights these principles.

  • September 18, 2017

    CFPB Publishes Report On "Frequent Overdrafters" And Proposes New Overdraft Disclosure Forms

    On August 4, the CFPB published a "data point" report on "frequent overdrafters"—consumers who attempted to overdraw their deposit accounts more than ten times in a 12-month period. Accompanying the report is a new set of overdraft disclosure prototypes designed to improve the model form that banks and credit unions already provide to consumers and have used as part of the opt-in process since 2010. In a comment letter to the CFPB, the American Bankers Association criticizes both the report and the proposed disclosure forms.

  • September 18, 2017

    Bank's Consensual Security Interest In Its Customer's Deposit Account Did Not Give It "Dominion And Control" Sufficient To Trigger Fraudulent Transfer Liability

    A significant recent decision from the Sixth Circuit tests the power of a trustee in bankruptcy to avoid allegedly fraudulent transfers of funds from the now-bankrupt debtor (Teleservices) to its depository/lending bank. Meoli v. The Huntington National Bank, 848 F.3d 716 (6th Cir. 2017).

  • September 18, 2017

    Negotiable Instruments Law: The Mortgage Follows The Note

    One of the enduring principles of negotiable instruments law is that the "mortgage follows the note."  Thus, even though a lender may think it has a perfected security interest in a piece of real estate through a recorded mortgage or deed of trust, failure to perfect against the note itself—by taking possession or filing a UCC financing statement—spells doom for the lender.  That lesson was learned the hard way in a recent bankruptcy case from Oregon.  We think the decision hits the target in the middle.

  • August 23, 2017

    CFPB Issues Final Rule Banning Class Action Waivers In Arbitration Agreements

    On July 10, 2017, the Consumer Financial Protection Bureau (CFPB) released its long-awaited and controversial final rule on arbitration agreements in contracts for consumer financial products and services. The rule, which takes effect 60 days after its release and requires compliance with its terms 180 days after that, prohibits certain financial services companies from relying on arbitration clauses to block class action lawsuits. It will effectively open up the gates to more class action lawsuits relating to consumer financial products such as  installment loans, credit cards and checking accounts, and will have a significant impact on the financial services industry.

  • August 23, 2017

    In Forged Indorsement Case, Kentucky Court Applies Displacement Principle And Rejects Discovery Rule

    In a recent forged indorsement case from Kentucky, the court got the bank off the hook on a motion to dismiss.  The court applied two oft-litigated rules of check-fraud law: (1) the legal framework of Articles 3 and 4 of the UCC displaces the plaintiff's common-law claims and (2) the UCC's three-year statute of limitations governs, without any "discovery rule" to toll it.  On both issues, the Kentucky decision is consistent with the strong weight of authority.

  • August 23, 2017

    South Carolina Court Rules On Liability Of Beneficiary's Bank In Handling Unauthorized Wire

    In a recent case from South Carolina, the apparent originator of an unauthorized $880,000 wire transfer sought to recover its loss from the beneficiary's bank, but was generally unsuccessful.  The case applies the rules of Article 4A governing misdescription of the beneficiary's identity, as well as the rules governing cancellation of payment orders. 

  • August 23, 2017

    Outside Of Bankruptcy, Suing On A Time-Barred Debt Still Violates The Fair Debt Collection Practices Act

    In the May 2017 issue of this newsletter, we reported on the recent Supreme Court decision holding that filing a proof of claim in bankruptcy for time-barred debt does not violate the Fair Debt Collection Practices Act (FDCPA).  Midland Funding, LLC v. Johnson, 137 S. Ct. 1407, 2017 U.S. LEXIS 2949 (U.S. May 15, 2017).  Writing for the majority, Justice Breyer opined that the simple fact of filing a proof of claim for a debt barred by a state statute of limitations is not a "false, deceptive, misleading, unfair or unconscionable" debt collection practice under the FDCPA. 

  • August 1, 2017

    FRB Issues Final Rule Amending Reg. CC To Account For Electronic Check Collection

    On June 1, 2017, after a multi-year delay, the Federal Reserve Board has published its Final Rule amending Regulation CC, effective July 1, 2018.  The FRB summarizes its efforts as follows:

  • August 1, 2017

    CFPB Proposes Fine-Tune Revisions To Prepaid Accounts Rule

    On June 15, 2017, the CFPB released proposed revisions to fine-tune its final Prepaid Accounts Rule that was published in November 2016, with an effective date of April 1, 2018. The proposal can be found at http://files.consumerfinance.gov/f/documents20170615 cfpb NPRM Prepaid-Accounts-Amendments.pdf.  In its press release dated June 15, 2017, the CFPB summarizes the meteoric rise of prepaid accounts/cards and provides a summary of the two most significant proposed amendments, which will be codified as amendments to Regulations E and Z.

  • August 1, 2017

    Debt Purchasers Collecting On Their Own Behalf Are Not “Debt Collectors” Under The FDCPA

    Disruptive dinnertime calls, downright deceit, and more besides drew Congress’s eye to the debt collection industry. From that scrutiny emerged the Fair Debt Collection Practices Act, a statute that authorizes private lawsuits and weighty fines designed to deter wayward collection practices. So perhaps it comes as little surprise that we now face a question about who exactly qualifies as a “debt collector” subject to the Act’s rigors.

  • August 1, 2017

    Impact Of The Recent Reg. CC Amendments On Remote Deposit Capture

    Background: How RDC works. Since the introduction of mobile remote deposit capture, banks have experienced an increase in the volume of suspected duplicate checks deposited by their consumer customers using this service.  Remote deposit capture (RDC) is an electronic banking service allowing a bank customer to scan the front and back of a check and transmit these images and other related information to a bank for posting or clearing as an electronic check.  In the most typical scam, a consumer wrongdoer deposits a check via a mobile phone (Bank A), and then takes the original paper check to a check-cashing company.  The check-casher deposits the original check, and its depositary bank (Bank B) will convert that check to an electronic check and present it to a paying bank, through an electronic forward-collection cash letter.  (About 99% of checks are now collected electronically.)  The  paying bank's cross-channel "duplicate detection system" will likely identify the check as a suspected duplicate and return the check, provided the check is presented within the system's operating window. 

  • July 6, 2017

    Midland Funding: A Repeat Visitor To The Supreme Court

    In our prior story, Andrew Muller reported on a recent Supreme Court decision in which a dominant debt collector, Midland Funding, LLC, persuaded the High Court that proofs of claim for time-barred consumer debt don't violate the federal Fair Debt Collection Practices Act.  That's a good victory for Midland Funding and other consumer-debt buyers. Interestingly, Midland Funding made another recent visit to the Supreme Court, with less satisfying results.

  • July 6, 2017

    Another Law Firm Hit By Check Fraud Scheme Fails To Shift Loss To Its Depository Bank

    In recent years we have witnessed a continuing flow of litigation in which a law firm is scammed by a con artist who gets a big wire payment from the law firm in exchange for a bogus check.  When the check is bounced by the drawee bank, the law firm's provisional credit is reversed.  The law firm is convinced that the bank shouldn't have let this happen, but the courts have repeatedly rejected attempts to shift the fraud loss to the gullible customer.  The most recent example of this "law firm litigation" comes from New York.

  • July 6, 2017

    Indorsement Of Check "Without Prejudice" Overrides Accord And Satisfaction

    In a recent New York case, the court ruled that a check stated by the drawer to be in "full payment" of a disputed debt did not constitute an accord and satisfaction when it was cashed by the payee because the payee had indorsed the check "without prejudice" before depositing it.  Under New York law, that indorsement trumped the "full payment" designation contained in a letter written by the drawer.  Significantly, the New York rule has recently been changed by New York's long-delayed adoption of amendments to the UCC that eliminate the effect of a "without prejudice" indorsement and thus encourage the use of "full payment" checks as a form of alternative dispute resolution.  New York was very slow in adopting these amendments, but it seems clear that they would overturn the recent judicial decision, bringing New York into alignment with the other states on this important issue.

  • July 6, 2017

    North Dakota Federal Court Rules That The "Discovery Rule" Does Not Apply To The UCC Three-Year Statute Of Limitations

    In check and wire fraud cases, a bank's first line of defense is that the plaintiff's claim is barred by (1) the UCC three-year statute of limitations or (2) the one-year statute of repose.  In  a recent decision from North Dakota, the court has ruled, in a check fraud case, that the three-year UCC  statute of limitations  can't be extended by the "discovery rule."   Although this ruling is consistent with the weight of authority around the country, it is notable that North Dakota has now fallen in line even though, historically, it strictly adheres to the discovery rule in tort and other litigation.  A related issue is whether a bank could reduce the three-year limit through a provision in the deposit agreement.

  • July 6, 2017

    Supreme Court: Proofs Of Claim For Time-Barred Debt Don't Violate The Fair Debt Collection Practices Act

    On May 15, 2017, the U.S. Supreme Court issued its much-anticipated opinion in Midland Funding, LLC v. Johnson, 2017 U.S. LEXIS 2949 (U.S. May 15, 2017).  At issue was whether filing a time-barred proof of claim in bankruptcy violated the federal Fair Debt Collection Practices Act.  When we previewed the Midland Funding case in the November 2016 issue of this newsletter, we noted that the Court could potentially reach several results on this issue, including a ruling that the Bankruptcy Code completely preempted the FDCPA, a ruling that filing a time-barred proof of claim was an FDCPA violation, or a ruling that there was nothing inherently misleading about an untimely claim.

  • May 23, 2017

    Bank Could Dishonor Cashier's Check, Based On Competing Garnishment Of Deposit Account

    Because cashier's checks are considered cash-equivalents, the general rule is that issuing banks are not allowed to refuse payment even if the remitter demands that payment be stopped based on a dispute between the remitter/customer and the payee. Wrongful dishonor of a cashier's check allows recovery of the face amount, plus consequential damages and attorney's fees.  UCC 3-411(b). In a recent case from Georgia, the court rejected the remitter's suit for wrongful dishonor because the remitter's deposit account had been timely garnished by a competing judgment creditor.  We think the decision is correct.  Perhaps the most interesting aspect of the case is the interplay between state garnishment law and liability for wrongful dishonor under the UCC rule.

  • May 23, 2017

    Louisiana Court Protects Bank From Liability For Unauthorized Debits Arising From Its Customer's Dishonest Employee

    In an interesting decision from Louisiana, the court has dismissed the claim of a bank customer whose deposit account was drained by its dishonest employee.  The fraudster obtained bogus credit cards, which it used to purchase a wide variety of goods, and then made credit card payments by transferring funds from its employer's deposit account via "debit memos" which appeared on the monthly statements. Although the employer sought to avoid the UCC by limiting itself to common-law claims of rescission, negligence and fraud, the court ruled that all these transfers were governed by the 60-day reporting deadline imposed by the deposit agreement and the one-year deadline imposed by UCC 4-406(f).  The fraud went on for six years before it was finally discovered and reported to the bank.  The big takeaway from the Louisiana case is the power of the "displacement" principle in this type of deposit account litigation.

  • May 24, 2017

    California Supreme Court Delivers A Counter-Blow In The Battle Against Consumer Arbitration Provisions

    In the world of consumer financial services, few issues have generated more controversy than the validity of consumer arbitration agreements that contain a waiver of the right to bring a class action.  It was back in 2011 when the U.S. Supreme Court ruled on the issue.  In a 5-4 decision written by Justice Scalia, the High Court held that class action waivers are enforceable under the Federal Arbitration Act, which preempted California's judicial rule that such waivers are unconscionable as a matter of state contract law.  The case involved a mobile phone contract, but its rationale clearly applies to other consumer financial products, from secured installment loans to bank deposit agreements.  AT&T Mobility LLC v. Concepcion, 131 Sup. Ct. 1740 (2011).