“Is the nation better served when banking products are provided by institutions subject to ongoing supervision and examination? Should a nonbank company that offers banking-related products have a path to become a bank?” On December 2, 2016, the Office of the Comptroller of the Currency posed these questions in a whitepaper entitled, Exploring Special Purpose National Bank Charters for Fintech Companies (the “Whitepaper”). The OCC sought public comment on its proposal to grant special purpose charters to various financial technology (“fintech”) companies that do not fall within the typical definition of a bank and by January 17, 2017 had received over 100 comment letters.
In last month's issue of this newsletter, we analyzed notable cases from New Jersey and California which exonerate a bank from liability for failing to discover and investigate possible fraud against its vulnerable and elderly customers. That story also summarizes the CFPB's 2016 "best practices" in dealing with exploitation of elderly and disabled customers by third-party con artists. Now we have a very recent decision from New Hampshire where the bank escaped from liability via a motion to dismiss. Consistent with the New Jersey and California decisions, the New Hampshire decision reflects judicial reluctance to impose affirmative duties on banks to protect vulnerable customers from fraud.
In our prior story, we reported on an interesting case involving the UCC one-year statute of repose for reporting unauthorized wire transfers. Now comes a Missouri case where the statute of repose for reporting forged checks was used by a bank to great effect. The case seems correct in every way and it includes some especially significant takeaways for the drafting of deposit agreements.
A recent federal district court decision, involving the search for a Ukrainian family's long-lost assets, rejects any claims against a bank arising from an unauthorized wire transfer from a family deposit account in Florida, based on the principle of displacement and the one-year statute of repose found at UCC 4A-505. With respect to claims against the bank arising out of deposits that remained in the account following the wire transfer, the court allowed a few claims to go forward but dismissed most other claims based upon statutes of limitations and repose.
In a recent decision from the Ohio court of appeals, a consulting firm (Fox) sued a business (Spartan) for breach of contract and unjust enrichment. Spartan had hired Fox to recommend ways for Spartan to save money in operating its business. Spartan counterclaimed, seeking a declaration that, under UCC 3-311 which governs "accord and satisfaction" by use of a check, Fox's claims should be dismissed. The court ruled that the parties did have an accord and satisfaction under the UCC rule, which precluded Fox from recovering anything beyond the $2500 check that Spartan sent to Fox and which Fox deposited. It's a classic "accord and satisfaction" dispute.
Two important decisions—one from the California Supreme Court and one from the Ninth Circuit—have put big dents in tribal payday lending programs and could have far-ranging consequences for tribal sovereign immunity.
In a notable recent decision, an Ohio federal district court has ruled that a business customer must bear the risk of unauthorized checks, based on language in the deposit agreement that disclaims bank liability where the customer has declined the opportunity to enroll in the bank's "positive-pay" product. The bank got rid of the customer's suit on a motion to dismiss.
Many banks and credit unions may not be aware of a notable "Advisory" issued in March 2016 by the CFPB and available on its website. The Advisory identifies best practices in dealing with exploitation of elderly and disabled customers by con artists. This is a fast-growing area of banking law that has generated numerous statutes across the country in recent years. In the introduction to its Advisory, the CFPB describes elder and disabled financial exploitation as "the crime of the 21st century." Only a small fraction of the incidents are reported. Older people are attractive targets for con artists because they often have assets and a regular source of income. These consumers may be especially vulnerable due to isolation, cognitive decline, physical disability, health problems, and/or bereavement….Banks and credit unions are uniquely positioned to detect that an elder accountholder has been targeted or victimized, and to take action.
Deposit account takeover litigation continues apace. In a recent federal decision from New York, the court refused to dismiss a claim brought by a Wells Fargo customer (Banco del Austro) whose deposit account had been hacked by unauthorized SWIFT wire transfers. Even though the court did dismiss the plaintiff's breach of contract and common-law negligence claims, it ruled that the plaintiff's fact-intensive claim under Article 4A of the New York UCC precluded Wells Fargo's motion to dismiss.
In a recent case from Ohio, the court ruled that the assignee of a home mortgage (U.S. Bank) was not entitled to enforce the mortgage through a foreclosure action because there was no evidence that the mortgage assignee was in possession of the mortgage note, or was entitled to enforce it in spite of the lack of possession, as allowed by Ohio's version of UCC 3-309. Since enforceability of the mortgage was dependent upon enforceability of the note, the bank was not entitled to foreclose. The case would have come out differently had Ohio enacted the 2002 amendments to the UCC, which give greater protection to non-holders who seek to enforce lost promissory notes. In any case, we think the Ohio decision is problematic.
The federal bank fraud statute makes it a crime for someone to:
In our prior story, we analyzed a recent Ohio case that imposed severe enforcement risks on the transferee of a lost mortgage note. These risks were based on the rules found in Ohio's version of UCC 3-309. Another variation on this theme is risk-allocation in connection with lost remittance instruments, particularly cashier's checks. These issues are primarily resolved by UCC 3-312, which establishes a set of guidelines to cover cases when the lost instrument is a bank obligation, including cashier's checks, certified checks, teller's checks, bank drafts, or bank money orders.
In a recent decision, the Seventh Circuit has ruled that the loss caused by a counterfeit check deposited by a naïve attorney into his firm's trust account must be shouldered by the purported drawer's bank. Once the check was paid by that bank, the attorney wired most of the proceeds to the Japanese fraudster, never to be seen again. The payor bank tried like the devil to move the loss upstream to the bank of first deposit and the Federal Reserve collecting bank, based on breach of warranty, but to no avail. First American Bank v. Federal Reserve Bank of Atlanta, Citizens Bank, N.A. and David M. Goodson, 2016 U.S. App. LEXIS 20934 (7th Cir. 11/22/16).
This term, the United States Supreme Court takes up the issue of whether a “debt collector” who files a proof of claim based on a debt that may no longer be enforced because of applicable statutes of limitation violates the Fair Debt Collection Practices Act (“FDCPA”).
On September 6, 2016, the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (“FinCEN”) issued Advisory FIN-2016-A003 to financial institutions, which concerns e-mail compromise fraud schemes. FinCEN intended for the Advisory “to help financial institutions guard against a growing number of e-mail fraud schemes in which criminals misappropriate funds by deceiving financial institutions and their customers into conducting wire transfers.”
Mai Thi Thu Tran was a newly arrived immigrant from Vietnam. She relied on a translator for English language communications. In April 2012, she established an account with Citibank, N.A., depositing $200,000.00. During this process, she was provided with the terms and conditions governing the account through the bank’s Client Manual, in English. She was not offered a translator.
Since 2004, October of every year has been observed as National Cyber Security Awareness Month. This year regulators seem to have geared up for the occasion with a spate of new guidance and regulatory proposals starting in September and continuing through October. For example, in September, the Federal Financial Institutions Examination Council (“FFIEC”) issued an update to the Information Security booklet of its Information Technology Examination Handbook (“IT Handbook”).
After two years of study, on October 5 the CFPB came down with its much-anticipated final rule on prepaid products. The rule, together with its accompanying materials, comes in a fat package of 1,689 pages. The new rule becomes effective October 1, 2017. Predictably, industry representatives think it goes too far, particularly the way it transplants credit card rules to prepaid products with overdraft features. By contrast, consumer advocates don't think overdrafts should be allowed at all on prepaid products. In order to digest the compliance challenges of the new rule, let us offer a checklist of issues:
Sometimes UCC rules conflict with other state statutes and the courts need to determine which statute controls. In a recent decision, the West Virginia Supreme Court has ruled that the state's Wage Payment Collection Act (WPCA) preempted the UCC rule that allows standby letters of credit to be designated and enforced as "perpetual." In reaching its decision, the court employed standard tenets of statutory construction. We agree with the decision.
On October 11, 2016, the United States Court of Appeals for the D.C. Circuit issued its highly anticipated opinion in PHH Corp., et al. v. CFPB, 2016 U.S. App. LEXIS 81332 (Case No. 1577, D.C. Cir. 10/11/16), holding that the Consumer Financial Protection Bureau’s (CFPB) structure is unconstitutional. But, surprisingly, that may not be the most significant holding in the opinion because the court also held that the CFPB’s administrative enforcement actions are subject to applicable statutes of limitations, which could significantly limit the agency's authority and companies’ potential exposure to fines and penalties for alleged offenses.