Clarks' Bank Deposits and Payments Monthly

  • January 22, 2019

    Is It A Forged Check Or An Alteration? FRB Amends Reg. CC To Create New Presumption Favoring Alteration

    Under the fraud loss allocation rules of the UCC, particularly the finality doctrine of Price v. Neal, the drawee bank usually ends up holding the bag on forged or counterfeit checks that it pays and fails to return by the midnight deadline. By contrast, if a check is altered, the drawee bank can shift the loss upstream to the bank of first deposit, based on breach of warranty. Particularly when the check has been truncated, there is no paper version to examine; it’s difficult to determine whether a check has been forged or altered. There is a clash in the federal appellate courts on the issue. A decision of the Seventh Circuit, penned by Judge Posner, solves the problem by breaking the “tie” in favor of alteration. By contrast, the Fourth Circuit protects the bank of first deposit, based on the finality principle.

  • January 09, 2019

    Bank That Suspects Scam Against Senior Customer Has No Duty To Notify Authorities Of Its Suspicions

    Like a number of other states, New Jersey has a statute that permits banks to report instances of suspected abuse against “senior” or “vulnerable” customers. To be “senior,” the customer must be at least 60; to be “vulnerable,” the customer must be at least 18 and “appear to have a physical or mental illness, disability or deficiency, or [lack] a sufficient understanding of, and the capacity to make, communicate or carry out decisions concerning the management of the customer’s savings or resources....” N.J.S.A. 17:16T-1 to 17:16T-4. In a notable decision, a New Jersey court has ruled that the statute permits financial institutions to report instances of abuse of senior or vulnerable customers, but does not require the institution to investigate or report suspected scams. The primary purpose of the statute is to encourage reporting by protecting the bank from liability for violating the customer’s right of privacy. The decision seems correct.

  • January 09, 2019

    Mismatch Of Wire Beneficiary’s Account Number And Name: Beneficiary’s Bank Protected “By The Numbers”

    If a wire transfer identifies the beneficiary by account number, but the number conflicts with the beneficiary’s name as reflected on the deposit account, the beneficiary’s bank is protected if it credits the funds according to the account number. This is the teaching of UCC 4A-207, which protects the bank in crediting the account “by the numbers,” so long as the bank has no actual knowledge of the discrepancy. Bank negligence in failing to discover the discrepancy between name and number is irrelevant. This UCC rule is intended to promote automation in the handling of wire transfers. This is a heavily litigated issue, and a recent decision from Florida is a classic example of how the UCC rule works in favor of the bank.

  • January 09, 2019

    Texas Court Rules That Negligent Misrepresentation Claim Is Not Displaced By Article 4A Of The UCC

    In our prior story, we analyzed a recent Florida decision involving payment on a wire transfer that contained an obvious mismatch between the account name and account number. The beneficiary’s bank accepted the wire into an improper account but was exonerated by the court because the bank paid the item “by the numbers” and had no actual knowledge of the discrepancy. The Florida court dismissed the plaintiff”s common-law negligence theory on the ground that the loss-allocation rules of UCC Article 4A governed the rights and duties of the parties. The field was occupied by the statute. In short, the bank was protected by the principle of displacement.

  • October 08, 2018

    California Supreme Court Rules That Consumer Loans Not Subject To Usury Cap May Still Be Deemed Unconscionable

    On August 13, the California Supreme Court unanimously ruled that the interest rate on a consumer loan in California can be deemed illegally high under the common-law “unconscionability” doctrine, even if the loan was not subject to the state’s statutory usury cap. De La Torre v. CashCall, Inc., 2018 Cal. LEXIS 5749 (Cal. 2018). Currently, California law sets interest rate caps only on consumer loans of less than $2,500. The defendant in this case, CashCall, Inc., is a nonbank lender of consumer loans to high-risk borrowers. One of CashCall’s signature products was an unsecured $2,600 loan, payable over a 42-month period, and carrying an annual percentage rate of either 96 percent or, later in the class period, 135 percent. The plaintiffs in this case obtained such loans from CashCall and alleged that the high interest rates on these loans violated California’s Unfair Competition Law (UCL). The plaintiffs argued that these high interest rates made such loans unconscionable (and thus unlawful) under the UCL, even though the loans were not subject to the statutory cap because the $2600 principal amount exceeded the $2500 threshold.

  • October 08, 2018

    OCC Ready To Consider Fintech Charters, But Will We Ever See One?

    On July 31st, the Office of the Comptroller of the Currency announced that it would begin accepting national bank charter applications from nondepository financial technology companies who participate in aspects of the business of banking. The decision to move forward with these special purpose national bank (“SPNB”) charters brings to fruition an idea first proposed under former Comptroller Thomas Curry and which was far from guaranteed to be finalized under current Comptroller Joseph Otting. A Policy Statement and supplement to the Comptroller’s Licensing Manual, “Considering Charter Applications From Financial Technology Companies” (“Fintech Supplement”) accompanied the OCC’s announcement.

  • October 08, 2018

    Citibank Prevails In Check Fraud Suit Brought By Employer Of Dishonest Bookkeeper

    In our prior story, the employer of an embezzling bookkeeper was able to impose liability against the employer’s bank in a suit brought by the employer against its bank. In another recent New York case involving similar facts, the displacement principle precluded recovery against the bank (Citibank). Moreover, the fraud-loss allocation rules of the UCC, as well as the customer’s failure to timely report the embezzlement, allowed the bank to prevail.

  • October 08, 2018

    Drawee Bank Liable For Employee’s Forged Signatures On Employer’s Checks

    In a recent decision from New York, the court ruled that a customer’s corporate checks, signed without authority by the customer, could be the basis of a negligence claim under the loss-allocation rules of the UCC. We think the decision is problematic.

  • October 03, 2018

    Carolina Court Protects Bank That Allows Anomalous Withdrawals By Apparently Incompetent Elder Customer

    We are seeing more and more litigation involving banks which allow problematic withdrawals by apparently incompetent customers. Is the bank liable in negligence for allowing such withdrawals? Conversely, can the bank be held liable for wrongful dishonor if it if it refuses to allow unusually large withdrawals by an elderly or disabled customer? Are there UCC provisions that come into play? Has the state where the bank is located enacted a non-UCC statute that gives the bank protection? A good recent case from North Carolina protects the bank from liability.

  • October 03, 2018

    Indiana Court Rules For Bank Of First Deposit In Forged Check Embezzlement Case

    In a classic check fraud case from Indiana, the court refused to impose liability on a credit union that served as bank of first deposit for a dishonest bookkeeper of several related small businesses. The companies who hired the fraudster sued the credit union under the Indiana UCC and common-law negligence for cashing 105 fraudulent checks written by the bookkeeper on the deposit account of her employers. The court ruled, as a matter of law, that the credit union owed the companies no duty of care for the loss the companies sustained. The Indiana court found that the credit union was not liable on any warranty theory and did not violate the UCC fraud-allocation rules. Moreover, there was no private cause of action for failure to report the fraudster’s “extreme banking activity” as “suspicious activity” under the federal money laundering rules.

  • October 03, 2018

    Supreme Court Holds American Express Antisteering Provisions Don’t Violate Federal Antitrust Law

    On June 25, 2018, the United States Supreme Court issued its opinion in Ohio v. American Express Co., 138 S. Ct. 2274 (2018). The case involved an antitrust challenge brought by the federal government and several States to “antisteering” provisions in American Express’s merchant contracts. If a merchant wants to participate on American Express’s network it must agree to the antisteering provisions, which prohibit the merchant from discouraging customers (at or near the point of sale) from using an Amex card.

  • October 03, 2018

    The Perpetual Letter Of Credit: A Curious Animal

    One of the standard elements of a letter of credit is its expiry date. Documentary presentments beyond that date are invalid, and a bank that pays anyway without the consent of the applicant has no right of reimbursement. Under prior law, letters without expiry dates created a risk of “perpetual” liability for the issuing bank. Under the UCC as revised, if there is no stated expiry date or other provision that determines its duration, a letter expires one year after issuance. A letter stating that it is “perpetual” expires five years after its issuance. UCC 5-106(c); UCC 5-106(d).

  • July 26, 2018

    Garnishment Of Deposit Accounts: Operational Headaches

    Next to employers, depository institutions probably garner more incoming garnishment notices than any other group. Two of the most recurrent issues deal with joint accounts and name discrepancies. Let’s take a brief ride through this landscape.

  • July 26, 2018

    Wire Transfer Agreement Provisions: A Banker’s Dozen

    In General. Now that Article 4A has been enacted throughout the country and has been heavily litigated over the years, financial institutions need to establish solid agreements with customers using wire transfer services. Of course Article 4A sets out a very comprehensive set of rules governing funds transfers. Thus, even without a special agreement there will be fairly well defined guidelines to which the parties to a funds transfer may look in order to understand their rights and obligations. Moreover, unlike the general freedom of contract that prevails under Article 4 dealing with checks, Article 4A contains numerous provisions that may not be varied by agreement. Nonetheless, there are several key issues that can be resolved in the depository institution’s favor through the use of funds transfer agreements. We’ve identified a “banker’s dozen.”

  • July 26, 2018

    Existential Battles Continue For CFPB

    Perhaps the most influential and news-making player in the financial services industry, the Consumer Financial Protection Bureau (CFPB) has been a source of disagreement and controversy since its formation in 2011. In the latest chapter of this saga, on June 21, 2018 a New York federal judge found the CFPB's structure to be unconstitutional, adding to a growing debate surrounding the agency's power and contributing to a discussion about its future.

  • July 05, 2018

    Impact Of Adverse Claim Statutes Affecting Bank Deposit Accounts

    Adverse claim statutes, designed to protect banks from the perilous common-law position of vulnerability to suit by either the depositor or the adverse claimant, have been enacted in at least 36 states as well as the District of Columbia. Some bank attorneys are not aware of these important statutes. Here's a primer.

  • July 05, 2018

    Ohio Court Refuses To Dismiss Claims Against Bank For Allegedly Unauthorized And Unverified ACH Debits

    A recent decision from an Ohio federal district court allows an insurer of two limited partnerships to proceed to trial on UCC claims involving allocation of loss for unauthorized/unverified funds transfers. The Ohio case is the most recent application of the UCC Article 4A rules.

  • July 05, 2018

    Does A Recent Supreme Court Decision Provide A Defense For Banks Against The “Triple Whammy?”

    On numerous occasions in this newsletter, we have warned secured lenders of what we call the “triple whammy.” This is consumer protection on steroids. Many secured lenders are totally taken by surprise when they seek to foreclose and draw a counterclaim for huge damages in a consumer class action.

  • July 05, 2018

    Law Firm Scammed By Fraudster Can’t Shift Loss To Bank Arising Out Of Deposit Of Counterfeit Cashier’s Check

    In a recent case from Michigan, a law firm was defrauded by deposit of a counterfeit cashier’s check that prompted a partner in the firm to wire funds to the fraudster. The court ruled that the law firm must shoulder the loss, based on breach of warranty against the transfer of forged or counterfeit items. The law firm could not shift this loss to the bank based on a bank officer’s statement that the counterfeit check had “cleared.” That statement was not enough to constitute “bad faith” on the part of the bank. The Michigan decision is the latest in a long line of decisions where the court refuses to shift the loss from the gullible customer (often a law firm) to the bank. The decision seems correct.

  • June 11, 2018

    The Curious Incident Of Double Indemnity Under A Bill Payment Check

    Background. Under a bill payment service offered by many banks, a customer originates a payment by accessing the customer’s account online, selecting the bill payment service, and inputting the amount to be paid to an identified payee.  While most payees are paid electronically through the automated clearing house network, some payees are paid through a paper check drawn on the bank providing the bill payment service, as the payee is unable to receive an electronic payment, particularly an individual payee.  Based on an actual incident, we explore below the legal and regulatory ramifications when a consumer customer’s account is compromised and a bank providing a bill payment service is induced to mail a bill payment check to an apparent wrongdoer without the consumer’s authorization.