Clarks' Bank Deposits and Payments Monthly

  • 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.

  • June 11, 2018

    Bank Gets Off The Hook For Unauthorized Wires, Based On Waiver Of Negligence And Displacement

    In a recent decision from Delaware, a bank's business customer suffered a big loss when a dishonest employee embezzled funds by initiating unauthorized outgoing wires pursuant to the bank's security procedure. The unhappy customer sued its bank for negligence in failing to investigate and monitor the deposit account.  The Delaware court allowed the bank to get off the hook on a motion to dismiss,  based on displacement of the common-law tort claim by the rules of the UCC. The decision is short and sweet. Virtually every wire transfer case these days draws a displacement defense, and in many cases the bank is able to get rid of the case on a motion to dismiss.

  • June 11, 2018

    Pennsylvania Court Enforces 30-Day Deadline For Customer To Report Forged Indorsements To Drawee Bank

     It's black-letter law that a customer must report a forged drawer's signature or an alteration to the customer's bank (the drawee) within one year of receiving the monthly statement that relates to the unauthorized debit. UCC 4-406(f). Moreover, based on the freedom of contract principle found in UCC 4-103(a), the one-year statutory deadline can be reduced by the deposit agreement to a much shorter deadline such as 30 days.

  • May 03, 2018

    Missouri Court Rules That Bank's Automated Debit Card Overdraft Fees Were Not Subject To State Usury Laws

    In recent years, legal challenges to automated overdraft programs have centered on posting order to enhance fees, particularly high-to-low debit posting.  We now have a good judicial decision from Missouri that involves a class-action where the plaintiffs allege that a state-chartered bank was violating the Missouri usury laws by charging debit card overdraft fees of $25 to $30.  The Missouri court of appeals rejected those claims on the ground that debit card overdraft fees were not interest under the usury laws, but statutorily-permitted "service charges" imposed on a deposit account.

  • May 03, 2018

    Full D.C. Circuit Rules That CFPB Structure Is Constitutional

    On October 16, 2016, a split panel of the D.C. Circuit ruled that the CFPB is unconstitutional because it violates the separation of powers. On January 31, 2018, the full D.C. Circuit reversed the panel and voted 7-3 to affirm the constitutionality of the CFPB, particularly its structure of a single director who can't be fired by the President without cause. PHH Corp. v. CFPB, 2018 U.S. App. LEXIS 2336 (1/31/18). Given the impact of the CFPB on bank deposit products and agreements, the new decision is significant indeed.  In this story, we will review the October 2016 ruling, then come back to the full D.C. Circuit decision, primarily in the words of the court.

  • May 03, 2018

    Legends On Checks Prohibting Mobile Remote Deposit Capture

    Background. Recently, a customer at a bank tendered a cashier’s check (“Check”) with the legend “NOT VALID FOR MOBILE DEPOSIT.”  A copy of that Check is set forth below.   As shown by information printed on this Check, it was issued on January 20, 2018, by Ohio Valley Bank (“Bank”) presumably as an advance on an anticipated tax refund under a program branded “Refund Advantage.”

  • May 03, 2018

    Conversion Of A Deposit Account

    Background. Sheldon Fong (“Fong”) and his related associates had multiple commercial loan relationships with East West Bank (“Bank”).  During the course of these relationships, in order to secure a personal loan obligation running in favor of Bank, he pledged his certificate of deposit in the amount of approximately $1,000,000.00 (“CD”).  Additionally, in order to make loan payments or to pay off a loan, he authorized specific transfers from his personal money market deposit account (“MMDA”) or a certificate of deposit over which he had control (referenced by the Court as Fong’s certificate of deposit account registry service and defined as “CDARS”).

  • May 03, 2018

    UCC "Displacement" Defense Is Big In Fraudulent Wire Transfer Litigation

    For banks that are sued for losses caused by a fraudster in a wire transfer scheme, by far the most important defense is the preemptive power of the UCC rules over common-law claims such as negligence, conversion, or breach of contract. If the fraud scheme is within the scope of UCC Article 4A, the bank can argue that any common-law claims that conflict with the UCC rules are displaced by the rules of the statute. Over the last 20 years, we have seen a huge amount of litigation on this issue. The most recent example, where the bank won on a motion to dismiss, is a notable decision from California.

  • May 03, 2018

    Does Automation Excuse Banks From Accepting Checks Through ATM Machines Or Remote Deposit Capture In Spite Of Indorsement Discrepancies?

    In our prior story, we reported on a recent California wire transfer decision that excused the beneficiary's bank from common-law negligence claims, based on displacement by the UCC rules. The bank prevailed because UCC 4A-207 allows a beneficiary's bank to accept wire transfers "by the numbers" so long as it doesn't have actual knowledge that the beneficiary's name and account number refer to different persons. The drafters of the UCC allow this "safe harbor" because of the need to promote automation in the processing of payment orders.

  • May 03, 2018

    Proposed Amendments To Reg. J Would Prevent Collection Of Electronically-Created Items Through Reserve Banks

    The Federal Reserve Board (the "Board") is continuing to take steps toward modernizing check collection regulations in order to reflect that, today, the United States check collection and return environment is almost entirely electronic. On March 15, 2018, the Board published proposed amendments to Regulation J, which governs the collection of checks and other items by Federal Reserve Banks and funds transfers through Fedwire. The proposed amendments are intended to parallel the Board's recent amendments to Regulation CC, which implements the Expedited Funds Availability Act. Comments on the proposed rule must be submitted by May 14, 2018.