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.
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.
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).
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.
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.
We continue to see a strong flow of securitized real estate mortgages, born of the "mortgage meltdown" and still in the process of foreclosure. One big lesson coming from this litigation is that the secured lender's right to foreclose is very much dependent on the law of negotiable instruments under Article 3 of the UCC. That's because the "mortgage follows the note" and any defect in the transfer of notes through the pipeline can knock the creditor out on "standing" grounds. As illustrative examples, we offer two recent judicial decisions. The first case, from Florida, involves the "lost note" problem; the second deals with the "allonge" problem. In both cases, correctly applying the rules of UCC Article 3, the court ruled in favor of the secured lender's standing to foreclose the mortgage.
“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.
Regulation E imposes several important compliance requirements on preauthorized transfers. These requirements relate to authorization of the transfer, stopping payment, notice of amount, and notice of receipt. Reg. E requires that authorization for preauthorized transfers from a consumer's deposit account be obtained in a writing that is signed or similarly authenticated by the consumer. Moreover, the person who obtains the authorization must provide the consumer with a copy of it. This requirement is roughly equivalent to that set forth in the NACHA rules, and complying with one of the requirements will generally satisfy both.
In our prior story, we reported on a recent California case holding that an authorized signer on a corporate checking account had no individual standing to sue the bank for alleged mishandling of the deposit account, thereby allowing a third-party fraudster to milk the account of $878,000. Only the bank's corporate "customer" had standing to file such a suit. In the story that follows, we explore the issue of individual standing when corporate or partnership checks have been wrongfully dishonored by the bank, damaging the personal reputation of the shareholder or partner. This is a big-dollar issue since open-ended consequential damages are collectible in wrongful dishonor actions under the UCC.
In a recent case from California, an individual plaintiff, Soroya Ahalchi, sued U.S. Bank for negligence and violation of the UCC for allegedly mishandling a nonprofit business checking account opened in the name of "The Cyrus Society" (TCS). The plaintiff was the president of the nonprofit corporation and opened the corporate account as the sole signer on the signature card. The plaintiff's complaint against the bank alleged that a third-party fraudster, Farzaneh Akhavi, perpetrated fraud and identity theft through the checking account, a car loan, and credit cards issued by the bank. The California court knocked out the plaintiff's claims based on lack of standing. Ghalchi v. U.S. Bank, N.A., 91 UCC Rep. 2d 693 (C.D. Cal. 2017).
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.
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.
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.
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 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.
The federal bank fraud statute makes it a crime for someone to: