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:
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.
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”).
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.
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.”
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).
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.
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”).