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.
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.
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.
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.
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.
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).
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.
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.
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.
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.”
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.
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.
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.
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.
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.
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.
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.
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.
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.”
In the typical check fraud case, the first line of defense for the bank is the customer's duty to notify it of any fraud within the one-year deadline established by UCC 4-406(f). Failure to give timely notice of unauthorized debits to the account precludes the customer from shifting the loss to the bank, even though the bank might be guilty of negligence in handling the deposit account. The one-year discovery deadline displaces any negligence on the part of the bank, including failure to act on red flags raised by the bank's computer system. In a recent case from Massachusetts, the court invoked the one-year deadline and granted summary judgment to the bank. The decision seems correct.