Clarks' Bank Deposits and Payments Monthly : Mealey's : Legal News & Analysis

Clarks' Bank Deposits and Payments Monthly

May 23, 2017
Louisiana Court Protects Bank From Liability For Unauthorized Debits Arising From Its Customer's Dishonest Employee

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.
May 24, 2017
California Supreme Court Delivers A Counter-Blow In The Battle Against Consumer Arbitration Provisions

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).
April 26, 2017
Recent Litigation On Preauthorized Electronic Transfers

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.
April 25, 2017
Signer On Corporate Deposit Account Has No Standing To Sue Bank For Facilitating Third-Party Fraud

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).
April 25, 2017
What’s A Bank? OCC’s Special Purpose Fintech Charter May Test The Limits

“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.
April 25, 2017
Wrongful Dishonor Of Checks: Who Is The Bank's "Customer"?

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.
March 13, 2017
New Hampshire Court Finds No Duty Of Depository Bank To Protect Its Vulnerable Customers From Third-Party Fraud

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.
March 13, 2017
D. C. Federal Court Wrestles With Ancient Wire Transfers, Lost Deposit Accounts, And International Intrigue

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.
March 13, 2017
UCC Statute Of Repose Strikes Again

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.
March 13, 2017
Ohio Court Enforces Accord And Satisfaction Via Buyer's Use Of A "Full Payment" Check

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.
February 28, 2017
Tribal Payday Lending Entities Suffer Setbacks

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.
February 28, 2017
CFPB Issues Advisory On Best Practices To Enable Financial Institutions To Prevent And Respond To Exploitation Of Elderly And Disabled Customers

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.
February 28, 2017
Ohio Court Enforces "State Of The Art" Language Regarding Positive-Pay In Deposit Account

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.
January 26, 2017
Who Bears The Risk Of A Lost Negotiable Instrument?

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.
January 26, 2017
Special Rules Governing Lost Cashier's Checks And Other Remittance Instruments

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.
January 26, 2017
New York Case Involving Hack Of SWIFT Wire Illustrates Difficulty Of Getting Account Takeover Cases Dismissed

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.
January 26, 2017
Supreme Court: Stealing From A Bank’s Customer Is Stealing From A Bank

The federal bank fraud statute makes it a crime for someone to:
December 23, 2016
Negligence Claim Survives Because Bank Lost Signature Card

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.
December 23, 2016
Seventh Circuit: Loss In Counterfeit Check Scam Lands On Shoulders Of Payor Bank

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).
December 23, 2016
Supremes Will Address Whether Proofs Of Claim For Time-Barred Debts Violate The Fair Debt Collection Practices Act

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”).
December 23, 2016
FINCEN Email Fraud Advisory Appears To Be Inconsistent With UCC Article 4A Provisions And Wire Transfer Realities

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.”
November 22, 2016
Cybersecurity Update: FFIEC Guidance & Beyond

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”).
November 22, 2016
State Wage Protection Law Trumps "Perpetual" Standby Letter Of Credit

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.
November 22, 2016
DC Appellate Court: CFPB's Structure Is Unconstitutional And Enforcement Actions Are Subject To Statutes Of Limitation

On October 11, 2016, the United States Court of Appeals for the D.C. Circuit issued its highly anticipated opinion in PHH Corp., et al. v. CFPB, 2016 U.S. App. LEXIS 81332 (Case No. 1577, D.C. Cir. 10/11/16), holding that the Consumer Financial Protection Bureau’s (CFPB) structure is unconstitutional. But, surprisingly, that may not be the most significant holding in the opinion because the court also held that the CFPB’s administrative enforcement actions are subject to applicable statutes of limitations, which could significantly limit the agency's authority and companies’ potential exposure to fines and penalties for alleged offenses.
November 22, 2016
A Checklist For Prepaid

After two years of study, on October 5 the CFPB came down with its much-anticipated final rule on prepaid products. The rule, together with its accompanying materials, comes in a fat package of 1,689 pages. The new rule becomes effective October 1, 2017. Predictably, industry representatives think it goes too far, particularly the way it transplants credit card rules to prepaid products with overdraft features. By contrast, consumer advocates don't think overdrafts should be allowed at all on prepaid products. In order to digest the compliance challenges of the new rule, let us offer a checklist of issues: