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

Clarks' Bank Deposits and Payments Monthly

May 05, 2020
Hacked Prima Donna Customer Loses To Wells Fargo After Dissing Dual Control In A Recent California Decision

In a significant payments decision by the California Court of Appeals, Wells Fargo Bank, N.A. avoided taking the hit when its customer’s commercial deposit account was hacked, thanks to solid documentation including an arbitration clause and sound security procedures the bank followed in good faith. The fact that its customer was less than astute when its president turned down dual control authentication also helped.
May 05, 2020
COVID-19: NACHA’s FAQs Offer Guidance To Industry Participants During The Pandemic

As part of its toolbox for dealing with the pandemic crisis, NACHA released updated FAQs on April 6, 2020. The FAQs distill key information based upon questions posed to NACHA by industry participants. The FAQs answer questions relating to RDFI’s and ODFIs. We’ve selected several FAQs to discuss and offer several takeaways.
May 05, 2020
COVID-19: Are Deposit Account And Credit Card Fees Under Scrutiny?

New York state-regulated banking institutions are required to grant financial relief to any individual who can demonstrate financial hardship from COVID-19. The relief includes the elimination of overdraft fees, ATM fees, and credit card late payment fees.
March 24, 2020
Compliance Strategies For Reducing Fraud Risk In Alternative Payment Systems

The fraud risk in wire transfer systems is a serious one for sending and receiving institutions. A wire transfer might be fraudulently initiated or altered in an attempt to misdirect or misappropriate funds. One example is an employee who sends unauthorized wire transfers. Another is an interloper who gains unauthorized access to a wire transfer system. How can these risks be reduced, either by internal procedures or contractual provisions? Set forth below is a menu of compliance strategies to consider.
March 24, 2020
Status Report On UCC And Related Legislation

Connecticut: House Bill 5048, 2020 Bill Text CT H.B. 5058 was introduced on 2/11/2020 to require the state to record a lien against the property owned by parents of an aid to dependent children beneficiary for amounts owing under any order for support for the lien to be effective against a bona fide purchaser of such property. The bill was assigned to the Joint Banking Committee.
March 24, 2020
Cancelling Or Amending Wire Transfers

To what extent can a sender cancel or amend a wire transfer order once it has been transmitted? This problem is analogous to the right of a drawer to stop payment on a check.
March 24, 2020
Business Email Compromise

As banks and customers have been putting more tools in place to address corporate account takeover, another threat has been developing—so-called “business email compromise” or BEC. According to an April 4, 2016 press release from the FBI’s Phoenix Field Office, BEC involves fraudsters who are able to spoof a company’s email or use social engineering to assume the identity of a high-level company officer. Once they have done that, they then send an email that looks like it is from that high-level company officer to one of the company’s employees who has the ability to initiate wire transfers. That email will request that employee to initiate a wire transfer and will often have an explanation of why the request needs to be treated in a confidential manner. The employee dutifully initiates the wire transfer and the money is gone.
March 24, 2020
Standby Letters Of Credit In Bankruptcy

If a debtor is in default on its obligation to pay the creditor and the debtor files a bankruptcy petition, the creditor’s right to go after the debtor and its assets is automatically stayed by the filing of the bankruptcy petition. But does the automatic stay restrain the beneficiary of a standby letter of credit from drawing on the letter if the applicant files bankruptcy? If it did, the commercial utility of a letter of credit would be greatly compromised.
March 10, 2020
CFPB Publishes “Supervisory Highlights” Of Creditor Compliance With The Fair Credit Reporting Act

While efforts continue to eliminate the Consumer Financial Protection Bureau (CFPB), the controversial federal agency has been shifting its enforcement efforts from ruling by individual cases and administrative rule-making to broader supervision of the industry players and a “kinder, gentler” regulatory environment. In December 2019, the CFPB published a white paper entitled “Supervisory Highlights/ Consumer Reporting Special Edition.” The Special Edition sets forth a number of compliance issues that continue to arise, particularly in the home mortgage market, the consumer auto loan market, and the consumer deposit relationship. The purpose of this newsletter story is to summarize the agency’s supervisory findings and serve as a compliance guideline for consumer lenders.
March 10, 2020
Status Report: Amending The UCC To Accommodate Emerging Technologies

A study committee, formed by the Uniform Law Commission and the American Law Institute, has embarked on the most ambitious and extensive revision project in the 60-year history of the Uniform Commercial Code. Intended to bring the UCC more fully into the digital age, the scope of the study covers all articles of the Code.
March 10, 2020
Eleventh Circuit Protects Beneficiary’s Bank From Liability For Accepting Wire In Spite Of Discrepancy Between Beneficiary’s Name And Deposit Account Number

If a wire transfer identifies the beneficiary by account number, but the number conflicts with the beneficiary’s name as reflected on the deposit account, the beneficiary’s bank is protected if it credits the funds according to the account number. This is the teaching of UCC 4A-207, which protects the bank in crediting the account “by the numbers,” so long as the bank has no actual knowledge of the discrepancy. Bank negligence in failing to discover the discrepancy between name and number is irrelevant. This UCC rule is intended to promote automation in the handling of wire transfers. This is a heavily litigated issue, and a recent decision from the Eleventh Circuit is a classic example of how the UCC rule works in favor of the beneficiary’s bank.
February 04, 2020
What Law Governs Unauthorized ACH Debits: The UCC Or The ACH Rules?

A company victimized by unauthorized ACH debit transactions received bad news from a court in Florida. In Industrial Park Dev. Corp. v. American Express Bank, 2013 U.S. Dist. Lexis 13929 (M.D. Fla. 2013), the company (i.e., the “receiver” of the ACH debits) sued the ODFl. The only claim made by the company was for conversion, and the court concluded that allocation of loss was governed exclusively by Article 4A of the UCC, which it felt displaced common-law claims such as conversion. For good measure, the Florida court also found that the complaint did not provide sufficient facts to support a conversion claim. In addition to the Florida case, we also analyze recent cases in this area from Pennsylvania and California.
February 04, 2020
UCC Rules Govern Loss Allocation In International Check Scam

Law firms have become a favorite target of international check fraudsters. These scams feature bogus checks deposited by a new “client” of the law firm. When the checks bounce, the bank exercises charge-back against the law firm’s deposit account. In response to the charge-back, the unhappy law firm sues the bank. The bank prevails in most of these cases, based on the loss-allocation rules of the UCC and provisions in the deposit agreement. A good example is a leading case from Illinois, Dixon, Laukitis and Downing, P.C, v. Busey Bank, 993 N.E.2d 580, 81 UCC Rep. 2d 259 (Ill. Ct. App. 2013.).
February 04, 2020
Check Cashers As Holders In Due Course

One of the most important applications of negotiable instruments law is the status of a check-cashing company as a holder in due course, with power to enforce the check free from defenses of the drawer. Two decisions—one from New Jersey and the other from Illinois—illustrate how differently courts can come out on the issue.
February 04, 2020
Standby Letters Of Credit In Bankruptcy

If a debtor is in default on its obligation to pay the creditor and the debtor files a bankruptcy petition, the creditor’s right to go after the debtor and its assets is automatically stayed by the filing of the bankruptcy petition. But does the automatic stay restrain the beneficiary of a standby letter of credit from drawing on the letter if the applicant files bankruptcy? If it did, the commercial utility of a letter of credit would be greatly compromised.
February 04, 2020
Signature Issues In Signing Notes And Checks

A problem that periodically raises its head in the realm of negotiable instruments has to do with the signatures on the instrument. Because an item is negotiable only where it is “signed,” the failure to have the correct signature on the instrument may render the instrument nonnegotiable.
December 09, 2019
Assignment Of Letters Of Credit And Proceeds

In the world of letters of credit, a sharp distinction must be drawn between outright transfer of the letter itself and a collateral assignment of proceeds payable by the issuer upon a conforming draw.
December 09, 2019
Nebraska Court Rules That A Secured Loan Is Not An “Assignment” For Purpose Of Imposing Liability On An Account Debtor Who Fails To Respond To A Deflection Notice

UCC 9-406 provides that an account debtor on an account, chattel paper or a payment intangible may discharge its obligation by paying the assignor until, but not after, the account debtor receives a deflection notice, authenticated by the assignor or the assignee, that the amount due or to become due has been assigned, and that payment is to be made to the assignee. After receipt of the notification, the account debtor may discharge its obligation by paying the assignee and may not discharge the obligation by paying the assignor.
December 09, 2019
USAA Mobile Check Deposit Patent Cases - $200,000,000 Verdict

The United States Automobile Association (USAA) owns a portfolio of patents aimed at mobile check deposit technology. One group of these patents is targeted as the process by which a mobile check deposit is accomplished (i.e., the backend processing of mobile check deposits in banking data centers). Another set of patents is aimed at the specific technology used by mobile devices to correctly capture the image of the check (i.e., technology that allows a user to capture check information in proper formats using a camera on a smartphone or another mobile device).
December 09, 2019
Bank Regulators Begin The Process Of Overturning The Problematic Madden Case From The Second Circuit

On November 18, 2019, the OCC and FDIC began a rulemaking that would reverse the Second Circuit decision which ignores the “valid when made” principle of commercial law that allows the assignee of a contract to jump into the shoes of the assignor for purposes of applying state usury laws. The new rule will provide that, if the interest rate on bank credit card debt was not usurious for the national bank that originated the debt, it can’t be usurious for a nonbank buyer to which the debt was sold. We think the ruling in Madden v. Midland Funding LLC, 786 F.3d 246, 2015 U.S. App. LEXIS 8483 (2d Cir. 2015), is flat wrong because it contradicts 182 years of well-settled law, disrupts secondary markets, freezes liquidity, and interferes with the core powers of a national bank to sell its loans to third parties.
October 25, 2019
Mississippi Court Rules That Construction Surety Has Priority To Retainage Over Claims Of The Contractor’s Secured Lender

In a recent decision from Mississippi, a bankruptcy court has ruled in favor of a surety over the construction lender’s perfected security interest in a retainage. The surety’s victory was based on a claim of equitable subrogation, outside the scope of Article 9. The Mississippi case is the latest of a long line of decisions favoring the surety in this important and recurrent priority scenario.
October 25, 2019
Maryland Court Protects Bank In Crooked Bookkeeper Case

Who says that checks are dead? We see a continuing flow of judicial decisions involving bookkeepers who embezzle funds from their employer, who then sues the bank to recover the loss. Common law claims usually dominate the suit. The first line of defense for the bank in these suits is usually “displacement” or “preemption” by the UCC, which enables the bank to get rid of the suit on a motion to dismiss. That’s what happened in a recent Maryland case, which involved both checks and outgoing wire transfers.
October 25, 2019
Standby Letters Of Credit: Issuer’s Right Of Reimbursement And Wrongful Honor

Once the issuer has honored a draft drawn under a standby letter of credit, it has a statutory right of reimbursement from the applicant. UCC 5-108(i). This poses a credit risk for the issuer. Since the statutory reimbursement claim is unsecured, the issuer is unlikely to collect much on its claim if the applicant files bankruptcy. If a commercial letter is involved, this risk is reduced because the issuer can hold the bill of lading until the applicant either pays or arranges for credit.
September 25, 2019
California Court: Loss-Allocation Rules Of Article 4A Displace Customer’s Common-Law Claims Arisisng Out Of Wire Scam

Over the years, the most heavily litigated issue involving wire transfers is whether the plaintiff’s common-law claim that the beneficiary’s bank was negligent in handling an unauthorized wire is displaced by the rules of UCC Article 4A. The big question in these cases is whether the bank’s alleged negligence occurred within the four corners of the wire transfer transaction; if the negligence occurred before or after the wire transfer process, the displacement principle does not apply and the plaintiff’s common-law negligence claim may support recovery. In a recent case from California, the court applied the displacement principle broadly and threw out the negligence claim. The decision seems straight-forward and consistent with the weight of authority.
September 25, 2019
Continuing Priority Battle: Bank Security Interest V. IRS Tax Lien

Suppose ABC Corp. grants its bank a security interest in a CD issued by that bank, then merges with XYZ Corp. A year later the IRS hits XYZ’s bank with a notice of tax levy, using ABC’s corporate name and tax ID number. Can the depository bank ignore the levy because it identified a nonexistent taxpayer? If the IRS levies under the proper name, can the bank ignore the levy and exercise setoff against the CD? These two issues were before the Third Circuit. The bank won on the first issue, but lost on the second.