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

Clarks' Bank Deposits and Payments Monthly

September 25, 2019
ACH Payments And The Late Return Issue

An overview of the ACH system. The ACH system promotes the quick transfer of money by electronic means rather than paper check. There are two types of ACH transactions: (1) an ACH debit entry where the originator of the entry receives funds and (2) an ACH credit entry where the originator of the entry pays funds. Using an ACH debit entry as an example, there are typically six participants handling the payment instruction, which is called either an “entry” or an “item”: (1) The “originator” is the party (under agreement with the receiver) authorized to request from the receiver the electronic payment of funds to the originator’s account. The originator is the seller if the underlying transaction is a sale. (2) The “originating depositary financial institution” (ODFI) is the financial institution that forwards the originator’s request to the clearing facility and that maintains the account of the originator that is to be credited as a result of the ACH transaction. In other words, it is the seller’s bank. (3) The “originating ACH operator” is the clearing facility that, under its agreement with the local ACH association of which the ODFI is a member, receives the entry from the ODFI, forwards the entry, and arranges for a credit to the account of the ODFI as a result of the ACH transaction. (4) The “receiving ACH operator” is the clearing facility that, under its agreement with the local ACH association of which the RDFI is a member, receives the entry from the originating ACH operator. (5) The “receiving depositary financial institution” (RDFI) receives the entry request from the receiving ACH operator and maintains the account of the receiver that is to be debited. It is the buyer’s bank. (6) The “receiver” is the party that has authorized the originator to initiate the entry and whose account with the RDFI will be debited as a result of the ACH transaction. The receiver is the buyer of the underlying transaction.
September 25, 2019
OCC Fintech Charters: Still Waiting For Answers And Applicants

Previous issues of this newsletter have explored OCC special purpose national bank (“SPNB”) charters and litigation brought by state regulators challenging these proposed “fintech charters.” See Clarks’ Bank Deposits and Payments Monthly Mar. 1, 2017 & Aug. 1, 2018. Recent decisions issued in two lawsuits challenging the OCC’s authority to issue fintech charters mean it’s time for a short update.
August 22, 2019
Bank Credit Cards: Limits On Setoff

As a corollary to the federal limit on holders in due course with respect to lender credit cards, the FCBA flatly prohibits an issuing bank from setting off a cardholder’s checking or savings account against a debt arising from use of a bank credit card1. The only exception is when the cardholder-depositor gives previous written authorization of a “check-off” arrangement under which a portion of his account is debited regularly to pay off his credit card liability. Even then, the cardholder may revoke that authorization. However, the setoff prohibition does not extend to the right of the issuer, under state law, to levy execution on the account following judgment2.
August 22, 2019
Virginia Court Rules That “Full Payment” Check Was A Debtor’s “Gimmick,” Not An Accord And Satisfaction

The most recent “full payment check” case comes from Virginia, where the court rejects the debtor’s claim of an accord and satisfaction under the UCC Rule, based on a finding of “bad faith” by the debtor in tendering an $890 money order in full payment of a $63,000 mortgage loan.
August 22, 2019
Wire Transfers And Garnishment

If B gets a judgment against A for a debt, it is clear that B can garnish A’s deposit account. But can B garnish funds being transferred to A before they land in A’s account? In particular, can B garnish an intermediary bank that is moving funds from originator to beneficiary as part of a wire transfer? State law, in the form of the UCC, does not allow garnishment of an intermediary bank. Until recently, federal admiralty law, as construed by a 2002 decision from the Second Circuit, allowed such garnishments. This decision generated much litigation and controversy, particularly in New York. Then, on October 16, 2009, the Second Circuit overruled its older decision. Now the UCC rule prohibiting intermediary bank garnishments governs all transactions.
August 22, 2019
Displacement And The UCC Statute Of Limitations

A significant recent decision from North Dakota considers whether the UCC rules displace common law claims with respect to bank liability and whether, in a check fraud case, the three-year UCC statute of limitations bars the plaintiff’s claims. The court ruled that the plaintiffs were time-barred.
July 22, 2019
Other Issues Posed By The UCC Statutes Of Limitation

In our prior story, we focused on a recent North Dakota decision dealing with the relationship between common law tort theories and the UCC statute of limitations. In this next story, we take a look at other issues that arise under the UCC, which establishes a comprehensive statute of limitations for negotiable instruments under UCC 1-118, and for bank rights and duties under UCC 4-111. In addition, the statute defers to the courts the issue of when a given cause of action “accrues.”
July 22, 2019
Recent North Dakota Case Wrestles With Displacement And UCC Statute Of Limitations

A recent decision from North Dakota considers whether the UCC rules displace common law claims with respect to bank liability and whether, in a check fraud case, the three-year UCC statute of limitations bars the plaintiff’s claims. The court ruled that the plaintiffs were time-barred.
July 22, 2019
Discovery Rule And “Continuing Violation” Rule

The statute of limitations is the first line of defense for banks sued in check fraud cases. Plaintiffs frequently seek to lengthen the three-year UCC statute of limitations by invoking the “discovery rule” or its first cousin, the “continuing violation” rule. Thus far, the courts have declined these invitations.
July 22, 2019
Perils Of A Bank Wire Transfer Form

Background. Roy J. Elizondo is an attorney in Houston. A putative international client solicited Elizondo via email for representation in a purported collection action. Elizondo agreed to represent the client. Almost immediately the debtor agreed to settle the dispute. The client informed Elizondo that the debtor would mail him a cashier’s check in the amount of the settlement. The client instructed Elizondo to deposit the check into his law firm’s IOLTA and to wire a portion of the funds to a third party’s designated bank account in Japan. The client emphasized that time was of the essence, explaining that the dispute with the debtor had disrupted the client’s cash flow and caused it to fall into arrears with various entities with which it did business, including the Japanese holder of the designated Japanese bank account.
June 11, 2019
Supreme Court Resolves Circuit Split Regarding Application Of FDCPA To Non-Judicial Foreclosures

Last July, we reported that the U.S. Supreme Court granted a petition for certiorari in the case Obduskey v. Wells Fargo, 879 F.3d 1216 (10th Cir. 2018) to consider whether the Fair Debt Collection Practices Act (FDCPA) applies to non-judicial foreclosure proceedings. On March 20, 2019, the Supreme Court issued its decision in the case in favor of the defendant, confirming that a business engaged in only non-judicial foreclosure proceedings is not a “debt collector” under the FDCPA, except for the limited purpose of 15 U.S.C. § 1692f(6), which prohibits non-judicial action if there is no right or intent to take possession of property. This decision resolved a circuit split on the issue, confirming previous holdings by the U.S. Court of Appeals for the Ninth and Tenth Circuits, as well as many district courts, and overruling prior holdings of the Fourth, Fifth, and Sixth Circuits.
June 11, 2019
Bank Regulators Consider Reversing The Madden Decision From The Second Circuit, Which Rejects The "Valid-When-Made" Principle

On May 17, 2019, the heads of the OCC and FDIC reported to Congress that they were strongly considering a regulatory fix to the infamous Second Circuit decision, Madden v. Midland Funding LLC, 786 F.3d 246 (2d Cir. 2015). As Law360 put it, the Madden decision shocked bankers and those in the FinTech world "for its apparent inconsistency with a legal doctrine known as valid-when-made." This doctrine dates back to the days of Andrew Jackson. Law360 elaborates:
June 11, 2019
Infamous GM Bankruptcy Case, Triggered By Colossal UCC Filing Error, Is Settled For $231 Million

The General Motors bankruptcy filed on June 1, 2009 provided the venue for a case in which a small yet crucial error in a UCC filing in Delaware spawned a decade of litigation between hundreds of lenders who thought they were secured creditors and the unsecured creditors committee. The colossal filing error was made when a UCC-3 termination statement was prepared and filed, releasing a security interest in error. By preparing a termination statement for the wrong financing statement number, over $1.5 billion in debt was put at perilous risk of loss.
May 14, 2019
New York Court Rules That Wells Fargo Did Not Violate The Automatic Stay By Temporarily Freezing Bankrupt Customer’s Deposit Account

In a significant bankruptcy case from New York, the bankruptcy court held that Wells Fargo violated the automatic stay in its customer’s Chapter 7 bankruptcy when the bank dishonored a presented check because it had temporarily frozen the account. The bank imposed the freeze while it waited for a response from the debtors’ trustee about what to do with the account in light of an exemption claimed by the debtors.
May 14, 2019
Unsecured Transferee From Debtor’s Deposit Account Takes Free Of Factor’s Claim To The Account As Proceeds

In a notable case from New Jersey, a factoring company (LAF) financed an attorney’s lawsuit and filed a financing statement to notify the world of advances it had made. The attorney then went to another financer (Law Cash) and got an unsecured loan to finish the litigation. Which financer had priority to the proceeds of the lawsuit settlement? The court ruled that the unsecured creditor prevailed to the extent that it had received checks drawn on the debtor’s deposit account, under the powerful take-free rule of UCC 9-332(b). It made no difference that Law Cash never bothered to check the UCC records. We think the decision is correct.
May 14, 2019
First Circuit Rules That National Bank’s Overdraft Fees Are Not “Interest” For Purposes Of Federal Usury Law

On March 26, 2019, a 2-1 split panel of the First Circuit affirmed a lower court decision that dismissed a putative class action brought against Citizens Bank NA, a national bank. Fawcett v. Citizens Bank N.A, 919 F.3d133, 2019 U.S. App. LEXIS 8983 (1st Cir. 2019). The First Circuit panel concluded that the “flat excess overdraft fees” charged by the bank did not qualify as usurious “interest”, but were in the nature of deposit account service charges.
May 14, 2019
Courts Insulate RDFIs From Liability For ACH Debits Against Customers Who Borrow From Payday Lenders

If a bank processes ACH debits against its customer’s deposit account when the debits were originated by online payday lenders making loans which the bank allegedly knew were illegal under state law, are there any theories by which the bank can be held liable to the customer? This is a recurrent scenario. Under the ACH payment system, the consumer debtor is the “receiver” of the ACH debits, the consumer’s bank is the “receiving depository financial institution” (RDFI), the payday lender is the “originator” of the ACH debits, and the lender’s bank introduces debit entries into the ACH system in its role as “originating depository financial institution” (ODFI). In two recent cases—one from New York and the other from Pennsylvania—the courts rejected a potpourri of theories used by the receiver to impose liability on its bank as RDFI. This is a big issue for banks, since annual ACH dollar amounts total $39 trillion based on 22 billion transactions.
April 09, 2019
The Money-Back Guaranty Under Article 4A

In a notable and well-reasoned decision, a New York court has ruled that the funds in a wire transfer, frozen for 14 years at a New York intermediary bank pursuant to a Presidential executive order, were properly returned to the originator’s bank (and the originator) once the freeze was lifted, as though the wire had never occurred. The court rejected the argument of the intended beneficiary that the intermediary bank had an obligation to complete the wire as intended once the funds were unfrozen by the government. The court concluded that the intermediary bank had no obligation, enforceable by the intended beneficiary, to complete the wire transfer by issuing a payment order to the beneficiary’s bank to pay the beneficiary. The funds at issue needed to be sent backward, not forward. In reaching this conclusion, the New York court wrestled with a number of interrelated rules under Article 4A of the UCC, particularly the “money-back guaranty.” The New York decision provides a useful case study in the rules of Article 4A.
April 09, 2019
Favorable Texas Ruling On UCC 4-406 And The Terms Of A Solid Account Agreement

The December 2018 edition of this newsletter analyzed a notable ruling in Compass Bank v. Calleja-Ahedo, 2018 Tex. LEXIS 1314 (Tex. Dec. 21, 2018). In its recent ruling, the Texas Supreme Court provides a favorable boost to the protections afforded a bank under UCC 4-406 and the terms of a deposit account agreement.
March 11, 2019
Recent Illinois Decision Shows Risks For Banks In Handling IOLTA Accounts

In an opinion filed in 2015, an appellate court in Illinois held that Wells Fargo Bank should have frozen a judgment debtor’s “interest on lawyer’s trust account” (IOLTA) because it potentially included funds to which the debtor “may be entitled or which may thereafter be acquired by or become due him.” Kauffman v. Wrenn, 2015 Ill. App. (2d) 150285, 2015 Ill. App. LEXIS 916. The Illinois case illustrates the risks that banks must manage in handling IOLTAs, and the options available to the bank in managing those risks.
March 11, 2019
Condo Mortgagees Find Themselves In Big Priority Battles With Homeowner Association Assessment Liens

In recent years, we have seen some notable pieces of litigation between “first-priority” real estate mortgages and homeowner associations armed with “super-priority” statutory liens for unpaid assessments. This priority litigation occurs after the owner of a condo or a coop apartment defaults on both the mortgage and the homeowner association assessments on the unit. Mortgagees are now coming to realize that their “first-priority” mortgage may be trumped by the “super-priority” claim of the homeowners association (HOA). Even worse, a non-judicial foreclosure sale by the HOA could wipe out an entire mortgage lien that was recorded long before any HOA assessments were levied. A notable case from the District of Columbia dramatically illustrates this new credit risk for real estate secured lenders.
March 11, 2019
Letters Of Credit: How “Strictly” Must The Documents Comply?

Standby letters of credit are akin to secured loans, even though the legal/compliance risks are different. One of the baseline principles governing letters of credit is that the issuing bank must honor a presentment that appears on its face “strictly to comply with the terms and conditions of the letter of credit.” UCC 5-108(a). In spite of this rule, the courts often provide some slack, as illustrated by a notable decision from New York.
February 15, 2019
The “Discharge For Value” Rule In Wire Transfer Law

The concept of bona fide purchase permeates Anglo-American law. There are many variations on the theme. The law of wire transfers offers one variation. Under the “discharge for value” rule, a wire mistakenly sent from a debtor to a creditor may be applied to the debt by the creditor so long as the debt is fixed and liquidated, and the creditor applies the funds in good faith, without notice of the mistake. The debtor (the originator of the mistaken wire) can’t force the creditor to give back the funds based on principles of restitution.
February 15, 2019
How Do You Perfect And Enforce A Lien On Virtual Currencies Such As Bitcoin?

With legitimate use of virtual currencies increasing rapidly, creditors may find themselves taking and seeking to perfect security interest in assets that include virtual currencies. There are hundreds of virtual currencies and cryptocurrencies in existence at the present time, with Bitcoin as the largest and most frequently mentioned. Article 9 of the UCC governs security interests in personal property, tangible and intangible. The application of Article 9 to virtual currencies, and issues related to the perfection and control of these animals, are discussed below.
February 15, 2019
Pennsylvania Federal Court Protects Bank From Liability To Business Customer Whose Deposit Account Is Hacked

If a business account is hacked to the tune of $580,000 by a fraudster, can the customer shift the loss to the bank as initiator of the bogus wire transfer? That was the key issue in a recent decision from Pennsylvania. The court rebuffed a variety of claims filed by the unhappy customer, including violation of the bank’s deposit agreement, violations of Article 4A of the Pennsylvania UCC, and common-law negligence. The bank escaped any liability on a motion to dismiss.