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

Clarks' Bank Deposits and Payments Monthly

October 19, 2017
Speedier Payments: NACHA Issues Guidance Ahead Of Second Phase Of Same-Day ACH

Given the fact that originators and other participants in the ACH networks have built systems and processes over decades that were keyed to the delayed processing that has historically been inherent in the ACH networks, on April 11, 2017, NACHA issued an ACH Operations Bulletin ahead of the second-phase effective date of the rollout of same-day ACH. NACHA ACH Operations Bulletin #2-2017.
October 19, 2017
Maryland Court Rejects Class Action Claims Against ATM Operator Regarding Third-Party Fees

A recent case from Maryland confirms that an ATM operator is not required to disclose the amount of fees that another party (such as the financial institution at which the cardholder has his or her account) may charge. The case, Alston v. Wells Fargo Bank, N.A., 2016 U.S. Dist. LEXIS 103026 (D. Md. 8/5/2016), involved a putative class action against Wells Fargo and Capital One. Alston claimed that he was charged undisclosed fees when making a withdrawal from his Capital One account at a Wells Fargo ATM.
October 19, 2017
Courts Continue To Wrestle With The Arcane Subject Of Promissory Note "Allonges"

Securitized real estate mortgages continue to raise "standing" issues for secured lenders seeking to foreclose. The cases illustrate how the law of negotiable instruments under the UCC, including the use of allonges to substitute for indorsements on the note itself, is crucial for determining standing. A recent decision from Ohio illustrates the point. The court holds that allonges may be paperclipped to the note, without stapling. Therefore, the securitization trustee could foreclose on the mortgage. And in a recent case from Connecticut, the court okayed an allonge even though there was space for the indorsement on the note itself.
October 19, 2017
Social Engineering Fraud Against Public-Sector And Other Entities

As reported in prior issues of this newsletter, social engineering often plays a large role in many of the most prevalent forms of payment fraud. NACHA recognized a growing trend of social engineering by which fraudsters manipulate public-sector employees to redirect legitimate vendor payments to accounts under the control of the fraudsters. The fact that public-sector entities often must make their contracts a matter of public record appears to make them a favorite target of the fraudsters. In response, NACHA released its ACH Operations Bulletin #1-2017 in early 2017 to provide relevant information to participating depository financial institutions and their business customers regarding these scams.
October 19, 2017
Check-Cashing Companies As Holders In Due Course

The holder in due course rule, which dates back centuries, allows a bona fide purchaser of a negotiable instrument to take the instrument free of claims and defenses. A common example is a check given for an underlying obligation such as the sale of goods. The payee of the check deposits it and takes off with the funds before the item has a chance to clear. When the drawer of the check discovers that the goods are defective, it immediately stops payment on the item. The check is dishonored and bounces back to the bank of first deposit, which can't charge it back against the payee's account because the payee has taken off for parts unknown.
September 27, 2017
Negotiable Instruments Law: The Mortgage Follows The Note

One of the enduring principles of negotiable instruments law is that the "mortgage follows the note." Thus, even though a lender may think it has a perfected security interest in a piece of real estate through a recorded mortgage or deed of trust, failure to perfect against the note itself—by taking possession or filing a UCC financing statement—spells doom for the lender. That lesson was learned the hard way in a recent bankruptcy case from Oregon. We think the decision hits the target in the middle.
September 27, 2017
CFPB Publishes Report On "Frequent Overdrafters" And Proposes New Overdraft Disclosure Forms

On August 4, the CFPB published a "data point" report on "frequent overdrafters"—consumers who attempted to overdraw their deposit accounts more than ten times in a 12-month period. Accompanying the report is a new set of overdraft disclosure prototypes designed to improve the model form that banks and credit unions already provide to consumers and have used as part of the opt-in process since 2010. In a comment letter to the CFPB, the American Bankers Association criticizes both the report and the proposed disclosure forms.
September 27, 2017
Limits On Shifting Losses By Deposit Account Agreement

Although the UCC permits the provisions of Article 4 to be varied by agreement, the parties to the agreement cannot disclaim a bank’s responsibility for its lack of good faith or failure to exercise ordinary care. UCC 4-103(a). Even in the context of an agreement between a commercial customer and a bank, the principles underlying this section continue to apply. A recent decision from the Sixth Circuit, applying Ohio law, highlights these principles.
September 27, 2017
Bank's Consensual Security Interest In Its Customer's Deposit Account Did Not Give It "Dominion And Control" Sufficient To Trigger Fraudulent Transfer Liability

A significant recent decision from the Sixth Circuit tests the power of a trustee in bankruptcy to avoid allegedly fraudulent transfers of funds from the now-bankrupt debtor (Teleservices) to its depository/lending bank. Meoli v. The Huntington National Bank, 848 F.3d 716 (6th Cir. 2017).
August 23, 2017
South Carolina Court Rules On Liability Of Beneficiary's Bank In Handling Unauthorized Wire

In a recent case from South Carolina, the apparent originator of an unauthorized $880,000 wire transfer sought to recover its loss from the beneficiary's bank, but was generally unsuccessful. The case applies the rules of Article 4A governing misdescription of the beneficiary's identity, as well as the rules governing cancellation of payment orders.
August 23, 2017
In Forged Indorsement Case, Kentucky Court Applies Displacement Principle And Rejects Discovery Rule

In a recent forged indorsement case from Kentucky, the court got the bank off the hook on a motion to dismiss. The court applied two oft-litigated rules of check-fraud law: (1) the legal framework of Articles 3 and 4 of the UCC displaces the plaintiff's common-law claims and (2) the UCC's three-year statute of limitations governs, without any "discovery rule" to toll it. On both issues, the Kentucky decision is consistent with the strong weight of authority.
August 23, 2017
CFPB Issues Final Rule Banning Class Action Waivers In Arbitration Agreements

On July 10, 2017, the Consumer Financial Protection Bureau (CFPB) released its long-awaited and controversial final rule on arbitration agreements in contracts for consumer financial products and services. The rule, which takes effect 60 days after its release and requires compliance with its terms 180 days after that, prohibits certain financial services companies from relying on arbitration clauses to block class action lawsuits. It will effectively open up the gates to more class action lawsuits relating to consumer financial products such as installment loans, credit cards and checking accounts, and will have a significant impact on the financial services industry.
August 23, 2017
Outside Of Bankruptcy, Suing On A Time-Barred Debt Still Violates The Fair Debt Collection Practices Act

In the May 2017 issue of this newsletter, we reported on the recent Supreme Court decision holding that filing a proof of claim in bankruptcy for time-barred debt does not violate the Fair Debt Collection Practices Act (FDCPA). Midland Funding, LLC v. Johnson, 137 S. Ct. 1407, 2017 U.S. LEXIS 2949 (U.S. May 15, 2017). Writing for the majority, Justice Breyer opined that the simple fact of filing a proof of claim for a debt barred by a state statute of limitations is not a "false, deceptive, misleading, unfair or unconscionable" debt collection practice under the FDCPA.
August 01, 2017
FRB Issues Final Rule Amending Reg. CC To Account For Electronic Check Collection

On June 1, 2017, after a multi-year delay, the Federal Reserve Board has published its Final Rule amending Regulation CC, effective July 1, 2018. The FRB summarizes its efforts as follows:
August 01, 2017
Debt Purchasers Collecting On Their Own Behalf Are Not “Debt Collectors” Under The FDCPA

Disruptive dinnertime calls, downright deceit, and more besides drew Congress’s eye to the debt collection industry. From that scrutiny emerged the Fair Debt Collection Practices Act, a statute that authorizes private lawsuits and weighty fines designed to deter wayward collection practices. So perhaps it comes as little surprise that we now face a question about who exactly qualifies as a “debt collector” subject to the Act’s rigors.
August 01, 2017
CFPB Proposes Fine-Tune Revisions To Prepaid Accounts Rule

On June 15, 2017, the CFPB released proposed revisions to fine-tune its final Prepaid Accounts Rule that was published in November 2016, with an effective date of April 1, 2018. The proposal can be found at http://files.consumerfinance.gov/f/documents20170615 cfpb NPRM Prepaid-Accounts-Amendments.pdf. In its press release dated June 15, 2017, the CFPB summarizes the meteoric rise of prepaid accounts/cards and provides a summary of the two most significant proposed amendments, which will be codified as amendments to Regulations E and Z.
August 01, 2017
Impact Of The Recent Reg. CC Amendments On Remote Deposit Capture

Background: How RDC works. Since the introduction of mobile remote deposit capture, banks have experienced an increase in the volume of suspected duplicate checks deposited by their consumer customers using this service. Remote deposit capture (RDC) is an electronic banking service allowing a bank customer to scan the front and back of a check and transmit these images and other related information to a bank for posting or clearing as an electronic check. In the most typical scam, a consumer wrongdoer deposits a check via a mobile phone (Bank A), and then takes the original paper check to a check-cashing company. The check-casher deposits the original check, and its depositary bank (Bank B) will convert that check to an electronic check and present it to a paying bank, through an electronic forward-collection cash letter. (About 99% of checks are now collected electronically.) The paying bank's cross-channel "duplicate detection system" will likely identify the check as a suspected duplicate and return the check, provided the check is presented within the system's operating window.
July 06, 2017
North Dakota Federal Court Rules That The "Discovery Rule" Does Not Apply To The UCC Three-Year Statute Of Limitations

In check and wire fraud cases, a bank's first line of defense is that the plaintiff's claim is barred by (1) the UCC three-year statute of limitations or (2) the one-year statute of repose. In a recent decision from North Dakota, the court has ruled, in a check fraud case, that the three-year UCC statute of limitations can't be extended by the "discovery rule." Although this ruling is consistent with the weight of authority around the country, it is notable that North Dakota has now fallen in line even though, historically, it strictly adheres to the discovery rule in tort and other litigation. A related issue is whether a bank could reduce the three-year limit through a provision in the deposit agreement.
July 06, 2017
Midland Funding: A Repeat Visitor To The Supreme Court

In our prior story, Andrew Muller reported on a recent Supreme Court decision in which a dominant debt collector, Midland Funding, LLC, persuaded the High Court that proofs of claim for time-barred consumer debt don't violate the federal Fair Debt Collection Practices Act. That's a good victory for Midland Funding and other consumer-debt buyers. Interestingly, Midland Funding made another recent visit to the Supreme Court, with less satisfying results.
July 06, 2017
Indorsement Of Check "Without Prejudice" Overrides Accord And Satisfaction

In a recent New York case, the court ruled that a check stated by the drawer to be in "full payment" of a disputed debt did not constitute an accord and satisfaction when it was cashed by the payee because the payee had indorsed the check "without prejudice" before depositing it. Under New York law, that indorsement trumped the "full payment" designation contained in a letter written by the drawer. Significantly, the New York rule has recently been changed by New York's long-delayed adoption of amendments to the UCC that eliminate the effect of a "without prejudice" indorsement and thus encourage the use of "full payment" checks as a form of alternative dispute resolution. New York was very slow in adopting these amendments, but it seems clear that they would overturn the recent judicial decision, bringing New York into alignment with the other states on this important issue.
July 06, 2017
Another Law Firm Hit By Check Fraud Scheme Fails To Shift Loss To Its Depository Bank

In recent years we have witnessed a continuing flow of litigation in which a law firm is scammed by a con artist who gets a big wire payment from the law firm in exchange for a bogus check. When the check is bounced by the drawee bank, the law firm's provisional credit is reversed. The law firm is convinced that the bank shouldn't have let this happen, but the courts have repeatedly rejected attempts to shift the fraud loss to the gullible customer. The most recent example of this "law firm litigation" comes from New York.
July 06, 2017
Supreme Court: Proofs Of Claim For Time-Barred Debt Don't Violate The Fair Debt Collection Practices Act

On May 15, 2017, the U.S. Supreme Court issued its much-anticipated opinion in Midland Funding, LLC v. Johnson, 2017 U.S. LEXIS 2949 (U.S. May 15, 2017). At issue was whether filing a time-barred proof of claim in bankruptcy violated the federal Fair Debt Collection Practices Act. When we previewed the Midland Funding case in the November 2016 issue of this newsletter, we noted that the Court could potentially reach several results on this issue, including a ruling that the Bankruptcy Code completely preempted the FDCPA, a ruling that filing a time-barred proof of claim was an FDCPA violation, or a ruling that there was nothing inherently misleading about an untimely claim.
May 23, 2017
Bank Could Dishonor Cashier's Check, Based On Competing Garnishment Of Deposit Account

Because cashier's checks are considered cash-equivalents, the general rule is that issuing banks are not allowed to refuse payment even if the remitter demands that payment be stopped based on a dispute between the remitter/customer and the payee. Wrongful dishonor of a cashier's check allows recovery of the face amount, plus consequential damages and attorney's fees. UCC 3-411(b). In a recent case from Georgia, the court rejected the remitter's suit for wrongful dishonor because the remitter's deposit account had been timely garnished by a competing judgment creditor. We think the decision is correct. Perhaps the most interesting aspect of the case is the interplay between state garnishment law and liability for wrongful dishonor under the UCC rule.
May 24, 2017
The Mortgage Follows The Note: Litigation Continues Apace On Standing To Foreclose Securitized Real Estate Mortgages

We continue to see a strong flow of securitized real estate mortgages, born of the "mortgage meltdown" and still in the process of foreclosure. One big lesson coming from this litigation is that the secured lender's right to foreclose is very much dependent on the law of negotiable instruments under Article 3 of the UCC. That's because the "mortgage follows the note" and any defect in the transfer of notes through the pipeline can knock the creditor out on "standing" grounds. As illustrative examples, we offer two recent judicial decisions. The first case, from Florida, involves the "lost note" problem; the second deals with the "allonge" problem. In both cases, correctly applying the rules of UCC Article 3, the court ruled in favor of the secured lender's standing to foreclose the mortgage.
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.