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Bank Litigation

Division Of Banks Told That Hearings Are Not Optional

A Superior Court judge recently expressed little patience with the Massachusetts Division of Banks's (the "Division's") failure to hold a hearing prior to issuing cease and desist letters, calling it "disturbing" that two statutes requiring hearings "were completely ignored by an absolutist and overbearing executive department."

First Circuit Examines Compliance Requirements Under Bank Secrecy Act

Federal law - specifically a section of the Bank Secrecy Act (31 U.S.C. § 5318(g)) (the "Act") and related regulations - requires financial institutions both "to report any suspicious transaction relevant to a possible violation of law or regulation" and forbids those institutions, government officials, and others from "notify[ing] any person involved in the transaction that the transaction has been reported."  31 U.S.C. § 5318(g).  

CFPB to institute TILA-RESPA Integrated Disclosure Rule on October 3, 2015

The Real Estate Settlement Procedures Act (RESPA) was enacted by Congress in 1974 in order to promote "more effective advance disclosure to home buyers and sellers of settlement costs." 12 U.S.C. § 2601(b)(1). In particular, RESPA requires the issuance of forms to the borrower that "conspicuously and clearly itemize all charges imposed upon the borrower and all charges imposed upon the seller in connection with the settlement." 12 U.S.C. § 2603(a). The related Truth-in-Lending Act (TILA) of 1968 requires that, "in the case of any consumer credit transaction," the lender "shall clearly and conspicuously disclose" to the borrower certain material terms and shall provide notice of right to cancel.  15 U.S.C. § 1635(a).  

Two Appellate Courts Hold That Banks' Duty of Care to Non-Customers Is Extremely Limited

The United States Courts of Appeals for the Sixth and Eleventh Circuits have added to the significant body of law limiting a bank's duty to non-customers harmed or defrauded by one of the bank's actual customers.  The Sixth Circuit reaffirmed that, under Michigan law, a bank only owes a duty of care to its own customers.  The Eleventh Circuit found that, under Florida law, a bank has no fiduciary relationship with its customers and only owes a duty of ordinary care in arms-length transactions with its customers, and that any aiding and abetting liability for acts of a bank's customers is limited to cases where a bank has actual knowledge of the customer's bad actions.

Fifth Circuit Rules Amendment to Electronic Funds Transfer Act Not Retroactive

A three-judge panel of the Fifth Circuit has ruled that a 2012 amendment to the federal Electronic Funds Transfer Act ("EFTA"), which abolished the requirement that operators of automatic teller machines ("ATM") maintain exterior notices of fees, was not retroactive.  Prior to the amendment, the EFTA required fee notices to be located both externally, "in a prominent and conspicuous location on or at the automated teller machine" and also before the close of the customer's ATM transaction, either "on the screen of the automated teller machine, or on a paper notice issued . . . before the consumer is irrevocably committed to completing the transaction."  15 U.S.C. § 1693b(d)(3) (2011). 

Alabama Supreme Court Holds Bank of First Deposit Must Bear Liability for Under-Encoded Check

On September 30, 2014, the Alabama Supreme Court issued an important decision with wide-ranging implications for depositary institutions.  In the case of Troy Bank and Trust Co. v. The Citizens Bank, 2014 WL 4851511 (Ala. 2014), the Court held that a bank that "under-encodes" a check is strictly liable for any loss caused by such an action under the Uniform Commercial Code.  

UCC Section 4-406(f) Reporting Requirement Has Teeth

While Section 4-111 of the Uniform Commercial Code ("UCC") contains a three-year statute of limitations for filing claims against a bank for paying an unauthorized or altered item from an account, a more potent tool for banks can be found in UCC 4-406(f), a one-year statute of repose for reporting the disputed item to the bank.  Under UCC 4-406(f), a customer is required to report the disputed item to the bank within one year after the bank makes available the account statement or other documentation of the items paid, but what constitutes a "report" to the bank by the customer is not spelled out in the statute. Courts that have analyzed the issue have read UCC 4-406(f) as requiring such a report to specify the account, payment amount, check number, or other specific information identifying the unauthorized draft.  Among the methods which have failed to satisfy the reporting requirement:  Placing a blanket stop-payment order on an account and requesting copies of the account statements, Hatcher Cleaning Co. v. Comerica Bank - Texas, 995 S.W.2d 933 (Tex. App. 1999); requesting copies of potentially invalid checks from the bank, Watseka First National Bank v. Horney, 686 N.E.2d 1175 (Ill. App. 1997); reporting to the bank that a specific employee was suspected of check forgery on the company accounts, Villa Contracting Co., Inc. v. Summit Bancorporation, 695 A.2d 762 (N.J. Super. Ct. Law Div. 1996); discussing with a bank officer possible irregularities with single signatures on a dual-signature account, First Place Computers, Inc. v. Security Nat. Bank of Omaha, 558 N.W.2d 57 (Neb. 1997); reporting to the bank a belief of foul play or general notice of a possible theft, Simi Management Corp. v. Bank of America, N.A., 930 F. Supp. 2d 1082 (N.D. Calif. 2013).

Identity Theft Prevention Satisfies FCRA's Legitimate Business Need Requirement

The 6th U.S. Circuit Court of Appeals has held that identity theft prevention satisfies the Fair Credit Reporting Act's ("FCRA") Legitimate Business Need requirement for purposes of FCRA compliance.  The Court in Bickley v. Dish Network, LLC, 2014 WL 1887565 (6th Cir. May 13, 2014) upheld a grant of summary judgment in favor of the defendant, who had pulled a credit report in order to verify the identity of a consumer and determine his eligibility for service.

Recent Developments in the Rapidly Changing Bitcoin Market

On February 27, 2014, Fitch Law Partners LLP posted a blog article regarding the volatile market for Bitcoin and the rapid rise of the cryptocurrency over the past two-three years.  Over the past month, there have been several important new developments.

A Primer on Bitcoin

Bitcoin is a relatively new 'cryptocurrency' in which in which encryption technology enables consumers and businesses to exchange goods for currency over the Internet without having to rely on the element of trust in order to ensure payment.  Users buy Bitcoins and load them onto a virtual wallet, which they can then use to transfer Bitcoins instantly and anonymously to other users anywhere in the world.  As such, there are significant cost savings and efficiency benefits associated with the use of Bitcoin as a method of currency.  As Venture Capitalist Marc Andreessen explained on the New York Times' Dealbook, "Bitcoin is the first Internetwide payment system where transactions either happen with no fees or very low fees (down to fractions of pennies)."(1)  Many vendors are starting to consider Bitcoin in part to combat the large fees charged by credit card companies which cut into sales margins.  However, no central bank exists to regulate Bitcoin, and it entirely relies on peer-to-peer transactions and largely unregulated exchanges.

Washington and Colorado State Banking Associations Request Federal Guidance Regarding Banking Activities with Marijuana Producers

In the fall of 2012, voters in both Colorado and Washington introduced a new era in the United States when they voted to legalize the sale of marijuana.  In response to the landmark referenda, the Department of Justice issued a revised "Guidance Regarding Marijuana Enforcement" on August 29, 2013.  The DOJ Guidance noted that the federal Controlled Substances Act includes several important priorities with respect to marijuana, including preventing access of minors to marijuana, preventing revenue from the sale of marijuana going to criminal enterprises, preventing violence, and preventing drugged driving.  While the DOJ Guidance states that state and local law enforcement in jurisdictions that have legalized marijuana in some form should remain the "primary means" of addressing marijuana-related activity, the DOJ warns that the federal government may continue to "bring individual enforcement actions, including criminal prosecutions," focused on that activity.

Bank's Duty to Non-Customers Limited to Actual Knowledge of Misappropriation

In a recent case, Bernkopf Goodman LLP v. Herbert, 2013 WL 803521 (March 21, 2013), Massachusetts Federal District Judge Zobel considered the scope of a bank's duty of care to non-customers in cases of alleged misappropriation by an account holder. The plaintiff, Bernkopf Goodman LLP (the "Firm"), alleged that its payroll company, Checkmaster Payroll Service ("Checkmaster"), had misappropriated funds that were supposed to be used to pay the Firm's taxes. In addition to naming Checkmaster as a defendant, the Firm sued the two banks that Checkmaster used to transfer the Firm's funds that were supposed to be paid to the I.R.S.  The Firm claimed that the banks were negligent in failing to prevent the alleged misappropriation.

Consumer Financial Protection Bureau Eliminates Dual Notice Requirement Regarding ATM Fees

The Federal Consumer Financial Protection Bureau ("CFPB") recently amended Regulation E, 12 CFR 1005.16 ("Reg. E"), to eliminate duplicative fee notice requirements on ATM machines.  As a result of the March 26, 2013 amendment, banks will no longer be liable for failing to post notice on the ATM machine of a user fee for non-customers of the bank, even though a more specific warning is provided on the screen before an ATM transaction can be completed.

UCC Article 9 Damages Provisions Displace Common Law

In a case handed down just last month, the Supreme Judicial Court reinforced the long-standing rule that provisions of the Uniform Commercial Code (the "UCC") displace common law principles that would otherwise apply in contexts not governed by the UCC.

EFTA Amendments to Deter Serial Plaintiffs

Banks and other financial institutions that maintain ATMs got good news from Congress to close out the year.  On December 11, 2012, the Senate passed H.R. 4367 by unanimous consent, following passage by the House of Representatives in July.  The bill now moves to the President's desk for his signature.  H.R. 4367, as passed, amends the Electronic Funds Transfer Act to remove the placard fee disclosure requirement for ATMs operated by a financial institution other than the institution at which a consumer has an account.

Senator-elect Elizabeth Warren Appointed to Senate Banking Committee

The Democratic Steering Committee has approved the assignment of Senator-elect Elizabeth Warren, one of the most vocal critics of the financial services sector, to the Senate Banking Committee.  Warren previously led a congressional oversight panel that criticized the government's so-called "bank bailout" in the wake of the financial crisis.  Warren was the driving force behind the creation of the new Consumer Financial Protection Bureau, an agency created by the Dodd-Frank financial system overhaul.  Her potential appointment to head the Bureau, however, drew strong objections from Senate Republicans.  When the appointment went to former Ohio attorney general Richard Cordray, Warren instead successfully challenged incumbent Senator Scott Brown's reelection.

Go-Best: An Important Massachusetts Banking Law Decision

On July 30, the Massachusetts Supreme Judicial Court ("SJC") issued an important decision in a Ponzi scheme captioned Go-Best Assets Limited v. Citizens Bank of Massachusetts, 463 Mass. 50 (2012).  

A Safe Harbor For Banks And Their Employees Who Contact Law Enforcement Authorities

In the course of performing their job duties, bank tellers and their supervisors may occasionally be asked to perform a transaction that appears to be somewhat suspicious.  For example, a non-customer of the bank may arrive in the teller line and ask to cash a large check drawn on an account of one of the bank's customers.  In some such cases, bank personnel may come to believe that the subject transaction is fraudulent.  While most banks have very detailed procedures for addressing these situations, bank personnel must sometimes make a quick decision about whether to alert law enforcement personnel.  In certain cases, though, bank employees may have concerns about whether they will incur civil liability to the non-customer if they alert the police but the transaction ultimately turns out to be legitimate.  While such concerns are certainly understandable in our highly litigious society, bank personnel can take some comfort in knowing that federal law provides them with considerable protection in these situations.

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