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6th Circuit: No Waiver of Due Care and Fair Dealing

by Neil Garfield | August 3, 2017

This court has again returned us to the rule of law. You can’t screw up and then blame the victim for the problem or even allow the victim to suffer the damages.

So here is a reminder that while it may be difficult to establish a fiduciary relationship between the homeowner/borrower and some bank, servicer or trustee, there is still a duty of care and a duty of good faith attached to all transactions as stated by UCC Article 4.

One of the first cases I litigated (40 years ago) was against a large bank. My client was the owner of a checking account. He made a deposit of a check received from a third party. The bank accepted the deposit and then placed the following notice stamped on the deposit receipt: “It will take a maximum of 10 business days for funds to be available on this deposit.” [Spoiler alert]: within a few hours of this decision every bank in the country changed the stamp on the deposit receipt.”]

So my client waited 3 weeks before accessing part of those funds. He spent the money. Then he waited another 2 weeks before accessing and spending the rest of the deposited money.

Then about 2 weeks after he had spent all the money from that deposit the bank notified him that the check had been dishonored. The bank wanted him to replce the funds. He refused, saying that he relied upon the bank’s representation that after 10 business days, the deposit was safe. He took them at their word and waited much longer than even the period stated on the deposit receipt.

The bank sued him, using one of the most senior attorneys of a very large law firm. The suit pointed to the account holder’s obligation to cover losses. In court the lawyer’s argument was that the bank was not in the business of making gifts to its depositors.

The Court’s answer to that argument was, “well, you are now, at least in this case.” That was my first win against a 10,000 pound gorilla.

The point is that back then it did take days rather than seconds to clear checks as they now do under the Check21 system. The bank had a duty of care, fair dealing and good faith when dealing with its depositors.

When it made the representation that it will take a MAXIMUM of 10 days to get the money the depositor (i.e., the only party in the depository account contract) it was up to the bank to take such steps as were necessary within those ten days to determine if the account on which the check was drawn even existed (it didn’t) or if it was cleared through the Federal Reserve system (it wasn’t).

Bottom Line: Despite disclaimers and legal arguments, banks can’t walk away from their duty of due care and good faith. A loss that occurred because of their failure to perform those duties is a loss to the bank — not the customer who knew nothing about the “problem.”

So here we have a 6th Circuit decision that applies the same rule in a slightly different fact pattern. In this case fraudulent checks drawn on the depositor’s account were honored by the bank. The checks were forged. They also had the same number of checks already written. And the fraudulent checks did not bear the depositor’s logo.

The trial court dismissed the lawsuit from the depositor. There was a disclaimer in the depositor account contract that said if you don’t use our anti‐fraud products, you will be responsible for any losses. The depositor did not use the bank’s antifraud products. Nor were they ever described in any detail that would inform the depositor of what they were or how much they would cost.

So the depositor sued the bank saying that if the bank had done its job of at least looking at the signature, the check number and the logo they would have atleast flagged the transaction and called for verification of the transaction. Had they done so there woujld have been no loss.

The trial court did the customary thing that trial courts do when construing the UCC. It mangled both the wording and the interpretation of the statute. It dismissed the claim saying that the depositor assumed the risk of loss when the depositor failed to avail itself of unspecified anti-fraud services that were supposedly offered by the bank (presumably as an excuse to charge more fees rather than perform the service).

The 6th Circuit said you can disclaim all you want, but you can’t presume a waiver of good faith, fair dealing and due care. If the rule was what the bank argued, then every bank could get out of every potential loss involving a depositor’s account regardless of how negligent they were in maintaining the account and processing the transactions. That was expressly prohibited in Article 4 of the UCC, adopted by every state in the union.

With complete disclosure and a direct offer of anti‐fraud services that were real as part of the original contract between depositor and bank, the parties could have theoretically reached an agreement wherein the bank would not be liable for any loss in the account and the risk of loss was solely that of the depositor.

The stupidity of that argument is obvious. If the bank’s primary service is safeguarding your money why would anyone sign up with a bank that says we won’t be liable for not safe guarding your money.

Hence the arguments of servicers (and the undisclosed principals for whom they act), banks and trustees of REMIC Trusts and even trustees on deeds of trust and self proclaimed mortgagees and beneficiaries on deeds of trust should be rejected if the homeowner has alleged, based upon ultimate facts upon which relief could be granted, that the entity failed to act in good faith and due care.

 

 

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