Fla. Court Holds Alleged ‘No Lawful Basis to Debit’ Enough to State Claim Under Reg J and UCC Art 4A

The Circuit Court of the Eleventh Judicial Circuit in Miami-Dade County, Florida recently dismissed equitable and tort claims for restitution, “money had and received,” negligence, indemnification, tortious interference and conversion brought by a company against its bank for reversing a wire transfer due to fraud.  However, the Court refused to dismiss the account holder’s claim for breach of the deposit agreement.

The Court held that Regulation J (12 CFR § 210.25-210.32) and Article 4A of the Uniform Commercial Code (UCC) were incorporated into the deposit agreement at issue, and these provisions only allowed the bank to reverse the payment under the common law governing mistake and restitution.  Here, the plaintiff alleged the bank had “no lawful basis to debit” the account, which in the Court’s view was enough to state a claim for breach of the deposit agreement.

A copy of the opinion in Bay Rag Corp. v. Bank of America is available at: Link to Opinion.

A wire transfer in the amount of $62,000 was credited to a company’s deposit account at a bank (the beneficiary bank), but was later reversed at the request of the originating bank, which informed the beneficiary bank that it had mistakenly wired funds from an account of its customers that had no business relationship with the recipient of the wire transfer.

By the time the fraud was discovered, the wire recipient company had delivered more than $100,000 worth of goods to a purchaser it believed had wired the money.

The wire transfer recipient company sued both its bank and the originating bank, raising seven legal and equitable claims “sounding in both contract and tort.” The banks moved to dismiss.

The Court began its opinion by noting that “the only pertinent question presented” was whether the beneficiary bank “had a legal right to debit the account.”

The beneficiary bank argued that it had the right under the deposit agreement with the plaintiff to reverse a wire transfer if it was “fraudulent, counterfeit or invalid for some other reason.” The plaintiff wire transfer recipient company argued that the deposit agreement did not apply to wire transfers and provided that “[f]und transfers through Fedwire will be governed by … Regulation J, Subpart B, and [UCC] Article 4A….”

The Court first addressed whether the deposit agreement applied to fraudulent or invalid wire transfers, finding that a wire transfer was not an “item” as defined by the “Deposits and Cashed Items” provision of the deposit agreement, and that the parties’ rights and duties were governed exclusively by the “Funds Transfer Service” section of the deposit agreement.

The “Funds Transfer Service” section provided that funds sent through “Fedwire” were governed by Regulation J and UCC Article 4A. Because there was no dispute the money was sent through “Fedwire,” the Court found that the parties’ relationship was governed by and subject to Regulation J and UCC Article 4A, which were “enacted to provide a comprehensive statutory scheme to apply to fund transfer disputes not involving the Electronic Funds Transfer Act.”

The Court explained that when Article 4A applies to a funds transfer, it provides the sole remedy, to the exclusion of “common law or other statutory claims.”

The Court then turned to the applicable UCC provision — Article 4A-211(c)(2), codified as § 670.211(3)(b), Fla. Stat. — which provides that a payment order may be cancelled or amended by the beneficiary bank after it accepts it, if it “was issued in execution of an authorized payment order.”  In addition, the Court noted that “the beneficiary’s bank is entitled to recover from the beneficiary any amount paid to the beneficiary to the extent allowed by the law governing mistake and restitution.”  See Article 4A-211(c)(2); § 670.211(3)(b), Fla. Stat.

Thus, the Court held, the beneficiary bank could “charge back the funds initially wired and credited to [plaintiff wire transfer recipient company] only if [the beneficiary bank] would be entitled to reverse the initial payment by application of the common law ‘governing mistake and restitution.’”

Because the Court concluded that the provisions of the deposit agreement giving the beneficiary bank the unfettered right to reverse items credited fraudulently did not apply to wire transfers, and instead that Regulation J and the UCC applied, the plaintiff stated a cause of action for breach of contract because it alleged that its bank had “no lawful basis to debit” the account and doing so breached the deposit agreement.

Turning to the remaining equitable and tort claims, the Court dismissed the equitable claims with prejudice because of the common law rule that equitable relief is not available where an express contract exists between the parties.

The Court also dismissed the claims for negligence and indemnification against the originating bank with prejudice because that bank owed no legal duty of care to the plaintiff, which was not its customer.

Finally, the Court dismissed with prejudice the claims for tortious interference and conversion against the originating bank, finding that the bank had the right to request that the beneficiary bank return the funds under the UCC and thus could not have unlawfully interfered with the business relationship between the plaintiff and its beneficiary bank. In addition, the Court noted, because the money returned by the plaintiff’s bank “was not separate and identifiable it cannot be the subject of a claim for conversion.”

In sum, the Court denied the motion to dismiss the breach of contract claim, but granted the motion as to the other six non-contract claims. It also left intact the plaintiff’s claim for attorney’s fees based on the deposit agreement, but struck any claim for attorney’s fees as “consequential damages.”

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Hector Lora has substantial experience in all phases of complex commercial litigation, including motion practice, written discovery, depositions, mediations, bench and jury trials, and appellate practice. For more than a decade, his practice has focused extensively on the defense of civil enforcement actions filed by the FTC, as well as real estate litigation, and contested mortgage and condominium lien foreclosures and foreclosure of security interests under UCC Article 9. Hector also has substantial experience in advising a variety of types of businesses regarding their compliance with applicable federal and state laws, including the Federal Trade Commission Act, the Telephone Consumer Protection Act, the Telemarketing and Consumer Fraud and Abuse Prevention Act, the Telemarketing Sales Rule, the Controlling the Assault of Nonsolicited Pornography and Marketing Act of 2003, and Florida laws governing telephone solicitation and communication. Hector received his Juris Doctor from the Georgetown University Law Center, and his undergraduate degree with honors from the University of Florida.