6th Cir. Questions Bank’s Contractual Limit on Liability for Fraudulent Checks

The U.S. Court of Appeals for the Sixth Circuit recently reversed the dismissal of a class action lawsuit filed by a bank account holder who asserted that the bank violated the Uniform Commercial Code 4-401 and 4-103(a), dealing with liability for fraudulent checks.

The account holder experienced check fraud and the bank refused liability because the master services agreement for the account contained a liability waiver for failure to purchase fraud protection products, which the account holder had not done.

A copy of the opinion in Majestic Building Maintenance, Inc. v. Huntington Bancshares Inc. is available at:  Link to Opinion.

The bank account holder, a commercial cleaning business, opened a business checking account with the bank subject to a master services agreement that contained a liability waiver.

The liability stated that if the account holder elected not to avail itself of the bank’s products to discover and prevent unauthorized transactions, the bank would have no liability for any unauthorized transactions and no duty to re-credit the account for any losses.

The account holder did not avail itself of the bank’s anti-fraud products, and instead ordered hologram checks from a third party as protective measure to avoid fraudulent account activity.

The account holder discovered four unauthorized, non-hologrammed checks debited from the account totaling $3,973.96 that had the same check numbers as previously used hologram checks. The account holder contacted the bank within 24 hours to request reimbursement and the bank responded via letter stating that “reasonable care was not used in declining to use our [fraud prevention] services, which substantially contributed to the making of the forged item(s),” and that “[a]s a result, we will not reimburse you for these unauthorized/forged item(s).”

The account holder’s attorney sent a letter to the bank and filed complaints with the Federal Reserve and the FDIC, which resulted in the OCC contacting the bank about the complaints. The bank again responded to the account holder that the bank would not have any liability for the fraudulent transactions because the account holder had not used the bank’s anti-fraud products. The OCC sent the account holder a letter that it would not intervene in a private party dispute involving the interpretation and enforcement of a contract.

The account holder filed a putative class action complaint alleging that the bank had breached its obligations under U.C.C. § 4-401 when it paid the four fraudulent checks, and violated U.C.C. § 4-103(a) when it unreasonably shifted all liability to the account holder and improperly disclaimed its responsibility to act in good faith and exercise ordinary care by incorporating a liability waiver into the master services agreement.

The bank moved to dismiss the complaint for failure to state a claim.  The trial court granted the motion holding that the account holder had not stated a claim that the bank violated § 4-401 or § 4-103. The trial court concluded that the master services agreement was not manifestly unreasonable and did not absolve the bank of its duties to act in good faith and exercise ordinary care because several provisions “plainly reaffirm [the bank’s] duties to act in good faith and exercise ordinary care” and thus was not liable for the account holder’s loss. The account holder appealed.

The Sixth Circuit found that the provision in the master services agreement at issue “might improperly disclaim [the bank’s] basic responsibility to act in good faith and exercise ordinary care” such that the complaint sufficiently stated a claim to survive the motion to dismiss.

The Court noted that under U.C.C. § 4-401, cmt. 1, “[a]n item containing a forged drawer’s signature or forged indorsement is not properly payable.” As you may recall, this rule may be varied by the parties’ agreement but the agreement cannot disclaim a bank’s responsibility for its lack of good faith or failure to exercise ordinary care and cannot limit the measure of damages for that failure.  See U.C.C. § 4-103(a). The agreement may state reasonable standards for measuring the bank’s responsibility.  See U.C.C. § 4-103(a).

The Sixth Circuit explained that this means the bank could not use the master services agreement to remove its statutory duty to act in good faith and exercise ordinary care toward the account holder and that doing so could be considered “manifestly unreasonable.”

The Court found that the account holder had plausibly alleged that the provision at issue violated § 4-103(a) because it allegedly unreasonably disclaimed the bank’s basic duties of ordinary care and good faith. The Sixth Circuit pointed out that the factual record would need to be developed regarding whether the bank charged the account holder additional fees for what it was supposed to do at no additional cost, which was to exercise its ordinary duty of care.

The Sixth Circuit further explained that the trial court erred by concluding that because the master services agreement contained other provisions that reaffirmed the bank’s duties to act in good faith and exercise ordinary care, the provision at issue did not violate § 4-103(a). The Court held that the account holder properly challenged a specific provision, and the other provisions did not change that.

Accordingly, the trial court’s order dismissing the putative class action complaint was reversed, and the case was remanded with instructions to allow the account holder to amend the complaint as needed and conduct discovery.

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Amy Jonker is a commercial litigator whose practice focuses on defending consumer financial services companies in class actions, individual matters, and regulatory investigations, representing employers in investigations and litigation, and successfully resolving commercial disputes. She has extensive experience delivering positive outcomes in complex commercial litigation in state and federal courts across the country, including for many financial institutions and law firms for claims filed under the Fair Debt Collection Practices Act (FDCPA), the Fair Credit Reporting Act (FCRA), the Fair and Accurate Credit Transactions Act (FACTA), the Telephone Consumer Protection Act (TPCA), UDAAP and state consumer protection laws, under the Family and Medical Leave Act (FMLA), Title VII, the Americans with Disabilities Act (ADA), whistleblower claims, and in complex insurance disputes. Her experience covers all phases of litigation at both federal and state levels, including obtaining dismissals of complaints, obtaining summary judgment on claims and defenses, handling all phases of discovery in both individual and class actions, negotiating individual and class action settlements, preparing for and participating in trials and arbitrations, conducting oral arguments, and federal and state court appellate work.