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6th Cir. Confirms Bank Entitled to Restitution When Payment Made by ‘Mistake’ and Not ‘For Value’


banking law

The U.S. Court of Appeals for the Sixth Circuit recently held that, because a bank teller paid checks on an account that had insufficient funds by “mistake” and did not take those checks “for value” by issuing replacement “teller’s checks,” the bank was entitled to restitution for the amount of the checks under the Tennessee Commercial Code.

A copy of the opinion in Goodman v. Com. Bank & Trust Co. is available at:  Link to Opinion.

A farmer dealt with an insurance broker at a brokerage firm to obtain a crop insurance policy. Later that year, the farmer discovered that certain portions of his property could not be farmed due to excess moisture. The farmer filed a claim under the insurance policy, but the insurer denied the claim as beyond the scope of the policy.

The farmer accused the broker of failing to obtain proper coverage. The broker then provided the farmer with two checks drawn from his firm’s account. The firm’s account had insufficient funds to cover the draws. The farmer gave the broker nothing in consideration for the checks. The farmer twice unsuccessfully attempted to cash the checks.

Months later, after exchanging text messages with the broker, the farmer was heading to a bank when the broker sent a text message reading “everything stopped.” At the bank, the farmer asked for cashier’s checks in exchange for the brokerage firm checks, without mentioning his past attempts to negotiate the checks. The teller did not check the balance in the firm’s account but printed “teller’s checks” payable to the farmer. When the teller realized the account lacked sufficient funds, the bank issued a stop payment order.

The farmer sued to enforce the checks. The bank counterclaimed for restitution. The trial court held that the bank paid the checks by mistake and that the farmer did not give value. Accordingly, the court granted summary judgment to the bank on its claim for restitution. The farmer timely appealed.

Chapter Three of the Tennessee Commercial Code governs negotiable instruments. See Tenn. Code Ann. § 47-3-101. This statutory framework served as the legal backdrop for the question on appeal:

When is a bank entitled to restitution from a payee when it pays an instrument to the payee drawn on an account with insufficient funds? See Tenn. Code Ann. § 47-3-418(b).

The threshold inquiry in answering that question is whether the bank here “paid” the farmer by “mistake.” Id. If it did, the next inquiry is whether the farmer took the “instruments” in “good faith” and “for value.” Id. § 47-3-418(c). If the farmer did not do so, then the bank was entitled to restitution.

Upon review of the principles of “mistake” and “restitution” in the Tennessee Commercial Code, the Sixth Circuit determined that a bank paying a check on the erroneous belief that the underlying account contained sufficient funds constitutes the type of mistake eligible to be remediated by restitution, which the Court held was the situation here. The record reflected that the bank’s teller felt “rushed” and was “working under the assumption that the funds were available,” an assumption that was “not in accord with the facts.” Thus, the Court held that a “mistake of fact” by the teller occurred, meaning the farmer was not entitled to payment on the checks he attempted to cash.

However, even with the bank’s mistake qualifying for restitution under Tennessee’s Commercial Code, the Sixth Circuit reasoned that the farmer would not be obligated to pay restitution if he took the checks “in good faith and for value.” Tenn. Code Ann. § 47-3-418(c). The bank argued that the checks were taken neither in good faith nor for value. The Court only addressed the “value” question.

The most relevant subsection to the Sixth Circuit regarding “value” was § 47-3-303(a)(3), which provides that payment of “an antecedent claim” is a transfer “for value.” Id. Conversely, “[a] moral obligation alone is not a sufficient consideration to sustain a promise.” Evans, Fite, Porter & Co. v. Bell, 83 Tenn. 569, 572 (1885); see also Tenn. Code Ann. § 47-3-418 cmt. 3.

The record reflected that the broker gave the checks to the farmer because he felt “morally obligated to help” him, not in exchange for a release of claims by the farmer. Indeed, the broker testified that the farmer never gave the broker anything in return for these payments. Furthermore, the farmer, in a deposition, testified that he and the broker never discussed a claim or potential lawsuit when he received the checks from the broker. Even after the broker took his time in paying him, in fact, the farmer never threatened to sue the broker.

Thus, the Sixth Circuit concluded that the farmer did not take the checks “for value” because they were nothing more than a gratuitous gift. And as the farmer failed to satisfy Tenn. Code Ann. § 47-3- 418(c)’s “for value” requirement, the Court held that the bank was entitled to restitution.

Accordingly, the Sixth Circuit affirmed the trial court’s summary judgment in favor of the bank.

Photo: Andrey Popov/

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The attorneys of Maurice Wutscher are seasoned business lawyers with substantial experience in business law, financial services litigation and regulatory compliance. They represent consumer and commercial financial services companies, including depository and non-depository mortgage lenders and servicers, as well as mortgage loan investors, financial asset buyers and sellers, loss mitigation companies, third-party debt collectors, and other financial services providers. They have defended scores of putative class actions, have substantial experience in federal appellate court litigation and bring substantial trial and complex bankruptcy experience. They are leaders and influencers in their highly specialized area of law. They serve in leadership positions in industry associations and regularly publish and speak before national audiences.

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