Justia Commercial Law Opinion Summaries

This appeal arose from a judgment entered after a demurrer by three banks to plaintiff’s second amended complaint was sustained without leave to amend. The three banks were US Metro Bank, Wilshire State Bank, and Pacific City Bank. An employee of a corporation with responsibility to gather incoming checks made payable to the corporation and deposit those checks into the corporation’s bank account (in this case, the corporation’s accounting manager) stole some of the incoming checks and took them to a check cashing service where she forged the signature of one of the officers of the corporation and received hard cash in return. After discovery of the thefts, the corporation fired the accounting manager and tried to recoup at least some of its losses. In this case, the corporation’s recoupment effort included suing its own bank, the three check cashing services where the employee took the checks, and the three banks which received those checks from the check cashing services for deposit into those companies’ own accounts. The legal issue presented in this appeal was one of first impression in California: Does the interposition of the check cashing services between (a) the employee who stole the checks and (b) the three banks who took the checks from three check cashing companies and credited the accounts of those check cashing companies, relieve the banks of all duty of care under section 3405 of California’s Commercial Code? The Court of Appeal concluded the answer was no: the three banks were the first banks to process the checks through the banking system, and, as “first banks,” they had a duty of care in the processing of those checks “‘to make certain all endorsements [were] valid; banks subsequently taking the paper have a right to rely on the forwarding bank.’” Check cashing companies are not banks, and should not be treated as banks for purposes of California’s Uniform Commercial Code. View "HH Computer Systems v. Pacific City Bank" on Justia Law

Between 2009 and 2012, Sunshine and Purdy, a Kentucky dairy farmer, entered into “Dairy Cow Leases.” Purdy received 435 cows to milk, and, in exchange, paid monthly rent to Sunshine. Purdy’s business faltered in 2012, and he sought bankruptcy protection. Sunshine moved to retake possession of the cattle. Citizens First Bank had a perfected purchase money security interest in Purdy’s equipment, farm products, and livestock, and claimed that its perfected security interest gave Citizens First priority over Sunshine with regard to the cattle. Citizens argued that the “leases” were disguised security agreements, that Purdy actually owned the cattle, and that the subsequently-acquired livestock were covered by the bank’s security interest. The bankruptcy court ruled in favor of Citizens, finding that the leases were per se security agreements. The Sixth Circuit reversed, noting that the terms of the agreements expressly preserve Sunshine’s ability to recover the cattle. Whether the parties strictly adhered to the terms of these leases is irrelevant to determining whether the agreements were true leases or disguised security agreements. Neither the bankruptcy court nor the parties sufficiently explained the legal import of Purdy’s culling practices or put forward any evidence that the parties altered the terms of the leases making them anything but leases. View "In re: Purdy" on Justia Law

Plaintiff-school opened a bank account for its operating fund with Defendant-bank. One of Plaintiff’s employees later opened a bank account with Defendant that Plaintiff had not authorized and deposited into that account several hundred checks originating from, or intended to be deposited into, Plaintiff’s bank account with Defendant. Over the course of approximately four years, the employee deposited $832,776 into this bank account and withdrew funds just short of that amount. Defendant refused Plaintiff’s demand to return the funds that the employee had funneled through this account to himself. Thereafter, Plaintiff commenced this action, alleging breach of contract, violations of the Uniform Commercial Code (UCC), negligence, and common law conversion. The trial court rendered judgment in favor of Plaintiff on each of the counts and awarded $832,776 in total compensatory damages. The Supreme Court affirmed in all respects with the exception of the damages award, holding that some of Plaintiff’s claims under the UCC were time barred and that the trial court did not otherwise err in its judgment. Remanded with direction to reduce the award by $5,156 and to proportionately reduce prejudgment interest, . View "Saint Bernard Sch. of Montville, Inc. v. Bank of Am. " on Justia Law

Coastal filed suit against Chase Bank, asserting claims of conversion and negligence under the Texas Uniform Commercial Code (UCC) and money had and received under the common law. At issue on interlocutory appeal was whether section 3.405 of the UCC can serve as an affirmative defense to a common law "money and received" claim and whether settlement credits in Texas reduce the nonsettling defendant's liability rather than the plaintiff's total loss. The court concluded that the money had and received claim as applied in this situation must simply incorporate the affirmative defense provided by section 3.405. Therefore, the district court did not err in its determination that section 3.405 could so be applied. Further, the district court was correct in holding that the settlement credit should be applied to reduce the nonsettling defendant's liability, not the plaintiff's total loss. On remand, however, the district court must give Coastal an opportunity to demonstrate that allocation of the settlement amount is appropriate. Accordingly, the court affirmed and remanded for further proceedings. View "Coastal Agricultural Supply v. JP Morgan Chase Bank, N.A." on Justia Law

A Law Firm had an escrow account with a Bank and authorized an employee to sign checks on the account by herself. The employee began embezzling money from the Firm’s various escrow accounts by engaging in a scheme called “check-kiting,” which involved the employee writing and depositing checks between the Bank account and the Law Firm’s account at another bank. More than three years after the last activity on the Bank account the Law Firm sued the Bank, raising four claims, including violations of the Uniform Commercial Code and common-law causes of action. The court of appeals concluded that the claims were barred by the one-year repose period of Ky. Rev. Stat. 355.4-406. The Supreme Court affirmed on other grounds, holding that the claims were barred by the three-year statute of limitations under Ky. Rev. Stat. 355.4-111. View "Mark D. Dean, P.S.C. v. Commonwealth Bank & Trust Co." on Justia Law

Corporation, which owned corporate operating accounts at Bank, took out a loan and line of credit. Corporation passed a corporate resolution providing that unless it notified Bank within fourteen days of an improperly paid item in order to recover the payment, Bank would not be held liable for any error in Corporation’s account. Corporation later discovered that its bookkeeper had been forging signatures on certain Bank documents and had embezzled approximately $386,000 over the course of two years. Corporation sued Bank to prevent Bank from forcing repayment on the loans. Bank counterclaimed to recover amounts due under the loans. Supreme Court granted summary judgment for Bank, concluding that a bank and its customer may agree to shorten from one year to fourteen days the statutory time period under N.Y. U.C.C. Law 4-406(4) within which the customer must notify its bank of an improperly paid item in order to recover the payment thereon. The Court of Appeals affirmed as modified, holding (1) a customer and bank can contractually reduce section 4-406(4)’s one-year limitations period; and (2) shortening the one-year period to fourteen days was not manifestly unreasonable under the facts of this case. View "Clemente Bros. Contracting Corp. v Hafner-Milazzo" on Justia Law

AmEx is the world’s largest issuer of traveler’s checks, which never expire. AmEx and third-party vendors sell the checks at face value, and AmEx profits by investing the funds until the TC is redeemed. Although most are cashed within a year, AmEx uses the remaining uncashed checks for long-term, high-yield investments. Until recently, every state’s abandoned property laws presumed abandonment of uncashed traveler’s checks 15 years after issuance. This presumption requires the issuer to transfer possession of the funds to the state. In 2008 Kentucky amended KRS 393.060(2) to change thes abandonment period from to seven years. AmEx claims violation of the Due Process Clause, the Contract Clause, and the Takings Clause. Following a remand and amendment of the complaint to add a dormant Commerce Clause argument and a claim that the legislation did not apply retroactively to checks that were issued and outstanding prior to the effective date, the district court granted the state summary judgment. The Sixth Circuit affirmed, holding that the amendment applies only prospectively and does not violate the Commerce Clause. View "Am. Express Travel Related Servs. Co., Inc. v. Hollenbach" on Justia Law

Newman Park, LLC was formed for the sole purpose of developing a piece of property. In 2004, it took out a loan to purchase the property at issue in this suit. In 2008, without knowledge of the other owners in Newman Park, one member went to Columbia Community Bank and requested a loan for his 95%-owned company, Trinity. Trinity had nothing to do with Newman Park, but the Bank's loan to Trinity was secured by a second deed of trust on the Newman Park property. The issue before the Supreme Court in this case was whether the Bank, who was tricked into refinancing the property that the borrower lacked authority to pledge as security, could benefit from equitable subrogation when that Bank had no preexisting interest in the property. The property-owner/debtor argued that the Bank's lack of the preexisting interest barred it from equitable subrogation because of the "volunteer rule" which would characterize it as an intermeddler. The Court rejected the volunteer rule as a bar to equitable subrogation. The Court affirmed the appellate court which held that the defrauded Bank was entitled to be equitably subrogated as first priority lienholder.View "Columbia Cmty. Bank v. Newman Park, LLC" on Justia Law

In Chapter 11 liquidation of KB Toys Inc. and affiliated entities, the Residual Trustee of the KBTI Trust sought to disallow certain trade claims that ASM (a company in the business of purchasing bankruptcy claims) obtained from creditors. Under 11 U.S.C. 502(d) a claim can be disallowed if a claimant receives property that is avoidable or recoverable by the bankruptcy estate. The Bankruptcy Court disallowed the claims, concluding that a claims purchaser holding a trade claim is subject to the same 502(d) challenge as the original claimant. ASM was on “constructive notice” of potential preference actions, could have discovered the potential for disallowance with “very little due diligence,” and was not entitled to protection as a “good faith” purchaser. The district court and Third Circuit affirmed, holding that a trade claim that is subject to disallowance under502(d) in the hands of the original claimant is similarly disallowable in the hands of a subsequent transferee. View "In re: KB Toys Inc." on Justia Law

Beginning in 2004, 1st Source Bank entered into secured transactions with the debtors for the sale or lease of tractors and trailers. The agreements granted 1st Source a security interest in the tractors and/or trailers, accounts, and in proceeds from that collateral. 1st Source filed financing statements that identified the collateral as including the specified tractors/and or trailers, and “all proceeds thereof, including rental and/or lease receipts.” The financing statements did not refer to “accounts,” “accounts receivable,” or any similar language. Later, defendant banks also entered into secured transactions with the debtors and filed financing statements that specifically referred to a security interest in “all accounts receivable now outstanding or hereafter arising.” In 2009, the debtors defaulted. 1st Source undertook repossession of the collateral securing the agreements and attempted to claim a perfected security interest and first priority in debtors’ accounts, arguing that the term “and all proceeds thereof” included accounts receivable. The district court granted defendants summary judgment, finding that 1st Source’s financing statements were not sufficient to put defendants on notice that 1st Source claimed a security interest in accounts receivable, and holding, as a matter of Tennessee law, that “proceeds,” as used in a company’s financing statement, does not include its accounts receivable. The Sixth Circuit affirmed. View "1st Source Bank v. Wilson Bank & Trust" on Justia Law