Banking Law Roundup


No. 105       Perspectives on Developments in the Law from The Sharp Law Firm, P.C.       December 2013

Citation Respondent May Rely on Face of Un-Freeze Order

            A respondent that has frozen an account in response to a citation to discover assets is entitled to unfreeze that account upon receipt of an order “the most reasonable reading of which” unfreezes the account, the U.S. Court of Appeals for the Seventh Circuit has held. 

            In making the ruling, the court in Mendez v. Republic Bank, 725 F.3d 651 (7th Cir. 2013), expressly rejected the idea that the citation respondent has a duty to inspect the court file – or even the court docket – to determine the meaning of an allegedly ambiguous court order.  In Mendez, the face of the order suggested the subject account had been unfrozen, although the court’s comments in subsequent proceedings indicated that it had not.

            In weighing whether the respondent bank should be held liable for an improper release, the Seventh Circuit said the proper inquiry “should not extend beyond the text of the court’s order.  It is not reasonable to expect a third-party citation respondent to investigate the intended meaning of a court order beyond the text of the order itself.  A respondent may be expected to comply with only the most reasonable reading of a court order unfreezing assets.” 

            The decision is consistent with but distinguishable from Hicks v. Midwest Transit, Inc., 531 F.3d 467 (7th Cir. 2008), discussed in Sharp Thinking No. 18 (March 2009).  In Hicks, the court held that a broker served with an attachment order regular on its face had no duty to explore validity questions which could only be answered from extraneous sources. 

No Cause of Action Under HAMP

            Yet another court has agreed with that portion of Wigod v. Wells Fargo Bank, N.A., 673 F.3d 547 (7th Cir. 2012), which holds that the Home Affordable Mortgage Program (“HAMP”) does not contain a federal private right to sue.  See Sharp Thinking No. 61 (April 2012), No. 82 (Jan. 2013), No. 93 (June 2013). 

            However Reitz v. Nationstar Mortgage, LLC, __ F.Supp.2d __, 2013 WL 3282875 (E.D. Mo. 2013), and an apparent majority of cases in the Eighth Circuit, part ways with Wigod on whether HAMP may be enforced through state common law theories.  Suggesting but not holding that HAMP preempted state causes of action, the Reitz court went on to find that plaintiff’s complaint failed to state causes of action under Missouri law in any event. 

Lawyers Caught in Scam Can’t Use Tort Law To Hold Bank Liable

            A bank customer seeking to use tort law to hold a bank liable for provisionally accepting what turned out to be a counterfeit check has struck out under Illinois’ “economic loss” doctrine. 

            In Dixon, Laukitis & Downing, P.C. v. Busey Bank, 2013 IL App (3d) 120832, the bank customer was a law firm that fell victim to the international check scammers who have been targeting lawyers in recent years.  See Sharp Thinking No. 54 (November 2011), No. 56 (January 2012).  Like the law firms discussed in those issues, plaintiff accepted and deposited what looked like a legitimate check and then paid out the bulk of its proceeds before the check had been finally settled.  When the putative issuing bank returned the document as bogus, the provisional credit was reversed and the firm was left with a substantial debit to its trust account.  It sought to use both Illinois’ enactment of the Uniform Commercial Code (810 ILCS 5) (“UCC”) and common-law negligence principles to hold the bank liable for accepting the check without warning that it might dishonor the deposit later.  The Appellate Court rejected both of the firm’s arguments. 

            Citing 810 ILCS 5/4-103(c), the court held that action or non-action approved by Article 4 of the UCC was the exercise of ordinary care.  “UCC compliance is nonnegligent as a matter of law,” it said.  Because UCC §§ 4-201 and 4-202 create the system for provisional acceptance and place the ultimate risk of eventual charge-back upon the depositor, the court said the firm’s arguments to the contrary were without merit, as UCC provisions “displace common law negligence principles.” 

            Moreover, it said, under the common law a collecting bank does not owe a duty to its customer to inspect a check later determined to be counterfeit, nor any duty to remind customers that they bear the risk of loss until the check is finally settled.

            Furthermore, the court said, the firm’s attempt to use tort theory ran afoul of the “economic loss” rule of Moorman Mfg. Co. v. National Tank Co., 91 Ill.2d 69 (1982).  Distinguishing a federal case that suggested an implied duty of care implicit in a contract “may support” an exception to Moorman, the court said the account agreement and the UCC set forth the bank’s duties and defined ordinary care, and thus there was “no extracontractual relationship” to support an exception to the Moorman doctrine.

Separate Claims On Note, Mortgage Permitted

            Illinois law permits lenders to bring separate enforcement actions on a mortgage and on the note, and a creditor’s taking of judgment on the note does not operate as res judicata extinguishing its claim upon the mortgage, an appellate panel in Chicago has reiterated.

            In Turczak v. First Am. Bank, 2013 IL App (1st) 121964, First American held a second mortgage and was a party to a foreclosure case filed by the first mortgagee.  However, it also filed a separate proceeding upon the note and obtained a judgment before the foreclosure case was resolved.  When a short sale was proposed to resolve the foreclosure sale, First American requested $6,000 of the proceeds in exchange for approving the procedure.  Plaintiff then sued First American and its lawyers, claiming First American had no valid claim in the foreclosure matter any longer, giving rise to alleged violations of the Consumer Fraud & Deceptive Business Practices Act (815 ILCS 505) and the Fair Debt Collection Practices Act (15 U.S.C. § 1692 et seq.).

            Rejecting those claims, the appellate panel said it was “settled that, upon default, the mortgagee is allowed to choose whether to proceed on the note or guaranty or to foreclose upon the mortgage” and that those remedies “may be pursued consecutively or concurrently.”

                                                                                                John T. Hundley,, 618-242-0246