Court Sides with Miss. Bank

Things might move a bit slower down here in Mississippi, but when legalities are involved, there’s a certain respect paid to those slower efforts; it’s all part of the tradition and commitment to the judicial system. After three years, there’s one case that’s been resolved, at least as far as a federal court here in the Magnolia state is concerned.

That federal court sided with a Mississippi bank in a long-simmering brouhaha with a customer over losses due to an account takeover in 2010. The bank is, for all intents and purposes, off the financial hook and won’t be forced to pay any kind of damages, fees or losses due to the takeover.

Fraudulent Wire Transfers

Last week, a summary judgment was filed in a U.S. District Court in favor of BancorpSouth and its legal dispute with Choice Escrow Land Title LLC. At stake was a $440,000 loss that resulted from fraudulent wire transfers. The judge in the case, John Maughmer, said in his briefing that Choice Escrow declined the bank’s offer for the safer two-person authorization on wire transfers and because of that, the bank shouldn’t be held responsible for the fraud that resulted because of Choice Escrow’s decision.

He went further and reminded the parties that not only once did Bankcorp South offer to put into place the better protections, but it did so on at least two occasions and both times, Choice Escrow declined the opportunity. It’s common practice for banks to put into place dual controls and when the other party doesn’t agree to those measures, the banks shouldn’t be held liable for any subsequent fraud that’s committed,

There can be little doubt that ‘dual control’ meets the definition of a security procedure,

he ruled.

Additional Precautions Needed

He did say that cases involving ACH disputes and wire fraud are on the rise and the subsequent legal cases that result from them are growing more heated with time. This highlights the need for financial institutions to take those additional precautions to protect not only consumers and in this case, homeowners, but to protect their own assets as well. Despite any confidence these entities have and their faith in their own protective mechanisms, courts are going to be limited by what either part does or does not do to protect itself. He stated in his summary judgment,

The tension in modern society between security and convenience is on full display in this litigation. Choice understandably feels as though it did nothing wrong, but yet is out $440,000.

He went on to say that Bancorp South believes it did not wrong and while he believes both parties are right to some degree, someone must “bear the risk of loss”. Choice chose the less safer route therefore, it must bear the brunt of that decision.

The History

Choice Escrow, in November 2010, filed a lawsuit against BancorpSouth. It claimed it had a right to recover the financial losses that resulted from a fraudulent transfer that was approved by the bank and subsequently wired to an overseas account in Cyprus. That’s where the problems began and where they’ve continued for the past 2 1/2 years. There were several instances where one entity sued the other. To say it became a “big ‘ol southern mess” is an understatement.

Not quite two years later, a district court dismissed the bank’s counterclaim. It had sought to have Choice shoulder the full financial loss and it also wanted the company to cover the legal costs. The district court agreed and ordered the bank to share the burden. Soon after, the bank appealed the decision and it’s been back and forth ever since. Choice can still appeal, though comments made following the announcement suggest it’s undecided on whether or not it will.

That could be because of the judge’s reliance on the Uniform Commercial Code. This is the body that governs the way banks and other financial institutions handle wire transfer fraud. The court specifically noted that if a bank offers additional security mechanisms and a commercial customer declines those mechanisms, the customer is then left liable. “The experts in this case agree that the fraud would not likely have occurred if Choice had utilized the ‘dual control'” offered by the bank, the judgment states.

It elected not to … twice.

UCC Liability

Meanwhile, one of the attorneys in the case said this latest ruling is a first. Dan Mitchell said it’s the first time a ruling is based on the UCC liability provision. He also says that the primary the provision is not often referenced is because it’s not typical for a commercial customer to refuse a security feature offered by a bank. “Most clients take the procedure when it’s offered,” he says.

So is it really that simple? David Navetta, who is the co-founder of the Information Law Group and co-chairman of the American Bar Association’s Information Security Committee, offers his own opinion on why the ruling went down the way it did, “The bank customer turned down ‘dual control,'” he says.

Under UCC 4A-202(c), if a bank offers a commercially reasonable security procedure and that offer is turned down by the customer, and the customer agrees in writing to be bound by payment orders, even if they didn’t authorize them, then the customer bears the risk of loss.

Many wonder why it took so long for it to finally come full circle; after all, the provision is actually quite clear. The fact that Bancorp South documented its efforts helped it as well. Navetta said, “the bank was smart and had good lawyers”. If Choice does opt to decide, the argument could be made that there’s no justification as to why the dual controls are better; it could be the lack of clarity would be a viable argument for an appeal.

If nothing else, this should serve as a reminder that when it comes to all things financial, anytime an additional security layer is made available, we should all run with it. From a personal finance perspective, it’s proof that going the extra mile can mean the difference in justice or becoming our own worst enemies.

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