Federal Reserve’s Secure Payments Task Force Seeks Feedback on Payment Use Cases

The Secure Payments Task Force, convened by the Federal Reserve to advance the safety, security, and resiliency of the national payment system, is asking for feedback on a set of payment use cases which together map out the lifecycle of a payment for eight payment types.  The payments types include ACH, Card Not Present, Card PIN, Card Signature, Check, Contactless, Wallet, and Wire.  The payment use cases are intended to provide a common foundation for the payments industry to understand the landscape as it exists today and the associated risks.  Each use case addresses its respective unique payment flow overview, payment type operation, overview of security methods and associated risks, inventory of sensitive payment data and associated risks, and overview of standards.

As a member of the Fed’s Task Force, Ludwig & Robinson is seeking feedback on these payment use cases, which has created an online Payment Use Cases Industry Survey for that purpose.

In addition, the Task Force is presenting Payment Use Case webinars to provide an opportunity to gain a high-level overview of each use case as a supplement to the use case documents, as follows:

Payment Use Cases Webinar – ACH, Wire and Check
Date and Time: Thursday, May 11 from 3:00 – 4:00 p.m. ET

Payment Use Cases Webinar – Card Signature, Card PIN and Card Not Present
Date and Time: Friday, May 12 from 2:00 – 3:00 p.m. ET

Payment Use Cases Webinar – Card Not Present, Contactless and Wallet
Date and Time: Monday, May 15 from 2:00 – 3:00 p.m. ET

You may register for one or more of these webinars to learn about each of the payment use cases and provide your input.  This information can also be found on FedPaymentsImprovement.org.

For further information, contact Salvatore Scanio at sscanio@ludwigrobinson.com or 202-289-7605.

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Behind Raging Battles over Guns and a Court Nominee: Constitutional Illiteracy

Robert Ludwig offers more legal and historical insights in response to the latest threatened shutdown, this time of the Supreme Court by Judiciary Committee Republicans who vowed not to hold hearings this year on any nominee to succeed Justice Antonin Scalia. Sen. Ted Cruz, a committee member running for the presidency, argued “we’re one justice away from the Second Amendment being written out,” referring to a right to guns newly found in District of Columbia v. Heller, 554 U.S. 570 (2008). Sen. Cruz also vowed in an op-ed to filibuster any vote to protect this “long-cherished” right (of eight years), which “even nonlawyers can’t miss,” unlike those “invented” by liberal courts “that are nowhere in the Constitution.” Not mentioned is Heller’s “judicial activism,” criticized by conservative Judge Harvie Wilkinson on the appeals court where Cruz once clerked, “creat[ing] a new blockbuster right “not apparent to the court for over two centuries,” much less nonlawyers.

In another timely article, “Court Nominee, Guns, and Constitutional Illiteracy ” (Law360 Mar. 15, 2016), Mr. Ludwig points out that, overlooked in the GOP pledge, filibuster threat, and raging court and political battles over gun rights and control, “are the amendment itself, and rudimentary constitutional terms of art.”

“For past generations, there was no ‘long-cherished’ right to ‘write out.’” On the bicentennial of the amendment, former Chief Justice Warren Burger, who knew the difference between his common law right to the shotgun he cherished and the Second Amendment, called a right to guns a “fraud.” Judge Robert Bork agreed, no small irony after Democrats savaged his nomination: “it really is people’s right to bear arms in a militia.” And the justice Bork would have succeeded, Lewis Powell of the Burger court that unanimously reaffirmed there was no right to guns, questioned why the amendment “should be viewed as creating a right to own and carry a weapon that contributes so directly to the shocking number” of gun deaths.

Remarkably, Heller, a sharply divided 5-4 decision overturning D.C.’s handgun ban and two centuries of law and legislative practice, did not address, let alone decide, the full amendment as assumed. Nor did Heller consider, in roiling settled law if not domestic tranquility, the whole constitutional and founding record, which is more extensive and clear than believed.

“One would think,” the article notes, “in construing the right ‘to keep and bear Arms’ which ‘shall not be infringed,’ Heller determined the meaning of ‘infringed.’ Yet nowhere did the court even address it, transposing instead ‘infringed’ to ‘abridged’ (‘abridge the ancient right of individuals to keep and bear arms’).”

“Infringed” and “abridged” are different words, have different meanings, and are not even synonyms. Where words “cannot, in any appropriate sense, be said to be synonimous,” Justice Joseph Story once warned, to “suppose them to signify the same thing,” as Heller did, “would be to defeat the obvious purposes of both.”

“‘Abridge,’ the article points out, “is the little-known term of art Congress invoked” in the First Amendment and “all amendments thereafter for individual rights: the Fourteenth, Fifteenth, Nineteenth, Twenty-fourth, Twenty-sixth, and proposed Equal Rights Amendments (apart from juridical rights in the Fourth through Eighth).”

“‘Infringed,’ used in an amendment associated with federalism, is the constitutional term for protecting sovereignty, which individuals did not possess, unlike states that did.” For example, “nothing is more American than the cries for self-representation during the decade of encroachments by Parliament on the sovereignty of colonial legislatures, which led to the Revolution. Similarly distinctive is the term used to protest them.” Construing “the people” with the sovereign usage of “infringed” permits only a collective, not individual meaning, and constitutional right.

Heller, mistaken on many levels, never reached the question presented: whether D.C.’s ban “infringed” any Second Amendment right, and may have no authoritative effect.

“Why have these terms of art been so long overlooked?” Mr. Ludwig asks. In the case of “‘infringed,’ the nonlawyers’ expression ‘you had me at’ is an apt explanation. For two centuries the amendment’s unique preamble was enough: declaring the necessity of a ‘well regulated Militia,’ it clarified any ambiguity in the clauses that followed,” and canons of construction mandated that result.

Still, “for lawyers to advocate a constitutional position, in this case the Second Amendment, without addressing the constitutional wording, borders on malpractice.” Meanwhile, as “lawyers slumber or lead another misguided insurgency against constitutional government, the republic bleeds.”

The article concludes: “There is no Second Amendment to ‘write out,’ but to actually read and understand, including text even lawyers can’t miss.”

For further information, contact Robert Ludwig at rludwig@ludwigrobinson.com or 202-289-7603.

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The Second Amendment Still Undecided, Hiding in Plain View

Robert Ludwig offers new legal and historical insights in response to “The Gun Epidemic,” the first New York Times front-page editorial in a century, urging: “It is past time to stop talking” and start reducing or “eliminating some large categories of weapons and ammunition” in the wake of San Bernardino, Colorado Springs, and daily mass shootings. President Barack Obama, saying “enough is enough,” last week issued his own historic Times op-ed, “Our Responsibility,” and executive actions, constrained not only by Congressional inaction, but suprising myopia about the Second Amendment.

In a timely article, 2nd Amendment Still Undecided Hiding In Plain View” (Law360 Jan. 11, 2016), Mr. Ludwig points out that the Supreme Court in District of Columbia v. Heller, 554 U.S. 570 (2008), a sharply divided 5-4 decision overturning D.C.’s handgun ban and two centuries of law and legislative practice, “remarkably did not address much less decide the full amendment as is assumed. Nor did Heller address, in roiling settled law if not domestic tranquility, the whole constitutional and founding record, which is far more extensive and clear than believed.”

“For openers, one would think that in construing the right ‘to keep and bear Arms,’ which the amendment commands ‘shall not be infringed,’ the court addressed the meaning of ‘infringed.’ Yet nowhere in Heller, overturning 200 years of law that the right was collective and not individual, does the court consider let alone decide that term, a smoking gun hiding in plain view.”

Heller did recognize the text says the right “‘shall not be infringed,’ but did not address what ‘infringed’ means.” Instead it “transposed ‘infringed’ to ‘abridged’ (‘Congress was given no power to abridge the ancient right of individuals to keep and bear arms’), equating the two with no analysis.” Two years later an even more splintered court applied this newfound right against the states to strike down Chicago’s similar ban, again using “‘abridged’ and ‘infringed’ interchangeably, defining neither.”

Infringed and abridged are different words, the article explains, “have different meanings in period and modern dictionaries, and are not even synonyms. Where words ‘cannot, in any appropriate sense, be said to be synonimous,’ Justice Joseph Story once warned, to ‘suppose them to signify the same thing,’ as Heller and McDonald did, ‘would be to defeat the obvious purposes of both.’”

“Why did the framers use, in fact insist upon, ‘abridged’ and not ‘infringed’ when they intended an individual right?,” Mr. Ludwig asks. “The reason becomes obvious when one looks, as urged by Story: ‘It must have been the result of some determinate reason; and it is not very difficult to find,’ here in pertinent drafting history” and founding-era documents, none addressed in Heller.

In other words, Heller “never decided the question presented: whether D.C.’s handgun ban ‘infringed’ a Second Amendment right.” And until the court addresses the verb on which the entire Amendment rests, “arguably Heller, having neither addressed nor authoritatively decided whether anything was ‘infringed,’” has no effect on the courts or legislatures. That would mean “the court’s prior unanimous holding in 1939 which Heller never overruled, as unanimously reaffirmed by the Burger court in 1980, is still controlling.” As the latter affirmed, nothing in the amendment prevents “legislative restrictions,” including those called for in the Times editorial. “Gun rights and control groups have much to debate, just not the Second Amendment.”

For further information, contact Robert Ludwig at rludwig@ludwigrobinson.com or 202-289-7603.

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Payment Card Fraud, Data Breaches and Emerging Payment Technologies

In today’s cybercrime era, a cliché has evolved: there are two types of companies, those that have been hacked (or don’t know it yet) and those that will be hacked.  According to Verizon’s 2015 Data Breach Investigations Report, across all industries worldwide in 2014, there were 79,790 security incidents, with 2,122 breaches involving a confirmed data loss, and 700 million compromised records.

The theft of payment cards is a top target in data breaches.  Recent data breaches involving theft of payment card records from merchants include Home Depot (2014, 56 million payment cards) and Target (2013, 40 million payment cards), among numerous other companies.  Fueled by major data breaches, payment card fraud is escalating.  In 2014, the total amount of direct payment card losses to criminals incurred by issuers, merchants, and acquirers was estimated to be $16.31 billion worldwide, an increase of 19 percent over 2013, according to the The Nilson Report, a payments industry newsletter.  Meanwhile, the payment card landscape is changing rapidly, with new technologies designed to provide faster and safer transactions.

Sal Scanio’s recent article Payment Card Fraud, Data Breaches and Emerging Payment Technologies, XXI Fidelity L.J. 59 (2015) provides an overview of the evolving payment card system and nature of payment card fraud.  The article discusses current and developing loss allocation under federal law and card network rules, and how, in the event of payment card theft as a result of a data breach, loss allocation is being shifted in several developing areas, including Payment Card Industry (PCI) Data Security Standards, consumer class action litigation, claims by issuing banks against merchants, and card network fines and assessments.  The article also examines how emerging payment technologies in the form of EMV chip card technology, Near Field Communication, tokenization, and encryption are being implemented in varying degrees, and discusses their expected impact on payment card fraud.

For further information, contact Salvatore Scanio at sscanio@ludwigrobinson.com or 202-289-7605.

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Recent 11th Circuit Opinion in Financial Institution Bond Coverage Case Illustrates Definition of “Counterfeit”

As reported in our July 2014 post, “More Federal Decisions Highlight Need to Invoke Original Document Defense in Financial Institution Bond Cases,” several recent federal decisions have served as reminders of the importance of the original document requirement defense under Insuring Agreement (D) or (E) in Financial Institution Bond coverage disputes.  One of the cases discussed, Bank of Brewton v. The Travelers Companies, Inc., 2014 U.S. Dist. LEXIS 69567 (S.D. Ala. May 21, 2014), in which summary judgment was granted to the insurer, was recently affirmed on appeal, 777 F.3d 1339 (11th Cir. 2015).

In this case the bank, in exchange for a series of loans consolidated and renewed beginning in 2005, obtained assignment of several stock certificates from its customer. Comparing the certificates in 2009, the bank realized one was not an original but a color copy. The customer provided a replacement certificate, and the bank renewed certain loans totaling $1.5 million. Then in 2010, the bank discovered the customer had actually pledged the prior original certificate to another bank, rendering the replacement null and void, as representing the same shares as the pledged original.

The FIB provided coverage under Insuring Agreement (E) for an extension of credit “on the faith of any item listed in (a)(i) through (a)(iv) above [including a “Certificated Security”], which is a Counterfeit.” The Bond defined “Counterfeit” as meaning “an imitation which is intended to deceive and to be taken as an original.”  The bank argued that the replacement certificates qualified as counterfeit because they “appeared for all intents and purposes to be a valuable stock certificate.”  777 F.3d at 1342.

The 11th Circuit rejected this argument, stating “[a]n attempt to deceive by means of a document that imitates the appearance of an authentic original is not the same as an attempt to deceive by means of false factual representations implicit in an authentic document.  To conflate the two, as the Bank would have us do, would obliterate elementary distinctions among the techniques of deceptions,…distinctions [which] are recognized in ordinary and commercial usage and preserved in the bond.” Id. at 1343 (internal quotation marks and citation omitted).  The 11th Circuit recognized: “The Bond does not cover losses resulting from every document tainted by fraud.  Instead, the Bond provides coverage for a subset of deception-based losses—those stemming from documents that imitate an original.  The difference hinges on the nature of the underlying misrepresentation.  While counterfeit documents deceive by misrepresenting authenticity, [the replacement certificates’] deception concerned a misrepresentation of value.”  Id. (emphasis in original).  While the replacement certificates were authentic (issued, numbered, dated, and signed), they had no value because they were obtained under false pretenses.  Thus, the replacement certificates were not “counterfeit” under the terms of the Bond.  Id.

For further information, contact Salvatore Scanio at sscanio@ludwigrobinson.com or 202-289-7605, or Robert Ludwig at rludwig@ludwigrobinson.com or 202-289-7603.

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L&R Prevails for PNC Bank in $5 Million Bank Suit in Maryland

L&R recently prevailed for client PNC Bank, N.A. in a lawsuit filed in Rockville, Maryland arising out of a $9 million distressed real estate investment scheme.  On May 15, 2015, the Circuit Court for Montgomery County closed the case, after the Maryland Court of Special Appeals affirmed summary judgment.  Ivanhoe Investment Partners, LP, et al. v. PNC Bank, N.A., et al., No. 0037 (Sept. Term, 2014).

This action was the last of a series of suits filed in Maryland, Connecticut and New York arising from the latest financial fraud by Michael Howard Clott, who 25 years ago during the S&L crisis, as head of First American Mortgage Co. (FAMCO), pled guilty to “one of the largest [frauds] brought to prosecution in the federal system” in Maryland. E.F. Hutton Mortg. Corp. v. Equitable Bank, 678 F. Supp. 567, 570 (D. Md. 1988). At sentencing for another financial crime, the federal judge reportedly proclaimed that Clott could not be stopped “short of isolating him from all contact with humanity, like putting him on a desert island,” and even then “[h]e’d fleece the pigeons that landed there.”

In this case, while facing separate charges in New York, Clott induced investors from Greenwich and Philadelphia in 2009 to invest $9 million in a purported “no-risk” deal, to buy and sell simultaneously portfolios of foreclosed properties from banks, as “show money” deposited in a Rockville title company’s accounts at PNC. The investors, after settling prior actions against the title company and others, belatedly brought suit in December 2012 against PNC for $5 million in remaining damages, asserting claims of knowing participation in breach of fiduciary duty, negligence, and breach of contract, among others.

On the eve of trial in February 2014, the Hon. Michael D. Mason, having already dismissed eight of ten counts against the bank, granted summary judgment dismissing the rest, finding the bank owed no duty to the investors, and had not acted with actual knowledge of any breach or in bad faith. Judge Mason further held the action barred as a matter of law, both by contributory negligence and the statute of limitations as not tolled by the discovery rule, issues commonly left to the jury.

“This was a hard-fought litigation, and we’re pleased that both the trial and appellate courts saw the case the way we did” said L&R’s Robert Ludwig. “The investor-plaintiffs were not customers but virtual strangers to the bank, all transactions were authorized, and by their own admissions they failed to conduct any due diligence to protect themselves and then ignored numerous red flags.”

On appeal, the Maryland Court of Special Appeals summarily affirmed in all respects. It adopted the opinions of the trial court as its own and issued an unreported opinion focused on the statute of limitations, agreeing that plaintiffs “were on inquiry notice that something was amiss more than three years prior to the filing of the action.”  The appellate court rejected the testimony proffered by plaintiffs’ real estate investment expert on multiple grounds, noting it was “undisputed [plaintiffs] made no effort to look into the reputations or backgrounds of [their business associates] for, had [they] done so, [they] would have learned that [Clott’s alias] did not exist.”

For further information, contact Robert Ludwig at rludwig@ludwigrobinson.com or 202-289-7603 or Salvatore Scanio at sscanio@ludwigrobinson.com or 202-289-7605.

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More Federal Decisions Highlight Need to Invoke Original Document Defense in Financial Institution Bond Cases

As reported in our September 2013 Newsletter, recent federal decisions in Michigan serve as instructive reminders of the need for insurers in Financial Institution Bond (FIB) cases to timely explore the availability of, and invoke, the original document requirement defense under Insuring Agreement (D) or (E). In Bank of Ann Arbor v. Everest Nat’l Ins. Co., 2013 U.S. Dist. LEXIS 24999 (E.D. Mich. Feb. 23, 2013), the district court granted summary judgment in favor of coverage, and then denied reconsideration in Bank of Ann Arbor v. Everest Nat’l Ins. Co., 2013 U.S. Dist. LEXIS 65762 (E.D. Mich. May 8, 2013), where the insurer had not timely raised the defense.

In that case, the Michigan bank received a faxed wire transfer request from an individual purporting to be its customer, requesting that $196,000 be wired from the customer’s home equity line to a bank in South Korea. The request contained the customer’s signature and account information. The bank further verified the request by calling the phone number on file (modified the week before by letter purportedly emailed from the customer), and wired the funds to Seoul. Two days later the bank received a second request for a $98,000 wire, this time processed by an employee who knew the customer, questioned why he would wire funds to South Korea, and called him on his actual phone number, uncovering the scam. The bank re-credited the account and submitted a claim for coverage under its FIB, which the insurer denied.

On cross-motions for summary judgment, the court overruled the insurer’s two grounds for denying coverage. The court found the forged wire request was a covered “Withdrawal Order” under Insuring Agreement (D) and an Unauthorized Signature Rider, and that the loan-loss exclusion of the Bond did not apply where the loss was not the result of a loan, the customer having neither received the funds nor agreed to repay the debt. Though both Agreement (D) and the Rider expressly required a “Written Original” for coverage, which the faxed transfer request clearly did satisfy, that requirement was not raised by the insurer until after summary judgment, and the court declined to consider the new argument on reconsideration in the exercise of its discretion pursuant to Federal Rule 59(e).

This Spring three more federal decisions were handed down which further underscore the importance of timely raising the original document requirement in FIB cases under Insuring Agreements (D) and (E).

1.         In April, the Sixth Circuit affirmed the result in Bank of Ann Arbor, holding the district court did not abuse its discretion in refusing to entertain the insurer’s original document defense, raised for the first time on motion for reconsideration after summary judgment had been granted. Bank of Ann Arbor v. Everest Nat’l Ins. Co., 2014 U.S. App. LEXIS 7820 (6th Cir. Apr. 23, 2014). Additionally, the appeals court held that under Michigan law, when an insurer denies coverage on stated grounds, it generally waives or is estopped from raising new defenses. Here the insurer’s declination letter stated only two grounds for denying coverage, and did not raise the original document requirement. Although not addressed in either opinion, the insurer also did not raise the related “physical possession” requirement of the Bond, which provided further grounds for denial of coverage.

Bank of Ann Arbor serves as a cautionary tale of the importance for insurers to closely evaluate the potential applicability of the original document defense (and related physical possession defense) at the earliest stages of not only the litigation, but the claim itself.

2.         In contrast, in May the District Court for the Southern District of Alabama granted summary judgment to the insurer which did timely raise the original document defense in relation to certificated securities alleged to be counterfeit. Bank of Brewton v. The Travelers Companies, Inc., 2014 U.S. Dist. LEXIS 69567 (S.D. Ala. May 21, 2014).

In that case the bank, in exchange for a series of loans consolidated and renewed beginning in 2005, obtained assignment of several stock certificates from its customer. Comparing the certificates in 2009, the bank realized one was not an original but a color copy. The customer provided a replacement certificate, and the bank renewed certain loans totaling $1.5 million. Then in 2010, the bank discovered the customer had actually pledged the prior original certificate to another bank, rendering the replacement certificate null and void, as representing the same shares as the pledged original certificate.

The FIB provided coverage under Insuring Agreement (E) for an extension of credit “on the faith of any item listed in (a)(i) through (a)(iv) above [including a “Certificated Security”], which is a Counterfeit.” The Bond defined “Counterfeit” as meaning “an imitation which is intended to deceive and to be taken as an original.” Addressing those provisions of the Bond, the court upheld the insurer’s denial of coverage upon the bank’s initial claim that the color copy of the original certificate constituted a counterfeit, on grounds that the bank knew the certificate was a copy and not an original, and thus not counterfeit. The court further held that the bank suffered no loss resulting directly from having relied upon that certificate as a genuine original document, knowing it to be a copy when the loans were renewed.

Addressing the bank’s belated alternative argument that the replacement certificate constituted a counterfeit within the meaning of the Bond, the court noted that a document “must be a fake version of an existing, genuine document,” and “must possess sufficient similarity to to the original to render it plausible that it is the genuine original of that which it imitates.” 2014 U.S. Dist. LEXIS 69567, *10. Finding the prior original certificate was a genuine document, the court held the replacement certificate, while quite similar, bore obvious differences beginning with the certificate number itself, and thus could not purport to be a counterfeit imitation as a matter of law.

The bank filed a notice of appeal of the district court’s grant of summary judgment denying coverage, on June 2nd.

3.         Earlier this year a district court in Utah addressed whether electronic transmissions are covered “originals” under a modified version of the standard Form 24 FIB that omitted the form’s definition of “Original.” Transportation Alliance Bank, Inc. v. BancInsure, Inc., 2014 U.S. Dist. LEXIS 22187 (D. Utah Feb. 21, 2014).

The case involved a factoring fraud perpetuated on Transportation Alliance Bank (TAB) by Arrow Trucking, Inc. TAB, pursuant to an Accounts Receivable Purchase and Security Agreement, purchased Arrow’s accounts receivable at discount with the right to the full receivables when paid, also guaranteed and secured by Arrow’s accounts and assets. Pursuant to the Agreement, Arrow periodically provided TAB with electronic account statements, which Arrow electronically altered to falsely reflect higher receivables, inducing TAB to advance more cash than Arrow was entitled to receive, leading to a loss of $11.5 million. TAB submitted a FIB claim to BankInsure, Inc., which denied coverage for failure to satisfy the five discrete conditions to coverage under Insuring Agreement (E).

Addressing the first condition, the court found the electronic account statements were covered documents, whether as “Evidence of Debt,” or as a “Security Agreement” when combined with the A/R Purchase and Security Agreement. Next, addressing the condition that each covered document be an “original,” the court noted the Bond omitted the Form 24 definition (“Original…does not include…electronic transmissions even if received and printed”), under which there would have been no coverage. Finding that omission to be deliberate, and citing case law and Utah’s Uniform Electronic Transactions Act, the court held that, in the absence of a contrary definition, electronic transmissions “are a way of life and are just as original as a printed, hard copy of document…” Further, the court found that Arrow’s electronic overwrites were covered “alterations,” and that TAB had “physical possession” of the electronic data in its computers within the meaning of the Bond. The “physical possession” requirement, however, is meant to be read in conjunction with the “original” requirement and to provide the insured the opportunity to examine the “original” document and discover obvious defects. That purpose is not served in the case of electronic documents. Lastly, the court held the loss “resulted directly from” TAB having made over-advances upon Arrow’s alterations of its accounts receivable.

The case is an object lesson, particularly in today’s banking world where electronic documents are widely treated as originals, to ensure the standard form definition of “original” or its equivalent is included in the Bond.

For further information, contact Robert Ludwig at rludwig@ludwigrobinson.com or 202-289-7603, or Salvatore Scanio at sscanio@ludwigrobinson.com or 202-289-7605.

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L&R Obtains Summary Judgment for PNC Bank in Maryland $5 Million Banking Suit

In March 2014, L&R obtained summary judgment in Maryland state court for client PNC Bank, N.A., dismissing the rest of a suit arising out of a $9 million distressed real estate investment scheme.  Ivanhoe Investment Partners, LP, et al. v. The PNC Financial Services Group, Inc., et al.   This action was the last of a series of civil suits filed in Maryland, Connecticut and New York arising from the latest financial fraud by Michael Howard Clott, who 25 years ago, as head of First American Mortgage Co. (FAMCO) during the S&L crisis, pled guilty to “one of the largest [frauds] brought to prosecution in the federal system in” Maryland. E.F. Hutton Mortg. Corp. v. Equitable Bank, 678 F. Supp. 567, 570 (D. Md. 1988). At sentencing for a subsequent financial crime, the judge reportedly proclaimed that Clott could not be stopped “short of isolating him from all contact with humanity, like putting him on a desert island,” and even then “[h]e’d fleece the pigeons that landed there.”

In 2009, while facing charges in New York, Clott induced investors from Greenwich and Philadelphia to invest $9 million in a purported “no-risk” deal, to simultaneously buy and sell bulk portfolios of foreclosed properties from banks, as “show money” deposited in a title company’s accounts at PNC Bank.  The investors, after filing prior actions against the title company and others, brought suit against PNC asserting claims of knowing participation in breach of fiduciary duty, negligence, breach of implied contract, breach of contract for intended third-party beneficiaries, negligent misrepresentation, conversion, banking malpractice, and wrongful involvement in litigation.

In December 2013, the trial court dismissed eight of ten counts against the bank, permitting plaintiffs’ two negligence claims to proceed pursuant to Chicago Title Ins. Co. v. Allfirst Bank, 394 Md. 270 (2006).  On summary judgment in March 2014, the court dismissed the remaining claims, finding the bank owed no duty to the investors under Chicago Title, had not acted with actual knowledge of any breach or in bad faith, and that the action was further barred by contributory negligence and the statute of limitations.

The court observed that “as a general rule, banks don’t owe duties to non-account holders.”  Under the exception in Chicago Title, however, a duty may exist where there is “some type of intimate nexus that is established and based upon the facts of [the] case.”  Here, based upon the facts in the record, plaintiffs did not fall within the exception, particularly as there was “no evidence that the defendant, PNC, was aware of the plaintiff’s reliance on any of their actions.”

The court found, based upon the record evidence, that PNC had not acted with actual knowledge of any breach of fiduciary duty by the fiduciaries or in bad faith.  The court rejected plaintiffs’ argument that the bank was chargeable with knowledge of alleged suspicious account activity and obligated to investigate, finding that PNC did not act in a commercially unjustified manner under the circumstances.

The court also ruled that plaintiffs’ action was barred by contributory negligence and the statute of limitations, finding as a matter of law that plaintiffs were both contributorily negligent and on inquiry notice well before December 2009, more than three years before suit was filed.  The court made extensive findings based on undisputed facts and admissions developed in discovery that the investors could not simply rely on Clott, but rather ignored repeated red flags and failed to investigate, illustrated particularly by the primary investor request that the investment manager obtain bank statements on plaintiffs’ purported account, who failed to do so.

The case is currently on appeal to the Maryland Court of Special Appeals.

For further information, contact Robert Ludwig at rludwig@ludwigrobinson.com or 202-289-7603 or Salvatore Scanio at sscanio@ludwigrobinson.com or 202-289-7605.

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