I have a distaste for lender against lender litigation.  That goes for any financial institution for that matter.  Perhaps it comes from the doctrine of not airing one’s dirty laundry.  I am reminded of this from a decision that came down this Monday (March 2, 2020, for those reading this in reprint) by the US District Court for the S.D. Indiana.  No one gains from these types of lawsuits. 

If the following story bores you (and it should not) please do read the penultimate statement at the end.

BMO Harris Bank was financing a construction project for its customer, North & Maple LLC, with Midwest Form Constructors, LLC as the general contractor.  Throughout most of the project BMO Harris funded advances to Midwest’s account at Salin Bank and Trust Company to be used for the completion of the construction project.  At some point North & Maple notified BMO Harris to no longer send loan advances to Midwest but instead, to send them to Atlas Funds Control, LLC, the agent for Midwest’s bonding company.

However, when BMO Harris received instructions to transfer funds to Atlas, BMO mistakenly wired the funds to Midwest’s account at Salin.  Salin accepted the wire transfer and credited the funds to Midwest’s bank account and then withdrew most of it as a setoff to credit an outstanding loan made by Salin to Midwest. 

BMO promptly issued a recall request advising Salin of the mistake and demanding that the wire be returned.  Salin did not and instead, completed the setoff transaction.  Salin did this even though it had full knowledge that Midwest was having financial problems.  BMO claimed that Salin knew, or should have known, that the transfer was mistakenly sent to Salin.

BMO Harris brought an action against Salin for unjust enrichment, conversion and replevin.  Salin moved for judgment dismissing the action relying on Article 4A of the Indiana Uniform Commercial Code (yes, the UCC has more than Article 9), arguing that was the exclusive source of rights for financial institutions participating in the federal wire transfer system.  The court began with an examination of the Article 4A definition of a fund transfer:

 [T]he series of transactions, beginning with the originator’s [North & Maple] payment order, made for the purpose of making payment to the beneficiary [Midwest] of the order. The term includes any payment order issued by the originator’s bank [BMO Harris] … intended to carry out the originator’s payment order. A funds transfer is completed by acceptance by the beneficiary’s bank [Salin] of a payment order for the benefit of the beneficiary of the originator’s [North & Maple] payment order.

Keep in mind that North & Maple’s payment order was for the funds to go to Atlas – not Midwest.  The Court went on to consider Section 211 of Article 4, which provides:

(a) A communication of the sender [also North & Maple] of a payment order canceling or amending the order may be transmitted to the receiving bank [Salin] orally, electronically, or in writing[.]

(b) Subject to subsection (a), a communication by the sender [North & Maple or BMO standing in its shoes] canceling or amending a payment order is effective to cancel or amend the order if notice of the communication is received at a time and in a manner affording the receiving bank a reasonable opportunity to act on the communication before the bank accepts the payment order.

(c) After a payment order has been accepted, cancellation or amendment of the order is not effective unless the receiving bank [Salin] agrees or a funds-transfer system rule allows cancellation or amendment without agreement of the bank.

The Court then turned to case law from other districts, focusing on a New York case:

“[P]arties whose conflict arises out of a funds transfer should look first and foremost to Article 4A for guidance in bringing and resolving their claims[.]” …. If a situation is unequivocally covered by particular provisions in Article 4A, then it is beyond debate that Article 4A governs exclusively. …. However, courts should not interpret this directive to mean that Article 4A has “completely eclipsed” the applicability of common law in the area of funds transfers. …. (Article 4A “does not establish a legislative intent to preclude any and all funds transfer actions not based on Article 4A”); ….(holding that Article 4A did not preempt common law claim when the UCC was “silent” as to the factual scenario alleged);. Rather, preemption likely does not foreclose common law claims related to funds transfers when the disputed “conduct or factual scenario is not addressed squarely by the provisions of [Article 4A].”

The Court went on to conclude:

Article 4A does not squarely address BMO’s allegations and thus does not preempt the common law claims presented.

However, that did not end the case: it only denied the motion to dismiss.  BMO Harris still needs to prove its case – especially that Salin knew of Midwest’s financial distress and that BMO would no longer be sending wires to Midwest. 

Perhaps reasonable minds will prevail and the banks will recognize their risks and reach a settlement.

BMO erred and Salin took advantage of it.  There was a time when financial institutions would not seize upon an opportunity like this.  Disputes such as these reflect poorly on the industry and only help to fuel borrowers’ claims against lenders.

Here comes the penultimate statement.

How could they have avoided airing their dirty laundry?  Arbitration. With arbitration the same result could have come about but without the notoriety of having the decision made public.  Yes, one of the major benefits of arbitrating disputes is that the process may remain confidential.  Had these parties submitted their dispute to arbitration those of you thinking “How dumb” or “How greedy” would never have known of this. 

You will be reading more on these pages about using arbitration in commercial finance disputes.  Its time has come.

BMO Harris Bank N.A. v Salin Bank and Trust Company, 2020 WL 998657, (SD Indiana, March 2, 2020)


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