recently reversed a lower court's decision to award damages against a bank
based on the bank's alleged negligence in processing a check, on the
grounds that the bank's customer was not made worse off by that
A copy of the opinion is available at:
FSI, Financial Solutions, Inc. ("FSI") received a check from Bay Capital
Corporation ("Bay Capital") for $90,000 (the "check"), and attempted to
deposit it with Wells Fargo Bank, N.A. ("Wells Fargo"). Wells Fargo
informed FSI that a hold had been placed on the check. When the hold
expired, FSI called a Wells Fargo employee, who confirmed that the funds
were available. FSI then transferred part of those funds to various
entities to which it owed money. At the time of the deposit, the account
on which Bay Capital's check was written had been closed.
In error, Wells Fargo made the funds available to FSI prior to forwarding
the check for presentment to the payor bank. When Wells Fargo did forward
the check for presentment, it was returned due to insufficient funds.
Wells Fargo then charged back the $90,000, resulting in FSI's account
having a negative balance. In addition, Wells Fargo charged FSI $748.00
for the return of several checks. Wells Fargo then sued FSI to recover
the funds. FSI counterclaimed, alleging violations of the California
Uniform Commercial Code ("UCC") section 4214, among other allegations.
The lower court awarded FSI: (1) the amount recovered by Wells Fargo from
FSI's account after the check was returned; (2) the $748 in penalties
imposed by Wells Fargo; and (3) attorney fees and costs. In addition, the
lower court ordered Wells Fargo to reverse the chargeback levied against
FSI's account. Wells Fargo appealed.
Based on its examination of the UCC and related case law, the appellate
court had little difficultly in determining that Wells Fargo had the right
to charge back or otherwise seek recovery of the $90,000.
The appellate court first concluded that, based on UCC provisions, the
"provisional settlements made through the chain of banks did not become
final." The Court noted that, under the UCC, where the settlement has not
become final, the right to charge back applies even where the customer has
already used the credit provided, or where the bank did not exercise
ordinary care in handling the check.
Next, the Court considered whether Wells Fargo's purported negligence or
misrepresentations were actionable by FSI.
As you may recall, section 4214 of the California UCC provides that banks
are "liable for any loss resulting from delay" in returning a check to a
customer or providing notice of dishonor. To determine the amount of
damages, courts must consider "the amount of the item reduced by an amount
that could not have been realized by the exercise of ordinary care."
The Court observed that "[h]ere, the item was entirely uncollectible by
the use of ordinary care," because Bay Capital's account had been closed
prior to FSI's deposit of the check. The Court acknowledged that FSI
might have suffered cognizable damages when Wells Fargo dishonored the
checks written by FSI (for example, FSI's credit score or relationship
with other vendors might have been damaged).
However, no evidence of such damages appeared in the record, apart from
the $748 in overdraft fees discussed above. Further, as FSI used the
funds from the check to pay various debts, it merely substituted that
indebtedness for a new indebtedness to Wells Fargo. Because "FSI was not
made worse off as a result of Wells Fargo's negligence and misstatements,"
the Court directed the lower court to enter a judgment in Wells Fargo's
Ralph T. Wutscher
McGinnis Tessitore Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
Mobile: (312) 493-0874
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