Choice Escrow & Land Title, LLC v. BancorpSouth Bank
2014 U.S. App. LEXIS 10817
| 8th Cir. | 2014Background
- Choice Escrow & Land Title (Choice) maintained an escrow trust account at BancorpSouth and used the bank’s InView online platform to initiate wire transfers.
- BancorpSouth provided password authentication, PassMark device authentication, optional daily transfer limits, and optional dual-control (two-user approval) security; Choice declined dual control in writing.
- A phishing-related malware infection captured an authorized user’s credentials and device characteristics, allowing a third party to submit a fraudulent $440,000 payment order on March 17, 2010, which BancorpSouth executed and transmitted overseas.
- Choice sued BancorpSouth for the lost funds; BancorpSouth moved for summary judgment under Article 4A of the U.C.C. and counterclaimed for attorney’s fees under an indemnification clause in its agreement with Choice.
- The district court held Article 4A allocated the loss to Choice and dismissed BancorpSouth’s fee counterclaim; the Eighth Circuit affirmed allocation of loss, reversed dismissal of the fee claim, and remanded.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Were BancorpSouth’s security procedures commercially reasonable under Article 4A? | Choice: Procedures were not reasonable (argues bank should have done transactional analysis and PassMark wasn’t an agreed security procedure). | BancorpSouth: Multi-factor authentication (password + device), PassMark, daily limits, and offering dual control were commercially reasonable and PassMark was incorporated into the agreement. | Held: Procedures were commercially reasonable; PassMark was part of the agreement and dual control was a reasonable option Choice declined. |
| Did BancorpSouth accept the payment order in good faith and consistent with the security procedure? | Choice: Bank failed reasonable commercial standards of fair dealing and should have noticed irregularities (e.g., memo line). | BancorpSouth: Employees acted routinely and honestly by routing an order that passed the agreed automated security procedure; no objective basis to suspect fraud. | Held: BancorpSouth acted in good faith and complied with customer instructions; no bad-faith or suspicious facts sufficient to override compliance. |
| Did Choice give BancorpSouth an instruction to limit foreign wires? | Choice: Email requesting limiting foreign wires constituted an instruction BancorpSouth ignored. | BancorpSouth: The email was an inquiry; bank replied it could not limit only foreign wires and Choice never implemented a restriction. | Held: The exchange was an inquiry, not an enforceable instruction; no directive restricting acceptance of the order. |
| Is BancorpSouth entitled to attorney’s fees under the contract indemnity provision, or is that provision preempted by Article 4A? | Choice: Indemnity provision conflicts with Article 4A’s allocation of loss and is therefore unenforceable. | BancorpSouth: Fee-shifting under the indemnity does not alter Article 4A’s allocation of loss and is not displaced by the statute. | Held: The portion of the indemnity covering attorney’s fees is not inconsistent with Article 4A; counterclaim for fees may proceed. |
Key Cases Cited
- Hill v. Walker, 737 F.3d 1209 (8th Cir.) (summary judgment standard reviewed de novo)
- Patco Constr. Co. v. People’s United Bank, 684 F.3d 197 (1st Cir.) (discussion of Article 4A allocation of risk for fraudulent payment orders)
- In re Nieves, 648 F.3d 232 (3d Cir.) (good-faith definition: honesty in fact and observance of reasonable commercial standards)
- Watson Coatings, Inc. v. Am. Exp. Travel Related Servs., 436 F.3d 1036 (8th Cir.) (relation between commercial reasonableness and fair dealing inquiry)
- Zengen, Inc. v. Comerica Bank, 158 P.3d 800 (Cal.) (Article 4A preemption limits on common-law claims)
- Nanakuli Paving & Rock Co. v. Shell Oil Co., 664 F.2d 772 (9th Cir.) (expert testimony not the only way to establish industry standards)