October 14, 2011
Another Meaningless Question: Has the Check Cleared?
The New York Court of Appeals has decided that the term "cleared" with regard to a bank check is ambiguous. Greenberg, Trager & Herbst, LLP v HSBC Bank USA, 2011 NY Slip Op. 07144 (Oct. 13, 2011). H/T Above the Law & Eric Turkewitz)
From the opinion:
On September 27, 2007, a [Greenberg, Trager & Herbst, LLP (GTH)] partner called a representative of HSBC inquiring as to whether the check had "cleared" and if the funds were available for disbursement.[*4]According to GTH, a five year banking relationship existed between them. GTH was informed that the funds were available. Later that day, GTH wired $187,500 from its account to Hong Kong pursuant to the wiring instructions it received from Northlink. GTH claims that, but for the assurance that the check had "cleared," it would not have forwarded the funds. On September 28, 2007, HSBC confirmed to GTH that the wire transfer had been consummated.
On October 2, 2007, HSBC received an EARNS notice from Citibank that the check was being dishonored as "RTM [return to maker] Suspect Counterfeit." An HSBC Branch Manager later contacted GTH, informing them that the check had been dishonored and returned as counterfeit. HSBC then revoked its provisional settlement and charged back GTH's account.
. . . .
GTH's claim is based on the alleged oral statement by the HSBC representative that the check had "cleared" — an ambiguous remark that may have been intended to mean only that the amount of the check was available (as indeed it was) in GTH's account. Reliance on this statement as assurance that final settlement had occurred was, under the circumstances here, unreasonable as a matter of law. (footnote omitted)
Wow. I would have thought that was the right question to ask, too. The dissent explains:
HSBC makes much of the fact that the word "cleared" is not found in the UCC and the majority finds it to be ambiguous. However, UCC § 1-205 defines "course of dealing and usage of trade" as encompassing "any practice or method of dealing having such regularity of observance in a place, vocation or trade as to justify an expectation that it will be observed with respect to the transaction in question" (UCC § 1-205 ). The term "cleared" is used liberally in the banking business. Indeed, the Federal Trade Commission in a bulletin addressed to consumers states that "it's best not to rely on money from any type of check . . . unless you know and trust the person you're dealing with or, better yet — until the bank confirms that the check has cleared" (Federal Trade Commission Facts for Consumers, Giving the Bounce for to Counterfeit Check Scams, http://www.ftc.gov/bcp/edu/pubs/consumer/credit/cre40.pdf [January 2007]). Therefore, I disagree with the majority's position that relying on this statement was unreasonable as a matter of law (see majority op at 16)[FN9]. I suspect many business professionals would have done the same thing as Trager. . . .
Footnote 9: If the term “cleared” means anything in common banking usage, it is that final settlement has occurred (see Black's Law Dictionary [9th ed 2009] [defining the term as it relates to a bank as "to pay (a check or draft) out of funds held on behalf of the maker (the bank cleared the employee's check)"] [defining the term as it relates to "a check or draft" as "to be paid by the drawee bank out of funds held on behalf of the maker (the check cleared yesterday)"]).
I agree that a lot of business professionals would have done the same thing, too. If "cleared" is too ambiguous, what would I ask my banker? The majority doesn't suggest what would have been the proper question. Does the bank never have to tell me if the money is really mine or not? I just have to guess? It appears so. The courts explains that "GTH was in the best position to guard against the risk of a counterfeit check by knowing its client."
Silly me. I had always thought the bank, at some point, would be able to tell me whether a check was good or not, even if it came from a Nigerian prince or someone seeking help collecting on a divorce settlement "in my jursidiction." I mean, this is all electronic -- if nothing else, isn't there a time when the bank knows the money is real? It's one thing for a bank to say, "The money is available to you now, but we won't know for sure the money was actually transferred and available for X days, so you proceed at your own risk."
I am no banking expert, but I do know there is a lot of nuance to all of this. It just seems to me that the people in the best position to prevent this kind of loss, are the people who understand this nuance. Why not have a rule that requires banks to tell it like it is, or at least say, "We're not sure, either."? The reason the banking system works, and e-commerce has been so successful is because we can count on it. This decision says to me you can until you can't. Talk about ambiguous.
What you fail to consider is that someone has to bear the loss if the nominal drawer bounces his check--an event which may occur weeks after it is submitted to the drawee. Who better to bear the loss than the guy who thought he had the money, and spent it (in this case, foolishly)? If you make the bank responsible, it will simply spread the risk among all its customers by doing things we don't like, such as imposing a fee on debit cards.
As for "clearing" having a commonly accepted meaning, if you Google the term you will see that there remains plenty of uncertainty. but that most of the efforts at explaining it ignore the very risk involved here--that the drawee bank may change its mind.
Posted by: Arthur Armstrong | Oct 15, 2011 8:37:25 AM
I did consider that someone has to bear the loss, and I'm okay with it being GTH, as long as they understand that they are. As far as I'm concerned, the bank's response was misleading, and that's why I would have held them accountable. It's my sense that most people think that when a check "clears" it means that the money has been withdrawn from the check writer's account and is now available for the depositor. Given the dissent, I know at least one relevant judge agrees. It doesn't seem that hard to me for a bank to explain that its customer needs to be especially careful with money from a new or relatively unknown source, even if the bank has made the money available for use. Perhaps it is not a wholly unreasonable outcome, but I still think it's wrong.
Posted by: Joshua Fershee | Oct 15, 2011 3:41:30 PM