Bank Has A Duty To Non-Customers? Contour Says Yes.

Should a bank question a long-time, good customer? One bank chose not to, and it cost $360,000 plus the headache of a lawsuit.

In the recent case of Contour Industries v. U.S. Bank, 437 Fed.Appx. 408 (6th Cir. 2011), Contour Industries sued U.S. Bank claiming that U.S. Bank improperly allowed Timothy Byrd, a Contour employee, to cash checks made out to Contour. Mr. Byrd had access to both Contour's accounting system and Contour's deposit stamp. He was a customer of U.S. Bank, but Contour was not.

Over the course of approximately three years, Mr. Byrd embezzled sixty-two checks that were payable to Contour. He had altered Contour's deposit stamp and endorsed the sixty-two checks to himself by forging the signature of Contour's accountant and placing the endorsement "Pay to the order of" Timothy Byrd on the checks. Mr. Byrd also took steps to hide the fraud from Contour.

U.S. Bank had a policy that required supervisor approval for depositing or cashing any check that was originally made payable to a business and that was later signed over to another party. When Mr. Byrd attempted to deposit the first of the sixty-two checks made payable to Contour, a U.S. Bank supervisor allowed Mr. Byrd to deposit the check into his account after apparently talking with a Contour employee who said that the check was signed over to Mr. Byrd to correct a problem with his recent paycheck. U.S. Bank tellers interpreted the approval of the deposit for the first check as a blanket approval for any checks signed over from Contour to Byrd.

Eventually, Contour discovered the fraud and sued U.S. Bank under the Tennessee Uniform Commercial Code. U.S. Bank asserted a defense under the "fictitious payee rule" that required, among other things, a showing that U.S. Bank deposited the funds into Byrd's account in good faith. At trial, the jury found for Contour and awarded it more than $360,000. On appeal, U.S. Bank argued that its actions were in good faith and that the case should be dismissed because the bank did not owe any duty to a non-customer under the Tennessee Uniform Commercial Code. Whether or not banks owed certain duties to non-customers under the Tennessee Uniform Commercial Code was an open question before the Contour decision. The Sixth Circuit rejected U.S. Bank's arguments and upheld the jury verdict.

There are three takeaways from the Contour case.

1. Bank procedures are not rules that are meant to be broken. In Contour, a bank employee followed protocol for the first check by calling the payee company to verify that the transfer of the check to Mr. Byrd was proper; however, employees did not follow protocol for subsequent checks. It is easy to relax the rules for long-time, trusted customers, but any relaxation comes with risk, especially when done over a long period of time.

2. When it comes to dealing with third-party checks, the phone is a friend and a letter is better. Even if a blanket exception for a customer is provided, follow-up phone calls and letters to the affected third parties will go a long way toward protecting your institution, should litigation ever arise.

3. On a narrower, legal note, under the Contour decision, banks can be liable to non-customers under the Tennessee Uniform Commercial Code for certain things happening to the non-customer's account. It is no longer a defense to say that no duty is owed to non-customers.

No institution can completely insulate itself from lawsuit, but every now and then, it is a good idea to remind yourself to follow protocols and to follow up with third parties, even if they are not customers. If nothing else, the Contour decision provides that reminder.

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