Alert March 24, 2009

Massachusetts Supreme Judicial Court Issues Decision Limiting Banks’ Liability in Check Collection Process

The Supreme Judicial Court of Massachusetts issued a decision in favor of Fleet National Bank (now Bank of America) in the case of Gossels v. Fleet National Bank, SJC-101186.  The case called into question core principles governing the vast check collection system in the United States, including the duty of care owed by collecting banks to customers who submit foreign checks for collection, the disclosures that collecting banks are required to make, and the appropriate allocation of risk for currency fluctuations between customers and collecting banks. The case had been tried before the Superior Court and argued on appeal at the Massachusetts Court of Appeals, with differing results. The Appeals Court decision, if left standing, likely would have undone over 175 years of settled banking law.

Given the potential effect on all banks doing business in Massachusetts, the Massachusetts Bankers Association retained Goodwin Procter LLP to prepare a comprehensive amicus curiae brief. Litigation partners Brenda Sharton and Dahlia Fetouh worked with Consumer Financial Services partner Lynne Barr to analyze the key issues and draft a comprehensive brief that succinctly highlighted for the Court the important policy concerns raised by the case. Goodwin’s brief outlined how the Appeals Court decision ran contrary to the Uniform Commercial Code and settled banking law and further argued that, if left standing, the decision would threaten the operation of the check collection system to the detriment of banks that do business in Massachusetts and their customers. Goodwin also worked with the MBA’s and the bank’s lawyers to help streamline the myriad issues raised by the case into a concise and clear presentation of the critical issues for the Court.

The Court heard oral argument on November 3, 2008. In the Court’s opinion, it specifically acknowledged the MBA’s amicus brief in one of its lead footnotes and directly adopted many of the arguments advanced by Goodwin on behalf of the MBA. The Court led its written decision by describing one of the primary themes stressed in Goodwin’s brief: the importance of the national, uniform system of check collection adopted by the UCC and the need to enforce that uniform system lest “banks . . . face a motley patchwork of liability standards from State to State.”

The Court then re-affirmed two critical principles, advanced by the MBA and the bank, governing the liability of collecting banks in the check collection system that the previous decisions in this case had called into question: (1) the bank customer remains the owner of the check through the collection process and bears the risk of collection, including the risk of currency fluctuation, and (2) the collecting bank is only held to a standard of ordinary care in making the collection. Because these bedrock principles had been thrown into question following the earlier decisions in this case, as explained in Goodwin’s brief, the Court’s decision will provide useful guidance and support for banks going forward.

The Court then examined each of the plaintiff’s individual claims against the bank and the following is a summary of some of the key holdings. Most importantly, the Court provided guidance and clarity on the disclosure obligations of collection banks. Specifically, the Court concluded that the lower courts had ruled incorrectly when they imposed disclosure obligations on the bank that are not required by the UCC.

The Court solidified the critical standard of care set by the UCC for collecting banks. Under the lower court decisions, collecting banks were threatened with being required to meet heightened standards of care for every check collected. The Court stated clearly that the “UCC only requires that collecting banks use ordinary care as they seek to collect settlements on instruments.” Adopting an argument advanced by the MBA and the bank, the Court stated that elevating a bank’s internal manuals to a set of affirmative disclosure requirements on par with the disclosure requirements of the UCC “would vitiate the goal of mak[ing] uniform the law amount the various jurisdictions.”

In another ruling important for banks in the Massachusetts, the Court also made clear that banks are not liable for conversion (the wrongful exercise of control over specific personal property of another) when they fail to pay funds that they owe to a customer, and that bank accounts cannot be the subject of a claim for conversion.

This decision closes the door on the uncertainty raised by the lower court’s decision and re-affirms bedrock principles governing the check collection system. Goodwin’s brief in this case highlights the collaborative relationship between Goodwin’s Litigation Department and Financial Services Group on behalf of our financial services clients. If you have questions about the decision and its effect on the check collection system in Massachusetts, please contact Brenda Sharton at bhsarton@goodwinlaw.com or 617-570-1214, or Lynne Barr at lbarr@goodwinlaw.com or 617-570-1610. Click here for the decision.