Is JPMorgan Chase Responsible for Unauthorized Withdrawals?
Imagine you own a small business. For years, you struggle to build the business, keep customers happy and hopefully earn a small profit. As a restaurant owner, you focus on making sure you have the best ingredients, good staff and happy customers. Unfortunately, you don’t monitor every transaction that occurs in your checking account. Then one day you realize that someone has stolen $333,000 from your account.
Sound farfetched? JPMorgan Chase is being sued by the Kurry Pavilion, an Indo – Chinese restaurant in Manhattan. The restaurant claims that the bank allowed one of the restaurant’s employees to make hundreds of thousands of dollars of unauthorized withdrawals. As a result, the eatery claims $1.3 million in damages.
The restaurant opened a checking account with Chase in 2015. They claim they are a private banking client meaning the bank owes them a very high duty of care. More on that below.
According to the complaint,
“Beginning in January 2016 Defendant wrongfully and recklessly allowed,
permitted or caused unauthorized withdrawals in the amount of $319,886 to be made from the account by a dishonest employee of Plaintiff.
“Plaintiff did not authorize such withdrawals from the Account, nor did it consent
to such withdrawals or acquiesce in them.
“In addition, beginning in or about May 2017, Defendant allowed, permitted or
caused additional unauthorized withdrawals of $13,580 through forged employee check
endorsements.
“Plaintiff did not authorize such withdrawals from the Account, nor did it consent
to such withdrawals or acquiesce in them.
“Plaintiff was not negligent with regard to the unauthorized withdrawals from the account.”
In August of 2017, the restaurant discovered the unauthorized withdrawals and notified both the bank and police. JPMorgan Chase has refused to refund the monies taken from the account nor have they paid for the restaurant’s other damages.
The facts of the complaint are straightforward. The legal issues are anything but clear cut, however.
Is the bank responsible for unauthorized withdrawals?
Does it matter that the person stealing the money was an employee?
Does it matter that the Kurry Pavilion is a Chase private banking client?
Let’s answer those questions in order.
A bank often has liability for unauthorized fund transfers. In this case, that represents $319,000 of electronic transfers and not the handful of improperly endorsed checks.
Federal laws protect consumers but to get those protections, you generally must report unauthorized transfers within 60 days. JPMorgan Chase can say that it is unfair to complain about illegal withdrawals that took place almost two years ago. When things are reported late, it becomes difficult for the bank to investigate and try to get the money back.
For commercial accounts, the Uniform Commercial Code (Article 4A) applies. Once again, the laws are written to protect consumers but banks can escape liability if the person stealing the money had apparent authority. That the person who stole from the restaurant also worked for the restaurant helps the bank, not the restaurant.
But did the employee who stole have “apparent authority”? We don’t know yet. To better explain this, let’s look at some scenarios. For example, if the person stealing the money was a busser, there should be no reasonable expectation that he or she can access accounts. But if the thief is an officer or bookkeeper, the bank has a much defense.
Another factor is what security procedures were offered by the bank. If the bank offers reasonable security procedures and sticks to them, the client may be high and dry. Frequently, customers refuse those protections because they are not convenient. An example would be two party authorizations or daily withdrawal limits. In this case, if Chase offered enhanced security protocols and the customer didn’t accept, the bank may win.
But how secure were the bank’s security protocols? The complaint suggests that the thief impersonated the CEO of the restaurant and says that the bank should have “asked
standard security questions (e.g. date of birth, name, middle name, passport number, I.D.
number, address) in order to verify identity correctly.”
We note that at least one court has said that security challenge questions alone don’t constitute reasonable security because anyone hacking the customer’s computer may also be able to learn the answers to the security questions.
Another important issue in the case is Kurry Pavilion’s status as a private banking client. Many bank clients mistakenly believe that a bank owes them a fiduciary duty of care. In most states, the normal depositor or lender – borrower relationship creates no fiduciary duty. A private banking or wealth management relationship chances things, however.
If bank provides business or financial planning or helps you with investments, they probably owe you a fiduciary duty. In this case, the private banking relationship could be critical in holding the bank responsible for the restaurant’s losses.
Since the lawsuit was filed this fall, JPMorgan Chase has asked the court to remove the case to federal court.
In many cases, the damages are far more than the money stolen. We often talk to business owners who say they were forced to close their doors, lay off staff or cancel orders because of these unauthorized transfers, Last week I spoke to a man who said $75,000 in unauthorized withdrawals resulted in the bank freezing his account and him losing the ability to bid on a $750,000 contract.
We don’t know many details about Kurry Pavilion except to note that they seek $1.3 million in damages, a sum far greater than their alleged losses of $333,000. Why the difference? It may be because shortly after discovering the theft, Kurry Pavilion closed its doors. Hopefully, if the closure resulted from the bank’s refusal to make good the wrongful transfers, justice will prevail.
When is a Bank Responsible for Unauthorized Withdrawals?
As noted above, the answer to this question can be complex and depend on many variables. Hurting the account holder in this case are the lengthy delays between when the fraud began and when the restaurant reported the theft. We suspect the restaurant didn’t discover the problem until checks began to bounce. By the time they figured out what had happened, they had to close their doors.
Factors to consider in these cases include the length of time between the date of loss and the date it was reported, whether the bank is a fiduciary, whether the customer had availed itself of bank security measures, whether those measures were reasonable and whether the person committing the theft was an insider with apparent authority.
The lender liability lawyers at MahanyLaw and Judge, Lang & Katers help customers who have suffered losses of $2.5 million or more. We handle cases across the United States including unauthorized fund transfers, wires and withdrawals. (In jurisdictions where we are not licensed, we use local counsel to assist.)
For more information, contact attorney Brian Mahany at [hidden email] or by phone at (414)704-6731 (direct). See also our cornerstone content on unauthorized withdrawals.
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