Plum House IV, Inc. v. Wells Fargo Merchant Services, LLC (Maryland U.S.D.C.)

Filed: January 29, 2016

Opinion by: Catherine Blake

Holding: Under Maryland’s "economic loss rule" courts have limited remedies if the loss is purely economic and the parties were engaged in arms-length commercial bargaining.

Facts: Plaintiff operated a restaurant that allowed customers to pay with American Express Credit Cards. Plaintiff alleged that Defendant, a merchant payment card processor, mixed up the customer identification number and this mistake resulted in $349,395.14 being routed incorrectly to John Doe/ ABC Co. Plaintiff sued Defendant, American Express, and John Doe/ABC Co. to recover payments made by customer’s credit cards.

Plaintiff sued Defendant for negligence and breach of contract. Defendant filed a motion to dismiss for failure to state a claim. Parties agreed, per the terms of the contract, to apply NY law for the breach claim. The Court applied the Erie doctrine, choice of law, and outcome determinative test. Maryland law controlled the negligence claim and NY law controlled the breach of contract claim.

Analysis: The Court relied on Jacques v. First Nat'l Bank of Md., to determine if a duty exists. The Jacques test balances the nature of the harm that is likely to result from a failure to exercise due care and the nature of the relationship between the parties. When the failure to exercise due care creates only a risk of economic loss courts generally require an intimate nexus between the parties to impose tort liability. Plaintiff argued that, like in Jacques, it had a special relationship with Defendant which trumps the economic loss rule.

A special relationship exists when: (i) the business is affected with the public interest; (ii) the plaintiff is an individual consumer who is particularly vulnerable and dependent upon the other parties' exercise of due care; (iii) there is a disparity in strength of bargaining position; (iv) and one party more sophisticated than the other.

The Court disagreed. Specifically, it distinguished this matter from Jacques in two ways. First, Defendant in this matter is a merchant payment card processor, not a bank. Second, and more importantly, Jacques centered upon the fiduciary relationship a bank has to the individual clients. The Defendant conducts a sophisticated commercial enterprise with the same bargaining power as the Plaintiff. The Court ruled that a credit card payment processor does not have the same fiduciary relationship to a vendor that a bank has to individual consumers.

The Court determined that the economic loss doctrine applies for the negligence claim and granted Defendant’s motion to dismiss the negligence claim.

The full opinion is available in PDF.

Suntrust Bank v. Goldman (Ct. of Special Appeals)

Filed: September 30, 2011
Opinion by: Judge James R. Eyler

Held: The prevailing party in a suit for breach of a line of credit agreement may only be awarded attorneys' fees in the amount of fees actually incurred (including future fees that can be proven with certainty), notwithstanding contract language allowing for recovery of a greater sum measured as a percentage of the principal loan amount.

Facts: A borrower entered into a line of credit agreement with a bank. The agreement contained a clause that stated that the borrower would be responsible to pay any costs of collection for failure to pay on the loan, including 15% of the principal as attorneys' fees or reasonable attorneys' fees. The borrower defaulted and the bank sued. The borrower failed to answer, and the trial court awarded the bank an order of default for the principal amount due and interest. The bank also asked the court for attorneys' fees in the amount of $60,206.00, or 15% of the principal. The court denied this request and only awarded attorneys' fees in the amount of $3,258.30, or the actual fees incurred to date plus costs. The bank filed a motion to revise judgment to award attorneys' fees as provided in the contract, which the trial court denied. The bank appealed.

Analysis: The Court of Special Appeals affirmed.

The bank argued that it sought the 15% fee to cover actual fees, as well as fees it may incur in the future as a result of efforts to enforce the judgment. The bank pointed out that if it were denied that fee, it would not be able to sue to enforce the provision after final judgment due to the doctrine of merger.

The Court stated that attorneys' fee provisions are in the nature of indemnity agreements. The Court explained that "Maryland law limits the amount of contractual attorneys fees to actual fees incurred, regardless of whether the contract provides for a greater amount." The Court distinguished this case from Webster v. People's Loan, Sav. & Deposit Bank of Cambridge, 160 Md. 57 (1976) that contained language by the Court of Appeals that supports the bank's claim for the 15% attorneys' fee then later crediting the appellees with the amount of fees not actually incurred. This Court distinguished Webster because it dealt with a judgment by confession when confessed judgments were entered by the clerk of the court based on the terms of the underlying note. Now, the Court explained, the procedure is different. Md. Rule 2-611, amended in 2010, includes a new section (b) which "requires a court to review a confessed judgment for factual and legal validity before the clerk may enter the judgment." Therefore, judicial review of confessed judgment is now done at the outset where the reviewing court can make a determination as to the reasonableness of the attorneys' fees.

The bank explained that it should be able to claim un-incurred fees, subject to later credit because the merger doctrine does not allow a party to seek post-judgment requests for attorneys' fees for which the court has already entered judgment. The Court discusses various ways to avoid the merger bar, including for the parties to state their intent in the contract that the fee provision shall not merge into the judgment (without specifying how this would be done).

The Court concluded that in order to collect both incurred fees and future fees, the requesting party will need to put on evidence of fees that it will certainly incur in the future, as well as those fees actually incurred at that time, as long as they are reasonable. Because the bank presented no evidence as to any agreement to pay attorneys' fees other than on an hourly basis and no evidence to provide fees certain to be incurred in the future, the Court concluded that the trial court had properly awarded only incurred attorneys' fees to the bank.

The full opinion is available in pdf.

Hayes v. Autocorp, LLC (Mont. Co. Cir. Ct.)

Filed: July 13, 2011
Opinion by Judge Ronald B. Rubin

Held: A bank that elected to accept rather than contest the improper dishonor of its customer's check and to proceed against the customer for sums "charged back," waived its right to recover against the dishonoring bank after its attempt proved unsuccessful.

Facts: A broker was hired to sell a 1960 Aston Martin DB4 as the agent of its owner. The buyer contacted the broker and agreed to purchase the car for $345,000. The buyer sent two checks to the broker. The broker deposited both checks without endorsement. The broker sent part of the proceeds to the owner, but an officer of the broker stole the rest and absconded.

The buyer's bank began an investigation and determined that the checks were deposited without proper endorsement. The bank returned the check to the broker's bank stamped "Return Reason -- endorsement irregular." The broker's bank debited the broker's account and the amount was credited back to the buyer's bank account. The broker's bank returned a copy of the check to the broker; the original check was destroyed upon processing and replaced with a copy.

After that, the car's owner contacted the buyer and asked him to wire the purchase money directly to the owner. Before proceeding, the buyer wanted to ensure that the broker would not re-deposit the original check. The broker returned to the buyer the copy it had received from its bank.

The buyer then wired the purchase money directly to the owner. He also placed a stop payment on the original check. The owner released the car to the buyer and signed the title over to him.

More then a month later, the broker's bank asserted a late return claim against the buyer's bank and argued that it was entitled to be paid on the check. The claim was made through the Federal Reserve and resulted in an automatic adjustment of accounts, reversing the flow of funds so that the buyer was now without the money. It appeared that the broker's bank's actions were precipitated by the inability to recover the funds from the broker.

The buyer's bank assigned its rights to the buyer, who filed suit against the broker and the broker's bank to recover his money. The parties filed cross motions for summary judgment.

Analysis: The court began with the general rule that where there are contesting parties who are relatively blameless, it is necessary to examine the conduct to determine who had more control and which party was in a position to prevent the loss.

Regarding the missing endorsement: the court noted that case law indicates that a bank is not at fault for transferring an item with a missing endorsement if the same transaction of funds would have resulted, regardless of the missing endorsement. Applying this principle, the court concluded that the failure to recognize the lacking endorsement was irrelevant to the question of fault in the case.

Regarding the return of the check to the broker's bank, pursuant to section 4-104(a)(10) of the Commercial Law article, an item is finally paid when the payor bank makes provisional settlement and fails to revoke the settlement in the time and manner permitted by statute, clearing house rule, or agreement. The court found that the buyer's bank violated the rule when it sought to dishonor the check 15 days late under an improper endorsement theory.

The court also found that the buyer's bank violated Federal Reserve protocol by returning the check through the Federal Reserve rather than by dealing directly with the broker's bank.

The court further found, however, that the broker's bank returned the substitute check to the broker, along with a debit advice, and fined the broker a returned check fee. Based upon this, the court concluded that the broker's bank had the opportunity to review the returned check and decide the appropriate next steps. This was critical.

The court concluded that when the broker's bank made the election to collect from its customer, it no longer was entitled to use the copy of the check because it was then "owned" by the broker. Because the strategy elected by the broker's bank was unsuccessful, the court concluded, the bank was no longer entitled to a second bite of the apple against the buyer's bank, nor may it legally do so without title to the check copy. By making the election pursue and debit its customer, the broker's bank waived further claim against the buyer's bank.

On this basis, the court held that the broker's bank had more control and was in a better position to prevent the financial loss. As a result, the court granted summary judgment for the buyer.

The full opinion is available in pdf.