Wells Fargo Bank v. Citizens Bank of Texas, No. 10-04-00268-CV (TX 9/7/2005)
| Decision Date | 07 September 2005 |
| Docket Number | No. 10-04-00268-CV.,10-04-00268-CV. |
| Parties | WELLS FARGO BANK, N.A., Appellant/Cross-Appellee v. CITIZENS BANK OF TEXAS, N.A., Appellee/Cross-Appellant. |
| Court | Texas Supreme Court |
Appeal from the 9th District Court, Montgomery County, Texas, Trial Court No. 02-04-02426 CV.
Reversed and rendered.
Before Cheif Justice GRAY, Justice VANCE, and, Justice REYNA.
Citizens Bank of Texas, N.A. filed suit against Pate & Pate Enterprises, Inc. and other related entities after the defendants engaged in a check kiting scheme involving accounts with Citizens Bank, Wells Fargo Bank Texas, N.A., and Wells Fargo Bank Ohio, N.A., resulting in overdrafts at Citizens Bank totaling $8,150,000. Citizens Bank amended its petition to name the Wells Fargo banks as defendants. Citizens Bank settled with the Pate defendants, and the court heard its remaining claims in a bench trial. The court rendered judgment in favor of Citizens Bank.
Wells Fargo Texas, through its successor in interest Wells Fargo Bank, N.A., contends in six issues that the court erred by: (1) holding Wells Fargo Texas liable for failing to timely return unpaid checks drawn on a Wells Fargo Ohio account; (2) finding that Wells Fargo Texas breached a duty of good faith to Citizens; (3) imposing duties on Wells Fargo Texas more stringent than the requirements of the U.C.C. or Regulation CC; (4) finding that Wells Fargo Texas breached a duty of ordinary care; (5) awarding damages for breach of duty of ordinary care; and (6) finding that $892,333 which had been garnished from Wells Fargo Texas was only a conditional setoff against the judgment.
Citizens Bank contends in its sole cross-issue that it established as a matter of law that Wells Fargo Texas promised to treat all checks drawn on any Wells Fargo bank as having been drawn on Wells Fargo Texas and that the court's finding to the contrary is against the great weight and preponderance of the evidence.
We will reverse and render.
The Pate defendants are in the pipeline construction business. They have maintained accounts with Citizens Bank since the early 1990's. Citizens Bank established a correspondent banking relationship with Wells Fargo Texas's predecessor in interest Norwest Bank Texas, N.A. in 1997. Under this relationship, Norwest was responsible for processing checks deposited with Citizens Bank and handling those checks for collection. Wells Fargo Texas assumed these responsibilities when it consolidated with Norwest in 1999.
In 1998, Norwest established a "controlled disbursement account" for the Pate defendants. Wells Fargo Texas continued this account when it consolidated with Norwest. Under this arrangement, the Pate defendants wrote checks on a Wells Fargo Ohio bank account with a zero balance. Whenever a check was presented for payment from the Ohio account, Wells Fargo Services Co. would electronically transfer funds in that amount from the Pate defendants' Wells Fargo Texas account to Wells Fargo Ohio to cover the check.
The parties dispute the purposes and legitimacy of controlled disbursement accounts. Nevertheless, it is undisputed that the effect of the Pate defendants' controlled disbursement account was to extend the check collection process. This resulted from the manner in which Wells Fargo Texas processed checks written on the Ohio account. For the Ohio checks, Wells Fargo Texas delivered the checks to the Federal Reserve Bank in Houston, which forwarded the checks to the Federal Reserve Bank in Ohio. The Federal Reserve Bank in Ohio then presented the checks to Wells Fargo Ohio for payment. Thus, Wells Fargo Texas held funds in the Pate defendants' account longer than it would have if the Pate defendants had written checks from a Wells Fargo Texas account.1
The dispute in this case focuses on sixteen checks totaling $8,150,000 which the Pate defendants wrote on the Ohio account and deposited with Citizens Bank. Under the terms of the correspondent banking agreement, Citizens Bank delivered these checks to Wells Fargo Services Co., which handled check processing services for Wells Fargo Texas. Wells Fargo Services processed these checks via the Federal Reserve Banks in Houston and Ohio as described. Because of concerns that the Pate defendants were engaged in a check kiting scheme,2 Wells Fargo Texas decided to place a hold on the funds in the Pate defendants' accounts.
Wells Fargo Ohio returned the checks to Citizens Bank unpaid. On receiving notice that these checks were dishonored, Citizens Bank was able to return $2,728,375 of the checks to Wells Fargo Texas. However, because of the delay resulting from the checks being processed through the controlled disbursement account in Ohio, Citizens Bank was unable to return nearly $3,000,000 of the checks.3 Citizens Bank suffered about $5,000,000 in losses from the Pate defendants' overdrawn checks.
Citizens Bank alleges that Wells Fargo Texas owed it a duty of good faith because of their correspondent banking relationship.4 Citizens Bank alleges that Wells Fargo Texas breached this duty by:
(1) implementing the controlled disbursement account which "encouraged and facilitated the possibility of bank fraud";
(2) "failing to disclose to Citizens Bank the extra risk created by these accounts, and by intentionally shifting to Citizens Bank the losses they created by placing holds on the accounts, continuing to accept deposits and by returning checks unpaid to Citizens Bank, especially when there were funds remaining in the account to cover at least some of the checks returned";
(3) using its superior knowledge of information about the Pate defendants and Citizens Bank to its advantage;
(4) failing to expedite the check collection process as required by contract and federal regulation; and
(5) giving Citizens Bank late notice of non-payment.
Citizens Bank contends that Wells Fargo Texas is strictly liable under the U.C.C. for:
(1) failing to give timely notice of non-payment; and
(2) providing defective notice of non-payment by listing one dishonored check as being in the amount of $50,000 rather than $500,000.
Citizens Bank also alleges that Wells Fargo Texas is liable for misrepresenting the status of the Pate Enterprises account and for breach of the warranty of presentment by presenting cashier's checks to Citizens Bank for payment which had not been properly endorsed.
The court found that Wells Fargo Texas:5 (1) failed to timely return the checks; (2) breached the duty of good faith it owed under the U.C.C. and Regulation CC; and (3) breached the duty of disclosure it owed to Citizens Bank as its correspondent bank. The court rejected Citizens Bank's breach of contract claim. The court awarded Citizens Bank $4,654,792 in damages, prejudgment interest, $870,676 in trial attorney's fees, appellate attorney's fees, and court costs. In the alternative (if the judgment is reversed on the theory that Wells Fargo Texas and Wells Fargo Ohio must be treated as separate legal entities), the court found that Wells Fargo Ohio acted as an agent for Wells Fargo Texas and awarded Citizens Bank $2,947,973, which represents the additional amount of checks Citizens Bank could have returned if it had received earlier notice that the checks had been dishonored.
The trial court found that "Wells Fargo Texas set up the Ohio account for the purpose of evading or extending the time limits set forth in the UCC and Reg[ulation] CC." Thus, the court implicitly found that the Ohio account was a delayed disbursement account, which is disfavored by the Federal Reserve, rather than a controlled disbursement account as Wells Fargo Texas contends.
Under the typical scenario, a controlled disbursement account is a checking account with a zero balance held by a corporation. When a check written on this account is presented for payment, funds from an interest-bearing account are transferred to the zero balance account to pay the check.6 See e.g. Schering-Plough Healthcare Prods., Inc. v. NBD Bank, N.A., 98 F.3d 904, 910 (6th Cir. 1996); RPM Pizza, Inc. v. Bank One Cambridge, 869 F. Supp. 517, 518-19 (E.D. Mich. 1994).
Banks offering controlled disbursement services notify their corporate customers early in the day of the amount of the corporation's check payments that have been presented that day so that the corporation can invest surplus balances or borrow additional funds, as necessary, while money markets are still active. U.S. money markets become progressively less liquid after noon Eastern Time.
Controlled disbursement accounts are strikingly similar to delayed (or remote) disbursement accounts, the use of which was sharply criticized as "an abuse of the check collection system" by the Comptroller of the Currency in 1979. Comptroller of the Currency, Banking Circular No. 121, 1979 OCC CB LEXIS 11 at *1 (Feb. 7, 1979). The Federal Reserve continues to view such accounts with disfavor.
General policy. Delayed disbursement (sometimes referred to as "remote" disbursement) is the practice of issuing checks that are payable by, through, or at a bank located in a geographic area such that collection of the checks is generally delayed. For example, these arrangements may be designed to delay the collection and payment of checks by drawing checks on banks located substantial distances from the payee or outside of Federal Reserve cities when alternate and more efficient payment arrangements are available.
The Board is concerned that delayed disbursement practices reduce the efficiency of the check collection system. Drawing a check on a bank remote from the payee often increases the costs of handling the check. More institutions are...
To continue reading
Request your trial