Banking & Financial Services Update - Vol. 10, Fall 2011 

October, 2011 -

Because of a recent decision by the Tennessee Court of Appeals, a bank may not rely as heavily on a Power of Attorney (“POA”) as much as it may have relied previously for immunity to claims brought against the bank by the Grantor of the POA. A bank may now be held liable for transactions made by the Agent, even when the POA grants broad and virtually unrestricted authority to the Agent.

Until recently, there appeared to be a conflict in the Tennessee Code. On the one hand, state law provides what appears to be unfettered immunity to banks for transactions involving a POA:  Banks “may recognize the authority of a power of attorney authorizing in writing an attorney-in-fact to operate . . . the account of a depositor . . . until the bank receives written notice of the revocation of the authority.”  Further, “[n]o bank shall be liable for damages” for making payments in accordance with the terms of a POA. See TCA § 45-2-707.

On the other hand, state law also provides a list of “red flag circumstances” under which a bank handling a transaction will be “on notice” of breach of fiduciary duty and therefore, subject to claims such as conversion brought against the bank by the person represented by the fiduciary. See TCA §§ 47-3-307(b) and -420. These “red flag circumstances” arise when a bank takes an instrument such as a check made payable to a depositor: (i) in payment for a debt that the bank knows is the Agent’s personal debt, (ii) in a transaction that the bank knows is for the Agent’s personal benefit, and (iii) as a deposit by the Agent into an account that does not belong to the depositor.

Reading the laws together, until recently it was not clear whether a bank transacting business pursuant to a POA would be immune to misappropriation claims when the bank had notice of any of the “red flag circumstances” set out in TCA § 47-3-307(b). The facts of the case of Clara Jean West ex rel. Harvey v. Regions Bank, No. W2010-02023-COA-R3-CV, 2011 WL 3059693 (Tenn. Ct. App. July 26, 2011), forced an examination of this issue.

In the Clara Jean West case, a man granted his Nephew a very broad POA, authorizing the Nephew to:

deposit and withdraw funds from any bank account or other account which [Uncle] now [has] or [has] in the future in any bank or other depository, and to sign [Uncle’s] name as a drawer of checks and drafts thereon, and to endorse checks, drafts or other instruments belonging to [Uncle] or in which [Uncle has] any right, title or interest for any purpose whatever, whether for deposit or for any other purpose.

The POA further allowed the Nephew to sell any stocks owned by his Uncle and to handle matters related to life insurance. The POA was durable and would not be adversely affected by any later disability or incapacity of the Uncle. The Nephew’s power was virtually unrestricted.

Shortly after the Uncle executed the POA, the Nephew set about transferring the Uncle’s assets at the bank to his own accounts at the same bank. When the Uncle died leaving no will, his Widow was his only heir at law. The Widow was disabled and her affairs were being managed by a conservator. The conservator filed suit against the Nephew for breach of fiduciary duty and conversion, among other things, and also sued the bank for negligence and for aiding and abetting the Nephew’s misappropriation and conversion.

In its defense, the bank argued that it was immune to the Widow’s claims by virtue of the POA statute. The Widow fought back, arguing that the bank was on notice of the Nephew’s breach of fiduciary duty because the bank knew that the Nephew was depositing checks made payable to the Uncle into the Nephew’s personal accounts. Therefore, she argued, the bank was liable for conversion. Ruling in favor of the bank, the trial court found that the bank relied on the broad POA and could not be held liable pursuant to the immunity statute.

On appeal, the Court of Appeals reversed the trial court, holding that the transactions in question fell within the ambit of the “red flag circumstances” and that the immunity statute did not shield the bank from liability given the facts of the case. The Court of Appeals noted that the Tennessee General Assembly passed the statute setting out the “red flag circumstances” after the immunity statute was passed, and noted that the statute was part of a “delicately balanced statutory scheme governing the endorsement, negotiation, collection, and payment of checks.”  

Importantly, the Court of Appeals’ opinion left the door open for the bank, on remand of the case to the trial court, to defend itself on grounds that it acted in a commercially reasonable manner. Thus on remand, the bank may argue that the Nephew was authorized by the extremely broad POA to transfer the Uncle’s funds to himself as he did. Indeed the Court of Appeals acknowledged that it was not addressing the issue of whether the bank acted in a commercially reasonable manner, and limited its opinion only to its disagreement with the holding of the trial court that the immunity statute shielded the bank from any liability whatsoever.

Fortunately, the Clara Jean West case does not mean that immunity from claims arising from Powers of Attorney transactions is a thing of the past. The case does, however, instruct that banks do not have blanket immunity when transacting business with the holder of a POA. It tells banks that there are circumstances where immunity can be removed, and those circumstances arise when a bank takes an instrument made payable to a depositor, and knowingly transacts that instrument in a way that benefits the Agent.

In the Clara Jean West case, the Agent (the Nephew) took checks made payable to the depositor (the Uncle) and deposited them into his own account. The bank was therefore on notice of the Nephew’s breach of duty. On the other hand, had the Nephew simply converted the checks to cash and nefariously spent the cash at his local watering hole, then the bank may not have ever had the requisite knowledge for a court to remove the immunity. The bank in that circumstance may have been immune. Importantly, the holding of the Court of Appeals is limited to the “red flag circumstances” listed in the statute.

To protect themselves, banks should require Agents upon their presentation of a POA to the bank, to sign a written agreement to indemnify and hold the bank harmless from claims of any kind arising in any way relating to the use of the POA. Most importantly, banks should exercise caution when dealing with holders of POAs, and ensure that the Agent’s transactions are transactions permitted by the words within the four corners of the document granting the power.

Why Banks Should Consider Mandatory Arbitration Provisions
By: Brian Malcolm

In the wake of AT&T Mobility LLC v. Concepcion, 131 S.Ct. 1740 (2010), banks are taking another look at mandatory arbitration clauses and the possible benefits of such language in customer agreements. Concepcion effectively closed a possible state-law loophole to the enforceability of arbitration provisions for class claims. This potential loophole frustrated banks’ purpose for the mandatory provision (lowered litigation costs) where they might need it the most, class litigation. As a consequence, a bank now has more incentive than ever to consider whether it would be beneficial for the bank to require that its customers agree to arbitrate disputes in lieu of going to court.

The issue before the Court in Concepcion was whether a state rule requiring the availability of classwide arbitration in order enforce an arbitration agreement comported with the Federal Arbitration Act (“FAA”), 9 U.S.C. § 2. Recognizing the importance of this issue and the ramifications of a decision by the Court, banking groups1  jointly filed a brief with the Court in support of the enforcement of arbitration provisions against class actions under the FAA. The theme of the banking groups’ brief was that arbitration benefits all parties, even customers, by lowering costs and allowing businesses to pass along cost savings. The banking groups also presented evidence demonstrating that bank customers were not unfairly disadvantaged in the arbitration forum versus the court forum.

The Concepcion Court held, with a 5-4 majority, that the FAA prevents states from imposing rules that condition the enforceability of arbitration agreements on the availability of classwide arbitration, such as California’s Discover Bank rule.2   Justice Scalia wrote for the majority that “[r]equiring the availability of classwide arbitration interferes with fundamental attributes of arbitration and thus creates a scheme inconsistent with the FAA.” 3  Following the Supreme Court’s lead, on August 11, 2011, the Eleventh Circuit4  held that, “in light of Concepcion, [a] class action waiver in . . . arbitration agreements is enforceable under the FAA.”   Thus, Concepcion means that banks may enforce mandatory arbitration provisions against class claims, and this benefit to banks, coupled with the other benefits of arbitration, could mean big savings for banks’ litigation budgets.

Other commonly-known benefits of arbitration provisions for businesses include:

  • Arbitration allows a business to get out of the court system, which can be especially helpful in certain circumstances;
  • Sometimes it is helpful to compel arbitration in order to have the dispute resolved in a more convenient locale;
  • Arbitration may allow a business to avoid certain judges that it perceives as undesirable;
  • Sometimes, arbitration is more efficient than the court system;
  • Arbitration avoids the uncertainty associated with jury trials;
  • Arbitration is typically less expensive, less formal, more streamlined, and often has less restrictive evidentiary and procedural rules;
  • There is increased flexibility with scheduling between the parties, due to a lack of dependence on court schedules;
  • The results of arbitration are often less public and, as a consequence, often lead to a lesser ripple effect from a result;
  • The increased confidentiality that is often associated with arbitration promotes the maintenance of a business relationship between opposing parties; and
  • The case or controversy is sometimes decided by a decision-maker with knowledge and expertise in the banking industry.

Some of the potential disadvantages of arbitration include:

These benefits encourage banks and businesses in general to require arbitration agreements with their customers.

The enforcement of arbitration provisions also typically eliminates incentive for frivolous or small suits. This might be because arbitration imposes higher upfront costs on claimants than public courts. Potential claimants often must pay at least portions of arbitrator fees and other administrative costs, depending on the governing rules and agreement between the parties. When compared to providing an inexpensive filing fee with a court, these upfront arbitration costs can act as a deterrent to pursuing unworthy claims against banks.

There are also some lesser-known benefits. For example, courts may be more willing to enforce a contractual provision compelling arbitration than to enforce a contractual provision waiving a right to jury trial—even though both provisions effectively deny a claimant access to a public jury proceeding. In Georgia, a pre-litigation contractual jury trial waiver is void under state law.6 California has the same policy.7 Whether such pre-dispute waiver provisions are valid is a matter of substantive law for these states. A federal court sitting in diversity and applying Georgia or California law is compelled to apply the appropriate state’s substantive law and, accordingly, must construe pre-trial contractual jury trial waivers as unenforceable.8 Yet the FAA would require the same court to enforce a valid arbitration provision.
This disparity might be explained by courts’ initial presumption against jury trial waiver because of the Seventh Amendment and their presumption in favor of enforcing arbitration provisions because of the FAA. The right to a jury trial is a constitutional right created by the U.S. Constitution and waiver of such a right requires “intentional relinquishment or abandonment . . . .”9  The Supreme Court considers “the right of jury trial [as] fundamental,” and consequently “courts indulge every reasonable presumption against waiver.”10   Meanwhile, those same courts must come to a dispute involving an applicable arbitration agreement with a presumption in favor of arbitration. The FAA requires all courts within the United States to resolve any doubts about whether arbitration is appropriate in favor of arbitration, because the FAA clearly delineates a national policy favoring arbitration.11 The test for determining whether the FAA applies and compels arbitration simply requires: (1) existence of a written arbitration agreement between the parties; and (2) that the underlying transaction involves interstate commerce. This showing for a party seeking to compel arbitration is far less stringent than the showing required of a party seeking to enforce waiver of a jury trial.

  • Appeal of a bad result is not allowed;
  • Arbitration does not allow for the disposal of a controversy on summary judgment, so the arbitration process often goes all the way to a trial-like proceeding;
  • The quality of the result of arbitration is often heavily dependent on the quality of the arbitrator;
  • Fees for arbitration are higher than court fees; and
  • At times, the arbitration forum may be less convenient.

The balance of pros and cons with respect to arbitration will be different for each bank, and possibly for each particular case. The inclusion of arbitration provisions in customer agreements, though, will often give the bank the choice of whether arbitration is appropriate on a case-by-case basis. This is because customers often file suit in court, and it is up to the bank to decide whether or not to enforce the arbitration agreement.12

Banks now have more incentive than ever to consider arbitration. A bank should assess its confidence in its court system, the goals of the bank, and litigation costs to determine whether arbitration might be an effective tool for the bank.

1      On August 9, 2010, the American Bankers Association, the American Financial Services Association, the Consumer Bankers Association, the Financial Services Roundtable and the   
        California Bankers Association jointly filed a brief in support of AT&T Mobility LLC with the Supreme Court, as friends of the Court.

2      Discover Bank v. Superior Ct., 113 P. 3d 1100 (Cal. 2005), the California Supreme Court, based on general state-law principles disfavoring exculpatory contracts and demanding that
        unconscionable contract clauses be limited so as to avoid an “unconscionable result,” ruled that class action waivers in some consumer contracts are unconscionable, and, thus,
        unenforceable (the “Discover Bank rule”).  

3      Concepcion, 131 S. Ct. at 1748.

4      Cruz v. Cingular Wireless, LLC, No. 08–16080, 2011 WL 3505016648 F.3d 1205, at *1 (11th Cir. Aug. 11, 2011).

5      As of September 15, 2011, the U.S. Court of Appeals for the Sixth Circuit has not applied the Concepcion holding.

6      Bank S., N.A. v. Howard, 444 S.E. 2d 799, 800 (Ga. 1994).

7      See Grafton Partners, L.P. v. Superior Court, 116 P.3d 479, 492 (Cal. 2005) (deeming pre-dispute contractual jury trial waivers unenforceable as a matter of state law).

8      See, e.g., GE Comm. Fin. Bus. Prop. Corp. v. Heard, 621 F. Supp. 2d 1305, 1308 (M.D. Ga. 2009).

9      College Sav. Bank v. Fla. Prepaid Postsecondary Educ. Expense Bd., 527 U.S. 666, 682 (1999) (quoting Johnson v. Zerbst, 304 U.S. 458, 464 (1938)).

10     Aetna Ins. Co. v. Kennedy to Use of Bogash, 301 U.S. 389, 393 (1937)

11     See, e.g., Granite Rock Co. v. Int'l Broth. of Teamsters, 130 S. Ct. 2847, 2856-57 (2010) (citations omitted).

12     All parties may enforce arbitration agreements against all other parties to the agreement, but, as a practical matter, customers typically prefer the court system for reasons of familiarity and lower upfront costs.

Contributors:Larry B. Childs and Heath A. Fite

Recap of Seventh Annual Southeastern Banking Seminar

In mid-August, an impressive faculty addressed nearly ninety financial services and banking industry executives at Waller Lansden's Seventh Annual Southeastern Banking Seminar. Held at Nashville's Downtown Sheraton Hotel, this complimentary program provided insight into recent industry developments, emerging issues and the potential impact of the new federal financial regulations.

Faculty included Cecelia Calaby, Executive Director and General Counsel of the American Bar Association's Securities Association, Commissioner Greg Gonzales of the Tennessee Department of Financial Institutions, Tim Amos, Senior Vice President and General Counsel of the Tennessee Bar Association, Robert B. Albertson, Principal and Chief Strategist, Investment Strategy at Sandler O'Neill & Partners, Wynne Baker, Member-in-Charge of KraftCPA's Banking Industry Group, and Larry Childs, Partner, Waller Lansden Dortch & Davis.
So that we can continue to offer events that meet the needs of the financial services and banking sectors, please email Derek Edwards with suggestions for topics that we can include in next year's seminar. We value your input.
Please mark your calendars for Waller Lansden's Eighth Annual Southeastern Banking Seminar to be held on Friday, August 17, 2012.

The opinions expressed in this bulletin are intended for general guidance only.  They are not intended as recommendations for specific situations.  As always, readers should consult a qualified attorney for specific legal guidance.

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Powers of Attorney Do Not Create Blanket Immunity for Banks
By: Becca Brinkley, Woody Woodruff




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