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ACH Developments 2010
Solomon
Law Firm
Payday Loan
Bar Association
Bridgette Roman
General Counsel, Vice President &
Assistant Secretary
CheckSmart Financial Company
7001 Post Road, Dublin, Ohio 43016
broman@Checksmart.com
Stephen Solomon
Solomon Law Firm
Dallas, Texas
Telephone: 972-713-9753
StephenSolomonAttorney@yahoo.com
November 2010
Ronald D. Gorsline
Chambliss, Bahner & Stophel, P.C.
1000 Tallan Building Two Union Sq.
Chattanooga, Tennessee 37402
(423) 756-3000
www.cbslawfirm.com
rgorsline@cbslawfirm.com
Justin B. Hosie
Chambliss, Bahner & Stophel, P.C.
1000 Tallan Building Two Union Sq.
Chattanooga, Tennessee 37402
(423) 756-3000
www.cbslawfirm.com
jhosie@cbslawfirm.com
http://twitter.com/consumerfinance
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Solomon
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Payday Loan
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November 2010
Overview
• AmeriCash
• NACHA Rules
• Bankruptcy Cases
– 362(b)(11) and In re Roete
• In re Meadows
• In re Kearns
• In re Brewer
– In re Snowden
– Others
• State Payday Laws, Regulations, and ACH
Issues
• Questions
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November 2010
AmeriCash - Facts
• Optional PEFT. Among 3 installment loan repayment
options, Plaintiff chose to pay by “voluntary payroll
deduction,” not the Check/ACH option.
• Backup ACH. Agreement nevertheless included a
“backup ACH” clause for various default/acceleration
issues. The clause disclosed revocation and stop
payment rights related to the ACH.
• Bank Information. Plaintiff signed the form, but failed
to specify the name of her bank, or provide her
checking account number, in the spaces provided.
But, AmeriCash had that information on file from prior
transactions.
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Payday Loan
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November 2010
AmeriCash
Issue and Arguments by Plaintiff
• Issue: Whether the EFT authorization form
can meet the statutory requirements of
“collateral” or “security interest.”
• Plaintiff: EFT authorization is “the functional
equivalent of a check, which gave AmeriCash
rights and remedies under the Illinois bad
check statute and, thus provided AmeriCash
with a security interest that had to be
disclosed pursuant to the TILA.”
AmeriCash - Arguments
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November 2010
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Merely a Method of Payment. “EFT is simply a method of
payment, like a voluntary payroll deduction, which does not
need to be disclosed.”
Bad Check Law Does NOT Cover EFTs. UCC includes the
Illinois bad check statute, and does not apply to electronic
fund transfers.
Not Personal Property. EFT is not “personal property,” so it
can’t be a “security interest” under UCC.
No EFTA Remedy for Canceling ACH. EFTA does not provide
a remedy for canceling or rejecting an electronic funds
transfer.
Akin to Voluntary Payroll Deduction. Precedent in Cobb
case indicates voluntary payroll deductions should not be
disclosed as security, as they are “mere devices for
consumers to make regular payments.”
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Payday Loan
Bar Association
November 2010
AmeriCash
Concepts Court Examined
• TILA. Requires creditors to disclose any security
interest taken and to describe the property in which
the interest is taken.
• Regulation Z. Defines as “an interest in property that
secures performance of a consumer credit obligation
and that is recognized by State or Federal law.”
• Illinois Law. Defines a “security interest” as “an
interest in personal property *** which secures
payment or performance of an obligation.”
• Bad Check Remedy. A post-dated check with a highinterest consumer loan was a security interest
because the check confers rights and remedies for
bad checks, in addition to those under the loan
agreement.
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Payday Loan
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November 2010
AmeriCash - Holding
• Holding. Based the following facts, the Court held
that “Plaintiff sufficiently stated a claim that
AmeriCash took a security interest in her checking
account.”
– Termination Hurdle. Plaintiff could not terminate the
agreement without written notice to AmeriCash in
sufficient time for it to act on its rights.
– Used as a Backup. Authorization allows AmeriCash to
debit plaintiff’s checking account if she reneged on her
promise to repay the loan through the wage allotment
option.
– Bad Check Collection Process. Any debit to the account
returned unpaid could be collected in the same manner
as an unpaid paper check.
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Payday Loan
Bar Association
November 2010
NACHA Rules Update
• Two key changes announced in
June.
• Rules Simplification and Mobile
ACH Payments
• Become effective on January 1,
2011
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Payday Loan
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November 2010
NACHA Rules Simplification
• Regroup Materials by Participant
Type. Goal to provide a more userfriendly set of rules and guidelines for
ACH Network participants through (1)
the re-organization and re-grouping of
material by each type of participant in
the ACH Network.
• Clearer Language. Use of clearer and
more consistent language to facilitate
user understanding and compliance
with the Rules.
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Payday Loan
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November 2010
NACHA Rules Simplification
• Stated Intention. Intended to make Rules
information easier to find and easier to
understand without altering the substantive
meaning of the underlying Rules.
• BUT – Increased Emphasis on Oversight.
Simplified Rules also explicitly recognize that:
– ODFIs are the entry points into the ACH Network
for corporate users and third parties and
– Financial institutions are responsible for those
parties’ compliance with the Rules.
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Payday Loan
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November 2010
NACHA
Mobile ACH Payments Rule
• Mobile ACH Entries as the Goal.
Goal to establish a framework in
the NACHA Operating Rules for
initiating consumer debit entries
via a mobile device.
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Payday Loan
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November 2010
NACHA – MAPR! Rule
• WEB Definition Expanded. The
Mobile ACH Payments Rule expands
the definition of Internet-Initiated
Entries (WEB) to include consumer
ACH debits authorized and/or initiated
via Wireless Networks
• Must Use WEB Code. Requires use of
the WEB Standard Entry Class (SEC)
Code.
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Payday Loan
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November 2010
NACHA
WEB Includes Wireless Networks
• Revised “WEB” Entry Definition.
– a debit Entry initiated by an Originator to a Consumer
Account of the Receiver based on:
• (1) an authorization that is communicated, other than by
an oral communication, from the Receiver to the
Originator via the Internet or a Wireless Network, or
• (2) any form of authorization if the Receiver’s instruction
for the initiation of the individual debit Entry is designed
by the Originator to be communicated, other than by an
oral communication, to the Originator via a Wireless
Network.
• Amendment adds “Wireless Network” as a defined
term within the NACHA Operating Rules, establishing,
for ACH purposes, the concept of an Unsecured
Electronic Network for the communication of data
using wireless technology.
NACHA
Unsecured Electronic Networks
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November 2010
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Also revised definition of “Unsecured Electronic Network” to
include Wireless Networks within its scope and to provide
additional clarification on such networks
Defines an “Unsecured Electronic Network” as a network, public or
private, that (1) is not located entirely within a single, contiguous,
physical facility, and (2) either (a) transmits data via circuits that
are not dedicated to communication between two end-points for
the duration of the communication, or (b) transmits data via
wireless technology (excluding a communication that begins and
ends with a wireline connection, but that is routed by a
telecommunication provider for a portion of the connection over a
wireless system).
Deems the Internet as an Unsecured Electronic Network, even
though secure transmissions may be made over that otherwise
unsecure network.
Revises the requirements for the transmission of ACH information
via Unsecured Electronic Networks to clarify that voice or keypad
inputs over a wireless telephone to a live operator or VRU will not
be subject to the requirement to secure the connection with a
minimum of 128-bit RC4 encryption.
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Payday Loan
Bar Association
November 2010
Bankruptcy Code 362(b)(11)
• General Rule. 11 U.S.C. § 362(a)(6) Except
as provided in subsection (b), a bankruptcy
petition operates as a stay of … any act to
collect, assess, or recover a claim against the
debtor that arose before the commencement
of the case under this title....
• Exception. 11 U.S.C. § 362(b)(11). Filing a
bankruptcy petition does not operate as a
stay … of the presentment of a negotiable
instrument and the giving of notice of and
protesting dishonor of such an instrument.
In re Roete
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Creditor received a check pre-petition, and then presented
it post-petition.
According to the Court:
– The exception “permits holders of checks drawn by the debtor
to deposit them for the purpose of preserving their rights on
the instruments despite the filing of a bankruptcy petition."
– The key issue in such cases should simply be whether the
Creditor "presented" a "negotiable instrument."
– Under the UCC
Payday Loan
Bar Association
November 2010
• “the mere demand for payment constitutes presentment.”
• “a negotiable instrument is a writing, signed by a maker or drawer,
containing an unconditional promise to pay a sum certain, payable
on demand or at a definite time, and payable to order or bearer.”
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Thus, “the automatic stay was not violated by the Creditor'
presentment of a negotiable instrument.” The creditors'
actions clearly fall within the plain meaning of section
362(b)(11).”
In re Meadows
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Facts. Plaintiff asserted payday lender violated the automatic stay
when, it did not unconditionally return funds received from its postpetition presentment of debtor’s prepetition, postdated check.
Bankruptcy Court held that lender willfully violated the stay and
ordered it to return the funds and to pay debtor’s reasonable
attorneys fees. Lender appealed.
Holding. Bankruptcy Appellate Panel (BAP), held:
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November 2010
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when debtor’s prepetition check was honored post-petition, the
estate’s property interest in the bank funds was transferred to lender
and the funds ceased to be property of the estate;
lender’s retention of the funds did not violate the automatic stay; and
the unauthorized transfer to lender was subject to avoidance under the
section of the Bankruptcy Code governing post-petition transactions.
One Notable Quote From the Court: The purpose of § 362(b)(11)
is to encourage the free flow of commerce by permitting parties to
present and honor negotiable instruments without having to
worry about a potential violation of the automatic stay. This
purpose is thwarted if the party honoring the check is required to
distinguish between checks written concurrently with payment of
goods and services and checks post-dated in repayment of loans.
In re Kearns
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Payday Loan
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November 2010
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The FastBucks Idaho district was lending about $10,000 per month
that was immediately being discharged in chapter 7 bankruptcy
cases. A pattern was evident.
In all probability, several Idaho debtor’s attorneys were instructing
clients to go to FastBucks to fund the attorneys’ legal fees. This was
done, in spite of exposing themselves to potential state bar
proceedings for ethics violations.
A Bankruptcy Adversary Proceeding may be filed to have the debt
owed the lender excepted from discharge under 11 USC §523(a).
These proceedings are expensive, but also serve as a financial
institution’s strong warning to the bankruptcy debtor’s bar to stop
the practice of taking advantage of the financial institution.
In the 1990’s I was lead counsel on The Bank of New York’s 24
filings of §523(a) Adversary Proceedings wherein debtors had
taken large cash advances on their credit cards and almost
immediately filed chapter 7 bankruptcy. Prevailing on all of them, I
was successful in bringing the bank’s Visa and MasterCard losses
down dramatically.
Advice Based on Kearns
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November 2010
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In the past, where a pattern has been discovered, I have
contacted bankruptcy debtor’s attorneys around the
country and stated that management is instructing me to
file a grievance with their state bar for their probable ethics
violations in instructing their clients x, y, and z to go to
FastBucks and obtain a loan to pay the attorney’s fees.
Usually, FastBucks’ losses would stop shortly thereafter.
But, Idaho lawyers were resistant and defiant to stop their
practices and a test case was sought to be published in the
Bankruptcy Reporter to make an example of unethical
bankruptcy debtor’s attorneys.
A loud warning to the Idaho Bankruptcy bar was required.
But, I thought we could save legal fees by engineering a test
case outside of an Adversary Proceeding.
Engineering a Test Case – Take
Cautious and Purposeful Steps:
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Hire local counsel!
Only if the debtor is in Chapter 7 and has not yet received a
discharge, go to the debtor’s bank on or after the date the debt is
due and present the debtor’s original check. Obtain cash or
exchange the check for a cashier’s check.
It is best to make sure the debtor has received a paycheck postpetition. Post-petition earnings are not property of the bankruptcy
estate in a chapter 7 and are not protected by the automatic stay of
11 USC §362(a). Indeed, FastBucks was permitted to retain the
$968 in the Kearns bankruptcy. An added bonus but not the
purpose of a test case.
Caveat: These results are not obtainable in a chapter 13 case as
post-petition earnings are property of the estate and check
proceeds will likely be paid over to the chapter 13 trustee or even
back to the debtor.
Do not contact the debtor. It is best to simply negotiate the check.
Further Advice from
Kearns Cont’d
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November 2010
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Cash the actual signed original check of debtor.
Do not create demand drafts or paper debits.
Do not utilize an Electronic Debit (ACH) as 11 USC
§362(b)(11) does not include an exception for ACHs. The
bankruptcy code is not likely to be expanded to include
ACHs because ACHs are not a negotiable instrument. Or, are
they? Question to the Audience: Are state statutes on
negotiable instruments being expanded or interpreted to
make ACH authorizations a negotiable instrument? See
Snowden
One reason I doubt my ACH authorizations will become
negotiable instruments is due to the fact that they are not
for a specific amount, but are instead for an amount of $1
up to the full amount owed (not for an amount certain or
calculable on the face of the loan documents).
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Exceptions from Discharge in
Chapter 7 Bankruptcy
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Bar Association
November 2010
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All debtors should sign a separate statement with wording similar to: “I have
not consulted an attorney or obtained legal advice in the past six months
relating to filing for or planning a bankruptcy. I do not anticipate filing
bankruptcy in the next six months.” These representations are contained in
FastBucks’ loan applications and the clause is individually signed by all
debtors.
A debtor’s representation similar to the above on a loan application
facilitates relief under 11 USC §523(a). The debt may be excepted from
discharge thereby allowing the loan company to continue collections even
after their other obligations have been discharged.
In Kearns, the debtor misrepresented his recent consultation with a
bankruptcy debtor’s attorney and his imminent intent to file bankruptcy.
The payday loan was obtained on December 4, 2009 and the chapter 7
bankruptcy petition was filed on December 11, 2009. FastBucks exchanged
(presented and negotiated) the held check on December 19, 2009 for a
cashier’s check.
Had we not gotten a favorable published opinion on our utilization of 11 USC
§362(B)(11) (cashing the check), we would have then filed an Adversary
Proceeding under 11 USC §523(a) and had the debt determined to be nondischarged.
The Idaho district of FastBucks has suffered significantly less discharged debt
in bankruptcy since Kearns was published.
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Payday Loan
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November 2010
In re Brewer
• Payday lender presented check, post-petition
• Holding:
– Creditor did not violate automatic stay either by
its post-petition presentment of Chapter 13
debtor’s check to drawee bank for payment or by
its receipt of funds from debtors’ account; but
– Genuine fact issues precluded entry of summary
judgment on whether creditor’s refusal to turn
over proceeds of this post-petition transfer was
exercise of control over property of the estate, of
kind prohibited by automatic stay.
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November 2010
In re Snowden - Facts
o Payday Loan with BOC Disclosure. Debtor
obtained a prepetition payday loan from
Creditor. Debtor gave check as "security" and
“payment” for the loan. The Agreement
included the following disclosure:
o “[w]hen you provide a check as payment, you authorize
us either to use information from your check to make a
one-time electronic funds transfer from your account
or to process the payment as a check transaction.”
(emphasis added)
o Post Petition Debiting of Funds. Debtor filed
chapter 7 petition, listing Creditor as an
unsecured creditor. After filing, Creditor made
an electronic funds transfer for such amount.
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In re Snowden
o Creditor argued the ACH debit entry
was merely the means by which
Creditor presented the negotiable
instrument.
o RCW 62A.3-501(b)(1) specifically
authorizes “presentment” by any
commercially reasonable means,
“including electronic”
communication.
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In re Snowden - Holding
o This EFT was NOT Presentment. The
electronic transfer was not a
"presentment" under the UCC.
o So No Exception Applies. Since Creditor
did not enforce Debtor's agreement via
presentation of an instrument, the §
362(b)(11) stay exception is inapplicable
o Violated Automatic Stay. Creditor
willfully violated the automatic stay when
it initiated a post-petition electronic
transfer from Debtor's bank account.
In re Snowden - Reasoning
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To qualify as “presentment” Washington law requires :
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Key Facts the Court Noted:
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exhibiting the instrument,
giving reasonable identification and, if presentment is made on behalf
of another person, reasonable evidence of authority to do so, and
signing a receipt on the instrument for any payment made or surrender
the instrument if full payment is made. RCW 62A.3-501(b)(2).
ACH Records did not “identify Debtor's bank's routing number, her
account number, her name, a check date, and an amount.
ACH Records did not “specify the check number.” ACH Records do not
“specifically identify Debtor's check.”
ACH Records listed the “check date” as the day of debiting, not check’s
date.
Creditor did not surrender Debtor's check, “nor is it apparent how that
could be done electronically.”
Therefore, the court concluded that “the electronic transfer was
not presentment” of Debtor's check.
In re Snowden
Other Notable Quotes
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BOC Authorization Model Suggests a Choice Between
Check Transaction and EFT.
– The Agreement allowed Creditor either to process the payment
as a check transaction or to "use information from [Debtor's]
check to make a one-time electronic funds transfer from
[Debtor's] account.“
Payday Loan
Bar Association
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Court Said Company Chose EFT, Not Check Option. Creditor
“chose the latter and made a one-time electronic funds
transfer; it did not present the check electronically.”
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Consequence is no Bankruptcy Exception. One of the
consequences of this choice was…that the EFT in this
instance was not "presentment" as contemplated in Article
3 of the UCC. “
November 2010
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Payday Loan
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November 2010
In re Snowden
Can an ACH be Presented?
• “This is not to say that an EFT could never be
presentment, but it would necessarily have
to specify the particular instrument, and
could not be some other transaction
authorized by the parties' agreement.
• Although a check might provide the basis and
the necessary information for the
transaction, there can be no "presentment"
without specific identification of the
particular instrument, even if surrender
could be overlooked.”
In re Snowden
Other Reasons 362(b)(11) Fails
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Court noted § 362(b)(11)'s exception may be inapplicable here for
other reasons as well:
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“Exceptions to the stay are narrowly construed, and anything Creditor
did beyond the statutory requirements of presentation would violate
the stay. “
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“Arguably, even indorsement (sic) of a paper check for deposit into the
payee's or holder's account, with attendant warranties, RCW 62A.3-417,
is outside the strict requirements of presentment, and thus outside the
exception.”
Payday Loan
Bar Association
November 2010
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“If, under the contractual provisions governing the ACH system or
the rules of that system by which Creditor agreed to be bound, any
warranties or other actions beyond exhibiting and surrendering
the instrument would also seem to fall outside the exception's
ambit. But neither the agreements by which Creditor joined the
ACH system, nor the rules of that system, are in evidence, so that
question must await another case.”
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Payday Loan
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November 2010
ACH State Considerations
• Virginia
• California
• Elsewhere
Disclaimer
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November 2010
This presentation is provided with the understanding that
the presenters are not rendering legal advice or services.
Laws are constantly changing, and each federal law, state
law, and regulation should be checked by legal counsel for
the most current version. We make no claims, promises, or
guarantees about the accuracy, completeness, or adequacy
of the information contained in this presentation. Do not
act upon this information without seeking the advice of an
attorney.
This outline is intended to be informational. It does not
provide legal advice. Neither your attendance nor the
presenters answering a specific audience member question
creates an attorney-client relationship.