By Laura Alix
A recent Rhode Island Superior Court decision held that a money order company victimized by a fraudster cannot hold liable for its losses the bank that accepted the faux money orders for deposit.
The decision came in a lawsuit originally filed by Domestic Bank, now Admirals Bank, against Johanny Urbaez and others, in which Memo Money Order Co. Inc. intervened. The central question was which entity should take the loss in a fraudulent money order transaction, said Paul Sanford, an attorney for Domestic Bank in the case.
The court considered whether the issuer of a money order fraudulently altered or forged by a third party could bring a Uniform Commercial Code (UCC) or general negligence claim against the bank that accepted the money order for deposit, Sanford told Banker & Tradesman by email.
First Such Case in 35 Years
The action originated when Johanny Urbaez, who was acting as a special agent and trustee of Memo Money Order Inc., passed bad money orders in a kiting scheme. According to the suit, in 2006 Urbaez entered into a trust agreement with Memo Money Order Co. Inc. allowing him to sell Memo money orders as part of his check-cashing business.
In 2009, after the agreement was altered so that Urbaez, rather than Memo, could initiate the wire transfer that covered the money order, he deposited forged Memo money orders into his own accounts at Domestic Bank.
Memo’s bank, BancFirst Stratford, honored $1.2 million worth of the money orders before the fraud was detected, but later returned $235,737 after Memo ordered it to stop payment.
Later that year, Rhode Island’s Division of Banking revoked Urbaez’s license and ordered him to pay the state a $1,388 penalty. That left both Domestic and Memo out a considerable amount, and the question remained as to who should bear responsibility for those losses.
After the fraud was uncovered, Domestic filed a suit against Urbaez. Memo brought a claim against Domestic, hoping to recoup some of its own losses from the bank itself, and Domestic brought a counter-claim against Memo.
The last claim that considered a negligence case by a drawer against a depository bank in a personal money order setting was a 1979 New Jersey state court decision, according to Sanford. In that case, Western Union Telegraph Co. v. Peoples National Bank , the court dismissed the negligence claim brought by the drawer of the money order against the depository bank.
Western Union had sued Peoples National Bank in Lakewood, N.J., over a $1,100 discrepancy on a money order calling for payment of $100 in text, but $1,200 in numerals. The money order was cashed for $1,200, and Western Union demanded reimbursement of the difference more than two years later.
In that case, as in the Rhode Island suit, the court held that the drawer lacked standing to bring those claims, since it was Western Union’s own bank that had the last clear chance to stop the fraud.
What it Means for Banks
Memo’s claim argued it could sue Domestic directly because it was not the drawer of those money orders, but the drawee, and that the purchaser of the money orders was actually the drawer.
Domestic countered that Memo lacked the standing to bring many of its claims and that Memo should be taking action instead against its own bank, BancFirst. Ultimately, the court sided with Domestic on this claim.
A lawyer for Memo Money Orders said that Memo disagreed with the decision, but did not want to comment further at this time, as a few of the claims in Memo’s claim and Domestic’s counterclaim remain pending.
The decision, reached in late March, reaffirmed the UCC’s allocation of loss principles, which govern who may sue who in the event that a negotiable instrument like a money order is forged or fraudulently altered, Sanford said. In other words, a bank that accepts a personal money order for deposit cannot be sued by the issuer of that money order. The issuer must bring that claim against their own bank.
“This is an important liability limitation created by the UCC,” Sanford said by email. “Prior to this decision it was unclear whether that limitation explicitly applied to personal money orders. The decision confirmed that it does. This should be very reassuring to banks in that money orders are treated similar to checks and other negotiable instruments for allocation of loss purposes.”
Laura Alix is a staff writer for The Warren Group.