In Cadence Bank, N.A. v. Roy J. Elizondo III, PLLC, the Supreme Court of Texas recently held that an administrative form relied upon by a victim of a fraud scam did not impose contractual obligations on a bank to verify available funds before processing the wire transaction.
A Texas lawyer maintained an IOLTA deposit account at Cadence Bank. In 2014, a scammer emailed the lawyer, seeking his legal representation. When the lawyer agreed to the representation, the scammer informed him that the matter had settled, and the opposing party would mail the lawyer a cashier’s check for the settlement amount. The scammer then instructed the lawyer to deposit the check into his IOLTA account and wire $398,980 to a third party in an overseas account. The lawyer received a cashier’s check in the amount of $496,850, which he deposited into his IOLTA account at Cadence. Cadence provided the lawyer with a receipt stating, “All items are credited subject to payment.”
The lawyer then contacted Cadence to initiate the outgoing wire transfer. The lawyer completed the top portion of a form titled, “International Outgoing Wire Transfer Request.” The form contained notice of a $55 transfer fee, as well as a printed declaration, requiring the transferor to acknowledge that Cadence could not guarantee the delivery of an international wire, that the transferor could be responsible for “tracer fees” under certain circumstances, and that the transfer could take up to 10 business days. The form also contained a “preprinted admonishment” to Cadence employees, which stated: “Before signing off, be sure you ‘know your customer’ and have verified the collected balance and documented any exception approvals.”
Cadence wired $398,980 to the overseas bank account the lawyer identified on the form. The next day, the cashier’s check was dishonored and returned to Cadence unpaid. As allowed by the UCC and parties’ deposit agreement, Cadence charged the provisionally deposited amount back to the account and demanded payment of the overdrawn funds. The demand was refused.
Cadence sued to recover the funds, asserting claims of breach of the deposit agreement, breach of warranty under UCC § 4.207, and tort. The lawyer countersued, relying on the wire transfer form as a predicate for a breach of contract claim, as well as asserting fraud and negligent misrepresentation claims. Both parties moved for summary judgment. The trial court denied Cadence’s motion, granted the lawyer’s motion, and signed a final judgment that each party take nothing.
The parties appealed, and the Texas First District Court of Appeals affirmed. On appeal, the lawyer argued that by signing the top part of the wire transfer form and emailing it back to the bank, he made an offer to pay Cadence $55 to transfer money from the “collected balance” of his account, which was the remaining balance once provisionally credited funds are excluded. The lawyer also argued that the form’s instructions to “know your customer” and “have verified the collected balance” imposed binding obligations on the bank.
The Texas First District Court of Appeals agreed and found that the wire transfer form created a contract in which the administrative instructions to the bank officer were converted to an affirmative duty owed by the bank to the customer. In other words, the court imposed a contractual duty on the bank to verify the collected balance and ensure that funds for a deposited check cleared before proceeding with an international wire transfer.
The Supreme Court of Texas reversed, finding that the wire transfer request had “all the indicia of a form” used for “Cadence’s internal processing” of wire transfers, and was not a contract. The Supreme Court rejected the argument that the wire transfer form imposes duties on Cadence, superseding rights under the UCC and the deposit agreement between the parties. The Supreme Court noted that under this reasoning, any of a bank’s routine administrative forms could potentially override the liability scheme of the UCC. The case was remanded to the trial court to consider any of the remaining claims or defenses not based in contract.
The case affirms what bank lawyers assert in virtually every deposit case. The signature card and deposit agreement comprise the relevant contractual agreement between a bank and its depositor, and the parties are subject to the liability scheme of the UCC. Administrative forms do not supersede or modify those obligations. Banks should review their applicable deposit agreements to make sure they do not adopt and incorporate as contractual terms administrative forms used for internal processing of wire and other deposit transactions.