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Wednesday, November 7, 2012
Archives---November 7, 2005
You May have Missed---
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Archives---November 7, 2005
US Express Settles for 85% NorVergence Leases Forty customers, totaling $1.7 million, of US Express were offered 85% settlement of "equipment rental agreement" last week.
Allegedly 1,371 NorVergence lessees to date have been offered settlements, out of an original estimated 12,000. This does not include the FTC win of $47 million dollars of "uncommitted" signed leases, with claims against the receivables, assets, held by the NorVergence Corporation in bankruptcy and claimed by several leasing companies as "additional collateral" for their defaulted leases. No count of leases were given, according to Leasing News Research, and it should be noted the 12,000 leases was given to the Bankruptcy judge from the officers of the NorVergence Corporation at the time of filing. It also should be noted there is a 1450 member class action suit. The remainders of the alleged 12,000 leases appear to be in individual litigation with the first issue "venue," which is being overturned in most court districts.
Leasing News is attempting to find out from the 28 attorneys general Offices and District of Columbia actually what the "real number" is who have taken the settlement offered.
Illinois Attorney General Lisa Madigan said the latest settlement agreement could provide more than $160,000 in debt forgiveness to four Illinois small businesses located in Cook and Kane Counties.
Illinois was joined by the Attorneys General from California, Colorado, Connecticut, Georgia, Kansas, Maryland, Massachusetts, Michigan, North Carolina, Pennsylvania and South Dakota in reaching an agreement with New Jersey-based US Express Leasing, Inc. The settlement was reached in connection with collection agreements the leasing company holds regarding NorVergence, Inc.
Impacted consumers and businesses may choose or decline to participate in the settlement agreement. If all affected consumers in the participating states accept the deal, US Express will write off approximately $1.59 million in debt for 40 small businesses.
Earlier this year, Madigan and Attorneys General from across the country announced similar agreements with GE Capital, US Bancorp, Wells Fargo, CIT Technology and De Lage Landen Financial Services. Those leasing companies agreed to write off more than $27.7 million they claimed to be owed by 1,371 NorVergence customers, including more than $6.89 million owed by 341 Illinois customers.
"With each additional settlement reached with a leasing agency - whether big or small - additional small business owners are provided relief from the collection hassles they have experienced since NorVergence declared bankruptcy last year," Madigan said.
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Third-IFC Credit Trustee, Northfield, Illinois
"We purchased an Accounting system from them five years ago and financed it through First Corp. It was a 5 year lease with a $1 buyout. We just made our final payment and contacted them about the $10 buyout and wanted to make sure that their records matched ours. They are now called 'The Estate of IFC Credit Corp'.
“ I received this email back from them stating that there was a $1 buyout at the end, but we needed to contact them between a 30 day window (90-120 days prior to end of lease) to take advantage of that.
"They are saying that we didn’t do that so instead of owing $1 the lease renews at the current rate for 12 months. In the email attached they are trying to make a deal with us and if we pay right away they will waive six months. Is there anything we can do? Is there any help you can give or refer us to someone?”
Timothy G. Halko
Lance Craig signed as a personal guarantor, which in Illinois requires the lessor to notify the lessee in advance regarding any purchase option. That the purchase option is $1.00 is ludicrous and to charge any other dollar amount is reprehensible, particularly from a trustee appointed by the State of Illinois, who ethically and legally may be held in contempt of court for this action.
Leasing News is going to refer this to a private attorney as well as the Attorney General's office of Illinois.
Other IFC Credit Evergreen complaints:
New ---IFC Credit BK Trustee Complaint
IFC Credit Trustee, Northfield, Illinois
Companies who utilize Evergreen Clauses for Extra Lease Payments
These companies use language in their purchase options to confuse, perhaps to deceive, with the result an automatic continuation for an additional twelve months of payments.
Several have contiuation of payments and the requirement of replacing the equipment for a new lease. Leasing News has had complaints involving companies who invoke the twelve months on a $1.00 purchase option, as well as on an Equipment Finance Agreements.
ACC Capital, Midvale, Utah
ACC Capital, Midvale, Utah---This company is no longer in business, although its portfolio is being wound down, according to its owner Loni Lowder; the receivables are being collected by creditors. Lowder today is an employee, manager, Stalwart Contract Finance, Salt Lake City, Utah. To date, all Evergreen Clause complaints have been satisfied.
IFC Credit, Morton Grove, Illinois---This company is in bankruptcy, appeared many times in the Leasing News Bulletin Board prior to filing bankruptcy, but engaged in Evergreen Clauses, and unfortunately a recent example is a complaint to the trustee, stemming from M&T Bank lease assignment expiring and notify the lessee that they did not notify about the residual, which was a $1.00. This has happened many times with other banks who have taken over the IFC Credit Corporation portfolio. Calls and letters to the trustee and attorneys have gone unanswered.
Jules and Associates, Los Angeles, California--- Jules and Associates, Los Angeles, California---A repeat customer, who notified Jules and Associates on a lease, but was not before the 180 day expiration, so Jules and Associates instead of the 1% due for the residual ($2,308.79) charged six more payments or $40,463.94, and if 1% is not paid in this time, they will be subject to another three months.
LEAF Financial Group, Philadelphia, Pennsylvania---It appears this company is in a more wind down phase, moving its operation of LEAF Commercial Credit with basically the same management. There have been complaints about the Evergreen Clause, including one this year for an Equipment Finance Agreement!
Marlin Business Leasing, Mount Laurel, New Jersey---The actual SEC filings state the profit earned from Evergreen Clause, primarily from copier leases. Bulletin Board Complaints have been received about this practice in addition to the SEC financial statement filings.
(9) Marlin Response to posting
When the company was bought and became Pacific Western Equipment Finance (a division of Pacific Western Bank) he maintained the same position. It was noted his old company was still on the list, and a request of his "master lease" was made.
"Our docs are the same as when we were with Marquette. Because we’re public now, it is very difficult to get documents released."
I asked him if he could send to a broker wanting to do business with him, "Sorry, can’t forward to you or your brokerage."
A search of PACER, a national index for U.S. district, bankruptcy and appellate courts brought up a number of Marquette cases, and the first one hit pay dirt: Merchants & Farmers Bank, a Mississippi Corporation versus Marquette Equipment Finance and Applied Financial. It was a similar case and while "dismissed with prejudice" (6), it had the arguments regarding the purchase option and a copy of the complete contract with a similar PPR as with Mazuma Capital:
"(g) Lessee's Options at End of Initial Period. At the end of the Initial Period of any Lease, Lessee shall, provided at least one-hundred-eighty (180) days prior written notice is received by Lessor from Lessee via certified mail, do one of the following: (1) purchase the Property for a price to be determined by Lessor and Lessee, (2) extend the Lease for twelve (12) additional months at the rate specified on the respective Schedule, or (3) return the Property to Lessor at Lessee's expense to a destination within the continental United States specified by Lessor and terminate the Schedule; provided, however, that for option (3) to apply, all accrued but unpaid late charges, interest, taxes, penalties, and any and all other sums due and owing under the Schedule must first be paid in full, the provisions of Sections 6(c) and (d) and 7(c) hereof must be specifically complied with, and Lessee must enter into a new Schedule with Lessor to lease Property which replaces the Property listed on the old Schedule. With respect to options (1) and (3), each party shall have the right in its absolute and sole discretion to accept or reject any terms of purchase or of any new Schedule, as applicable. In the event Lessor and Lessee have not agreed to either option (1) or (3) by the end of the Initial Period or if Lessee fails to give written notice of its option via certified mail at least one-hundred-eighty (180) days prior to the termination of the Initial Period, then option (2) shall apply at the end of the Initial Period. At the end of the extension period provided for in option (2) above, the Lease shall continue in effect at the rate specified in the respective Schedule for successive periods of six (6) months each subject to termination at the end of any such successive six-month renewal period by either Lessor or Lessee giving to the other party at least ninety (90) days prior written notice of termination."
The first option is to purchase the equipment for a price to be determined by Lessor and Lessee and requires a certified letter 180 days prior. This sounds like a fair market purchase option, but the “price to be determined” language means that the Lessor can set any price it wants. This option is illusory in my opinion.
The second option is to continue the lease for an additional 12 months, the “Evergreen” period. No notice of this provision is given to the lessee either in advance of signing or prior to exercising this option. Republic Bank purchases these 12 month extensions in advance of their exercise. How would the bank know that the lessee is going to exercise this option, unless everyone knows it is the only practical option for the lessee to exercise? Republic Bank President Boyd Lindquist confirmed in a telephone call that he “buys” these extensions from Mazuma and has for quite some time.
The third option is to return the equipment, but the clause is draped with the condition that the lessee has to re-lease identical equipment for a similar term. It also has 180 day certified letter requirement, and applies to the second option of 12 months, but also has the clause of an automatic six month option. So what is the point of exercising this option? At the end of this re-lease, there would be the same three identical options, so the lessee would be required to re-lease and re-lease. It’s just like Groundhog Day.
Leasing News is working on obtaining information on other companies so named to add to the list, including follow-up on the master lease for Pacific Western Equipment Finance. If you have a copy, please send and will keep your name “off the record.”
((7) See for Copy of Filing, including contract.)
Mazuma Capital Corp, Draper, Utah Several routie "end of lease agreements, as alleged in Unified Container and Anderson Dairy (1) "8. The basic scheme involves the inclusion of a purchase, renewal, return (“PRR”) provision in the lease. The lessor assures the customer they will be able to purchase the equipment at the end of the initial term in the lease for a reasonable or nominal price. Often, the lessor promises the equipment can be purchased at a fixed percentage of the total amount financed. However, at the end of the initial lease term, the lessor refuses to honor the agreed upon purchase price or negotiate in good faith regarding a purchase price, but instead, insists the lease automatically renews for an additional term (usually twelve months).
9. The inclusion of the purchase and return options in the lease are entirely illusory and intended only to give the customer the false impression that it can exercise any of the three options at the end of the initial lease term, when in fact, the lessor will only allow an automatic renewal at the end of the initial lease term.) There are other exhibits. This case was settled "out of court."
H. Jared Belnap, President & CEO, Mazuma Capital Corp., takes exception on beingon the Evergreen list. His full letter and Leasing News Response is at (5).
Onset Financial, South Jordan, Utah --- Onset contract, which contained:
((8) See for Copy of Onset Contract with PPR purchase option.
Republic Bank, Bountiful, Utah Purchases and participates in extended Evergreen clause agreements.
They are legal in all states, except four states require advance notification be given to the lessee regarding termination of the lease and its residual (Four states: New York Rhode Island, Texas, Illinois (In Illinois, Consumer law, but may affect commercial, especially a proprietorship, partnership or personal guarantee)"
Tetra Financial Group, Salt Lake City, Utah Several routine "end of lease agreements, as alleged in Unified Container and Anderson Dairy (1)
“22. Mazuma Capital is associated with Republic Bank and obtains financing for its leases containing PRR provisions from Republic Bank.
23. Like what took place at Amplicon, Inc., the PRR scheme utilized by Matrix, Applied Financial, LLC, Mazuma Capital, Tetra Financial Group, LLC and others has begun to be exposed through litigation and negative press. See Deseret News (2) articles attached hereto as Exhibits B (2) and C. (3)”
Here is a case where New York courts threw out the Evergreen Clause as not legal in New York, even though venue appears to be Utah. (4))
(1) 36 main pdf
(2) Deseret News
(3) Exhibit C
(4) Salon Management case
(6) Order to Dismiss with Prejudice
(7) Copy of filing, including contract
(8) Copy of Onset Contract with PPR purchase option
Like many others who have written on how they became a CLP, I didn’t have a clue what it meant or its value. I wasn’t to learn until later how it helped my career, my performance, and our team growth in equipment financing and leasing. It all started when I agreed to become a part of the original team that started the Arvest Equipment Finance division of Arvest Bank in 2007. Although I had “grown up” in the banking industry, the leasing transactions I had limited exposure to our industry, made me realize I had a lot to learn.
Immediately following the initial ramp-up phase for Arvest Equipment Finance, my division President Kyle Gilliam, CLP, began to talk about this distinguished Certified Lease Professional designation. A CLP handbook was ordered and I was encouraged to casually read through the chapters and attend the master review class at an industry conference we were attending. It was a challenge as I dove into the book and the more I read, I realized I had just signed up for an adventure. This was not a casual read and my commitment level suddenly seemed to waiver. For several years I made excuses and then my 3rd annual performance appraisal suddenly had the dreaded goal I’d been ignoring. If I knew more about leasing when I started, the test for the CLP would certainly divulge.
Unfortunately for me, I couldn’t just show up and take the test; no one does as you need to study to pass. The Institute for Leasing Professionals session (sponsored by the National Equipment Finance Association I attended in Bellevue, Washington was the most beneficial experience because I sat and fine-tuned the areas I needed to focus on to take the test. In my opinion, you can never study, review and prepare enough for the eight hours of a four section exam. I even reverted to the all night cram before the test. Yes, I was desperate to prove that I was a Certified Lease Professional!
The people in our lives that influence us are sometimes unaware of the impact they have. My division President pushed me to see the importance of holding the CLP designation. The valuable knowledge I gained preparing for the test, the contacts I made attending the industry conferences and the Institute for Leasing Professionals session as well as networking with other Certified Lease Professionals, has given me an added confidence.
I am now getting more involved, including being a conference chair for the National Equipment Finance Association. It has also brought me recognition at the bank, where others in our department have also become a CLP. We have seven right now, and more to come, as I am mentoring some of my colleagues.
What we are learning at Arvest Bank is to respect those with the designation, as they have proven they hold the highest standards, have proven their knowledge of the industry by passing the test, and I plan to be recertified every four years (No recertification, but proof active in the leasing industry).
I am proud to be a professional in the leasing industry.
Why I Became a CLP series
(This ad is a “trade” for the writing of this column. Opinions
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As Section 179 Nears Expiration,
IRVINE, CA-- - Balboa Capital, a leading equipment financing and working capital loan company in the United States, is seeing an increase in capital equipment investing by small business owners who want to take advantage of the current Section 179 tax deduction before it expires on December 31, 2012. After this deadline, the Section 179 deduction limit will drop to $25,000 from its current limit of $139,000. Balboa Capital recently launched a comprehensive awareness campaign that includes a Section 179 infographic and Section 179 video that highlights their online Section 179 tax calculator.
Race Against Time for Business Tax Write-Offs
With 2012 coming to a close, now is the time for businesses to acquire new or used capital equipment that qualifies under Section 179. Companies can write off the full purchase price of qualifying equipment that is bought and put into use before the end of the year.
"Investing in new equipment is a way for businesses to grow and succeed, and Section 179 encourages this," said David Chiurazzi, Chief Financial Officer at Balboa Capital. He adds, "Small businesses are on the fast track to get new equipment because today's generous tax deductions won't be here in 2013."
Understanding Section 179
The Section 179 tax deduction is an IRS tax code that allows businesses to deduct up to $139,000 worth of eligible business property that is purchased or financed in 2012, instead of depreciating the asset over several years. On January 1, 2013, this maximum deduction is decreasing to $25,000, and the first-year bonus depreciation on new equipment, which is currently 50%, will be eliminated. Only tangible, depreciable business property qualifies for Section 179, such as office equipment, computers, machinery and business vehicles. "There's a list of qualifying equipment on the IRS website, but business owners should always consult with their accountants," said Mr. Chiurazzi.
About Balboa Capital
Section 179 Tax Deduction Video (2:01):
##### Press Release ############################
#### Press Release #################
Ascentium Capital Announces Additions to Credit Facility
Tom Depping, Chief Executive Officer of Ascentium Capital stated, "We are pleased to have diversified our funding sources by adding two first class money center financial institutions with strong trading platforms. We have aggressively grown our vendor sales force and monthly origination volume over the past year. Having four significant lending partners in our lender group provides us significant borrowing capacity and will enable us to more efficiently fund our business and attract talent."
Ascentium Capital specializes in providing financial solutions to open new avenues for growth and profit for small businesses located nationwide. The company offers equipment financing and leasing for capital expenditures across many industries nationwide.
Ascentium Capital is backed by Vulcan Capital, the private investment group of Paul G. Allen, and a group of investors led by LKCM Capital Group, LLC (“LKCM”), the alternative investment vehicle for Luther King Capital Management.
#### Press Release #################
Leasing News Help Wanted Classified Ad
Please see our Job Wanted section for possible new employees.
Letters?! We get eMail
(Mostly in Chronological Order)
"My Wife Mary Ann had a serious operation last Tuesday and had significant spinal cord damage. Good news is that went good however after 3 days out of the hospital she is in severe pain at the site and through her shoulders and
“Please remember Patrick Sponsel and Rosanne Wilson as well."
Why I Became a CLP
"Thank you for selecting me for your “Why I Became a CLP” feature. I am honored. Moreover, thank you for your enduring support of the CLP program. I wish you could have some idea of how much CLP appreciates you. I appreciate you, too."
Wells Fargo Equip. Finance Stripped of Its Perfected Lien
"I am really enjoying the articles by Tom McCurnin. Thanks for continuing to keep us all abreast of new developments."
"Tom's columns are terrific! Informative, educational, entertaining, gripping. He should collect those columns in a book. Everyone in the leasing business would buy a copy (including me).
"Love reading Tom McCurnin in Leasing News"
Titled Equipment Program
"...received extremely positive responses from our advertising with your publication and we look forward to working with you in the future."
45 Years in Leasing
"Kit, I thought you would like to pass on to all they old time lessor owners that Bob Storey, former of Master Lease Co. was still around and reading your newsletter as I am turning 82 in Nov 2012. Still in good health even though some say lessor die early. While there may not be many more still around, I'm sure there are a few. You might want to let them know I'm still here. my email is firstname.lastname@example.org in case they would like to say hi.
"I've enjoyed your newsletter and it even helps me keep up with what's happening in the business I was in for over 45 years."
(most current one)
“Alexa for ten years has ranked Leasing News first among internet readers for news in the leasing industry in the United States as well as the most read from the United states in other countries.
"Congratulations Kit!! Hope all is well. All good here. Both PFSC &
“Varilease Finance are having record years.
Yankee Stadium Parking Company Defaults on its Bonds
"Every year, for Fathers’ Day, my daughters take me, my sons-in-law, and the grandsons to the Stadium. You may know that the footprint of the old Stadium remains as a playground of three fields that are used for Bronx baseball leagues. It is nicely done and the players are thrilled that they are playing on the same dirt as Ruth, Gehrig, DiMaggio, Berra, Mantle, Munson, et. al. What remains however, is a parking garage that ran behind the old Stadium. I noticed at the game we attended this year that this four story structure was completely vacant and not in use.
"We all know that parking at these games is ridiculous, and it is interesting that this article speaks to the private lots that we park in…although still high, they are lower than the garages attached to the Stadium. Another example of the free market economy, driven by pricing and supply, working its mechanics.
"Please remove my ad. Thanks for running it. I have moved on and am now CFO at a non-profit. I still love to read the Leasing News to see what's going on in the industry I spent so many years in.
You perform a wonderful service! Keep up the great work!"
All the best,
Joseph Bonanno (MBA, JD), Why I Became a CLP
"Got a chuckle at the blast from the past about Joe Bonanno!
"I don't think enough of us take the time to recognize all Joe has done for our industry, usually without fanfare or reward. He's done more than anyone I can think of to encourage and enforce ethical standards among brokers and funders and to promote the interests of brokers, the most under-represented financial players in America.
"As senior finger-wagger, he gets sideways glances and put-downs, but few work harder and deserve more thanks."
Barry Marks, Esq.
BBB: Rating Leasing Companieshttp://www.leasingnews.org/Pages/bbb_listings.html
"Regarding BBB: I think that their rating system is a huge hoax on the public. A horrible company with 60+ complaints (which means another 600 people hate them and 6000 more would never use them again, but I digress), could easily have a big “A+” that the BBB customer would use in their advertising to make them seem like a good firm to do business with. BBB must know that 99% of the public would not take the effort to hit the hyperlink or go to the BBB web site and see that there could be 60 or any number of complaints so they are relying on the trusting nature of most folks to spread false good ratings on otherwise terrible companies. A filthy company with 60 complaints should have an indelible rating of D, and never any better, even if all complaints have been “satisfied”. A “C” rating is not good enough because an average business treats their customers fairly, a terribly one is below average. Just imagine the Paynet or D&B or Experian or any other database rating if you had 60 serious blemishes. You could have hundreds of positives and still never get a good overall raging, now that is proper reporting the BBB report is a lie.
"The other thing that amazes me is that some leasing companies seemingly think the public is so stupid that they have their BBB a+ logo on their web site and figure that will convince people, and don’t figure someone will put the hyperlink and see all the dirt. They are either very stupid or very cynical.
"By the way, we have been in business 26 years, have several thousand customers, many with 5, 10, 15 and more leases, some with 20+, and vendors that go back 15 years, and no complaints ever in BBB because we treat people right. If you treat people like dirt, they get revenge by reporting you to the BBB and filing suits (which we have had none). All of this is an aside, my main point is that the BBB is bogus.
"Wow, I am amazed how right I am and I bet you agree.
Bruce Forinash, Leasing Agent
Son: Professional Drummer
"As many of you know, my middle son Aaron, is a professional drummer. He’s accomplished quite a bit so far and many of you have seen him perform live on the television shows Glee and Glee Project. He has put together a very comprehensive website to display his mastery of several musical styles. For those of you with Facebook, he will continuously post Facebook with new videos, some drum lessons for various levels, interviews and more.
"We are making a push for exposure and I’d be personally grateful for any of you on Facebook to “Like” and “Share” his Facebook Page “Official Aaron Rudin”. For those of you without Facebook, please ask your kids to do this and please look at his work at www.aaronrudin.com.
Quail Equipment Leasing
Fifty “First Time” Attendees at NEFA Funding Symposium
NEFA Elects New Officers
Randy Haug Named NEFA Member of the Year
"Thanks for posting the nice article 2 days in a row about the NEFA member of the year.
"I'm not much into notoriety, but it is meaningful to me to be selected for this honor from my industry peers, and especially an award named after my dear friend Chris Walker. The most important part for me was sharing the stage with Jean and Maddie Walker who came to DC as we honored Chris Walkers legacy with NEFA, the CLP and the greater industry. Doug Olson Co-Chairman of GreatAmerica and his wife and daughter also accompanied Jean and Maddie on this trip. To me the focus should be on them, more than me honestly.
"Hope you continue to do well and we appreciate you mentioning this event.
"Thank you again!"
Likes Leasing News
Thanks again for the ongoing education and for making me feel looped in.
Paul Weiss Advice
"In reading today's leasing news, Paul Weiss of Panther Leasing suggested to an individual inquiring about becoming a lessor to read Terry Winder's column vs. buying any other book. I totally agree as they are so informative in all aspects of leasing. For years I have read and made copies of Terry's columns and have quite a library. Having been in leasing for 38 plus years, I still learn something new or remember things forgotten by reading Terry Winder's well written and concise articles. I have also considered taking the CLP exam and if so will use Terry's articles as a source for my studies.
Keep up the good work Kit!"
Fraudulent Wire Transfer Schemes Continue to Plague
By Tom McCurnin
Three Different Approaches: Three Different Results.
Charles Caleb Colton, an English cleric and writer, once said that “There are some frauds so well conducted that it would be stupidity not to be deceived by them.” And it is true today, as frauds get more and more sophisticated.
Fraudulent Wire Transfers are back on the rise again, this time with high tech fraudsters that penetrate security procedures and victimize business and banks alike. As demonstrated by three cases, fraudsters have the ability to take over business computers from remote locations, change the phone numbers for secure lines, and figure out the username and passwords of businesses which originate wire transfers. Quite frankly, it’s scary. Depending on the status of the reader, as a business or financial institution, the liability for a fraudulent wire transfer and the various approaches to stop such fraud may be different. Usually, it’s between the only two parties with a stake in the funds, the bank and the customer.
If the business is a victim of a fraudulent wire transfer, shifting the loss to the bank depends mainly on the scope of the financial institution’s agreed upon security procedures. Surprisingly, some financial institutions do not have such procedures, and if they do, many do not insist that the customer sign them. Other financial institutions may not offer the latest security procedures, and the bank’s actions may be deemed commercially unreasonable. If the bank is the victim, then its salvation will be the Uniform Commercial Code and the existence of commercially reasonable agreed upon security procedures.
To find the answer as to how courts deal with fraudulent wires, we looked at three different States, three different banks, and three different customers. The courts gave us three different results, but the cases demonstrate how fraudsters can get away with draining a bank account in minutes, and whether or the bank, or the customer, will bear the loss. Which entity bears the loss will depend mainly on the existence of an agreement to institute security procedures and whether the procedures are commercially reasonable.
The failure to have any procedures in place was the downfall of one financial institution. In the case of Universal City Studios Credit Union v. Cumis Ins. Soc., Inc., 2012 WL 3089378 (Cal.Ct.App. 2012), the Credit Union apparently did not have a security procedure or if it did, it did not require the customer to come into the branch and sign it person. Therefore the Credit Union was stuck with a $200,000 loss.
Universal City Credit Union received a phone call from its supposed customer, who requested that the Credit Union change the phone number on the customer’s account. The caller was not the customer but the fraudster.
The Credit Union wisely asked the “customer” for personal identification information, such as date of birth, social security number, mother’s maiden name and the like, which the customer readily and accurately supplied. The Credit Union did in fact change the phone number on the customer’s account. That was the first step to enable the fraudster to drain the account.
The next day, the “customer” called back and wanted to wire transfer the balance of the account to a third party, and even faxed a written request. The signature on the fax matched the signature on file. But as we know, a fax image may be photo-shopped or cut and pasted. The Credit Union did not insist upon the customer appearing in the bank in person.
The Credit Union performed a security check on the fax and the signature was genuine. The Credit Union called the “customer” to verify the wire, and the customer verified the wire.. The wire was approved and sent.
The problem is that the Credit Union was being spoofed by a fraudster. The phone number was a cell phone, and the fax authorization was taken by fax and not in person. The Credit Union did not know who it was dealing with. When the unauthorized wire was discovered, the Credit Union could not shift the loss to the customer because it did not have a written, signed security procedure agreement detailing the security procedures put in place with the customer. Consequently, the Credit Union was denied both recovery from its customer and its insurance coverage.
In All American Siding & Windows v Bank of America, 367 S.W.3d 490 (Tex Ct. App. 2012), the Bank had a written security procedure and the customer was cleverly spoofed to the point that the fraudster knew the user name, passwords and other information in the customer’s ACH system. Because the bank had a security procedure agreement, it was the customer, not the Bank that bore the loss.
In All American Siding, the company was plagued by forgeries on their deposit account. At the request of the bank, they opened up a new account and installed a positive pay system, whereby each debit is manually cleared, every day by the customer on line—every debit except wires and ACH’s.
For wires and ACH’s, the bank and the customer signed a detailed security procedure agreement whereby the originator of the ACH had to logon to a secure web site, input a username and a password. There was no call back procedure in the agreement. Somehow, the fraudsters logged onto the system, inputted the username and password, and drained the account in minutes.
When fraudulent wires were discovered, the Bank simply pointed to the agreement for the security procedures the customer agreed to (username and password), and the court placed the loss on the customer.
In Patco Const. Co., Inc. v. People's United Bank, 684 F.3d 197 (1st Cir. 2012), the Bank appeared to do everything right. It contracted with a National payment systems contractor, Jack Henry & Associates. The “premium” security package consisted of three levels of security: (1) User IDs and Passwords; (2) Invisible Certificate Cookie on Terminal; and (3) Risk Profiling; (4) Challenge Questions; and (5) Dollar Amount Thresholds which triggered the challenge questions. Moreover, as a further show of security, all transactions over $1 were subject to a challenge question.
The customer did not sign a formal security procedure agreement but may have agreed to some of the terms mailed to the customer in bills and sent via email to the customer.
Over the course of a week, someone at a remote terminal using a proper user ID and password ACH’ed the entire balance of the account to a previously unknown recipient. Although the bank knew the ISP of the originator was wrong and the recipient was new, the bank did not notify the customer.
When the fraud was discovered, a computer forensic expert was called in to diagnose the problem and found a keystroke logger virus on the system.
The trial ruled that the bank’s security procedures were commercially reasonable and that the customer had agreed to them, dismissing the customer’s lawsuit. On appeal, the 1st Circuit held that the Bank, by implementing challenge questions on every single transaction, actually encouraged and enabled the security breach, because the keystroke logging program gave the fraudsters the correct answers to all of the challenge questions.
Consequently, the Court of Appeal reinstated the customer’s lawsuit. In short, the security system was so tight that it actually encouraged fraud, a case of more is actually less.
Can we make any sense out of these three identical frauds with very different results? Well sort of.
The most important principal is the security system agreement, if there is one. Both ACH transfers and Wires are governed by Article 4A of the Uniform Commercial Code. That Article, §§ 201-2 has a provision which allows a bank to have a safe harbor and escape liability if the bank does two things.
First, the customer must sign a commercially reasonable security procedure form. Typically, these allow for a code number, a call back to a number specified in the agreement, or logging into a secure web site. Commercially reasonable generally means that the terms are similar to other security procedures used by other financial institutions of similar size in the area.
Second, the financial institution must follow the security procedure.
If the security system is in place, and the bank follows it, then any fraudulent wire transfers are on the customer, not the bank. The rationale is that the customer could have picked a more stringent security system, so the blame is passed on to the customer.
What security systems are appropriate for businesses with moderate to large volumes of wire transfers or ACH’s? There six basic security procedures in use in modern banking which are used either individually, or in combination with each other:
• Call Back. This is the simplest security procedure but can be spoofed if the fraudster is at the phone or the number is changed. While there may be a challenge question associated with the call back, that might ascertained by the fraudster if the code is written down or the question (mother’s maiden name) is known. This form of security is generally not recommended, but is probably commercially reasonable.
• Internet Based Security. Typically, there will be a login with a username and password. By itself, this is not a recommended security system because anyone knowing those two codes can drain the account. It should be combined with a call back or other security feature.
• Software Cookies. A software cookie (or a dongle) is installed on the terminal so the wire must originate from that terminal. Because an insider might use that terminal, it is not a good standalone security procedure, and should be used with other security procedures such as a username, password, and/or callback.
• USB Token. The authorized user carries a USB Token which contains an authentication code. This is one of the best forms of secondary security because it is physical and cannot be spoofed.
• Challenge Questions. This is a preprinted series of questions which can be easily spoofed.
• ISP Tracking. The bank may limit the wire to be originated from a specific ISP. This insures the fraudster has to have physical access to the building.
Picture Tracking. Using a web based camera, the originator is filmed and his/her picture compared to one on file.
So with reference to these security systems, how did the three customers fare?
In Universal City Studios Credit Union, the customer won because the bank did not have a signed security procedures agreement. It was the fraudster that signed the agreement. In All American Siding, the customer lost because the bank had a signed security agreement and followed it. In Patco, there was a question whether the customer actually signed a security agreement (a point not discussed by the Court), but court construed the security procedure as being so stringent, that it actually encouraged fraud.
So, depending on the reader’s point of view, (customer or financial institution), the lessons of these bi-polar cases are two-fold.
If the reader is a business, and the business anticipates a steady volume of wire transfers or ACH’s out of the account, then the best practice is to sit down with the banker and construct a security procedure which fits your business. The best security procedure has a physical aspect to it, such as a USB Token, software cookie, or a hardware dongle attached to the terminal. This way, the fraudster must have both the codes and physical entry into the customer’s place of business. This is very hard to penetrate. A bonded officer of the company should be the only one with the codes or USB Token. The All American Siding case demonstrates how important this is, and the result for the customer would have been different if the customer selected a more stringent security procedure.
If the reader is a financial institution, it is imperative that all wire transfer customers, unless they are physically in the bank at the time the wire is made, sign a security procedure agreement which delineates one of the above security protocols. In this way, no matter what happens, the bank is protected.
If the customer chooses one of the more lax security methods, like a simple call back, and the wire is unauthorized, the loss will be shifted to the customer. The Universal City Studios Credit Union would have been different had the bank required a signed security procedure agreement.
The bottom line is this—to stop fraudulent wires or ACH’s, a state of the art security system with both codes and physical aspect will protect the customer. It’s not stupidity, as Charles Colton suggested, it’s just plain common sense.
Tom McCurnin is a partner at Barton, Klugman & Oetting in Los Angeles, California.
Barton, Klugman & Oetting
Universal Studio Credit Union Wire Case 1
All American Siding and Windows Wire Case 2
Patco Construction Wire Case 3
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