Article

Factual Summary: C. Peter R. Gossels (Principal), received a check for EUEUR 85,071.19 drawn on German Payor Bank from the government of Germany for reparations for the seizure of property by the Third Reich. He requested Remitting Bank to collect it in October 1999. Principal did not request that the check be exchanged for dollars and was not informed by Remitting Bank's international teller that the bank "could pay [Principal] only in dollars, or that [Remitting Bank] paid international checks at a 'retail exchange rate' several percentage points lower than the interbank 'spot rate' for foreign currency." At the time the check was delivered to Remitting Bank, Principal was given a receipt that stated that the bank was "an agent for collection on [Principal's] behalf."

Principal testified that he would not have proceeded to use Remitting Bank's services were he aware of these facts. Remitting Bank's manual on foreign check collection practices "instructed tellers to inform the customer that receipt of payment by a customer for a foreign check would take four to six weeks, and that an exchange rate would be applied, based on the date of [Remitting Bank's] receipt of the funds from the foreign bank. Moreover, the manual instructed tellers to advise the customer of the approximate date on which the exchange rate would be determined. The international teller in this case failed to provide [Principal] with any of this information."

Remitting Bank also told Principal not to endorse the check "stating that no endorsement was required for checks drawn on a foreign bank" and failed to notify Principal, as per bank standards, when the rate of currency exchange would be determined. The check was forwarded to Remitting Bank's German correspondent. When Remitting Bank refused to guarantee Principal's endorsement at its correspondent's request, the check was returned. On 11 November 1999, Principal was notified by Remitting Bank that it was returned unpaid because of the absence of his endorsement. Principal then endorsed the check and resubmitted it. When Remitting Bank finally credited Principal's accounts in December 1999, the amount was US$81,754.77 based on a December exchange rate instead of the October rate, resulting in a loss of over US$7,000.

Legal Analysis:

1. Duty of a Remitting Bank; US UCC §4- 202: Principal argued that the court had erred in failing to find a breach of contract. The appellate court noted that Massachusetts law imposed a statutory agency relationship; designating Remitting Bank as a "collecting bank". In light of this relationship, the appellate court ruled that the trial court properly treated the case as sounding in tort since under local law breach of a fiduciary duty was a tort, especially when the relationship was established by statute. The court stated that "the bank's duties as agent include presenting the item, or sending it for presentment, notifying its transferor of nonpayment or dishonor, and settling with the principal when it receives final payment."

2. Collection, Duty of Remitting Bank; Disclose; Ordinary Care: Looking to UCC §4-202, the court ruled that the bank was required to exercise ordinary care.

3. Collection, Duty to Disclose: The court ruled that Remitting Bank, having taken the check for collection "became bound to perform the fiduciary duties of an agent to its principal... as [Principal's] agent and fiduciary, [Remitting Bank] was obliged to disclose fully all facts material to the transaction. 'The principal has a right to be informed of all material facts known to the agent in reference to the transaction in which he is acting for his principal, and good faith requires a disclosure of such facts by the agent.' Spritz v. Brockton Sav. Bank, 305 Mass. 170, 172, 25 N.E.2d 155 (1940)." The court concluded that the statement that the endorsement would not be required violated this duty. The court also stated

[a]dditionally, we think [Remitting Bank] committed a breach of its duty as an agent when the teller failed to disclose not only that the collection would be in dollars and not in euros, but other elements of the transaction as well, all set out in the instruction manual prepared for teller use with transactions of this nature, which the teller either ignored or of which the teller was ignorant... Nowhere in the transaction did [Remitting Bank] reveal that it would pay [Principal], its principal, a retail rate of exchange substantially less than the spot rate it obtained for the item, which former rate was set out daily on a "secret" rate sheet that bank employees were advised not to disclose to the public, and that it would profit by effectively keeping the difference. While the bank may argue that it was impossible to advise [Principal] of the actual rate of exchange, dependent as that information was on the rate when the check was actually put before the payor bank, [Remitting Bank] was under a fiduciary obligation to divulge to its principal that it would pay something less than the spot rate, whatever that might be. [footnote omitted] The receipt given to [Principal] when [Remitting Bank] took the check contained a statement indicating that the transaction would be subject to "[Remitting Bank] service charges." This statement did not fulfill [Remitting Bank's] fiduciary duty to disclose to [Principal] that its arbitrage of the exchange rate would cost [Principal] thousands of dollars. Courts in other jurisdictions have held that failure to disclose large commission charges are a breach of fiduciary duty.... Further, after payment of the item, when [Principal] did question the rate and the transaction, [Remitting Bank] failed to provide such detail of the transaction that would be expected of a fiduciary. Instead, [Remitting Bank] informed [Principal] by letter that he was not being "shortchanged" and that the spot rates [Principal] had cited were for "Interbank use, not for consumer exchange. [We] can assure you that the rate of exchange used in this matter is fair." By failing to disclose the rate, and by withholding the amount without giving [Principal] an adequate explanation, [Remitting Bank] further committed a breach of its fiduciary duty to give a complete accounting of the disposition of the funds, including the amounts gained by [Remitting Bank] as the result of its application of a rate differential.

The court ruled that Remitting Bank "was bound to account for the amounts it kept in the rate arbitrage, and to pay it over to [Principal]. [Remitting Bank] compounded its breach of fiduciary duty to [Principal] in April, 2000, when it refused to explain the bank's conduct or to account to [Principal] for the precise disposition of the funds, and when it refused to pay [Principal] the amount represented by the spot rate of exchange."

2. Conversion: The appellate court also ruled that the trial court erred in dismissing Principal's claim of conversion. Noting that conversion consisted of the wrongful exercise of control or dominion over property as to which there is no right of possession at that time, the court stated "that [Remitting Bank], as a fiduciary, retained a portion of the check proceeds based on its retail rate sheet differential and, upon inquiry by [Principal], failed either to account for the funds or to restore them to his account, [Remitting Bank] knowingly and purposefully deprived [Principal] of his funds, and thereby committed the tort of conversion in addition to a breach of its fiduciary duties."

3. Negligent Misrepresentation: The appellate court ruled that there was evidence supporting the trial judge's finding of negligent misrepresentation. "The judge found, correctly in our view, that [Remitting Bank] 'had an obligation to inform [Principal] whether [Remitting Bank] was accepting the check for 'provisional credit' or for 'collection only.' [Remitting Bank] also had an obligation to inform [Principal] that [Remitting Bank] gave only dollars and not euros,' and did not so inform him. The bank's silence here, in light of its duty to speak, constitutes a negligent misrepresentation."

4. Unfair Trade Practices: Principal had alleged that Remitting Bank had engaged in an unfair trade practice under applicable consumer protection law. The appellate court agreed, noting that "given our conclusion that [Remitting Bank] was in serious breach of its fiduciary obligations to [Principal], especially as regards the disclosure of the rate of exchange differential, we conclude that it was error to find that no unfair or deceptive act occurred under c. 93A.

5. Damages; Collection: The trial court awarded Principal the difference between the retail rate on the two dates. The appellate court modified the award, ruling that "the rate used should have been the spot rate for the latter date, and not the undisclosed, unagreed-to rate [Remitting Bank] withheld from the public and its customers. Absent an agreement to the contrary, ...the agent is responsible for paying to the principal the full amount of the proceeds obtained in the transaction." Accordingly, actual damages were US$10,269.03 instead of US$6,861.68. In accordance with the consumer protection statute, Principal was also entitled to attorney's fees, costs and multiple damages under the statutory formula.

Comment: This decision is of significance to all banks that collect checks or drafts drawn in foreign currencies. The conclusion that the remitting bank is an agent is not surprising. Not only would virtually all legal systems reach such a conclusion but it would be echoed by most bankers. Bankers, however, might be surprised to learn that as an agent they are required to disclose their profits on the foreign exchange trade dimension as well as risks and fees. However, most legal systems hold an agent to such a standard of accountability. To then run afoul of consumer protection statutes with their draconian fines adds insult to the injury. Presumably banks are entitled to retain charges for foreign exchange transactions but this decision will force lawyers to redraft requests for collection in a manner that more fully states risks, charges, and profits.

[JEB/gsp]

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