United States: Nutter Bank Report, March 2013


1. Massachusetts High Court Clarifies Rights of Secured Creditors
2. CFPB Removes ATM Fee Sticker Requirement from Regulation E
3. Federal Banking Agencies Issue Updated Guidance on Leveraged Lending
4. Federal Court Limits Liability of a Bank to a Third Party for Negligence
5. Other Developments: Credit Card Fees, CRA and Consumer Information

1. Massachusetts High Court Clarifies Rights of Secured Creditors

The Massachusetts Supreme Judicial Court has held that Article 9 of the Uniform Commercial Code ("UCC"), and not common law, determines the measure of a secured creditor's recovery under Section 9-405 of the UCC. The March 13 ruling clarified that certain common law principles may not be applied to reduce the amount a lender may recover under Article 9 of the UCC when a borrower defaults and the lender must collect on accounts receivable assigned to the lender as security. The case involved a general contractor that had contracted with a subcontractor for part of a large construction project. The subcontractor assigned to its bank the subcontractor's right to receive payment under the construction contract as security for the subcontractor's revolving line of credit from the bank. The general contractor received notification of the assignment and agreed to make payments directly to the bank. However, the general contractor instead made 12 payments to the subcontractor. The subcontractor subsequently ceased business operations and defaulted on the outstanding debt under the line of credit. The bank, represented by Nutter, brought suit against the general contractor for breach of contract and violation of Section 9-405 of the UCC to recover the total value of the 12 payments made to the subcontractor.

Nutter Notes: At trial, the general contractor argued that its liability should be limited, according to common law principles, to the bank's actual damages, a much smaller sum in this case than the full amount of the assigned security, and that no additional liability existed under Article 9 of the UCC. Representing the bank, Nutter argued that Article 9 of the UCC required the general contractor to pay over the full amount of the assigned security. The bank acknowledged that Article 9 would require the bank, in accordance with Sections 9-607 and 9-608, to distribute the amounts recovered in a way that ensured that the bank would not retain any surplus. The trial court agreed with the bank that the UCC, not the common law, provided the measure of damages on the bank's Article 9 claim. The general contractor appealed, arguing that common law principles reduce the general contractor's liability by the amount of a separate guaranty that also secured the bank's loan to the subcontractor, and that the trial court erred in awarding the bank the full amount of the assigned security. The Supreme Judicial Court agreed with the bank on all counts, affirming the trial court's conclusion that Article 9 provides a remedy distinct from the common law. The court also affirmed that the bank's Article 9 damages were not reduced by the separate guaranty. The court noted that the general contractor might seek to recover its losses from the subcontractor.

2. CFPB Removes ATM Fee Sticker Requirement from Regulation E

The Consumer Financial Protection Bureau ("CFPB") has issued a final rule amending Regulation E (Electronic Fund Transfers), which implements the Electronic Fund Transfer Act ("EFTA") to eliminate a requirement that a fee notice be posted on or at automated teller machines ("ATMs"). The March 20 amendment to Regulation E implements 2012 legislation which amended the EFTA to eliminate the ATM fee sticker requirement, and left in place the requirement that a specific fee disclosure must appear on the screen of the ATM or on paper issued from the ATM. ATM operators, including banks, will now only have to provide the on-screen or paper disclosure, which must include the amount of the fee to be charged and be provided before the consumer is committed to the transaction. In addition to the deletion of the rule requiring the "on or at" machine disclosure, the final rule also deletes Official Comment 16(b)(1)-1, which provided guidance on the meaning of certain terms related to the fee sticker requirement. The final rule deleting the ATM fee sticker requirement became effective on March 26.

Nutter Notes: In 1999, Congress amended the EFTA to require certain ATM fee disclosures both to be posted on or at the ATM and to be provided on the screen or on a paper notice issued from the ATM. The EFTA requires that the on-screen notice include the specific amount of the fee the consumer would be charged by the ATM operator, but the notice posted "on or at" the machine only had to disclose "the fact that a fee is imposed by such operator for providing the service." The EFTA prohibited ATM operators from charging a fee if both disclosures were not made. The "on or at" notice typically involved a sticker placed on the machine by the ATM operator. The EFTA allowed ATM operators 5 years to implement the technology needed to make the on-screen disclosures, but did not provide that once the 5 years elapsed operators could cease providing the separate notice "on or at" the machine. Under the EFTA, an ATM operator could be liable for actual damages, statutory damages in individual or class actions, and costs and attorney's fees for failure to provide both required disclosures. In adopting the final rule, the CFPB acknowledged longstanding concerns that the "on or at" notice requirement provides little or no benefit to consumers and at the same time has been the subject of costly litigation in cases where the notice was not properly posted or was improperly removed.

3. Federal Banking Agencies Issue Updated Guidance on Leveraged Lending

The federal banking agencies have issued updated supervisory guidance on leveraged lending, titled Interagency Guidance on Leveraged Lending, which applies to all financial institutions, including small and mid-sized banks, which originate or participate in leveraged lending transactions. The guidance issued on March 21 updates and replaces guidance issued in April 2001, titled Interagency Guidance on Leveraged Financing. The new guidance focuses on establishing a sound risk-management framework, underwriting standards, valuation standards, pipeline management, reporting and analytics, risk rating leveraged loans, the risks of participants (versus originators) and stress testing. According to the guidance, the agencies expect that an institution's management and board of directors will identify the institution's risk appetite for leveraged lending, establish appropriate credit limits and ensure prudent oversight and approval processes. The guidance recommends that an institution's valuation standards should concentrate on sound methods in the determination and periodic revalidation of the borrower's enterprise value. The agencies said that they expect institutions to be able to accurately measure exposures to loans on a timely basis, establish policies and procedures that address failed transactions and general market disruptions, and ensure periodic stress tests of exposures. The guidance became effective on March 22, and institutions engaged in leveraged lending activities must be in compliance with the guidance by May 21.

Nutter Notes: The guidance does not include a bright line test to determine which financing activities constitute leveraged lending. Instead, the guidance advises each institution engaged in leveraged lending to develop criteria to define leveraged lending within the institution's policies and procedures in a manner sufficiently detailed to ensure consistent application across all business lines. The guidance gives examples of the types of criteria institutions should consider, such as transactions where loan proceeds are used for buyouts, acquisitions, or capital distributions, and transactions in which the borrower's post-financing leverage significantly exceeds industry norms or historical levels. As a result, the guidance could apply to some commercial portfolio loans originated by small and mid-sized banks, including, but not limited to, certain asset-based loans. The agencies explained in the preamble to the guidance that an institution that originates a small number of less complex leveraged loans should not be expected to have policies and procedures commensurate with those of a larger institution with a more complex leveraged loan origination business. Although the concept of leveraged lending encompasses all business lines, the agencies said that they do not intend for the guidance to apply to small portfolio commercial and industrial loans, or traditional asset-based lending.

4. Federal Court Limits Liability of a Bank to a Third Party for Negligence

The U.S. District Court for the District of Massachusetts in a recent ruling dismissed a lawsuit brought against two banks by a third party that was not a customer of either bank for allegedly failing to detect fraudulent transfers from fiduciary accounts established at the banks to hold funds on behalf of the third party. The March 5 decision came in a case brought by a law firm whose payroll company had stolen more than $500,000 from accounts the company established at the banks. The law firm claimed that the banks knew the accounts were maintained by the payroll company in its fiduciary capacity, should have monitored account activity, and should have noticed a suspicious pattern of debits and credits and discovered that the company was misappropriating funds from the accounts. Courts have generally held that banks have no duty to monitor fiduciary accounts and may presume that fiduciaries will apply funds from such accounts appropriately. But a 2006 decision by the 2nd U.S. Circuit Court of Appeals created an exception under which a bank may be liable in a case where the bank has "notice or knowledge" of a fiduciary's misappropriation of funds. Under the exception, a bank may be held liable for knowingly failing to report stolen funds from a fiduciary account when the underlying facts support the "sole inference" that misappropriation was intended. The U.S. District Court held that the exception established by the 2006 case did not apply because the banks were not aware of suspicious circumstances giving rise to a "sole inference" of misappropriation, and also that the banks did not owe a duty of care to the law firm.

Nutter Notes: The U.S. District Court held that the law firm's case was distinguishable from the 2006 case based on the facts, which narrows any application of the exception to permit non-customers of a bank to sue the bank for negligence. In the 2006 case, a bank discovered that a fiduciary was embezzling funds from a fiduciary account after documenting frequent account overdrafts. Instead of reporting the misappropriation, the bank assisted the fiduciary in concealing the overdrafts. In the present case, the law firm did not claim that the payroll company overdrew its accounts or that the banks intentionally concealed the misappropriation. Instead, the firm alleged that the banks failed to adequately monitor the payroll company's account activities after one of the banks noticed account irregularities which it communicated to the company. The other bank temporarily froze the company's accounts in response to a search warrant issued by state police and after a bank branch manager allegedly became aware of pending lawsuits against the company. The U.S. District Court held that these events, in the aggregate, did not give rise to a "sole inference" of misappropriation.

5. Other Developments: Credit Card Fees, CRA and Consumer Information

  • CFPB Eliminates Cap on Credit Card Fees Charged Prior to Account Opening

The CFPB on March 22 issued a final rule amending Regulation Z (Truth in Lending) to remove a cap on the total amount of fees that a credit card issuer may require a consumer to pay with respect to a credit card account prior to the opening of the account. The final rule was issued in response to a federal court ruling last year that had granted a preliminary injunction to block a part of the fee cap rule from taking effect. The final rule became effective on March 28.

Nutter Notes: Regulation Z generally limits the total amount of fees that a credit card issuer may require a consumer to pay with respect to an account to 25% percent of the credit limit in effect when the account is opened. Prior to the amendment, Regulation Z stated that the limitation applies both prior to account opening and during the first year after account opening. The limitation now applies only during the first year after account opening.

  • Federal Banking Agencies Propose Revisions to CRA Guidance

The federal banking agencies on March 18 released a proposal to revise the Interagency Questions and Answers Regarding Community Reinvestment. Among other things, the proposed revisions would clarify how the agencies consider community development activities that benefit a broader statewide or regional area that includes an institution's assessment area. Comments on the proposed revisions are due by May 17.

Nutter Notes: The proposed revisions would also describe additional ways to determine whether recipients of community services are low- or moderate-income, and include service on the board of directors of a community development organization as an example of a technical assistance activity that can be provided to community development organizations for CRA credit.

  • Court Rules that Zip Codes Are Subject to Massachusetts Privacy Protections

The Massachusetts Supreme Judicial Court in a March 11 decision ruled that collecting and recording a consumer's zip code as part of a credit card transaction violates a Massachusetts privacy law. According to the decision, zip codes are "personal identifying information" under Section 105(a) of Chapter 93 of the General Laws of Massachusetts, which protects consumers from the unnecessary collection of personal information to complete a credit card transaction.

Nutter Notes: Even though a zip code does not directly identify a consumer, the court found that it can be combined with other information enabling merchants to identify the consumer's address and telephone number which is information that Section 105(a) expressly identifies as "personal identification information." 

Nutter Bank Report

Nutter Bank Report is a monthly electronic publication of the Banking and Financial Services Group of the law firm of Nutter McClennen & Fish LLP. Chambers and Partners, the international law firm rating service, has ranked Nutter's Banking and Financial Services practice among the top banking practices in the nation. The 2012 Chambers and Partners review says that a "broad platform of legal expertise and experience" in the practice "helps clients manage challenges and balance risks while delivering strategic solutions." Clients praised Nutter banking lawyers as "very responsive and detail-oriented." Visit the U.S. rankings at ChambersandPartners.com. The Nutter Bank Report is edited by Matthew D. Hanaghan. Assistance in the preparation of this issue was provided by Melissa Maichle and Thomas Powers.


This update is for information purposes only and should not be construed as legal advice on any specific facts or circumstances. Under the rules of the Supreme Judicial Court of Massachusetts, this material may be considered as advertising.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

*** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.