Check-kiting scheme results in liability of Bank to Credit Union.

Here, Clark Crapps was a member of First Railroad Community Credit Union and also held accounts at Columbia County Bank [Columbia] and First Community Federal Credit Union [Credit Union].

Crapps was engaged in an elaborate check-kiting scheme for which neither Columbia nor the Credit Union was aware.

Columbia allowed immediate credit on deposits made to the Crapps’ accounts without any hold being placed thereon pending collection. That is, Columbia allowed Crapps immediate access to the funds without waiting for the deposited items to clear.

From the accounts in which these deposits were made, Mr. Crapps would obtain cashier’s checks and/or use those funds for deposit to other accounts, including his account at the Credit Union.

Within a three day period, several deposits were made by Crapps to a Columbia account. Included in these deposits were checks drawn upon a Crapps’ account at the Credit Union.

No hold was placed upon these checks by Columbia, and Columbia permitted Crapps to obtain two cashier’s checks, each for $300,000. Both of these cashier’s checks were deposited to the Crapps’ account at the Credit Union.

The Credit Union submitted the cashier’s checks to Columbia for payment. Columbia discovered the check-kiting scheme after the cashier’s checks were issued and before the checks were presented by the Credit Union for payment. Columbia denied payment to the Credit Union and the Credit Union filed this suit to collect the $600,000 cashier check deposits.

Columbia argued that since Crapps had committed fraud on the bank to obtain the cashier’s checks, the bank ought not be liable to the credit union for the $600,000.

The court noted that:

[t]he purpose of a cashier’s check is to act as a cash substitute in dealings between parties. Parties using cashier’s checks in place of ordinary checks or instruments do so because cashier’s checks do not carry the risk of litigation costs or insolvency.

The court found that the fraud committed by Crapps on Columbia could not be raised to invalidate the deposit of those cashier’s checks into the credit union, as the only obligation the credit union had was to verify whether the payee or endorsee was, in fact, a legitimate holder. In this case, Crapps was the verified payee.

The court ordered that Columbia Bank must pay $600,000 to the credit union, with interest, as to do otherwise would undermine the entire purpose of a “cashier’s check”.  First Railroad Community Federal Credit Union v. Columbia County Bank (U.S. District Court, M.D. Florida, Case No. 92-102; 5-CIV-J-20).

Author: Charles R. Harroun, Attorney at Law