Payday Loan Choices and Consequences Business Case Analysis
Kenneth, as an individual, had an option to purchase a valuable piece of land for $500,000, provided he exercised the option by a certain date by mailing a deposit check for $50,000. This land was appraised at $600,000 and he intended to build housing for his family and his elderly mother on it. He drew a check for $50,000 on his personal checking account he had at Third American Bank and mailed it to the landowner. Kenneth had this checking account for 10 years. At the time he drew the check, he verified electronically that he had $60,000 in his account. However, he owed the bank $30,000 for a collateralized loan that was 60 days overdue. That loan was secured with collateral from Kenneth’s limited liability company, Kenneth’s LLC, and had been taken out two years ago. The bank refused to honor the $50,000 check and spent $750.00 handling the resulting paperwork. As a result of the dishonorment, Kenneth’s option became void, and the landowner sold the land to someone else for $550,000, resulting in a severe loss to Kenneth. He sued the bank for damages.
At trial, Kenneth’s attorneys proved the value of the land, his losses, and the fact that he had always paid the bank on time, except for the most recent payment that was overdue. The bank’s attorneys proved that Kenneth was over sixty days late on his last loan payment and that it was their practice not to notify customers that there might be insufficient funds in their accounts to cover all checks written, as doing so would place an undue burden on the banking system.
The Arguments at Trial
Kenneth’s attorneys argued that a bank has no right to dishonor a check except for the normal reasons permitted by law, such as a suspected forgery, an improper endorsement, and so forth. They further argued that the bank, based on its relationship with Kenneth, should have contacted him before dishonoring the check so that he could have taken other action to prevent his loss of the land and that he did not have an automatic deduction from his personal account for the business loan. The bank’s attorneys argued that Kenneth’s being overdue on his last loan payment indicated he was in financial trouble, that they had a right to seize Kenneth’s account to cover the overdue payment, and that instead they simply refused to honor checks on his account until the overdue loan was paid. They further argued that based on banking industry customs, it is the responsibility of the customer and not the bank to make sure there are sufficient funds to cover checks written. They were losing money each day that the loan was unpaid.
Questions to Discuss
- Whom do you think the jury will favor, Kenneth or the bank? Why?
- If you feel Kenneth should win, what will his damages be? If you feel the bank should win, what will their damages be?
- Under what circumstances, if any, should a bank be able to offset a loan to a customer against any bank account on which the customer’s name appears?