Commerce Bank of Cherry Hill, N.J., is suing First Union Corp. to retrieve nearly $1 million that First Union received through a Commerce customer's check-kiting scheme.
Commerce claims the First Union Corp. subsidiary failed to report the suspicious check activity to federal authorities and then refused to return funds that the courts found were obtained through the check kiting.
Upon discovering the scheme First Union Bank "facilitated its continuing occurrence" and along with C.F. Foods "conspired to retain the wrongfully seized funds," Commerce claims.
First Union's conduct has been "unconscionable and outrageous," Commerce said in a complaint filed Dec. 29 in the U.S. District Court for the District of Eastern Pennsylvania.
The complaint seeks $944,147, the amount Commerce lost in the kiting scheme, plus $150,000 in punitive damages.
Both sides said they could not discuss the case while it is pending.
The kiting occurred in April 1999, when David Burry, the owner of C.F. Foods - a Chaddsford, Pa., distributor of candy and nuts - deposited several checks drawn on accounts at other banks into an account at a Commerce branch in Chichester, Pa.
Shortly afterward, Mr. Burry wired the funds, which had not yet cleared, into accounts at other banks, including First Union.
Commerce soon discovered that the checks originally deposited were drawn against accounts with insufficient funds, its complaint said. Commerce used its own money to cover the wires from the C.F. Food account, the complaint said.
Mr. Burry, who had prior check-kiting convictions, was arrested, tried, and convicted. He is now serving time in federal prison.
Oliver Ireland, a counsel at Morrison Forrester in Washington who has represented banks in similar lawsuits, said that while it is common for one bank to sue another in connection with check kiting, the amount of money involved in Commerce's claim is unusually high.
"Check kiting is like musical chairs and it's not uncommon for disputes to arise if one of the banks did not play by the rules," Mr. Ireland said. "But $1 million is a lot of money."
Commerce is a subsidiary of $8 billion-asset Commerce Bancorp. First Union Corp., based in Charlotte, N.C., has assets of $247 billion.