Money stolen, yes, but whose money?

A judgement handed down nearly 30 years ago clearly illustrates a principle that is still valid today: claiming damages from the bank or a payout from the insurance company for money missing from a bank account will lead to a legal and insurance dead end.

Money often disappears out of bank accounts but seldom is the question asked or answered: "Whose money was stolen?" The following two examples will illustrate the point.

Firstly a mentally challenged elderly lady went to the auto teller outside the bank and while attempting to withdraw money she was accosted and deprived of her bank card. She went into the bank and reported the loss of the card. Some days later her account was cleaned out. Since the bank had been notified, and she was known to be mentally challenged, this suggested involvement by bank employees.

The second case also involved an elderly person. This time it was a high profile, wealthy gentleman who went to the bank (not the same bank) and advised them that he was going overseas for a while to visit family members. He transferred money from his investment account to his current account, to pay for the overseas trip. When he returned some weeks later and checked his investment account, he noted that considerable sums of money had been transferred out of his account. Since this happened while he was away, after advising the bank, this again pointed to complicity by bank employees. Incidentally, in after reporting the loss, bank employees made arrangements to see him. He naturally thought they were coming to apologise and explain how the matter would be resolved. To his amazement, when they arrived, they merely attempted to sell him further bank products!

Has it really been stolen?

These banking losses sometimes have insurance implications, where the loss is insured and reported to insurers. It is interesting when dealing with these losses to note the reaction of the bank account holders.

They almost always believe their money has been stolen and their insurer must indemnify them against their loss. What does not seem to occur to most people is that their money has not disappeared at all. In fact, holding that their money was stolen will lead to an insurance and legal dead end.

The reality

The correct position was explained some time back by Mr Justice Nestadt in the case of Jacobs v United Building Society 1981 4 SA 37W. Surprisingly, despite the importance of the principles set out by Justice Nestadt, in the nearly 30 years since the judgement was handed down the case has never been referred to.

In the Jacobs case, Mr Jacobs deposited money into his savings account and when he went to draw money he found money had 'disappeared' from the account. It was easy to find out what happened. His wife, Veronica, had arrived at the bank to withdraw the funds, and the bank paid the money over to her. Mr Jacobs then sued the bank, the UBS, for damages for his "missing" money. That was the legal dead end.

Claim for damages inappropriate

The idea that when a bank balance is incorrect, that it is not the depositor's money which had disappeared was well established in 1981. Justice Nestadt pointed out that the issue is not one of damages, indeed, correctly understood, Jacobs had not suffered any damages at all. Correctly understood, Jacobs had deposited money with the bank and now the bank still owed him all his money. Since the bank had no authority to debit his account with the unauthorised payments to his wife, the money was all still there or, put differently, the bank still owed him the full amount. What Jacobs should have done if he wished to have is money returned to him was sue for this sum of money.

Since the bank still owed him all the money he had not suffered any damages at all and the claim for damages was inappropriate. It is only his statement which is wrong. If any money had been lost, it was the bank's money which had been lost. If Jacobs did not want to withdraw his money from the bank (i.e. obtain a refund and close the account) the judge said, "I would have thought the more conventional way of framing his claim... if he did not wish payment-out to be made, (was) to seek an appropriate declaratory order".

Correcting the statement

If he wished to retain his account with the bank, he should have sued for a declaratory order correcting his incorrect bank statement. The issue then was about correcting bank statements not about lost money. Strictly speaking the judge could have dismissed the claim for damages, since it was not valid claim. This may have left Jacobs without any remedy but the judge declined to do so and ruled that the action could proceed. The final outcome was not published so I assume the bank settled the case.

So, to summarise, before thinking the money had disappeared from the bank account, the starting point is that the money has not disappeared, but that the bank statement needs to be corrected. In the two cases discussed in the opening paragraphs above the bank corrected the statements by reversing the withdrawals.