Latest news with #litigators
Reuters
3 days ago
- Business
- Reuters
Wire Transfer Litigation: UCC Article 4A Practical Law The Journal
Article 4A of the UCC generally governs funds transfers, commonly called wire transfers, in all states and territories that have adopted it. Article 4A litigation often focuses on allegedly fraudulent or otherwise unauthorized funds transfers, brought by parties who allege that a financial institution sent their money unlawfully or refused to send money without justification. Counsel litigating these cases must understand the parties' rights, duties, and liabilities under Article 4A. This article explains key issues that litigators need to understand when handling matters governed by Article 4A, as enacted in the relevant jurisdiction's version of the UCC. Notably, the 2022 amendments to the model UCC, which have been enacted in many but not all US jurisdictions, include a revision to Article 4A addressing security procedures (UCC § 4A-201; see Security Procedures below). However, prior case law interpreting the pre-2022 version of Article 4A remains instructive on the points addressed in this article. (For more on the 2022 amendments to the UCC, see 2022 Proposed Amendments to Articles 1 Through 7 of the UCC: Key Issues on Practical Law.) UCC Article 4A Fundamentals UCC Article 4A is a statutory framework governing funds transfers that states enact as part of their version of the UCC. A funds transfer is a specialized method of payment in which one party submits an order to their bank to make a payment to a designated beneficiary (UCC § 4A-104(a); see The Funds Transfer below). Article 4A balances the competing interests of the various parties to a funds transfer by, among other things: Assigning specific responsibilities among the parties involved. Defining behavioral norms for the parties involved. Allocating risks and establishing certain limits on liability. (UCC § 4A-102, official cmt.) The parties to a funds transfer include the sender (also called the originator), beneficiary, and banks and other financial institutions that process the transfer (see, for example, Patco Constr. Co. v. People's United Bank, 684 F.3d 197, 207-08 (1st Cir. 2012)). For clarity, this article uses the term sender rather than originator. Article 4A generally applies in litigation involving claims arising from alleged acts or omissions of: The sender, where, for example, the sender incurs an overdraft after a funds transfer processes (see, for example, Chino Com. Bank, N.A. v. Peters, 190 Cal. App. 4th 1163, 1175 (2010)). The beneficiary, where the beneficiary has used fraudulent means to induce the sender to wire money to them (see Fraudulent Payment Orders below). The financial institutions involved in the transaction. Claims against financial institutions tend to focus on a sender's assertion that the financial institution improperly processed a funds transfer (see Other Unauthorized Payment Orders and Errors in Execution or Failure to Accept Payment Order below). Article 4A is the key legal framework for parties and their counsel when prosecuting or defending claims for allegedly fraudulent or otherwise unauthorized funds transfers. (For the complete version of this resource, which includes more on the scope and key provisions of Article 4A, see UCC Article 4A for Litigators on Practical Law.) Key Concepts in Funds Transfers Litigators involved in a wire transfer litigation should understand how UCC Article 4A structures the funds transfer process, including what constitutes a payment order and the verification of payments through security procedures. (For the complete version of this resource, which includes information on parties' agreements to vary from Article 4A's provisions and the exclusion from Article 4A of transactions governed by the Electronic Funds Transfer Act, see UCC Article 4A for Litigators on Practical Law.) The Funds Transfer Article 4A defines a funds transfer as the entire series of transactions that the parties and their banks undertake for the purpose of making payment to the beneficiary of a payment order. A funds transfer: Begins with a sender's payment order, submitted to a receiving bank (typically a bank where the sender is a customer) for the purpose of making payment to a specified beneficiary. Is complete when the beneficiary's bank accepts the payment order for the benefit of the beneficiary. (UCC § 4A-104(a).) Funds transfers usually involve one or more: Banks. These are entities engaged in the business of banking, including savings banks, savings and loan associations, credit unions, and trust companies (UCC § 4A-105(a)(2)). Bank customers. These are persons, including banks, who have an account with a bank or from whom a bank has agreed to receive payment orders (UCC § 4A-105(a)(3)). (For the complete version of this resource, which includes more on the parties to a funds transfer, see UCC Article 4A for Litigators on Practical Law.) The Payment Order A payment order is an instruction from a sender to a receiving bank (typically the sender's bank) to pay a fixed or determinable amount of money to a designated beneficiary. A sender may transmit a payment order orally, electronically, or in writing. An instruction qualifies as a payment order if: It does not state a condition to payment to the beneficiary other than the time of payment. The receiving bank will be reimbursed for the payment by debiting an account of the sender or otherwise receiving payment from the sender. The sender transmits the instruction to the receiving bank or through an agent, a funds transfer system, or other communication system for the receiving bank. (UCC § 4A-103(a)(1); see also, for example, Piedmont Resolution, L.L.C. v. Johnston, Rivlin & Foley, 999 F. Supp. 34, 48 (D.D.C. 1998) (holding that, because the transaction included a condition to payment, it was not a payment order under Article 4A); Trustmark Ins. Co. v. Bank One, Ariz., NA, 48 P.3d 485, 489 (Ariz. Ct. App. 2002) (same).) Security Procedures Banks use security procedures to establish the authenticity of payment orders and communications made to cancel or modify them. They incorporate these procedures into their agreements with their customers. (UCC § 4A-201.) Banks design their security procedures to: Verify the identity of the person sending a payment order or other relevant communication. Detect any errors in transmission or the content of an order, such as a repeat order submitted by mistake. (UCC § 4A-201, official cmt. 1; UCC § 4A-202(b).) Security procedures may impose obligations on the bank or the customer, such as requiring the customer to supply a password or the bank to take certain steps to verify a payment order. Common security procedures include: It is critical that banks implement and follow commercially reasonable security procedures because doing so is a key defense against customer claims arising from allegedly unauthorized or improper payment orders. To qualify as a security procedure, a bank's protocol typically must include something more than confirming a single data point. For example, a comparison between a signature on an order and a specimen signature, standing alone, does not qualify. Similarly, the 2022 amendments to Article 4A clarified that requiring a payment order to bear certain electronic signatures, such as a known email address, IP address, or telephone number, does not suffice, by itself, as a security procedure. (UCC § 4A-201; for more on the 2022 amendments to Article 4A's rules on security procedures, see 2022 Proposed Amendments to Articles 1 Through 7 of the UCC: Key Issues on Practical Law.) It is critical that banks implement and follow commercially reasonable security procedures because doing so is a key defense against customer claims arising from allegedly unauthorized or improper payment orders (UCC § 4A-202(b); see also Patco Constr., 684 F.3d at 208-209 (addressing the commercial reasonableness of a bank's verification procedures)). Whether a security procedure is commercially reasonable is a question of law (UCC § 4A-202(c)). The UCC deems a security procedure to be commercially reasonable if either the customer: Chose the security procedure after the bank offered, and the customer refused, a security procedure that was commercially reasonable for that customer. Expressly agreed in writing to be bound by any payment order, whether or not authorized, issued in its name and accepted by the bank in compliance with the bank's obligations under the security procedure chosen by the customer. (UCC § 4A-202(c); see also Patco Constr., 684 F.3d at 208-209.) Effect of Verification Through Security Procedures Under Article 4A, if a receiving bank follows its security procedures and verifies a payment in good faith, then the customer bears the loss for any unauthorized payment orders. The bank generally is not liable, even if the customer claims that they did not authorize the payment. (See, for example, ADS Assocs. Grp., Inc. v. Oritani Sav. Bank, 219 N.J. 496, 512 (2014); Hedged Inv. Partners, L.P. v. Norwest Bank Minn., N.A., 578 N.W.2d 765, 772 (Minn. Ct. App. 1998).) Parties may vary from this rule in a written agreement (UCC § 4A-203(a)(1)). However, the bank may be liable for an unauthorized, verified payment order under certain limited circumstances. A customer can avoid liability on a verified payment order if the customer demonstrates that the person who submitted the order either: Was not entrusted by the customer at any time to act on their behalf, whether for submitting payment orders or for any other aspect of the relevant security procedures. Breached the relevant security procedures after they obtained access to the customer's transmitting facilities or information. (UCC § 4A-203(a)(2).) These are narrowly defined exceptions. However, if the customer can prove that either of these scenarios existed, then the bank bears the loss of the unauthorized transfer. Common Disputes in Wire Transfer Litigation Litigation over funds transfers typically involves some combination of: Fraud, where a bank's customer sues their bank after a third party uses fraudulent means to convince the customer to send them money. Transfers that the bank's customer claims were unauthorized or not verified, without alleging outright fraud. Alleged errors by either the receiving bank or the beneficiary's bank in executing or accepting a payment order. Fraudulent Payment Orders The most common type of dispute implicating Article 4A arises from fraudulent wire transfers. In these cases, a third-party fraudster convinces a bank's customer, under false pretenses, to transfer money to a bank account the fraudster controls. The customer submits a payment order to its bank, which typically processes the order following its normal procedures, including any applicable security procedures. Because the fraudsters are often overseas, insolvent, or impossible to locate, victims seek recovery from the financial institutions involved in the wire transfer, ordinarily the receiving bank and the beneficiary's bank (see, for example, Harborview Cap. Partners, LLC v. Cross River Bank, 600 F. Supp. 3d 485, 493 (D.N.J. 2022); Berry v. Regions Fin. Corp., 507 F. Supp. 3d 972, 975 (W.D. Tenn. 2020)). Because the victim is usually a customer of the receiving bank, the claims against the receiving bank tend to include: As pled against the banks, these claims often fail because: The receiving bank may demonstrate that: its duties and liabilities to its customer are set out in Article 4A and in the account agreement; and the customer authorized the transaction, either personally or through an agent, or the bank verified the transaction using its security procedures. (See Harborview, 600 F. Supp. 3d at 493; Berry, 507 F. Supp. 3d at 975.) The beneficiary's bank generally has no liability to the sender under Article 4A (for example, UCC § 4A-212). (See Key Legal Defenses in Wire Transfer Litigation below.) Other Unauthorized Payment Orders Disputes over funds transfers may focus on allegedly unauthorized payment orders submitted by a person who technically has legal authority to make a transfer. These cases often focus on alleged embezzlement or theft committed by a customer's: Employees or executives, who have the legal authority to complete funds transfers on behalf of the company but abuse that authority to steal money for their personal purposes (see, for example, Koss Corp. v. Am. Express Co., 309 P.3d 898 (Ariz. Ct. App. 2013)). Family members, such as children or spouses, who may have power of attorney or be joint owners of the relevant account with legal authority to transfer funds from the account. A bank's customer may nonetheless claim that their family stole the money from them. (See, for example, Tsepas v. JPMorgan Chase Bank, N.A., 2017 WL 1250801 (Ohio Ct. App. Apr. 3, 2017).) In these cases, customers typically claim that their banks should have intervened to stop the theft or embezzlement. However, the claims typically fail because: The bank may rely on its security procedures to establish that the relevant transfers were authorized, verified, or both. The bank's account agreement with its customer may specify who has authority to make transfers, such as where the alleged wrongdoer is a joint owner of the account. Banks are typically not liable for disputes that arise between joint owners. (See, for example, Tsepas, 2017 WL 1250801, at ¶ 34 (holding a bank not liable when the customer's daughters, who were co-owners of the relevant account, withdrew and transferred funds from the account).) Errors in Execution or Failure to Accept Payment Order Another common type of dispute between banks and their customers focuses on a bank's allegedly erroneous execution of payment orders. For example, a receiving bank may erroneously duplicate a payment order, creating a recurring instead of a one-time payment. In that case, the customer generally may recover the overpayments from their bank, subject to any applicable defenses of the bank, such as the statute of repose. (See, for example, Nat'l Bank of Com. v. Shelton, 27 So. 3d 444, 449 (Miss. Ct. App. 2009); see Statute of Repose below.) Under UCC § 4A-303, which generally governs this type of error, a receiving bank is entitled to recover from its customer (the sender) only the amount the customer authorized in the payment order. For example, if the bank: Transfers an amount greater than what the sender authorized, it: cannot hold its customer responsible for the excess; and may seek to recover from the beneficiary of the transfer. Transfers less than the amount the sender requested, it may only recover the amount it transferred from the customer, but it but may correct the deficiency and recover the full amount. Issues payment to the wrong beneficiary, the customer is generally not responsible for the erroneous payment. (UCC § 4A-303.) Key Legal Defenses in Wire Transfer Litigation In defending against disputes arising from funds transfers, banks often rely on Article 4A's preemption of common law claims, limitations on the banks' liability under the parties' contract or Article 4A itself, and Article 4A's statute of repose. Preemption of Common Law Claims Banks often defend against common law claims by asserting that the relevant state's version of Article 4A preempts those claims. While Article 4A does not contain an express preemption clause, the official comments explain that Article 4A: Is intended to be the exclusive means of determining the rights, duties, and liabilities of the affected parties in any situation covered by its provisions. Represents a careful balancing of the interests of the parties to a funds transfer. (UCC § 4A-102, official cmt.; see also Wright v. Citizen's Bank of East Tenn., 640 F. App'x 401, 406–09 (6th Cir. 2016); Harborview, 600 F. Supp. 3d at 495-96.) Courts do not allow parties to rely on principles of common law or equity to impose duties or to create rights that are inconsistent with Article 4A (see, for example, DeFazio v. Wells Fargo Bank Nat'l Ass'n, 2020 WL 1888252, at *3 (D.N.J. Apr. 16, 2020); Zengen v. Comerica Bank, 41 Cal. 4th 239, 244, 253-54 (2007)). Rather, courts routinely hold that Article 4A preempts common law claims that: Arise out of a situation addressed by Article 4A. Seek to create rights, duties, or liabilities inconsistent with Article 4A. Seek remedies for injuries or misconduct that occurred during the funds transfer process. (See, for example, Ma v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 597 F.3d 84, 90 (2d Cir. 2010) (affirming the dismissal of fraud and breach of fiduciary duty claims); Harborview, 600 F. Supp. 3d at 496 (holding that Article 4A preempted negligent misrepresentation, breach of contract, and promissory estoppel claims); DeFazio, 2020 WL 1888252, at *3 (barring a negligence claim); see also Peters, 190 Cal. App. 4th at 1175 (holding a customer liable for an overdraft and declining to hold the bank liable for alleged negligence in accepting a payment order).) Preemption may not apply, however, where: A plaintiff alleges wrongdoing that is beyond the scope of Article 4A (see, for example, Bloom v. PNC Bank, N.A., 659 F. Supp. 3d 27, 30-31 (D.D.C. 2023) (holding that Article 4A did not preempt a breach of contract claim based on duties alleged to be independent of the funds transfers); Shecter Landscaping, Inc. v. JPMorgan Chase Bank NA, 614 F. Supp. 3d 553, 557 (E.D. Mich. 2022) (finding that the alleged negligence in allowing an imposter to open an unauthorized account was not covered by Article 4A); Fragale v. Wells Fargo Bank, N.A., 480 F. Supp. 3d 653, 660 (E.D. Pa. 2020) (same); Schlegel v. Bank of Am., N.A., 271 Va. 542, 553-554 (2006) (holding no preemption of a claim against a bank for freezing instead of refunding funds allegedly obtained through unauthorized payment orders where the funds remained frozen after the parties in interest had resolved their dispute regarding the ownership of the funds)). A plaintiff alleges that a bank tortiously enriched itself with funds that it knew were illegally obtained (see, for example, Regions Bank v. Provident Bank, Inc., 345 F.3d 1267, 1279 (11th Cir. 2003); Sheerbonnet, Ltd. v. Am. Express Bank, Ltd., 951 F. Supp. 403, 409 (S.D.N.Y. 1995); Koss Corp., 309 P.3d at 901–02, 906). The alleged misconduct occurred outside or after the completion of the funds transfer process (Cosmopolitan Title Agency, LLC v. JP Morgan Chase Bank, N.A., 649 F. Supp. 3d 459, 463 (E.D. Ky. 2023); Baerg v. Ford, 2016 WL 683118, at *3 (Ky. Ct. App. Feb. 19, 2016)). Limitations on Liability A bank's liability regarding payment orders is well defined under Article 4A. For example, Article 4A specifically addresses a receiving bank's liability when it handles: Unauthorized wire transfers (UCC §§ 4A-201 to 4A-204). Erroneous wire transfers (UCC §§ 4A-205, 4A-207, and 4A-208). Amended and canceled wire transfers (UCC § 4A-211). Erroneously executed wire transfers (UCC §§ 4A-302 to 4A-305). (See, for example, Peters, 190 Cal. App. 4th at 1170; Sarrouf Law, LLP v. First Republic Bank, 2018 WL 4608025, at *11 (Mass. Super. Aug. 6, 2018), aff'd, 148 N.E.3d 1243 (Mass. App. Ct. 2020).) Additionally, banks may further limit their liability under any applicable agreement with their customers, except as otherwise provided under Article 4A (UCC §§ 1-302 and 4A-203(a)(1); Oritani Sav. Bank, 219 N.J. at 514). Statute of Repose Article 4A's statute of repose provides that all customer claims against a receiving bank regarding payment orders expire one year from the date when the customer receives notice that the bank accepted the order (UCC § 4A-505). For this purpose, a customer has notice of a funds transfer when the bank sends a communication or statement that reasonably identifies the transfer (see, for example, Ma, 597 F.3d at 91 (finding that a customer had notice of allegedly unauthorized funds transfers because the transfers, including the amounts and dates of each, were listed in account statements)). Courts disagree about whether this one-year period can be varied by agreement (compare Rodriguez v. Branch Banking & Trust Co., 46 F.4th 1247, 1254 (11th Cir. 2022) (variation not permitted) with Bonnema v. Heritage Bank NA-Willmar, 2002 WL 1363985, at *5 (Minn. Ct. App. June 19, 2002) (variation allowed)). The statute of repose applies even in cases where a refund is otherwise required under Article 4A, such as for claims alleging: Unauthorized or unverified payment orders. Erroneously executed orders. Incomplete orders. (UCC § 4A-505, official cmt.) The defense does not apply to claims that arise independently of a funds transfer. However, it does bar claims that address the mechanics of a funds transfer, such as asserting that a bank did not handle a funds transfer properly or that the transfer was unauthorized or unverified. Labeling these claims as fraud or breach of fiduciary duty does not mean that a longer statute of limitations or statute of repose applies to them. (See Ma, 597 F.3d at 90 (rejecting a customer's argument that claims regarding allegedly unauthorized funds transfers were fraud claims and therefore not barred by the statute of repose).)
Bloomberg
23-05-2025
- Business
- Bloomberg
Paul Weiss Loses Four Senior Litigators in Trump-Deal Fallout
Paul Weiss, one of the law firms that reached a settlement with Donald Trump's administration over past work with his perceived opponents, lost four senior litigators, according to a person with direct knowledge of the matter. The four plan to start their own firm, the person said.
