The buyer received an email from the supplier stating that it was going to switch banks and that payments should be redirected effective immediately. The buyer made four separate transfers via the Automated Clearing House (ACH) banking system before it realized that the email was a scam, and the supplier had not switched banks. The account to which these funds were transferred did not match the name of the beneficiary intended to be the recipient, although the account numbers matched. Although the beneficiary bank had an internal warning system, hundreds of thousands of these warnings were triggered daily. The buyer brought claims against the beneficiary bank for violations of § 4A-207 of the Uniform Commercial Code (UCC) (which is codified in Virginia as Va. Code Ann § 8.4A-207), as well as a breach of bailment, and sought compensatory and punitive damages. The court found in favor of the buyer for compensatory damages. The beneficiary's bank appealed the decision, and the buyer appealed the lack of an award of punitive damages.
In Studco Bldg. Sys. US, LLC v. 1st Advantage Fed. Credit Union, 133 F.4th 264 (4th Cir. 2025), the Fourth Circuit reversed the lower court's decision regarding the UCC claim and the bailment claim, affirmed the denial of punitive damages, and remanded the case to the district court with instructions to enter judgment in favor of the beneficiary’s bank. The main issues the court faced were whether the beneficiary’s bank was liable under § 4A-207 when the ACH instructions contained mismatched names and account numbers, as well as whether the originators' deposit at the bank constituted a bailment. The court found that under Virginia Code, § 8.4A-207(b)(1), the beneficiary's bank was not liable for these funds because the bank did not have actual knowledge of the misdescription of these funds. The district court had found that the beneficiary's bank was liable because it should have had knowledge through “due diligence,” but the Fourth Circuit explained that was only constructive knowledge, not actual knowledge, which is necessary to hold the bank liable. The court explained that finding the bank liable for only constructive knowledge would impede upon the rapid nature of electronic fund transfers. Its ruling, the court reasoned, upholds the UCC by not requiring banks to examine and address every discrepancy, therefore facilitating efficient commerce. The court also found that the buyer’s deposit of electronically transferred funds did not constitute a bailment at all, as there was no physical exchange, just a change in bank account balances. A bailment claim also requires a duty to return the bailed property, which was not present here. For these reasons, the court reversed the district court’s ruling regarding the violation of Va. Code Ann. § 8.4A-207, as well as its ruling regarding the buyer’s bailment claim. Because the court reversed these claims, it affirmed the district court’s denial of punitive damages against the beneficiary bank.
By Christian Collins [email protected]
Edited by Jace Brown [email protected]
Edited By Hayden Mariott [email protected]