Chris Willis is joined by veteran litigators and Troutman Pepper Locke Partners Mary Zinsner and Heryka Knoespel to dissect a groundbreaking Fourth Circuit decision on bank liability in wire transfer fraud cases.
In this episode of The Consumer Finance Podcast, Chris Willis is joined by veteran litigators and Troutman Pepper Locke Partners Mary Zinsner and Heryka Knoespel to dissect a groundbreaking Fourth Circuit decision on bank liability in wire transfer fraud cases. The ruling clarifies the actual knowledge standard under the Uniform Commercial Code, rejecting negligence-based liability and safeguarding the speed and efficiency of the banking system. Discover how this decision impacts future litigation and the banking industry's approach to fraud prevention.
The Consumer Finance Podcast – Wire Fraud Litigants Beware: Fourth Circuit Ruling Protects the Banks
Host: Chris Willis
Guests: Heryka Knoespel and Mary Zinsner
Date Aired: July 17, 2025
Chris Willis:
Welcome to The Consumer Finance Podcast. I'm Chris Willis, the Co-Leader of Troutman Pepper Locke’s Consumer Financial Services Regulatory Practice. In today’s episode, we're going to be talking about a recent, very consequential Fourth Circuit ruling involving liability for fraud and wire transfers on the part of the bank.
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Now, as I said, we're going to be talking today about a recent Fourth Circuit ruling in a case in which a customer sued a bank for a fraudulent wire transfer scheme that the customer had been a victim of. Joining me to talk about that are two of our veteran consumer financial services litigators who have a huge amount of experience in defending banks in this kind of litigation, Mary Zinsner and Heryka Knoespel. Mary, Heryka, thanks for being on the podcast today.
Mary Zinsner:
Thanks for having me, Chris.
Heryka Knoespel:
Thanks, Chris. Good to be here.
Chris Willis:
As we all know, today's banking world revolves around fund transfers. Millions and millions of dollars each day flow through our world's banks via the Fedwire system, automated clearinghouse transfers, and other fund transfer systems. Of course, because of their popularity, fund transfers had become a vehicle for fraudsters to use, as third-party scammers convince innocent parties to wire funds to the account of a fraudster using phishing schemes, business email compromises, and other scams to dupe unsuspecting depositors. The depositors, both individual and commercial parties, will wire funds, sometimes millions of dollars, to the accounts of the fraudster. Oftentimes, the scams involve international accounts. And once the money hits the fraudster's account, the funds are gone.
The victims then look around and see if they can hold anyone liable for the misfortune that they've just suffered. They investigate and pull the wire detail and instructions given to the banks and to the parties involved. They have no idea who the fraudster is, but they notice a discrepancy in the wire details. They see that the wire is directed to an account, and the name of the beneficiary for the account is different from the name on the instructions. They believe this mismatch is something they can use to pin liability on the beneficiary bank, that is the bank that received the wired funds, pursue it to the payment order. The question becomes, can liability flow from this type of mismatch?
The Fourth Circuit case we're going to be talking about today, which is in a case called Studco v. 1st Advantage Federal Credit Union, provides a good case study surrounding these facts. Heryka, can you start our discussion and talk to the audience about what the facts were in the Studco case, and how do they relate to the example that I just mentioned?
Heryka Knoespel:
Of course. Let's set the stage here and talk about the facts first. Here are the players. The plaintiff in this case was Studco Building Systems, a metal fabricator in New York. Studco had a very close relationship with its vendor in Ohio that it regularly purchased steel from. They had done business for tons of years, and Studco commonly paid the invoices via electronic transfer from its bank account to the vendor's bank account at a different bank.
So, where is the scam? Studco received an email that they believed to be from its vendor, stating that it was changing banks, and that Studco should begin making payments to the vendor's new bank account at a different bank, 1st Advantage Federal Credit Union in Virginia. Of course, the email provided Studco with the new banking account number, the routing number, and all the details to make these new payments. The result was Studco directed its next four ACH payments over a period of two months, totaling over $550,000 to what it believed was the vendor's new account at 1st Advantage.
When Studco realized it had been scammed, it sued the beneficiary bank, 1st Advantage, and John Doe. The original complaint, Chris, took the kitchen sink approach. It was over 200 paragraphs and raised six causes of action, including UCC Section 4A-207 against both defendants, UCC Section 3-420 for a conversion against both defendants, bailment against the credit union, fraud against John Doe, aiding and abetting against 1st Advantage, fraudulent concealment against the credit union, toward against the credit union, and then it later amended the complaint to add a civil RICO claim against both defendants, and money hadn’t received against the credit union. Lots going on in that complaint. Throwing everything at it to see what would stick.
Chris Willis:
Sure. The concept is that it's the beneficiary bank's duty to figure out if its account holders are fraudsters and do something to prevent them from perpetrating that fraud on third parties. This case was filed, I think, originally in the Eastern District of Virginia, which is a district that I know the two of you are extremely familiar with and litigate in all the time. How did the district court come out on these claims?
Heryka Knoespel:
It was very interesting, because the conclusion reached by the district court was different than what we normally see. Normally, the beneficiary banks are not found liable. Here the remaining claims of the district court from that long list of ones that I just read were the UCC Section 4A-207 claim, the bailment claim, and the fraudulent concealment claim. The court found for the plaintiff under the UCC and the bailment claims, entering judgment of over $550,000 for compensatory damages and directing the defendant to pay attorney fees and cost. It went the other way in this case, and that's what we're going to be chatting about today.
Chris Willis:
Yeah. That does seem very unusual, because it seems like it significantly opens the door beyond what I would think about as the beneficiary bank's potential liability. What does Section 4A-207 say about a financial institution's duties and liabilities? And why did the banking world think that the Eastern District of Virginia got it wrong in this case?
Heryka Knoespel:
Article 4A of the Uniform Commercial Code defines the exclusive rights and duties of financial institutions with respect to funds transfers. The UCC really thoughtfully set the rules to determine the risk of loss from funds transfers that went wrong. UCC 4A-207 covers who should bear the loss in cases just like this one. This section explains that a mis-description of the beneficiary occurs when a payment order identifies the beneficiary by name and an identified number, like a bank account number, for example. But the name and that number actually identify different people.
The drafters of the UCC had contemplated that this might occur, and they recognized that a large percentage of payment orders issued to beneficiary banks are processed by automated means. This means a machine is reading an account number and then crediting that account number with the funds. There is typically not a human processing each payment order, given the high volume of payments done this way. For that reason, the UCC created a safe harbor. A bank can't accept a transfer reliant solely on the account number as proper identification. The bank has no independent duty under the UCC to determine whether a conflict exists. There's really just no time for that when you're processing such a high volume of payments.
In these fact patterns, Chris, the key issue becomes whether the beneficiary bank had knowledge of a mismatch between the account number and the account name. This standard is actual knowledge. If the beneficiary bank, or bank receiving the payment knows the account number and the account name identify different persons and still processes the payment, then it may be found in violation of this UCC provision. It's all perfectly explained there in the UCC. With that background, we can dive into why this ruling was wrong and why it was so shocking to the industry.
And that's really because it changed the rules of the game. The UCC is clear, the beneficiary bank has no duty to proactively discover a mis-description. When you read this decision, though, Chris, you can see that the court sets a very different standard. It sets a new, or should have known standard to reach the conclusion that if more due diligence would have been done, then the harm could have been prevented. The court in its analysis of the UCC claim really went through an imputed knowledge to 1st Advantage based on evidence presented at the trial.
The court was very critical, for example, of alerts that were generated at the account opening about the credit union system for not being able to verify the address provided by the account holder, and what discrepancies there were in the account opening application. The court was also really critical of 1st Advantage's failure to establish what it called a reasonable routine to monitor alerts that warned of suspicious activity regarding the account at issue and the receipt funds. The court said that actual knowledge can be imputed, in this case, because there were real-time alerts that the name of the intended beneficiary did not match the name of the owner of the account receiving the payment.
The court was really critical in its ruling and said, 1st Advantage had access to all of this information in real-time but had no mechanisms in place to review them. There was no system in place to escalate alerts regarding high-value transactions, for example. Sprinkle that on top with the plaintiff's expert witness said, it wasn't commercially reasonable to not review the alerts just because they had many alerts being generated every day.
Really, despite the evidence that 1st Advantage had no ability, or did not review the alerts and had no actual knowledge of the mis-description, the court still heavily weighed 1st Advantage's routine, or lack of routine to find knowledge. Going so far to say, 1st Advantage could not ignore its own systems in order to claim no knowledge in these types of cases. As you can imagine, Chris, this ruling had the potential to open up the floodgate. It had potential to change what should be a quick escape for beneficiary banks in these fact patterns, into a fishing expedition by the plaintiff's bar, into actual routines, criticism of what could or should have been done to create a better routine in order to catch fraud.
So, the court focused on 1st Advantage's routine, whether it had exercised due diligence and whether the mis-description could, or would have been discovered during the first transfer issue really raised a lot of interest for this case, and what it could mean in terms of future beneficiary liability in these all too common cases.
Chris Willis:
Okay. Thanks, Heryka. It definitely sounds more like a negligence standard than an actual knowledge standard. Now, I'm on the edge of my seat and I'm sure the audience is too, because I introduced this episode saying that we're going to talk about a Fourth Circuit decision. Mary, there must have been an appeal. What happened next in connection with the appeal?
Mary Zinsner:
There was an appeal, Chris, and thank goodness for that. Thanks to Heryka for so ably explaining the troubling district court opinion. Those of us who do beneficiary bank work, we're really pretty concerned about it. We started seeing in our own cases, just the need to distinguish Studco in every single case, because everyone would bring it up and we'd say, “Oh, it's on appeal. It was wrongly decided, it's not binding.” But we had to deal with it, not just on the 4A-207 aspect, but on the bailment liability issue. We started seeing bailment claims in every wire fraud case. It was a big ruling out of the district court, and the appellate treatment of it was really crucial to the banking industry.
The case was being talked about at every banking industry conference I went to. 1st Advantage really did the right thing. They had a bad ruling. They went out and they retained, or solicited some really heavy hitters for the amicus briefs and had the Clearinghouse Association, NACHA, Virginia Credit Union League, National Association of Federally Insured Credit Unions, and some others and lined them up to file amicus briefs. Obviously, 1st Advantage filed its amicus brief and each of the amicus really honed in on some different issues, different perspectives.
For example, Clearinghouse and NACHA filed a joint brief really focused on the errors in the district court opinion, just the 4A-207 actual knowledge standard. It addressed some other errors of the district court, such as the district courts turning to some compliance errors, like Know Your Customer, Bank Secrecy Act, and finding that those compliance errors were relevant. It really did go to this negligence theory that you picked up on, Chris. Then the credit union amicus briefs, really focused on just the beneficial role of credit unions and how 1st Advantage had complied with the law and all aspects. And if the decision was left to stand, it would really burden credit unions and all financial institutions in terms of having to really manually review each and every bank wire that came in, rather than be able to rely on the account number as the UCC permits. The Fourth Circuit appeal was pretty important, and 1st Advantage did the right thing by bringing in these amicus heavy hitters.
Chris Willis:
How did the argument go in the Fourth Circuit, Mary?
Mary Zinsner:
The argument was fascinating. I guess, I say that, because I'm a bank deposit lawyer, but I feel like, other people would have been interested in it as well. Great panel had Judge Harvie Wilkinson, Judge Niemeyer, Judge Wynn, all of whom have been on the Fourth Circuit for quite a while. Really, some heavy hitting judges as well, they clearly had read everything. They were clearly troubled by the District Court decision and the possibility of it dramatically impacting the flow of funds.
At one point, one of the judges, I can't remember which one said, how real is this danger that the banking system could grind to a halt? The answer to the question was, it's real. It will grind to a screeching halt. They were really concerned about that. They also really seemed to get the UCC, its purposes, the fact that the UCC is predicated in large part on imposing the loss on the party closest to the fraud, the person who actually dealt with the thief, which is something we see in other articles of the UCC, like the provisions of the UCC dealing with check fraud, et cetera.
They honed in on the actual knowledge standard and the fact that actual knowledge for an organization must mean that someone within the bank had actual knowledge. It's not enough for the system just to spit out alerts of a mismatch, that there needed to be an actual individual with knowledge. I listened to the argument on the day it was argued and left feeling pretty good, which is always a frightening thing, because they say, you should never predict what an appellate court is going to be doing. But I actually thought there would be a helpful opinion to the industry and was thrilled when I was right on that prediction.
Chris Willis:
Okay. Well, let's not keep this cliffhanger going any longer. Tell us, Mary, about what the Fourth Circuit held and its significance in terms of this incredibly important area for banks.
Mary Zinsner:
It was a great opinion. Just a really favorable opinion for the banking industry. Judge Niemeyer wrote the opinion, and Judge Wynn wrote a concurring opinion. The first paragraph of the opinion really addresses the automated clearinghouse system in which every bank participates, talks about how important the orderly flow of funds transfers is to national commerce and includes language such as, for if those transfers were conducted manually, commerce would virtually grind to a halt. Just harkening back to that, the exchange at the oral argument about how real is this problem.
The opinion dives into the facts and interestingly, actually cuts and pastes the problematic email that the fraudster sent into the body of the opinion. You can actually see, it's one of those pictures speak louder than words type emphasis that you see the actual grammatical errors in the email, the typos, the cryptic language, poorly written, just other discrepancies that the judges clearly thought Studco, which was closest to the fraud, should have recognized.
Then the court just dives into the UCC, just talks about Article 4A being precise and detailed and the rules, assigning liability, enabling the parties to funds transfers to predict the risks and talks about the definitions of the different parties and then parses into Article 4A-207, and really does a good job of explaining just the whole purpose of 207 and the language in there allowing the beneficiary bank to rely on the account number as the proper identification of the beneficiary of the payment order, and it expressly states in that code section that the beneficiary bank need not determine whether the name and number refer to the same person. The court talked about that.
Then recognizing that there was this constructive knowledge at 1st Advantage, that there was testimony at the trial about alerts, just dozens and dozens of alerts about the mismatch. But the court explicitly found that that type of constructive knowledge is not enough. That the fact that a bank's internal systems noted a mismatch doesn't mean that somebody within the bank had actual knowledge of the mismatch and that the code used the precise language of actual knowledge for a reason. That reason was because actual knowledge means actual knowledge, and some individual at the bank needed to have actual knowledge. Really good ruling, really good recognition of the perils in our modern banking industry of imposing a constructive knowledge standard on a financial institution.
Then, the other good thing about the opinion, Chris, is the court rejected the bailment argument. Again, as I alluded to, we've seen this bailment theory thrown into all of these wire fraud cases now. And, the court just hammered that. Just said, ACH fund transfers are not chattels. Like bailment applies to goods being placed in somebody's custody. It shouldn't apply to an actual funds transfer. The court has this great definition of, it says, an ACH transfers, it's not a good or a chattel. It's an accounting statement with respect to fungible currency that nearly alters bank account balances, and Virginia law understands such deposits to be neither chattels nor goods. Really good recognizing the error in that finding by the court as well.
Chris Willis:
Okay. Well, it's good then, Mary, that your good vibrations that you got from listening to the argument turned out to be an accurate predictor of the court's opinion. Heryka, let me wrap up with you with some lessons learned from this case. How will this decision be helpful going forward in defending these cases that unfortunately, continue to be filed all the time?
Heryka Knoespel:
This case is going to be so helpful going forward. To Mary's point, we're going to be using it. We're going to be citing it. We're going to be really trying to continue to educate the plaintiff's bar about what the correct standard is in these cases. The standard is actual knowledge. It's not constructive. It's not imputed. Hopefully, this really causes a decrease in litigation against beneficiary banks in cases that have these similar fact patterns.
Victims of fraud should instead be seeking assistance from law enforcement. If they're going to file a lawsuit, they should be going after the fraudster that caused the loss, not the beneficiary bank. The names of potential fraudsters can be obtained through third-party subpoenas and a lawsuit against a bank is not needed. This case is very important to clarify that standard and hopefully, to move the target away from beneficiary banks. We should also consider the practical implications, Chris. Parties should be aware of the allocation of loss under the UCC. With an increase in business email-compromised cases, businesses really need to remain vigilant about written correspondence.
These scams can be prevented by picking up the phone and calling your vendor and saying, “Hey, did you actually change banks? I got this request for a pay to a different bank.” Take that extra step and prevent the scam. Don't try to kick the can down to another party that was not involved with the fraudster. In practice, beneficiary banks should absolutely continue to rely on the safe harbor in the UCC for processing payment orders in accordance with the account number. It's there for a reason. The drafters acknowledged a need for this efficient, quick payment system. This is part of that need for speed for the payment system to work.
As Mary explained, the risk of bringing this system to a halt is very terrifying and is the reason why the UCC so carefully allocated the loss and allows for the safe harbor. Lots and lots of takeaways, and we can keep chatting about it at length, but those are the main ones that come to mind.
Chris Willis:
Yeah. Honestly, Heryka, the point is, by adopting that section of the UCC, state legislatures made a policy judgment, that speed and certainty in wire transfers were more important than imposing a liability on the beneficiary bank to investigate any of these mismatches. That's exactly the kind of policy judgment a legislature's in top of the make, it seems to me.
Heryka Knoespel:
Exactly.
Chris Willis:
Mary, I'm going to give you the last word. Give the audience your takeaways on the significance of this ruling for the banking industry.
Mary Zinsner:
It was just an all and great industry decision, and one which was very welcome. I just want to add just one more takeaway that I thought was important from the ruling. It wasn't one that was addressed by the majority opinion, but it was addressed by Judge Wynn in his concurring opinion. He focused in on privity. Privity is an important concept in the UCC. You can only sue somebody under the UCC that you were in privity with in the bank transaction, or the contract. The situation was Studco was the sending party of the wire, and it had no relationship at all, banking or otherwise, with 1st Advantage, the credit union that received the fund transfer.
The court and Judge Wynn in his concurring opinion really adopted the privity argument that has been really taking storm. We use it a lot because it's an important concept under the UCC, that you have to be in privity with the party that you're suing under the UCC. Judge Wynn said that he didn't find that privity here, that Studco had absolutely no relationship with 1st Advantage and found that the privity concept that other courts have adopted, including the Second Circuit, is important. That's another good takeaway. I think you can cite the Studco decision for the privity argument and that's in the concurring opinion as well.
Chris Willis:
Well, thanks very much, Mary. Thanks to both you and Heryka for delivering this happy news of this great decision to our audience here on the podcast today. Of course, thanks to our audience for listening in as well.
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