4th Circuit Rules on Credit Union Liability in Fraud Cases

On March 26, 2025, the United States Court of Appeals for the Fourth Circuit issued an opinion in Studco Building Systems, US v. 1st Advantage Federal Credit Union. The opinion stated that, under Article 4A of the Uniform Commercial Code, a credit union could not be held liable for Automated Clearing House (ACH) payments based in fraud unless they had “actual knowledge” of the mismatch between the beneficiary name and account name in question.

Prior to this decision, the lower court had awarded Studco Building Systems over $550,000 in damages after a fraudulent email led them to electronically transfer funds to an account at 1st Advantage Federal Credit Union in Virginia. Believing the email to be from a company with which they did business, Studco transferred four payments worth over $550,000 to an account with 1st Advantage. Unfortunately, the email was fraudulent, and the scammers were never identified.

In response, Studco sought reimbursement from 1st Advantage based on a negligent failure to discover the scammers’ misdescription of the account into which the ACH funds were deposited, citing §4A-207 of the Uniform Commercial Code (UCC), which governs misdescriptions of a beneficiary.

Although the lower court awarded Studco their reimbursement, the Fourth Circuit, relying on Virginia’s adoption of the UCC, Virginia Code Ann. §8.4-207, disagreed. According to section (b)(1) of both the UCC and Virginia’s adaptation, the beneficiary bank—in this case, 1st Advantage—may rely on the provided account information as being proper, as long as the bank “does not know that the name and [account] number refer to different persons.” In fact, section (b)(1) goes on to state that the bank in question “need not determine whether the name and [account] number refer to the same person.”

Interpreting these provisions, the Fourth Circuit stated that the knowledge necessary to hold 1st Advantage liable is “actual knowledge”: that is, knowledge where one has “subjectively recognized” the fact. In other words, in order to hold 1st Advantage liable, an individual bank employee would have had to recognize the discrepancy and not act on that recognition.

In concluding their decision, the Fourth Circuit held that, because 1st Advantage did not have subjectively recognized knowledge of the incorrect beneficiary, they could not be held liable for the funds that Studco lost. Furthermore, the court stated, such liability for discrepancies would make it considerably more difficult and more expensive to rapidly transfer funds. This difficulty would ultimately impede commerce and negate the benefits of ACH payments. As a result, the Fourth Circuit reversed the lower court’s award.

Practice Pointers

• Beneficiary banks may rely upon their automated verification and security systems to honor payment orders based on the designated number of the recipient account, as long as those automated systems are commercially reasonable;
• Encourage customers to be vigilant about their email communications and funds transfers, possibly providing educational material to those customers;
• Encourage customers to verify any payment change requests independently with the entity with which they do business;
• Remain vigilant regarding scams and wire fraud issues, as customers will likely continue to file suits based on these claims, and different circuits may rule differently on other case theories related to similar scams.