Monday, December 3, 2012

FYI: 11th Cir Rules Against Bank on Fraudulent Wire Transfer "Security Procedure" Safe Harbor

The U.S. Court of Appeals for the Eleventh Circuit recently held that a bank may be liable for a supposedly fraudulent wire transfer, ruling that the parties' agreed-upon security procedure in a funds transfer agreement did not include the additional procedures that the unilaterally bank followed in processing payment orders, and thus did not meet the Florida UCC's statutory definition of "security procedure." 
The Court therefore ruled that the Florida UCC's "safe-harbor provision," the applicability of which hinged on the agreed-upon security procedure meeting the statutory definition and which would shift the risk of loss to the customer, did not apply to the wire transfer, and that summary judgment in favor of the bank was error.
A copy of the opinion is available at:
Plaintiff, a banking customer ("Customer"), opened an account with a bank ("Bank") in Florida.  Customer and Bank agreed to subject the account to Bank's "funds transfer agreement" ("FTA"), according to which Bank used a security procedure for processing payment orders to verify the authenticity of the order, and to detect errors in the transmission or content.  Customer was the only authorized representative on the account for purposes of funds transfers, and was required under the FTA to sign any payment orders delivered to Bank in person.

Customer visited Bank and deposited money into his account.  Shortly after his visit to Bank, Customer left the country.  Supposedly while Customer was en route, however, someone purporting to be Customer visited Bank, and submitted a written payment order for over $329,000.  The payment order was processed by an employee of Bank who confirmed (1) the information on the payment order, (2) the identity of the person via an identification document provided by him, (3) the sufficiency of funds in the account, (4) the existence of the FTA for the account, and (5) authenticity of the signature on the payment order.  The Bank employee also obtained written approval from two branch officers, who took additional measures to ensure the authenticity of the payment order.  The funds were subsequently transferred to an unknown beneficiary in a foreign country.

About two months after the payment order was processed, Customer supposedly first learned of the payment order and transfer.  Customer then filed an action against Bank in state court seeking to recover the funds transferred from his account.  Bank removed to federal court and moved for summary judgment, arguing as an affirmative defense that, under the "safe-harbor" provision of Florida's UCC Article 4A, Customer bore the risk of loss.  Customer moved for partial summary judgment, claiming that the safe-harbor defense did not apply.

The lower court granted Bank's motion for summary judgment, ruling that the safe-harbor provision shifted the risk of loss to Customer because the parties' agreed-upon security procedure satisfied the definition of "security procedure" in Florida's version of the Uniform Commercial code, the procedure was commercially reasonable, and Bank followed the procedure in good faith. 
Customer appealed.  The Eleventh Circuit reversed
As you may recall, the term "security procedure" is defined in Florida's version of Article 4A the Uniform Commercial Code as a "procedure established by agreement of a customer and a receiving bank for the purpose of:  (1) Verifying that a payment order or communication amending or canceling a payment order is that of the customer; or (2) Detecting error in the transmission or the content of the payment order or communication."  Fla. Stat. § 670.201 ("Section 201").  Section 201 also states that "[c]omparison of a signature on a payment order or communication with an authorized specimen signature of the customer is not by itself a security procedure."
In addition, a so-called "safe-harbor provision" in Florida's version of Article 4A provides in pertinent part that a bank may shift the risk of loss to the customer by showing that the parties agreed to a security procedure that is commercially reasonable and that the bank followed in good faith. Fla. Stat. § 670.202(2) ("Section 202").  See also Fla. Stat. § 670.102 (governing the rights, duties and liabilities of banks and customers with respect to wire transfers).
Moreover, the FTA between Customer and Bank provided that: (1) "written Payment Orders shall be delivered by an Authorized Representative . . . to the Bank either in original form in person or by mail, or by facsimile transmission.  Each written Payment Order must be signed by at least one Authorized Representative . . . "; (2) the applicable security procedure is that procedure selected by Customer; (3) "the use of the Security Procedure . . . shall be the sole security procedure required with respect to any Order"; (4) the bank "may use . . . any other means to verify any Payment Order or related instrument"; and (5) any additional or different security procedures were to be specified in writing, signed by Bank, and made a part of the FTA.  FTA § 5.
Noting the three requirements of Section 202 (an agreed-upon security procedure, the commercial reasonableness of that procedure, and good faith compliance with that procedure on the part of the bank), the Eleventh Circuit pointed out in part that the first requirement must meet the definition of  the term "security procedure" in Section 201 in order for the safe-harbor provision in Section 202 to apply.  The Court reasoned that the applicability of the safe-harbor provision in Section 202 to the wire transfer in this case hinged on the scope of the agreed-upon security procedure.
Turning therefore to the scope of the agreed-upon security procedure, the court focused on the FTA's express definition of "security procedure," which, the Court explained, was determined by Customer's selection of the security option that expressly limited the meaning of the term to a written payment order delivered and signed by an authorized representative.   The Court supported this interpretation by pointing out that the FTA further referred to the selected security procedure as the "sole security procedure required with respect to any Order," and that there was no writing modifying the security procedure Customer had selected. 
In so ruling, the Court rejected the lower court's interpretation that Bank could use other procedures in addition to the one Customer selected, despite the provision in the FTA that permitted Bank to use "any other means" to verify payment orders.  As the court explained, "[the] language does not show that the "any other means" is a security procedure.  In fact, it shows just the opposite, as §5(iii) [of the FTA] intentionally sets "any other means" apart from the defined "Security Procedure."
Moreover, agreeing with Customer that the security procedure he selected did not satisfy Section 201's definition of a security procedure because it did not even require a signature comparison, but only required that payment orders delivered in person be in writing and signed by Customer, the Eleventh Circuit ruled  that the agreed-upon procedure could not satisfy Section 201.  In so ruling, the Court noted that the selected security procedure did not require, for example, Bank to check the identification of the person presenting the payment order to ensure that Customer was in fact the one presenting the order. 
Accordingly, the Court ruled that the inability of the agreed-upon security procedure to meet Section 201's definition of a security procedure precluded application of Section 202's safe-harbor provision to shift the risk of loss to Customer.  The Court thus reversed the district court's grant of summary judgment in favor of the Bank.

Ralph T. Wutscher
McGinnis Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
Mobile: (312) 493-0874

NOTICE: We do not send unsolicited emails. If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention. Thank you.

Our updates are available on the internet, in searchable format, at: