Electronic Fund Transfer Act
The People of New York v. Citibank N.A
Date: Jan. 21, 2025
Issue: Whether the Electronic Fund Transfer Act (EFTA) applies to wire transfers.
Case Summary: A New York district court granted in part and denied in part, Citibank’s motion to dismiss New York Attorney General (NYAG) Letitia James’ lawsuit alleging the bank violated the EFTA by failing to protect wire fraud victims.
NYAG sued Citi alleging it violated the EFTA because it lacked sufficient online security measures to protect against scammers and unlawfully refused to reimburse them for fraud losses from wire transfers. Under the EFTA, consumers may dispute outgoing electronic payments and receive refunds for unauthorized withdrawals. According to NYAG, the bank did not use strong enough data security measures to protect consumer financial accounts, respond appropriately to red flags, or limit theft by scam. NYAG also claimed Citi reacted ineffectively to fraud alerts, misled consumers, and summarily denied their claims. Citi moved to dismiss, arguing the EFTA does not apply because Article 4A of the Uniform Commercial Code (UCC) governs wire transfers.
ABA filed an amicus brief urging the district court to dismiss NYAG’s lawsuit by making three main arguments. First, ABA argued NYAG’s position sidesteps UCC Article 4A and the universally accepted understanding of consumer wire transfers. Second, ABA argued both courts and regulators have confirmed Article 4A governs consumer wire transfers, not the EFTA. Finally, ABA argued that adopting NYAG’s theory would upend settled expectations at a significant cost to consumers.
The court denied Citi’s motion to dismiss Claim I of NYAG’s complaint, which alleged that Citi failed to comply with the EFTA when overseeing electronic consumer wire transfers. The court rejected Citi’s argument that the EFTA does not apply to transfers from a consumer’s account made to pay for a wire transfer. Citi claimed that the EFTA included an “exemption” to the statutory definition of an electronic fund transfer. According to Subsection (7)(B) of the EFTA, “the term ‘electronic fund transfer’ . . . does not include . . . any transfer of funds, other than those processed by automated clearinghouse, made by a financial institution on behalf of a consumer using a service that transfers funds held at either Federal Reserve banks or other depository institutions and which is not designed primarily to transfer funds on behalf of a consumer.” Because the losses in this case arose from unauthorized payment orders requesting wire transfers, Citi argued that Subsection (7)(B) renders the EFTA inapplicable. NYAG acknowledged that the losses arose from unauthorized payment orders but argued that Subsection (7)(B) excludes from the EFTA’s coverage only the transfer of funds from one financial institution to another along a wire network. By contrast, NYAG argued that the EFTA could still apply to an initially fraudulent payment order that creates debt from a consumer’s account, despite Subsection (7)(B). As a result, the court analyzed “a question of first impression”: which aspects of an electronic payment — initiated by a consumer and partially processed through an interbank wire — the EFTA regulates.
The court analyzed the EFTA’s statutory text and agreed with NYAG that Subsection (7)(B) does not exempt a consumer’s payment order to their bank. Instead, the exemption applies only to “the movement of funds within a wire network” between banks. The court explained that Subsection (7)(B) limits its scope to a “transfer,” a term the EFTA does not define, and sets three requirements: a transfer must be “made by a financial institution,” “on behalf of a consumer” and “using a service that transfers funds held at either Federal Reserve banks or other depository institutions and is not primarily designed to transfer funds for consumers.”
Rejecting Citi’s argument that “transfer” refers to a complete, end-to-end wire transfer, the court noted that the provision does not use the term “wire transfer” and that not every instance of “transfer” must carry the same meaning. The court concluded that Subsection (7)(B) exempts only the “bank-to-bank” portion of a wire transfer, as financial institutions make those transactions on behalf of consumers. Since a financial institution does not perform a consumer-initiated payment order on behalf of the consumer, it remains covered by the EFTA. The court also rejected Citi’s claim that limiting the exemption to interbank wires makes it meaningless, clarifying instead that it confirms purely interbank wires are beyond the EFTA’s reach.
The court rejected Citi’s argument that Subsection (7)(B) exempts electronic payments from EFTA coverage, finding no support in legislative history or regulatory guidance. It noted that Congress enacted the EFTA in 1978 to protect consumers from evolving electronic payment risks. While later interpretations may have assumed a broad exemption for wire transfers, in the court’s view, Citi’s evidence failed to prove this was Congress’s intent, while some evidence even suggested partial EFTA regulation of certain transfers. The court ultimately held that Citi’s interpretation would undermine the EFTA’s consumer protection purpose.
The court also rejected Citi’s motion to dismiss NYAG’s claim concerning unauthorized intrabank “consolidation” transfers (Claim II). NYAG argued that scammers move funds between multiple accounts within the same bank to steal larger sums without multiple payment orders, subjecting these transactions to the EFTA’s protections. Citi claimed these transfers are not unauthorized because they do not change a consumer’s wealth. However, the court ruled that if the transfers occurred without the consumer’s knowledge or authorization and facilitated fraud, a plaintiff has adequately alleged the absence of “benefit” within the EFTA.
However, the court dismissed NYAG’s claim that Citi violated UCC Article 4A by failing to refund fraudulently initiated Payment Orders (Claim IV), ruling that the EFTA, not the UCC, governs these transactions. The court also dismissed NYAG’s claims that Citi violated the SHIELD Act and General Business Law Section 349 (Claim V), and the Federal Red Flags Rule (Claim VI). The court determined that the Fair Credit Reporting Act and its related regulations either preempt or bar these claims. Additionally, the court partially granted and partially denied NYAG’s claim that Citi violated the EFTA by failing to disclose the “terms and conditions” of its EFT services and by including terms that unlawfully waive consumer rights (Claim III). The court ruled, however, that the EFTA does not require such disclosures. At the same time, the court refused to dismiss the waiver issue, finding that at least one section of Citi’s User Agreement violates the EFTA’s anti-waiver provision. The court partially granted and partially denied NYAG’s claim that Citi committed fraud under New York Executive Law Section 63(12) and violated New York General Business Law Section 349, which prohibits deceptive business practices in New York (Claims VII and VIII)
Bottom Line: Initial Conference is set for March 13, 2025.
Documents: Opinion
