Fraudulent transfers
Studco Building Systems U.S. LLC v. 1st Advantage Federal Credit Union
Date: March 26, 2025
Issue: Whether a financial institution can be held liable for processing a fund transfer when the beneficiary name and account number do not match, without having actual knowledge of the discrepancy.
Case Summary: In a 3-0 decision, a Fourth Circuit panel ruled that financial institutions are not liable for fund transfers where the beneficiary name and account number do not match, unless the institution knew the mismatch at the time of the transfer.
In 2018, an unknown third party impersonating Olympic Steel sent Studco a fraudulent email instructing it to update Olympic Steel’s banking information. The scammers provided an account number they controlled. Believing the request was legitimate, Studco made four ACH payments to the account at 1st Advantage, listing Olympic Steel as the beneficiary. In reality, the funds went to an account owned by someone else who had also fallen victim to the scheme.
In 2019, Studco sued 1st Advantage, alleging it failed to follow basic security procedures and should have rejected the transfers. Judge Raymond Jackson of the Eastern District of Virginia ruled for Studco, finding that the Virginia Commercial Code — which adopted the Uniform Commercial Code (UCC) — required 1st Advantage to reject ACH deposits if it knew the intended beneficiary did not match the account receiving the funds. 1st Advantage appealed the decision.
On appeal, the panel reversed, ruling 1st Advantage was not liable for the transfers. The panel determined that Studco did not know the beneficiary’s name and account number referred to different people when it made the deposit. Yet under the Virginia Commercial Code, if a payment order includes both a name and an account number that do not match, and the bank has no actual knowledge of the discrepancy, the bank may rely on the account number as the correct identifier, according to the court. The Code does not require the bank to verify whether the name and number match.
In this case, scammers duped Studco by impersonating Olympic Steel. The panel noted that 1st Advantage did not typically review such payment details due to the high volume — hundreds to thousands daily — and that doing so would have been impractical. Instead, 1st Advantage followed standard practice by relying on the account number Studco provided. Because the bank had no actual knowledge of the discrepancy when the deposits were made, the panel held that 1st Advantage was not liable.
The panel also ruled the district court erred in finding that Studco’s deposit created a bailment and imposed a duty of care on 1st Advantage. 1st Advantage contended that, under Virginia law, a bailment is created only by a transfer of a chattel (an item of tangible movable or immovable property except real estate). 1st Advantage also contended that no chattel was transferred, UCC Article 4A preempts any bailment liability, and Studco failed to exercise reasonable care. Agreeing with 1st Advantage, the panel noted that a general bank deposit does not create a bailment because a bailment involves rightful possession of goods by someone other than the owner—conditions not met here.
In concurrence, Judge James Wynn agreed with the majority’s interpretation of the Uniform Commercial Code. He emphasized the actual knowledge requirement applies to an individual bank employee who must know about the misdescription at the time of the deposit. However, Judge Wynn noted here, 1st Advantage may have gained actual knowledge of the discrepancy before Studco made its final two deposits.
Bottom Line: On April 9, 2025, Studco petitioned the Fourth Circuit for en banc review.
Document: Opinion
