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No duty to reverse fraudulent wire transfer

Virginia Lawyers Weekly//September 6, 2023

No duty to reverse fraudulent wire transfer

Virginia Lawyers Weekly//September 6, 2023//

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Where appellee was scammed for $134,500, the credit union that made wire transfers to the scammer had no duty to prevent the transfers. The circuit court’s decision in this case is reversed.

Overview

Appellee Lentz was a 74-year-old woman who was her husband’s care provider when a “scammer convinced Lentz to make two transfers, on successive days, via a Navy Federal Credit Union (‘NFCU’) branch office on March 25 and March 26, 2019.

“The first transfer was in the amount of $67,500 and the second $67,000. The amounts were alleged to be for an ‘insurance fee’ and a ‘World Bank Fee,’ respectively.

“Both wire transfers were addressed to Prosperity Bank in Austin, Texas, with the account holder name of ‘Bash’s ATM and Vending.’

“Several days after the wire transfers, Lentz realized that she had been scammed and returned to NFCU to attempt to reverse the transfers. NFCU sent two letters requesting return of the funds, but ultimately was unable to reverse the wire transfers.”

Lentz sued NFCU for negligence, alleging that the credit union should have detected the scam, “citing provisions of the Bank Secrecy Act (‘BSA’).

“Following NFCU’s demurrer filing, the circuit court granted both NFCU’s demurrer and Lentz’s motion to amend.

“Lentz filed an amended complaint alleging, in addition to the first negligence claim, negligence per se and breach of contract. NFCU demurred to the amended complaint, arguing that under the Uniform Commercial Code (‘UCC’) NFCU had no duty to prevent the transfer and that Lentz otherwise failed to plead another common law or statutory duty not superseded by the UCC that NFCU had toward Lentz regarding the wire transfers.

“After a hearing on the demurrer, the circuit court overruled NFCU’s demurrer to the amended complaint.” NFCU was granted an interlocutory appeal.

Arguments on appeal

NFCU presents three arguments, asserting that the circuit court incorrectly overruled its demurrer.

“Primarily, NFCU argues that:

“1) the BSA does not create a private cause of action;

“2) Code § 63.2-1606 does not create a duty owed by NFCU to Lentz nor does Lentz allege any common law duty owed by NFCU; and

“3) the UCC preempts other Virginia statutory or common law duties with respect to wire transfers. For the following reasons, we agree.”

No private cause

“NFCU argues that the BSA, a regulatory statute by which banks are required to report certain information to the federal government, does not create a private cause of action. We agree.

“It is well settled that the legislature, here Congress, must expressly create a private right of action to enforce a federal statute. …

“The duties created by the BSA are those owed by a bank only to the federal government, not to any private party, including bank customers. …

“Lentz argues that various regulations, booklets, letters, guidance and advisory publications issued by federal agencies relating to the BSA impose specific duties owed by financial institutions to customers, thus creating a private cause of action.

“Among the guidance documents are those addressing the detection of potential elder financial exploitation. However, nowhere in the statutory text of the BSA did Congress create a private cause of action for enforcement.”

Statutes

“NFCU argues that Code § 63.2-1606 likewise creates no duty because the language in the statute is permissive to allow a bank or credit union a ‘safe harbor’ from violating privacy laws if they report suspected elder abuse. We agree. …

“Code § 63.2-1606 establishes a reporting procedure for suspected elder abuse, neglect or exploitation. Eight classifications of individuals are what are referred to as mandatory reporters.

“Those individuals are required to make reports to the local department of social services or to the adult protective services hotline of ‘[m]atters giving reason to suspect the abuse, neglect or exploitation of adults.’ …

“The staff of a financial institution is not among those listed as mandatory reporters. Instead, they are listed as permissive reporters. Code 63.2-1606(C) establishes that ‘[a]ny financial institution staff who suspects that an adult has been exploited financially may report such suspected financial exploitation.’

“Similarly, Code § 63.2-1606(L) establishes a procedure that a financial institution may use to delay or deny a financial transaction when it ‘believes in good faith that the transaction or disbursement many involve, facilitate, result in, or contribute to the financial exploitation of an adult.’

“The legislature specifically used the permissive ‘may’ as opposed to ‘must’ or ‘shall’ when defining a financial institution’s obligation to report elder abuse. Likewise, the legislature’s language established a procedure that was permitted but not required to be instituted when a financial institution suspected financial exploitation. …

“We decline to extend a duty to mandate the reporting of elder abuse or to mandate an action by a financial institution when elder abuse is suspected where the plain language of a statute clearly says otherwise.”

UCC preemption

“NFCU argues that Lentz’s claims are preempted by the express provisions of the UCC. We agree. In reaching this analysis, we assume without deciding that a common law duty of care may have been owed to Lentz by NFCU. …

“The UCC rules concerning wire transfers set forth in Article 4A represent ‘a careful and delicate balancing of [competing] interests and are intended to be the exclusive means of determining the rights, duties and liabilities of the affected parties.’ …

“As such, ‘resort to principles of law or equity outside of Article 4A is not appropriate to create rights, duties and liabilities inconsistent with those stated in the Article.’ …

“To make it abundantly clear, ‘the bank owes no duty to any party to the funds transfer except as provided in this title or by express agreement.’ …

“The only express agreement between the parties would be the membership agreement and the incorporated important disclosures. These documents do not contain a duty requiring NFCU to police for elder abuse, specifically.

“Rather, the documents note that NFCU is liable to Lentz if her electronic transfer is not: 1) completed on time; 2) in the correct amount; or 3) sent to the correct recipient. …

“We hold that the UCC controls and preempts Lentz’s claims of negligence outside its provisions. Lentz only alleges a breach of a duty regarding the transfer of a wire – something the UCC addresses directly. Anything else in contradiction to those explicit provisions is preempted.”

Reversed.

Navy Federal Credit Union v. Lentz, Record No. 1115-22-2, Aug. 15, 2023. CAV (published opinion) (White) From the Circuit Court of Henrico County. (Harris Jr.) Mary C. Zinsner for appellant. W. Scott Greco for appellee. VLW 023-7-324, 8 pp.

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