No private action against bank for failure to prevent elder exploitation

An elderly woman scammed out of more than $130,000 has no private cause of action under federal and state laws that impose a permissive duty to deny or report transactions that it may suspect are elder financial exploitation, the Court of Appeals of Virginia has held.

Unable to recover money she transferred to a scammer’s account, the 74-year-old woman sued her bank for negligently failing to detect the scam, citing the Banking Secrecy Act, or BSA, as well as Virginia Code § 63.2-1606.

But Judge Kimberley Slayton White said the trial court improperly overruled the bank’s demurrer.

“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,” she explained. “Other courts have also found that the BSA does not create a private cause of action.”

She added that § 63.2-1606 “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.”

Senior Judge William G. Petty and Judge Stuart A. Raphael joined White in Navy Federal Credit Union v. Lentz (VLW 023-7-324).

Scammed

Delores Lentz fell prey to a thief who — by hacking her friend’s Facebook account — encouraged Lentz to contact the scammer about a government grant program. Lentz was 74 at the time and cared for her ill husband.

The scammer told Lentz to visit Navy Federal Credit Union, or NFCU, on successive days. First, Lentz wired $67,500 for an “insurance fee” and then $67,000 for a “World Bank Fee” to an account held by “Bash’s ATM and Vending” at Prosperity Bank in Austin, Texas.

Several days later, Lentz realized that she’d been scammed. She asked NFCU to reverse the transfers. Neither of the bank’s letters requesting return of the funds were successful and they were unable to reverse the transfers.

Claiming the bank’s failure to detect and prevent the scam breached its duties under the BSA and § 63.2-1606, Lentz filed suit in the Henrico County Circuit Court against NFCU for common law and per se negligence.

NFCU contended in its demurrer that the Uniform Commercial Code, or UCC, imposed no duty to prevent the transfers and otherwise superseded any common law or statutory duty that NFCU may have had toward Lentz regarding the wire transfers.

The circuit court overruled NFCU’s demurrer but certified its interlocutory appeal.

BSA

NFCU contended that the BSA, a regulatory statute by which banks are required to report certain information to the federal government, didn’t create a private cause of action.

White agreed.

“It is well settled that the legislature, here Congress, must expressly create a private right of action to enforce a federal statute,” she wrote. “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. Other courts have also found that the BSA does not create a private cause of action.”

The judge rejected Lentz’s claim that various regulations, booklets, letters, guidance and advisory publications issued by federal agencies relating to the BSA imposed specific duties owed by financial institutions to customers.

“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,” White said. “While Congress could have done so, ‘it is most certainly incorrect to say that language in a regulation can conjure up a private cause of action that has not been authorized by Congress.’”

She noted that “[a]gencies may play the sorcerer’s apprentice but not the sorcerer himself,” and found no reason to create a duty where Congress didn’t plainly do so.

‘Permissive reporters’

Arguing the statutory language was permissive to give a bank “safe harbor” from violating privacy laws if they report suspected elder abuse, NFCU said § 63.2-1606 didn’t create a duty as Lentz alleged.

White concurred.

The statute listed financial institutions as permissive reporters which “may report” financial exploitation and delay or deny suspected transactions based on a good faith belief that an adult was being exploited.

“The legislature specifically used the permissive ‘may’ as opposed to ‘must’ or ‘shall’ when defining a financial institution’s obligation to report elder abuse,” White pointed out.

Also, when a financial institution suspects exploitation, the language used by the legislature created a procedure that was allowed — but not required to be — instituted.

“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,” White wrote. “To do so would be an abandonment of the principles of separation of powers and our deference to the legislative branch on matters of policy.”

UCC preemption

White then addressed NFCU’s argument that Lentz’s claims were preempted by the UCC by assuming without deciding that NFCU may have owed Lentz a common law duty of care.

Article 4A of the UCC first established rules governing wire transfers and 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,’” the judge noted. “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.’”

As for liability, the UCC is clear: “‘the bank owes no duty to any party to the funds transfer except as provided in this title or by express agreement.’”

Here, the only express agreements between the parties were the membership agreement and the incorporated important disclosures, neither of which contained a duty requiring NFCU to specifically police for elder abuse.

“Lentz only alleges a breach of a duty regarding the transfer of a wire — something the UCC addresses directly,” White wrote. “Anything else in contradiction to those explicit provisions is preempted.”

Pointing out that the Supreme Court of Virginia and other jurisdictions have issued similar rulings, the judge said the circuit court improperly overruled NFCU’s demurrer and reversed.