RICHMOND, Va.–The U.S. Court of Appeals for the Fourth Circuit has overturned a district court decision that had found 1st Advantage FCU liable for compensatory and punitive damages due to fraud that had been committed by one of its members.
Instead, the higher court found a financial institution is not liable for fraudulent automated clearing house (ACH) payments under Virginia’s Uniform Commercial Code as long as the financial institution is not aware of the fraud.
News of the court decision was first reported by America’s Credit Unions.
The U.S. Court of Appeals found the $1-billion 1st Advantage “has no liability unless it had actual knowledge of the misdescription,” and without evidence, the previous court’s decision was incorrect.
About the Case
The case involved a 1st Advantage member who transmitted fraudulent emails to the plaintiff—Studco Building Systems–that caused the plaintiff to transmit a number of large ACH payments to the credit union, which were eventually withdrawn by the member. The U.S. District Court for the Eastern District of Virginia ruled in January 2023 that 1st Advantage, which is based in Yorktown, Va., had violated statute and ruled the credit union liable for both compensatory damages and punitive damages totaling nearly $760,000.
In October 2023, the organizations that now make up America’s Credit Unions, joined with the Virginia Credit Union League in filing a brief in support of 1st Advantage in October 2023, noting that the lower court’s decision threatened to “destabilize the system of settled rules that credit unions follow when implementing transaction software, and will assign credit unions an impossible task—the manual review of thousands of transactions every day,” according to America’s Credit Unions.
Support for ‘Operational Integrity’ of CUs
In a joint statement, America’s Credit Unions, along with the League of Credit Unions (into which the Virginia league has since merged), said, “The League of Credit Unions & Affiliates and America’s Credit Unions are pleased with the Fourth Circuit’s decision in Studco Building Systems US, LLC v. 1st Advantage Federal Credit Union, which reinforces the clear standards the UCC sets on how banks and credit unions process ACH transactions. Our amicus brief highlighted the vastness and complexity of the electronic payments system and the importance of clear rules on liability and requirements. This ruling supports the operational integrity of credit unions and ensures they can continue serving their members effectively within a well-defined legal framework. We were proud to support 1st Advantage through our amicus brief.”
