Legal win: Appeals court rules credit union not liable for fraudulent payments

Credit unions saw a legal victory with the U.S. Court of Appeals for the Fourth Circuit ruling to overturn a district court decision that a credit union was liable for both compensatory and punitive damages due to fraud perpetrated against a company and a member of the credit union. Wednesday’s decision confirms that a financial institution is not liable for fraudulent automated clearing house (ACH) payments under Virginia's Uniform Commercial Code as long as they are not aware of the fraud. 

The appeals court ruled that 1st Advantage Federal Credit Union “has no liability unless it had actual knowledge of the misdescription,” and without evidence, the previous court’s decision was incorrect. 

The lawsuit was brought by Studco Building Systems US, LLC against the credit union to recover funds it had routed to the credit union following spoofed emails from a fraudster posing as a supplier business partner. The fraudster had also tricked a credit union member in order to use their individual account for receipt and withdrawal of the funds. 

This scam resulted in the plaintiff transmitting several high-value ACH payments to the credit union, totaling $558,869. The U.S. District Court for the Eastern District of Virginia ruled in January 2023 that 1st Advantage violated statute and found it liable for both compensatory damages and punitive damages totaling nearly $760,000.

America’s Credit Unions’ legacy organizations and the Virginia Credit Union League filed 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.”

“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," said The League of Credit Unions and America’s Credit Unions in a joint statement. “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.”