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Note: Banco Del Austro (Authorizing Bank) and Wells Fargo Bank (Receiving Bank) entered into an agreement (Agreement) that Receiving Bank would honor commercial electronic funds transfers ordered by Authorizing Bank. The Agreement adopted SWIFT authentication procedures. Authorizing Bank claimed that the Agreement also required additional safeguards, citing to the language of the Agreement that states that it “‘will be governed by and construed in accordance with the Laws of the US and the State of New York, including (without limitation) Articles 3, 4, 4A, and 5 of the UCC’, as incorporating into the Agreement certain ‘know your customer’ fraud detection policies.”

During the term of the Agreement, Authorizing Bank’s sent Receiving Bank, via SWIFT, unauthorized orders for commercial electronic funds transfers which, upon receipt, Receiving Bank honored. Authorizing Bank sued Receiving Bank for violations of the New York UCC, breach of contract, and negligence. Receiving Bank moved to dismiss the complaint. The United States District Court for the Southern District of New York, Kaplan, J., denied Receiving Bank’s motion to dismiss the UCC violation claims, but granted its motions to dismiss the breach of contract and negligence claims.

The Judge examined Authorizing Bank’s claim that Receiving Bank neglected its duties under the UCC. The Judge noted that § 4A-202 “compels reimbursement of unauthorized funds transfers if (1) the authorizing bank nevertheless failed to act in good faith or (2) the security procedure was not commercially reasonable”, thus creating two distinct legal duties – one of good faith and another of commercial reasonableness. Furthermore, the Judge noted that the UCC defines “good faith” as “honesty in fact and the observance of reasonable commercial standards of fair dealing” and that any assessment of good faith requires an inquiry as to whether the security procedures were “commercially reasonable”.

The Judge noted that under § 4A-202(3), commercial reasonableness is a matter of law that is determined “by considering the wishes of the customer expressed to the bank, the circumstance of the customer known to the bank, . . .alternative security procedures offered to the customer, and security procedures in general use by customer and receiving banks similarly situated.”

The Judge determined that the court could not making a ruling on whether Receiving Bank’s procedures were commercially reasonable or if it complied with commercially reasonable standards in processing the transfers because the Agreement incorporated the SWIFT manual. The Judge determined that he could not, as a matter of law, determine whether “use of the SWIFT system, with nothing more, constituted a commercially reasonable security procedure in the context of this particular” relationship without further inquiry which was not appropriate at the current stage of litigation.

In determining the merits of Authorizing Bank’s breach of contract claim, the Judge noted that the agreement between the parties “did not transform any and all violations of federal and state law into breaches of contract and did not modify the security procedure explicitly outlined under separate header.” The Judge ruled that Authorizing Bank failed to allege sufficient facts to support a breach of contract claim since it did “not plausibly allege that [Receiving Bank] deviated from [the agreed-upon security procedures]”.

The Judge also dismissed Authorizing Bank’s claim that Receiving Bank was negligent in honoring the unauthorized transfers. Receiving Bank contended that Authorizing Bank’s negligence claim was barred under UCC Article 4A. Article 4A precludes “common law claims when such claims would impose liability inconsistent with the rights and liabilities expressly created by Article 4-A.” The Judge found that § 4-202 determines liability, and “[i]f the agreed-upon security procedure was commercially reasonable and [Receiving Bank] otherwise adhered to reasonable commercial standards of fair dealing, Section 4-A-202 absolves [Receiving Bank] of its default obligation to refund [Authorizing Bank].”The Judge ruled that negligence liability beyond § 4A-202 would be inconsistent with Article 4A.

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The views expressed in this Case Summary are those of the Institute of International Banking Law and Practice and not necessarily those of the ICC or Coastline Solutions.