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The 7th Circuit Court of Appeals reversed in part a ruling by the Indiana Southern District Court to dismiss a negligence claim involving the wire transfer of money to a bank, which deposited the transfers into its own account.
The appellate court affirmed in part the district court’s dismissal of Section 207 claims that the plaintiff made.
Section 207 of Article 4.1 of the Indiana Uniform Commercial Code governs the rights, duties and liabilities of banks and customers in relation to electronic funds transfers.
The plaintiff, Approved Mortgage Corporation, brought a lawsuit against Truist Bank in 2022 after Truist Bank received funds from Approved Mortage.
The mortgage company sued over an alleged hack that modified the wire instructions for what company would receive two customer payments the mortgage company obtained.
Despite Truist’s past concerns about suspicious activities in one of their accounts, which belonged to AER Operations, LLC, the bank applied the funds to that account and then took out half a million dollars from it to give to AER’s registered agent.
The agent then distributed that money to other parties who converted the money into cryptocurrency.
Because the funds never reached their intended destination, Approved Mortgage paid off the two customers’ mortgages with its own funds.
The circuit court affirmed the district court’s dismissal of Approved Mortgage’s UCC Section 207 claims, ruling that Section 207 cannot be used on its own but must be read with Section 402.
Under Section 402, a sender is entitled to a refund only from the bank that received its payment.
The district court concluded that privity was required for the mortgage company’s Section 207 claims.
The circuit court reversed the district court’s dismissal of the negligence claim as preempted by Article 4.1 and said that because the negligence arose from Truist Bank’s issuance of cashier’s checks after crediting the funds to the suspicious AER account, the claim isn’t preempted by Article 4.1.
The 7th Circuit remanded the case for further proceedings.
The case is Approved Mortgage Corporation v. Truist Bank, formerly known as SunTrust Bank, 22-3163.
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