Actual Knowledge Requirement for Beneficiary Bank Liability under UCC §4A-207(b)

Introduction

Studco Building Systems US, LLC (“Studco”) sued 1st Advantage Federal Credit Union (“1st Advantage”) after a sophisticated email-hacking scheme redirected four Automated Clearing House (“ACH”) payments totaling $558,868.71 from Studco’s intended beneficiary, Olympic Steel, Inc., into an account controlled by the fraudsters. Studco alleged that 1st Advantage was negligent and breached statutory duties under Article 4A of the Uniform Commercial Code (UCC) by failing to detect that the beneficiary name (“Olympic Steel Inc”) did not match the account holder (“Lesa Taylor”). The United States District Court for the Eastern District of Virginia awarded Studco full recovery under UCC §4A-207 (misdescription of beneficiary) and imposed bailment liability. On appeal, the Fourth Circuit reversed, holding that a beneficiary’s bank has no liability under §4A-207(b) unless it has actual knowledge of the name/number mismatch, and that no bailment existed as a matter of law.

Summary of the Judgment

The Fourth Circuit reversed the district court’s award under UCC §4A-207(b): a beneficiary’s bank may rely solely on the account number in an ACH order unless it has actual knowledge that the account name and number identify different persons.
The court held that constructive knowledge, industry “due diligence” or automated alerts alone do not satisfy the statute’s actual-knowledge threshold.
The Fourth Circuit also held that an ACH deposit of fungible funds into a bank account does not create a common-law bailment, so no bailment duty arose.
Studco’s separate appeal over punitive damages was rendered moot by the reversal of compensatory relief.

Analysis

1. Precedents Cited

First Security Bank of New Mexico v. Pan American Bank (10th Cir. 2000) – Held that a receiving bank’s liability under §4A-207(b) requires actual knowledge of a misdescription.
Donmar Enterprises, Inc. v. South National Bank of N.C. (4th Cir. 1995) – Emphasized Article 4A’s goal of speed, efficiency and certainty in funds transfers.
Grain Traders, Inc. v. Citibank, N.A. (2d Cir. 1998) – Recognized a privity-based “money back guarantee” in §4A-402(d) limiting recovery to the sender’s direct bank.
Approved Mortgage Corp. v. Truist Bank (7th Cir. 2024) – Affirmed the exclusive and detailed risk-allocation framework of Article 4A.
Parrish ex rel. Lee v. Cleveland (4th Cir. 2004) – Defined “actual knowledge” as subjective recognition, distinguishing it from constructive knowledge.

2. Legal Reasoning

Article 4A of the UCC, adopted in Virginia at Va. Code Ann. §8.4A-101 et seq., prescribes uniform, exclusive rules for ACH and other automated funds transfers. Section 4A-207(b)(1) provides:

“If a payment order received by the beneficiary’s bank identifies the beneficiary both by name and by account number, and the bank does not know that the name and number refer to different persons, the bank may rely on the number as the proper identification of the beneficiary.”

Key holdings and principles:

Actual knowledge is the statutory standard; neither constructive nor imputed knowledge triggers liability.
A beneficiary’s bank has no duty to investigate every name/number mismatch (e.g., minor typos, missing suffixes) in an automated environment.
Automated alerts (DataSafe warnings) that are generated—but not individually reviewed—do not establish actual knowledge.
Under §4A-402(d), only the sender’s bank (JPMorgan Chase) is the “receiving bank” from the sender’s vantage point; Studco must pursue relief in the proper chain of liability rather than directly suing 1st Advantage.
Under Virginia law, a general deposit of fungible funds does not create a common-law bailment; thus, no bailment duty arose.

3. Impact on Future Cases and the Industry

Clarity for Banks: Banks may continue to process ACH credits based on account numbers without fear of negligence liability for every name mismatch, provided no employee actually recognizes the conflict.
Risk Allocation: Imposes the loss on the originator who supplied the wrong number, encouraging originators to verify beneficiary data before transmitting large fund transfers.
Litigation Strategy: Plaintiffs must show an individual bank employee had actual, subjective knowledge of a misdescription to succeed under §4A-207(b).
Precedent for Bailment Claims: Reinforces that ordinary bank deposits of fungible funds are not bailments, precluding analogous common-law theories in ACH disputes.

Complex Concepts Simplified

Payment Order: The instruction from the originator (Studco) to its bank to send funds to another bank.
Originator vs. Beneficiary’s Bank: Under UCC, “receiving bank” is the bank to which the originator’s order is addressed (Studco’s bank), not the bank of the ultimate beneficiary.
Misdescription of Beneficiary: Occurs when the beneficiary’s name and account number in a payment order identify different persons.
Actual vs. Constructive Knowledge: Actual knowledge means a person subjectively recognizes the fact; constructive knowledge means one should have known, which is insufficient under §4A-207(b).
Bailment: A relationship requiring physical control of a specific chattel plus intent to hold it for another; ACH deposits of fungible funds do not meet these criteria.

Conclusion

The Fourth Circuit’s decision in Studco Building Systems US, LLC v. 1st Advantage Federal Credit Union establishes that under UCC §4A-207(b), a beneficiary’s bank may rely on an account number alone unless an employee has actual knowledge of a name/number conflict. This ruling preserves the speed and predictability of automated funds transfers, allocates risk squarely on the party that supplied the incorrect account information, and forecloses common-law bailment claims in ACH disputes. Financial institutions and commercial actors can now more confidently operate within a clear framework: verify beneficiary account numbers diligently at the outset, and banks can continue their automated processes without fearing negligence liability for every misdescription.