Bank Liability Under UCC 4A-207: Actual Knowledge Required for Misdescribed ACH Transfers

Introduction

This commentary examines the Fourth Circuit’s decision in Studco Building Systems US, LLC v. 1st Advantage Federal Credit Union, No. 23-1148 (4th Cir. Apr. 2, 2025), which clarifies the circumstances under which a beneficiary bank may be held liable for funds deposited into a misdescribed Automated Clearing House (ACH) account. Studco, a metal fabricator in New York, was defrauded when scammers redirected its nearly $560,000 payments meant for Olympic Steel, Inc. into an account at 1st Advantage Federal Credit Union that was held by an unrelated party. After Studco sued 1st Advantage under Virginia’s version of UCC Article 4A § 207 (misdescription of beneficiary) and for bailment, the district court awarded Studco its loss. The Fourth Circuit reversed, holding that Article 4A protects a beneficiary bank that relies solely on a valid account number absent actual knowledge of a name-number mismatch, and that a general bank deposit is not a bailment under Virginia law.

Summary of the Judgment

The Fourth Circuit (Judge Niemeyer), joined by Judge Wilkinson, reversed the district court’s ruling in favor of Studco on two principal grounds:

Article 4A-207(b) Misdescription Claim: A beneficiary bank may rely on the account number provided in a payment order and credit the associated account unless it has actual knowledge—i.e., subjective awareness—that the name and number refer to different persons. Constructive or imputed knowledge, or negligence in monitoring automatic warnings, does not trigger liability.
Bailment Claim: Under Virginia law, a general deposit of funds in a bank is not a bailment because no delivery of a physical chattel occurs, nor is there an expectation of returning the identical funds. Thus, 1st Advantage owed no bailment duty.

Accordingly, the court instructed the district court to enter judgment for 1st Advantage on both claims. The court also affirmed the denial of punitive damages as moot.

Analysis

Precedents Cited

Donmar Enters., Inc. v. Southern Nat’l Bank of N.C., 64 F.3d 944 (4th Cir. 1995): Recognized Article 4A’s purpose of speed, certainty, and finality in funds transfers.
First Sec. Bank of N.M., N.A. v. Pan Am. Bank, 215 F.3d 1147 (10th Cir. 2000): Applied the actual-knowledge standard under Article 4A-207(b), rejecting negligence or “commercially reasonable” tests.
Grain Traders, Inc. v. Citibank, N.A., 160 F.3d 97 (2d Cir. 1998): Held that recovery under Section 4A-402(d) is limited by privity to the direct sender-bank relationship, preventing “skip” claims against downstream banks.
Peter E. Shapiro, P.A. v. Wells Fargo Bank, N.A., 795 F. App’x 741 (11th Cir. 2019): Emphasized that due diligence or human review requirements would undermine Article 4A’s automated-system paradigm.

Legal Reasoning

Article 4A governs ACH and wire transfers and defines a “payment order” as instructions from an originator (Studco) to its bank (JPMorgan Chase) directing funds to a beneficiary’s bank (1st Advantage) for credit to the beneficiary’s account (Olympic). When a payment order identifies both a name and an account number that do not match, Section 4A-207(b)(1) provides:

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

The Uniform Commercial Code defines “knowledge” as actual knowledge—subjective awareness of the fact—rather than constructive or imputed knowledge. The court stressed that Article 4A’s efficiency depends on banks processing transfers automatically by account number, without mandatory human review of discrepancies. The DataSafe system at 1st Advantage generated thousands of automated warnings each day for minor name-number mismatches, but those warnings were never read. Because no bank employee had actual knowledge that the named “Olympic Steel, Inc.” account differed from the number-designated account held by a third party, 1st Advantage incurred no liability under Section 4A-207(b).

On bailment, Virginia law holds that a bailment requires delivery and possession of a chattel (a physical item) with intent to return that identical chattel. Automated electronic deposits of fungible currency alter account balances but do not constitute a bailment.

Impact

Affirms Article 4A’s exclusive framework, preempting negligence or conversion claims that would impose human verification duties on beneficiary banks.
Maintains the speed and certainty of ACH and wire systems by permitting banks to rely solely on valid account numbers absent actual knowledge of fraud.
Shifts the loss-allocation burden to the originator who chooses not to verify a suspect change in account instructions, thereby encouraging internal diligence at the payment source.
Clarifies that only the sender’s bank (in privity) may be forced to refund an improper transfer under UCC § 4A-402(d), preventing direct “skip” claims against downstream banks.

Complex Concepts Simplified

ACH System: An electronic network for batch-processing large volumes of credit and debit transactions, such as payroll and vendor payments.
UCC Article 4A: A uniform commercial code article adopted by most states that governs funds transfers, specifying rights, duties, and liabilities of banks and their customers.
Payment Order vs. Funds Transfer: A payment order is a single instruction to move money; a funds transfer is the series of payment orders moving the money through intermediary banks to the beneficiary.
Misdescription of Beneficiary (§ 4A-207): Occurs when the name and account number in a payment order refer to different persons.
Actual Knowledge: Subjective awareness of a fact. Banks are not charged with constructive or imputed knowledge simply because automatic systems flag discrepancies.
Bailment: A legal relationship in which personal property is delivered by a bailor to a bailee for safekeeping or use, requiring return of the same item. A general bank deposit does not create a bailment.

Conclusion

The Fourth Circuit’s decision in Studco v. 1st Advantage Federal Credit Union cements the principle that beneficiary banks may rely on account numbers without liability under UCC 4A-207(b) unless an employee has actual knowledge of a name-number mismatch. This ruling preserves the automated efficiency and finality of ACH transfers, allocates fraud-related losses to the party that failed to verify suspicious instructions, and clarifies that electronic deposits do not amount to bailments under Virginia law. Going forward, originators must verify changes in beneficiary account information, and banks can confidently process transfers by account number absent subjective awareness of fraud.