Bank Wins Account Takeover Loss Case

Appellate Court Says BancorpSouth Offered 'Reasonable' Security

By , June 16, 2014.
Bank Wins Account Takeover Loss Case

An appellate court ruling in favor of a bank in a dispute over account takeover losses dating back to 2010 has broad implications for financial institutions.

See Also: Financial Malware: Detection and Defense Strategies

The message from the court is that as long as banks and credit unions offer reasonable security measures, and note in their contracts whether those measures were accepted and implemented by their customers, they have fulfilled their obligations for security, legal experts say.

Plus, the court's move to require the customer who filed the lawsuit to pay the bank's legal fees could deter others from taking legal action against banks.

Result 'Isn't Surprising'

Nearly a year after Missouri-based Choice Escrow Land Title LLC appealed a district court's findings in its case against BancorpSouth, the Eighth Circuit Court of Appeals, in a June 11 decision, supported the lower-court's ruling (see Choice Escrow Appeals Wire Fraud Ruling).

"The result isn't surprising, in light of the underlying facts of the case," says Dan Mitchell, the attorney who represented account-takeover victim PATCO Construction in its federal appeal of a ruling related to wire fraud. "The Eight Circuit affirmed the trial court's ruling that the risk of loss was shifted back to the customer, Choice Escrow, because BancorpSouth offered dual control to Choice, but Choice declined it and agreed to be bound by the bank's other security procedures."

Those other procedures included password protection, daily transfer limits and device identification, a system that would trigger challenge questions if a wire or payment was scheduled from an unrecognized device, Mitchell notes.

Mitchell, who works in the litigation and business law practice at Maine-based Bernstein Shur, and cybersecurity attorney Joseph Burton, managing partner at the San Francisco office of the law firm Duane Morris, say the ruling supports a wider perspective of what is deemed "commercially reasonable" when it comes to security expectations.

They say the federal court leans heavily on Article 4A of the Uniform Commercial Code, which includes a provision about how banking institutions should handle incidents of wire-transfer fraud.

If a bank or credit union offers reasonable security procedures that a customer refuses, then under the 4A provision, the customer is liable if fraud results, Mitchell and Burton say.

Paying Legal Fees

In addition to not getting any compensation for the losses it suffered from its takeover incident, Choice Escrow now has to pay BancorpSouth's attorneys' fees as well.

Burton says requiring commercial customers that lose lawsuits against banks to pay the banks' legal fees will likely deter customers from filing suits related to account-takeover losses.

"Being able to go after attorneys' fees would seem to significantly raise the litigation risk for commercial customers contemplating filing a legal claim for funds losses," he says.

Mitchell says the appellate court's ruling related to payment of the attorneys' fees sends a strong message.

"Under normal circumstances, parties have to bear their own fees," he says. "An exception can exist, however, when there is a contractual agreement between the parties that provides for indemnification of legal fees by one party to another. There was such a provision in the account agreement in this case. The bank filed a counterclaim, based on this provision; but the trial court dismissed it. On appeal, the bank argued this was an error, and the Eighth Circuit agreed, reversing this aspect of the trial court's handling of the case."

Parties' Responses to Ruling

Jim Payne, co-owner of Choice Escrow, says his company is exploring some additional legal options, but that the ruling is an obvious disappointment.

Follow Tracy Kitten on Twitter: @FraudBlogger

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