Any good compliance person knows that, under the Electronic Funds Transfer Act, assuming a member makes appropriate and timely notification, a member’s liability for unauthorized electronic transactions is capped, making the member’s credit union responsible for reimbursing its member. But Article 7B of the Act has always been understood to exempt from its protection inter-bank wire transfers initiated by payment orders. These transactions are executed over the Fed-Wire system or the CHIPS network and are initiated by a member who makes a payment order. Back in 1978, when the Act was enacted, these orders were still made over the phone and in person, but in recent years, many online banking services give members the option of initiating payment orders online (incidentally, 1978 was also the year that Bucky Dent hit a game-winning home run against the Boston Red Sox, leading the Yankees to a dramatic victory in a one-game playoff. The Yankees would go on to win the World Series that year. The Red Sox, needless to say, would not, but I digress).

New York’s AG argues that these online payment orders turn traditional wire transfers, which could traditionally only be conducted between banks and were therefore governed by Article 4A of your state’s UCC, into electronic consumer fund transfers governed by the EFTA.

Why is this distinction so important? The AG sued Citibank after the bank refused to reimburse members who were victimized by fraudulent wire transfers. The AG also alleged that Citibank failed to follow the procedures outlined under the EFTA for investigating allegedly unauthorized transactions. Citibank responded by pointing out that its conduct complied with the requirements of Article 4A. The EFTA was irrelevant.

The district court agreed with the AG. In a decision that was largely based on textual analysis and deemphasized consideration of existing practice, the court held that the (7)(b) exemption could best be understood as applying to transactions between financial institutions. As a result, since an online payment order also involves a consumer, the exemption no longer applies.

As the joint brief filed by banks and credit unions last week explains, “This case has profound consequences for an industry that has organized around what has been understood for decades to be a settled legal regime. The Court’s decision has prompted significant uncertainty and will impose steep costs on Amici’s members as they consider whether and how to reorganize their online funds transfer offerings in the face of precedent that now conflicts across jurisdictions.”

For credit unions within the Southern District, the decision is of real and immediate concern. And if the Court of Appeals ultimately upholds the district court’s ruling for the Second Circuit, they would be joined by other credit unions, which suddenly will find themselves having to choose between expanded liability for unauthorized transfers for which they are not insured or denying members the convenience that comes with wire transfers.

Brace yourself for the increasingly frustrated member who must go to the credit union whenever they want to adjust their IRA. And even though this decision is only binding within the second circuit, it is undoubtedly being scrutinized by plaintiffs’ attorneys in other parts of the country who now have a good faith basis for advancing similar arguments in their neck of the woods.

The motion now pending before the district court is not seeking a reversal of its ruling. Instead, the financial services industry is seeking permission to appeal the court’s ruling to the Court of Appeals for the Second Circuit immediately instead of having to wait for the court to issue a final ruling on the case. Stay tuned.