This decision also overturned the lower court’s order requiring the credit union to pay SBS $558,868 in compensatory damages, $591,568 in attorney fees and $56,168 in expenses related to a business email compromise (BEC) lawsuit. Moreover, the appellate court affirmed the district court’s decision to deny SBS’s request for $350,000 in punitive damages.

Still, the Appeals Court's decision didn’t necessarily end the legal battle.

“Studco intends to seek en banc review of this panel decision and is optimistic that the full Appellate Court will accept review and defer to the District Court’s developed record and findings of fact showing 1st Advantage had actual knowledge of fraudulently misdirected funds in its customer’s account,” SBS said in a prepared statement.

An en banc review means the case would be heard before the full appellate court, which includes 15 judges. SBS must first file a petition requesting the rehearing, which is only granted if a majority of judges vote in favor. However, according to the Federal Judicial Center, such petitions are rarely granted.

“This ruling supports the operational integrity of credit unions and ensures they can continue serving their members effectively within a well-defined legal framework,” The League of Southeastern Credit Unions & Affiliates and America’s Credit Unions said in a joint statement. “We were proud to support 1st Advantage through our amicus brief.”

1st Advantage did not respond to CU Times' requests for comment.

The lawsuit stemmed from an event in August 2018, when a member, identified as L.T., opened a personal account with 1st Advantage. L.T., described as a merchant coordinator, informed the credit union that the account would be used for real estate transactions.

Two months later, in October, SBS received a spoofed email from someone claiming to be from Olympic Steel, a client of SBS. The fraudulent email instructed SBS to change its banking remittance information to L.T.’s account number. Between Oct. 1 and Nov. 13, 2018, SBS made four ACH deposits totaling $558,868 to L.T.’s account, who also had been unknowingly caught up in the scam.

At the time, 1st Advantage used a “DataSafe” system to monitor ACH transfers. This system automatically generated and stored reports for each transfer, flagging any discrepancies between the payee name and the account holder’s name. Even minor mismatches — such as a missing initial or an entirely different name — triggered an alert.

Although the system flagged the Olympic Steel transactions due to the name mismatch, the reports were stored automatically and never reviewed by credit union staff. The appellate court noted that reviewing hundreds or thousands of such alerts daily would not have been practical or customary. Instead, 1st Advantage processed the transactions based on the account number provided, in accordance with the Uniform Commercial Code (UCC).

“Because 1st Advantage had no actual knowledge of the misdescription at the time the deposits were made, it incurred no liability for making the deposits,” the court wrote.

In legal terms, "actual knowledge" means that a credit union employee is consciously aware that the account number and name in a payment order do not match.

The appellate judges found it erroneous for the district court to interpret “actual knowledge” as knowledge that could have been discovered through “due diligence,” as 1st Advantage had no duty to proactively search for mismatches.

While the lower court agreed that 1st Advantage had no duty to proactively discover a misdescription of the account information, the evidence showed that the credit union did not maintain reasonable routines for communicating significant information to the person conducting the transaction. If 1st Advantage had exercised due diligence, the misdescription would have been discovered during the first ACH transfer, according to the lower court ruling.

However, the appellate court emphasized that the UCC allows financial institutions to rely on automated systems. Requiring them to verify every name mismatch would hinder efficiency.

“And this makes good sense. Countless discrepancies can arise inadvertently and harmlessly,” the panel wrote. “For instance, the inclusion or omission of a suffix such as Jr. or a middle initial could trigger an alert, as could listing a surname before a first name. Requiring individualized review for meaningless differences such as these would be most impractical, time-consuming, and expensive and would impede the efficient transfer of funds, imposing gridlock on the financial system.”

READ MORE: Appeals Court Ruling-Studco Building Systems v. 1st Advantage Federal Credit Union.

Peter Strozniak can be reached at [email protected].