New court ruling provides amplification of banks' data security responsibilities

In a case with a result similar to the recent Patco case, where a court held that a bank's security measures were not commercially reasonable and reversed a lower court's decision to dismiss the claim against the bank involved, a U.S. District Court in Mississippi has dismissed Bancorp South's countersuit against Choice Escrow and Land Title. Bancorp South claimed the title company, not Bancorp South's subsidiary bank, was responsible for a $400,000 fraudulent wire transfer. The case is likely to now go to trial. Essentially, the court ruled that UCC 4A, which governs electronic funds transfers, pre-empts contractual indemnification clauses that contradict the spirit of the UCC. The company involved had opted out of the $14 billion bank's dual control options, which the bank believed should lead to losses being the responsibility of its customer. This ruling highlights the need to ensure that a financial institution's security procedures are indeed commercially reasonable, because contract language that provides for indemnification and an acknowledgment by a customer that they are reasonable may not be enough to satisfy a court.  

The material in this blog is not intended, nor should it be construed or relied upon, as legal advice. Please consult with an attorney if specific legal information is needed.