"Electronic technology is now a fact of life and new methods for transferring bank credit for the purposes of payment are a result."
The Uniform Law Commission wrote this in 1989 to support the inclusion of Article 4A in the Uniform Commercial Code, which was ultimately adopted with little revision in all fifty states. At that time, debit cards were little used, did not play a serious role in the article's creation and, as such, unfortunately, were not included in it.
Since 1989, the use of debit cards has grown exponentially. In retail transactions, debit cards have eclipsed physical checks as the payment method of choice for individual consumers and merchants alike. Debit cards have also become popular with class action trial lawyers who have made a cottage industry out of suing banks over debit-card- related issues, such as ATM fee notices, overdraft charges and transaction posting.
The class action plaintiff bar has recently exploited the loophole created by the exclusion of debit card transactions from Articles 4 and 4A of the Uniform Commercial Code. This loophole needs to be closed and sooner rather than later.
These UCC Articles were intended to, among other things, set rules under which financial institutions would process debit transactions in customer accounts. For example, these Articles provide financial institutions discretion to set the order in which they process certain electronic transactions in an account. They also provide financial institutions discretion for the order in which they process checks. The UCC recognizes that financial institutions must have flexibility in processing transactions and courts have tended to reject class-action challenges that conflict with the UCC.
Article 4A, however, excludes from its coverage transactions that are governed by the federal Electronic Fund Transfer Act. Debit card transactions come within the ambit of the EFTA. Because debit card transactions are excluded from both Article 4 and Article 4A, the class action plaintiffs bar has gained traction with lawsuits challenging the order in which financial institutions post debit card transactions to deposit accounts.
A few money center banks have agreed to settlements in the hundreds of millions. Right now, many of these cases against larger national and regional banks are pending in multidistrict litigation in the Southern District of Florida. Copycat cases against smaller regional and community banks are beginning to pop-up around the country. All of this costly litigation is made possible by a loophole in the UCC that does not foreclose second guessing from the plaintiffs' bar when banks and financial institutions exercise discretion in the posting order of debit transactions in deposit accounts.
It is time to close the loophole. The industry should ask the National Commission on Uniform State Laws to amend Article 4A to include debit card transactions. If the Uniform Law Commission fails to act, the financial services industry should press its case with state legislators. Closing the debit card loophole would provide to banks what the UCC intended all along – the flexibility to process all debit transactions in customer accounts without the prospect of costly, needless class action litigation.
Joseph Woodruff practices law as a partner at Waller, where he chairs the firm's Financial Services Group.