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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.
Originally published in the American Banker, 25 October
2012.
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