Second Circuit Poised to Rule on What Law Applies to Consumer Wire Fraud

Introduction

For years, courts faced with the question of who is liable for unauthorized wire transfers have turned to the familiar provisions of Article 4A of the Uniform Commercial Code (“UCC”). Those provisions focus on whether the bank that processed the transfer had commercially reasonable security procedures in place to prevent fraud, and whether it complied with those procedures in good faith with respect to the transaction at issue.

Recently, the New York Attorney General (the “NY AG”) has invoked the more demanding provisions of the Electronic Fund Transfer Act (“EFTA”), rather than Article 4A, in alleging that Citibank N.A. failed to sufficiently protect its customers from online fraud. Long believed to exempt customer wire transfers, the EFTA imposes on banks the obligation to investigate suspicious transactions and reimburse customers for losses above certain thresholds.

In an appeal being closely watched by the financial services industry, the Second Circuit is now set to decide, as a matter of first impression, whether the EFTA applies in the context of wire transfer fraud. The answer to that question could profoundly impact banks and consumers alike, as Citibank and several prominent trade organizations, acting as amici, recently explained in an opening round of appellate briefing.

The Case: New York v. Citibank

In 2024, the NY AG sued Citibank under the EFTA and its implementing regulation (Reg E) after customers allegedly lost money due to fraudulent wire transfers.¹ The NY AG claimed that Citibank violated the EFTA by, among other things, failing to investigate suspicious transactions absent a customer affidavit and to reimburse customers for stolen funds above EFTA thresholds. Citibank argues that the NY AG’s claims are fundamentally misguided, because wire transfers are expressly excluded from the EFTA’s definition of “electronic funds transfer.” It contends that unauthorized wire transfers are instead governed by UCC Article 4A, which it complied with—thus framing the central issue in the case.

EFTA vs. Article 4A

The EFTA is a federal statute that was enacted in 1978 in response to the increased use of electronic systems in banking to transfer funds. The EFTA provides consumers with some measure of protection against erroneous electronic fund transfers. Specifically, the statute requires banks to investigate when customers notify them of a questionable account transfer and, if fraud is found, to reimburse customers for any losses that exceed certain thresholds. Although these thresholds vary depending on how long after suspected fraudulent activity the customer discovers and reports it, those thresholds are relatively low, and banks bear the burden of establishing that the customer’s negligence in reporting suspected fraud caused the resulting loss (i.e., prevented the recovery of fraudulently transferred funds).

UCC Article 4A takes a different approach in dealing with unauthorized wire transfers. It relieves a bank from the obligation to refund an unauthorized wire transfer where the bank proves that it accepted the payment order in good faith and in compliance with a commercially reasonable security procedure to which the customer agreed. Article 4A’s design, adopted nationwide and incorporated into Federal Reserve rules for Fedwire, reflects the longstanding view that consumer wire transfers are excluded from the EFTA and are instead governed end to end by Article 4A.

Motion to Dismiss Denied, Appeal Authorized

In January 2025, Judge Paul Oetken of the Southern District of New York rejected Citibank’s argument that the EFTA is categorically inapplicable to consumer wire transfers. The court was persuaded by the NY AG’s theory of liability, which essentially breaks down wire transfers into three phases: first, a customer/payor sends instructions to its bank; second, the bank initiates a wire transfer to the payee’s bank; third, the payee’s bank credits the payee’s account. According to the NY AG, only the “bank-to-bank” transfer in step two is exempt from the EFTA, and financial institutions can be held liable under the EFTA for losses suffered by the customer arising out of fraud in connection with the first and third steps in the transaction.

In denying Citibank’s motion to dismiss, the district court considered the EFTA’s text and consumer-protection purpose in extending the statute’s provisions to modern, consumer-initiated online transactions. However, the district court authorized an interlocutory appeal to allow the Second Circuit to weigh in on this key question. 

The Appeal: Citibank Makes the Case for the Application of Article 4A

On November 10, Citibank filed its opening brief urging reversal of the district court’s ruling on two principal issues: (1) whether the EFTA applies to consumer wire transfers and (2) whether intrabank transfers qualify as “unauthorized electronic fund transfers” under the EFTA.

Citibank squarely challenges the NY AG’s “trifurcation” theory that treats a single consumer wire as three separate transfers. In Citibank’s view, that framing conflicts with the EFTA’s language and logic. If the bank‑to‑bank leg were truly a standalone transfer, it would not be a consumer transfer at all, and thus would be beyond EFTA’s scope altogether, rendering the EFTA’s wire transfer carve‑out superfluous.

Citibank further emphasizes the consistent, decades‑long regulatory and judicial understanding that consumer wire transfers fall outside the EFTA and are governed by Article 4A. It notes that the Federal Reserve and CFPB have repeatedly described wire transfers as exempt from the EFTA, and courts, including federal courts of appeals, have consistently applied Article 4A to consumer wire claims. Citibank argues that the district court’s acceptance of the NY AG’s trifurcation theory would upend settled expectations and produce a disruptive and unwarranted realignment of the longstanding Article 4A framework—which already protects consumers and carefully allocates risk associated with wire fraud.

Impact on Banking and Financial Services Industry

The outcome of this appeal could have a significant impact on the financial services industry. The industry has developed many of the security and compliance procedures in place today based on the terms of Article 4A. If the EFTA is found to apply to consumer wires, banks may need to rethink fraud detection, reporting, and protection operations and processes, and how (and on what terms) they make wire transfers available to customers. Such an overhaul could require substantial time and resources.

Amicus Briefing – At the District Court and Now Before the Second Circuit

Recognizing the industry-wide importance of this case, several prominent trade associations and advocacy groups, including the Clearing House Association L.L.C., the Bank Policy Institute, the New York Bankers Association, and the American Bankers Association, submitted amicus briefing during the district court proceeding.

On November 17, these same organizations, now joined by America’s Credit Unions and the New York Credit Union Association, filed a joint amicus brief supporting Citibank’s position on appeal. These amici argue that the AG’s position, and the district court’s decision, ignore the history underlying settled rules governing the nation’s payment systems. They further argue that Article 4A, which was added to the UCC 11 years after the EFTA was established, was created to fill a “legal vacuum” governing the rights and obligations of parties involved in wire transfers, which only underscores the inapplicability of the EFTA to those transactions. The briefing illustrated that the loss of Article 4A’s settled and comprehensive regulatory regime, in favor of application of the EFTA, would create significant uncertainty in the laws governing wire transfers and could severely restrict consumer access to electronic wire transfers.

Next Steps

Financial institutions should keep a close eye on this appeal, given its implications. The NY AG’s opposition brief, as well as any amicus submissions in support of the NY AG, are due to be filed in January 2026. We will closely track developments as the appeal unfolds.

¹ People of the State of NY v. Citibank, N.A., Case 1:24-cv-00659-JPO (S.D.N.Y.)