by Steven Walker, ATG Law Clerk

Abby Financial Corp., a Massachusetts based mortgage banking firm, declared bankruptcy by filing a petition under chapter 11 on April 1, 1994. Kenneth Harney, When Lenders Can’t Deliver on Rate Locks, Daily Press, Apr. 16, 1994. With its filing, and the automatic stay imposed by the bankruptcy court on its mortgage loan business, approximately 600 consumers throughout six states found themselves saddled with unfunded mortgages or double mortgages, and several attorneys faced shortfalls in their trust accounts. Jennifer Grier, Not All Payments are Equal Under "Good Funds" Laws, Portals and Rails, Federal Reserve Bank of Atlanta (Sept. 21, 2009).  As a consequence, numerous states enacted “good funds” laws to protect consumers by ensuring that money funding real estate purchases and refinance transactions is secure for disbursement at the time of closing.

Several states, including Indiana, Minnesota, and Missouri, enacted strict “good funds” laws, specifically limiting electronic transfers over a certain dollar amount for closings to wire transfers. Indiana’s good funds law states that, “a closing agent may not make disbursements from an escrow account in connection with a real estate transaction unless any funds that:

(1) are received from any single party to the real estate transaction; and

(2) in the aggregate are at least ten thousand dollars ($10,000);

are wired funds that are unconditionally held by and irrevocably credited to the escrow account of the closing agent.” IC 27-7-3.7-7.

Illinois enacted a comparable “good funds” statute requiring electronic transfers. It states that, “a title insurance company, title insurance agent, or independent escrowee shall not make disbursements in connection with any escrows, settlements, or closings out of a fiduciary trust account or accounts unless the funds in the aggregate amount of $50,000 or greater received from any single party to the transaction are good funds as defined in paragraphs (2), (6), or (7) of subsection (c) of this Section; or are collected funds as defined in subsection (d) of this Section.” 215 ILCS 155/26. . The definition of good funds does not explicitly require wire transfers, but the limits on electronic transfers effectively limit good funds to wire transfers. Therefore, understanding the distinction between electronic transfers considered “good funds” and those that are not is critical when conducting a real estate closing.

What are Considered “Good Funds” in Illinois?

Section 26(c) of the Title Insurance Act defines “good funds” to include,  “wired funds unconditionally held by and credited to the fiduciary trust account of the title insurance company, the title insurance agent, or independent escrowee,” 215 ILCS 155/26(c)(2).

Section 26(c)(2)’s term “wired funds” may create a question of whether the statute means wire transfers, or if electronic fund transfers through Automated Clearing Houses (‘ACH’) are also acceptable. However, properly understood, the statute’s addition of, “unconditionally held by and credited,” indicates that wire transfers are the only acceptable medium of electronically transferring funds.

Wire Transfers vs. Electronic Fund Transfers (ACH Credits/Transfers)

1. Wire Transfers
   1. Definition and Essential Features:

Wire transfers are defined as, “an unconditional order to a bank to pay a fixed or determinable amount of money to a beneficiary upon receipt or on a day stated in the order, that is transmitted by electronic or other means through Fedwire, the Clear House Inter Bank Payment System (‘CHIPS’), other similar networks, between banks, or on the books of a bank.” 12 C.F.R. § 229.2. Funds sent via wire transfer are typically received within the same day, if not minutes, and normally involve rapid, high-dollar transfers negating the high transfer fees associated with their execution. John Graham & Scott Smart, Introduction to Corporate Finance: What Companies Do, Abridged Edition, 529 (Joe Sabatino et al. eds., 3d ed. 2012); Steven M. Bragg, Accounting Best Practices, 54 (Johnson Wiley & Sons, Inc., 7th ed. 2013). Further, wired funds are irrevocable once accepted by the recipient’s bank, both under the UCC and as held in court opinions, and, “payment by these means gives no indication to the various bank intermediaries of any details destination, purchaser, nature of goods involved in the underlying transaction.” United States v. Beck, 615 F.2d 441, 445 (7th Cir. 1980).

2. Funds Transfer Systems: Fedwire and CHIPS
   
   • Overview:

Wire transfers are typically processed through one of two major wholesale interbank payment systems: the Federal Reserve Wire Network (‘Fedwire’) or the Clearing House Interbank Payments System (‘CHIPS’). Fedwire is an intermediary for wire transfers. Fedwire debits the Federal Reserve Bank account of the sending bank and credits the Federal Reserve Bank account of the receiving bank. Fedwire Funds Service, Federal Financial Institutions Examination Council (last visited May 23, 2014).

Operated by the Clearing House Payments Company, CHIPS, is “the largest private-sector U.S.-dollar funds-transfer system in the world,” and uses a similar process. About CHIPS, The Clear House (last visited May 23, 2014). CHIPS receives payments from the sending banks and credits accounts of receiving banks throughout the day.CHIPS  releases payments when possible according to its netting algorithm. and uses the Federal Reserve Bank of New York to complete the transfer of all unresolved payments by the end of CHIPS servicing day at 5:00 p.m., Eastern Time. CHIPS, Federal Financial Institutions Examination Council (last visited May 23, 2014). CHIPS has traditionally been used, “to facilitate dollar-denominated international transfers,” but in recent years, with the introducing of its intraday payment system, has has increased its number of domestic wire transfers. Larissa Gray et al., Asset Recovery Handbook: A Guide for Practitioners, 64 (The Int’l Bank for Reconstruction and Development/The World Bank, 2011). Both systems provide the recipient’s bank account with immediately available funds, upon notice or actual deposit of wired funds in the recipient’s bank account, unless rejected. R. Charles Moyer et al., Contemporary Financial Management, 653 (Conor Allen ed., 13th ed. 2014).

It should be noted that financial institutions (banks/credit unions) may also conduct transfers through bank-to-bank services and other intermediary payment systems. Helpful Tools: Wire Transfer FAQ, Consumers Credit Union (last visited Jun. 6, 2014).

• The Federal Reserve Wire Network (Fedwire):

Fedwire is a funds transfer service, “that enables participants to initiate funds transfers that are immediate, final, and irrevocable once processed.” Fedwire Fund Services: About, Board of Governors of the Federal Reserve System (February 19, 2014), (Italics Added). Fedwire typically requires its users and their intended recipients to have Federal Reserve Bank accounts when transferring funds. Because the Federal Reserve restricts account holders to financial institutions, Fedwire is only available to financial institutions, such as banks and credit unions, who may make wire transfers on behalf of their banking customers. Fedwire Funds Service, Federal Financial Institutions Examination Council (last visited May 23, 2014). Once a financial institution sends a payment order for processing through Fedwire, the order authorizes the Federal Reserve Bank where the sending institution’s account is held to debit its account and to credit the receiving financial institution’s federal reserve bank account the same amount. . Id. Once the Federal Reserve Bank credits the receiving institution's account, even if the sending institution requests it, the Federal Reserve Bank  will not reverse the transaction. . These orders are irrevocable regardless of whether the funds are received by the intended party. Roger Cowie, Cancellation of Wire Transfers Under Article 4a of the Uniform Commercial Code: Delbrueck & Co. v. Manufacturers Hanover Trust Co. Revisited, 70 Tex. L. Rev. 739, 744 (1992); Fedwire Funds Service, supra; Feasibility of a Cross-Border Electronic Funds Transfer Reporting System under the Bank Secrecy Act – Appendix D, U.S. Department of the Treasury 58-59 (Oct. 2006). (“The Federal Reserve Bank makes final payment to the receiving bank at the time the transfer is complete regardless of whether the Reserve Bank has received payment.”) Fedwire performs transactions, “21.5 hours each business day from 9:00 p.m. Eastern Time on the preceding calendar day to 6:30 p.m. Eastern Time.” Fedwire® Funds Service, Federal Reserve Bank Services (last visited Jun. 5, 2014). Additionally, while Fedwire processes payments in real-time, banks may be reticent to use the system unless the transfer is of the utmost urgency, preferring another funds transfer system such as CHIPS to ensure that as much of their funds as possible remain available for future transfers. Ruilin Zhou, Understanding intraday credit in large-value payment systems, Federal Reserve Bank of Chicago 31 (2000).

• The Clear House Interbank Payments System (CHIPS):

CHIPS, like Fedwire, is an electronic payment system, but, unlike Fedwire, limits funds transfers to a system of interconnected, participant banks without using the Federal Reserve System. Fedpoint: CHIPS, Federal Reserve Bank of New York (Apr. 2002). Also, unlike Fedwire, CHIPS specializes in performing settlements of foreign monetary exchange transactions. In 2001, CHIPS’ focus added domestic transactions after the introduction of its intraday settlement system. The CHIPS intraday settlement system, while similar to Fedwire’s domestic processing, provides certain benefits and disadvantages to banks in processing.

CHIPS processes wire transfers by arranging them in netting queues. Funds are not as immediately available by a receipient, but they are irrevocable earlier in the process. CHIPS, Federal Financial Institutions Examination Council (last visited June 3, 2014). This is because transfers are deemed irrevocable by CHIPS once they have been added to their netting queues, as the funds are needed to ensure that streams of credits and debits are being accurately accounted for, whereas Fedwire transactions are irrevocable once the actual transfer has occurred, subject to limited exceptions, because payments are performed in real-time. 810 ILCS 5/4A-403 (“If the sender and receiving bank are members of a funds transfer system that nets obligations…the receiving bank receives final settlement when settlement is complete in accordance with the rules of the system. The obligation of the sender to pay the amount of a payment order transmitted through the funds transfer system may be satisfied, to the extent permitted by the rules of the system, by setting off and applying against the sender's obligation the right of the sender to receive payment from the receiving bank of the amount of any other payment order transmitted to the sender by the receiving bank through the funds transfer system.”). Notably, smaller individual payments are subject to processing similar to Fedwire’s immediate transfer process when they can be accommodated by the bank’s available balance. CHIPS, supra. Other transfers are subject to CHIPS’ bilateral and multilateral netting process.

Bilateral and multilateral netting involves accumulating credits and debits among a series of participant banks, and processing those credits and debits in a manner that promotes net neutral or net positive balances among transacting banks at the end of CHIPS operating day. More specifically, bilateral netting commonly involves two banks transferring equal sums, thereby making actual transfers redundant, which CHIPS simply notes in bookkeeping entries rather than actually processing the fund transfers and temporarily diminishing the funds banks have available for future transfers (Fedwire simply performs two separate transactions). Multilateral netting similarly involves multiple banks with pending credits and debits, the credits and debits being aggregated before disbursement in order to limit actual reductions in a financial institution’s available balance. The credits and debits are calculated, disbursed, and accepted/rejected throughout the day when possible, or are finally settled at the end of CHIPS’ operating day. While netting ensures that financial institutions have funds available when processing transactions throughout the day, it can also cause delays in actual transaction processing. 

3. Cancellation/Revocability:
   
   • In General:

The Uniform Commercial Code (UCC) defines wire transfers, as well as electronic fund transactions, as payment orders. U.C.C. § 4A-103 (2013). Payment orders are defined as, “an instruction of a sender to a receiving bank, transmitted orally, electronically, or in writing, to pay, or to cause another bank to pay, a fixed or determinable amount of money to a beneficiary.” However, some provisions of the UCC conflict with provisions of the Electronic Fund Transfer Act (EFTA), limiting application of the UCC to those features of electronic fund transfers not covered under the EFTA. Consequently, the UCC, and state statutes that have adopted it, primarily pertains to wire transfers. 810 ILCS 5/4A (2014) (“Another type of payment, commonly referred to as a wholesale wire transfer, is the primary focus of Article 4A. Payments that are covered by Article 4A are overwhelmingly between business or financial institutions.”). Cancelling or revoking a payment order ordinarily requires the originator, or sender, to communicate its decision, “at a time and in a manner affording the receiving bank a reasonable opportunity to act on the communication before the bank accepts the payment order.”

 A receiving bank accepts a payment when one of the following has occurred:

1. A receiving bank (i.e., a Federal Reserve Bank via Fedwire) other than the beneficiary's bank executes a payment order; or
2. The beneficiary’s bank pays the beneficiary; or
3. The beneficiary’s bank notifies the beneficiary that it has received the order, or credited the account of the beneficiary, unless the notice indicates that the bank is rejecting the order or that the order’s funds may not be withdrawn or used until receipt of the sender’s payment; or
4. The beneficiary’s bank receives payment of the entire amount of the originator's order; or
5. The bank opens  the next funds transfer business day following the payment date of the order. Opening the next funds transfer business day is acceptance if, at that time, the amount of the sender's order is fully covered by a withdrawable credit balance in an authorized account of the sender, or the bank has otherwise received full payment from the sender, unless the order was rejected before that time or is rejected within (i) one hour after that time, or (ii) one hour after the opening of the next business day of the sender following the payment date if that time is later.

In re Griffin Trading Co. is  a case involving a question of wire acceptance, 683 F.3d 819 (7th Cir. 2012). Griffin Trading Company, a futures commission merchant, filed chapter 7 bankruptcy.The bankruptcy trustee filed an adversary proceeding against Griffin Trading’s directors, for failing to protect customer funds by stopping a wire transfer that they knew, or should have known, comingled funds from segregated accounts in an impermissible way and made a prohibited payment. The trial court found for the bankruptcy trustee. As part of its holding, affirming the defendants’ liability, the court found the defendants, “knew about [the wire transfer] while there was still time to stop it,” having almost 24 hours to notify the sending bank before it processed the transfer and the beneficiary’s bank accepted, and therefore could have cancelled the order because the sending bank had a “reasonable opportunity to act” to prevent processing.” 683 F3d 819, 824 (7th Cir. 2012).

However, given the near instantaneous nature of wire transfers after processing, acceptance is virtually guaranteed when the order is initially issued because the transfers are usually rapidly accepted or rejected by the beneficiary’s bank. After a payment order is accepted, the sender cannot cancel or amend the order unless the sending bank and the beneficiary’s bank agree to permit revocation, or a funds transfer system rule allows cancellation or amendment without recipient agreement. 810 ILCS 5/4A-211 (2014).

For instance, in Shawmut Worcester Cnty. Bank v. First Am. Bank & Trust, 731 F. Supp. 57, 60 (D. Mass. 1990), a sending bank accidentally transferred funds to a receiving bank. Later realizing its error, the recipient bank asked the account holder who received the funds to consent to return them, but he refused. The sending bank sued the recipient bank for conversion in handling the transfer, breach of a principal-agent relationship, and for negligence, and asserted claims under the Electronic Funds Transfers Act, 15 U.S.C. sec. 1693 (1982) et seq., and two Massachusetts statutes. The court held, “no conversion took place on…the day [sending bank] first requested that [recipient bank] “reverse” the erroneous transfer, because…Shawmut had no possessory rights in the mistaken transfer. By then the money had been “finally paid” by First American's Federal Reserve bank to First American, which extinguished Shawmut's “ownership interest” in the funds as personal property.”

Similarly, in Cmty. Bank, FSB v. Stevens Fin. Corp., 966 F. Supp. 775, 786 (N.D. Ind. 1997), HomeSide bank wired funds to the wrong bank and account at Community Bank, instead of Chase Manhattan bank as requested, when attempting to purchase a mortgage. Community Bank charged the account in which the funds were transferred for an outstanding balance, and when HomeSide sent funds to the appropriate account, demanded a reversal, and received only a partial amount of what they originally paid, HomeSide filed suit. The court held, “Community Bank gained ownership rights to the funds transferred upon acceptance of the…payment order and the subsequent crediting of Stevens Financial's account. Accordingly, since Community Bank has chosen not to agree to the cancellation or amendment of the payment order sent by HomeSide…Community Bank possessed ownership rights to the funds after they were credited to Stevens Financial's account. Thus, this court finds as a matter of law that HomeSide's attempt to cancel or amend the payment order was not binding….” Nonetheless, there are other limited exceptions that may allow the originator to revoke or cancel a payment order that has already been accepted, as follows:

• Revocation/Cancellation Exceptions Post-Acceptance:
  1. Duplication of a payment order previously issued by the sender and sent by the sender’s bank.
     • The Originator’s account must be credited with the amount withdrawn, and the Sending Bank is responsible for recouping its funds from the Beneficiary’s Bank.

2. Payment order issued to a beneficiary not entitled to receive payment from the Originator.
   
   • Example: A mistake inputting a digit of the intended recipient’s account number sends the funds to another person at the same bank, making them the beneficiary.
3. The Sending Bank may cancel the payment order to the Beneficiary’s Bank, but the Beneficiary’s Bank must consent to the Sending Bank’s request.
4. If the Beneficiary’s Bank grants the Sending Bank’s request, the Unintended Beneficiary will be required to return the funds, unless restitution permits otherwise.
3. Payment orders in an amount greater than the amount the beneficiary was entitled to receive from the originator.
   
   • Example: A payment order was intended to issue $500 to settle a debt, but, due to an input mistake by the sender, issued $5,000.
4. The Sending Bank may cancel the payment order to the Beneficiary’s Bank, but the Beneficiary’s Bank must consent to the Sending Bank’s request.
5. If the Beneficiary’s Bank grants the Sending Bank’s request, the Unintended Beneficiary will be required to return the funds, unless restitution permits otherwise.
4. Unauthorized order, fraudulently issued without commercially reasonable verification by the Sending Bank.
   
   • Example: A sending bank issues a payment order from the originator’s account without the knowledge or consent. Further, the bank has not followed procedure or taken reasonable efforts to verify the authenticity of the payment order.
5. The originator is entitled to cancel the order or be reimbursed, with no qualification. The Originator’s bank is liable for the issuance, and the Beneficiary’s bank can decide whether to cancel the order.

Roger Cowie, supra; 810 ILCS 5/4A-211.

Electronic Funds Transfers (ACH Credits/Transfers):

1. Definition and Essential Features:

The Electronic Fund Transfers Act defines electronic funds transfers as, “any transfer of funds, other than a transaction originated by check, draft, or similar paper instrument, which is initiated through an electronic terminal, telephonic instrument, or computer or magnetic tape so as to order, instruct, or authorize a financial institution to debit or credit an account.” 15 U.S.C. § 1693. Electronic fund transfers almost exclusively involve consumer based transactions, distinguishing them from wire transfers despite their similar transactional nature. Commercial account holders have few protections under the EFTA against problems with ACH transfers. For instance, in Fischer & Mandell LLP v. Citibank, N.A, No. 09CIV1160, 2009 WL 1767621, at 3 (S.D.N.Y. 2009), a customer brought suit against a bank for breach of contract and negligence after the bank debited the customer's in the amount listed on a counterfeit check deposited by customer. The customer argued that the bank was liable for the loss because the customer relied on bank's advice that funds from check were available, and wired most of the funds elsewhere. In holding that the bank had no negligence liability for failing to cancel the wire transfers, the court stated, “the EFTA does not apply to accounts that are used primarily or solely for commercial purposes."

In Ironforge.com v Paychex, Inc., 747 F. Supp. 2d 384, 402 (W.D.N.Y. 2010),  clients of a payroll and human resource service provided filed putative class action contending they were charged unjustified, unauthorized, hidden fees and that the provider unlawfully profited from interest earned on funds that it held on their behalf. The court stated, in holding that the clients were not protected under the EFTA, “…the relevant regulations state that the act applies "to any electronic fund transfer that authorizes a financial institution to debit or credit a consumer's account…established primarily for personal, family, or household purposes." Another distinction between wire transfers and electronic fund transfers lies in their processing. Electronic funds transfers occur exclusively through Automated Clearing House Systems, and are often termed ACH credits or ACH transfers, while wire transfers almost exclusively involve transactions through wire transfer systems.

2. Funds Transfer Systems: Federal Reserve Banks’ ACH (‘FedACH’), Electronic Payments Network (‘EPN’), and Electronic Data Interchanges (‘EDI’).
   
   • Automated Clearing House Systems (ACHS) – FedACH and EPN:

The ACHS are national electronic funds transfer networks used by banks when sending batches of electronic credit and debit transfers. Automated Clearinghouse Services, Board of Governors of the Federal Reserve System (February 18, 2014), ; How To: Request an Outgoing Wire Transfer or ACH Payment, Stanford University – Financial Management Services (last visited June 3, 2014). The FedACH and EPN, a division of the Clearing House Payments Company, are the national ACH operators. Both systems operate in a manner similar to Fedwire and CHIPS. The FedACH processes the majority of ACH transactions, the EPN processes the transactions of its member banks, and both exchange ACH transaction information when either party to the transaction is not their customer. These interoperator transactions are then handled by the FedACH system. Both systems process electronic funds transfers by: