6th Cir. Holds EFTA Does Not Provide Indemnification Or Contribution Right For Financial Institutions

The U.S. Court of Appeals for the Sixth Circuit recently upheld the dismissal of a financial institution’s putative class action lawsuit against a cellular service provider arising from a “SIM swap” scam, holding that the financial institution had no claim for indemnification or contribution under the EFTA or state law.

A copy of the opinion in Michigan First Credit Union v. T-Mobile USA, Inc. is available at:  Link to Opinion.

Certain customers of a financial institution became victims of a “SIM swap” scam whereby their cell phone numbers were hijacked through their cellular phone service company, and two-factor authentication codes allowing account access were intercepted. The scam resulted in numerous unauthorized electronic transfers being made from the customers’ accounts at the financial institution.

As you may recall, the federal Electronic Fund Transfer Act (EFTA) requires financial institutions to “reimburse their customers for unauthorized electronic transfers of money from the customers’ accounts,” except in certain limited circumstances not relevant here. The plaintiff financial institution reimbursed its customers for the unauthorized transactions as mandated by the EFTA.

The plaintiff financial institution filed a putative class action for indemnification or contribution from the affected cellular phone service company, alleging that the cellular service provider’s failure to prevent the scam constituted grounds for recovery. More specifically, the plaintiff financial institution sought indemnification and contribution from the cellular service provider under the EFTA and its implementing regulation (Regulation E), the Michigan Electronic Funds Transfer Act (MEFTA), and state common law.

The trial court dismissed the financial institution’s complaint, concluding that the financial institution failed to establish a claim for indemnification or contribution under the EFTA and state law. The financial institution appealed, arguing that the EFTA implicitly provides a right to indemnification or contribution, that the MEFTA is not preempted by the EFTA, and that their state common-law indemnification claim was also not preempted by the EFTA.

On appeal, the Sixth Circuit noted that “[c]laims for indemnification or contribution under a federal statute may be created in two different ways: (1) through action by Congress, either expressly or implicitly; or (2) by federal common law through the exercise of judicial power to fashion appropriate remedies for unlawful conduct.”

The Court held that the EFTA does not imply a right to indemnification or contribution for financial institutions, as “[t]he  EFTA provides a comprehensive framework governing the rights, liabilities, and responsibilities of both consumers and financial institutions” without providing any express right to indemnification or contribution, its primary purpose is consumer protection, and “none of the relevant factors weighs in favor of finding an implied right to indemnification or contribution for financial institutions under the EFTA.”

For similar reasons, the Sixth Circuit also rejected the plaintiff financial institution’s invitation to provide a “federal common law” right to indemnification or contribution in an EFTA action.

The Court also ruled that the EFTA preempts the MEFTA and any state common-law claims for indemnification or contribution, as such claims would interfere with the EFTA’s comprehensive regulatory framework designed to protect consumers from unauthorized electronic fund transfers.

In so ruling, the Court noted that “[t]he EFTA empowers the Consumer Financial Protection Bureau (CFPB) to preempt state laws that are inconsistent with the Act’s provisions,” and that “[i]f the CFPB declares a state law inconsistent with the EFTA, financial institutions incur no liability for a good faith failure to comply with that state law”. 15 U.S.C. § 1693q. The Federal Reserve Board (FRB) was originally provided with the power to make preemption determinations under the EFTA, and the FRB made such a determination as to the MEFTA in 1981. “After Congress assigned to the CFPB the responsibility of determining whether a State requirement is inconsistent or affords great protection” than the EFTA, 15 U.S.C. § 1693q, the CFPB adopted the Federal Reserve Board’s decision, see 12 C.F.R. pt. 1005, supp. I, cmt. 12(b)(2).”

Similarly, the Sixth Circuit held that the financial institution’s state common law claims were also preempted. The Court held that allowing the financial institution “to pursue a state-law claim for liability it incurred under federal law would not only frustrate the EFTA’s purpose, but it would also contradict the text of the statute and interfere with its existing comprehensive scheme.”

Accordingly, the Sixth Circuit affirmed the dismissal of the financial institution’s putative class action lawsuit against the cellular service provider.

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