On July 16, the Sixth Circuit held that the Federal Electronic Funds Transfer Act (EFTA) does not provide for an implied right of indemnification or contribution, and preempts indemnification claims under the Michigan Electronic Funds Transfer Act (“MEFTA”) and common law, when a bank reimburses customers for unauthorized electronic transfers, even if the unauthorized transfers were caused by the entity from which indemnification is sought.

Michigan First Credit Union (the “Bank”) filed a putative class action seeking indemnification or contribution from wireless telephone carrier T-Mobile USA, Inc. (“T-Mobile”) for amounts paid by banks, including the Bank, to reimburse customers for unauthorized transfers as required under the EFTA. The Bank asserted that the unauthorized transfers occurred because T-Mobile failed to adequately safeguard subscriber information, and therefore T-Mobile should indemnify or provide contribution to the Bank for the amounts refunded to Bank customers. The Bank’s claims were based on an implied right to indemnification or contribution arising under the EFTA, a common-law right to indemnification or contribution, and a right to indemnification or contribution under Michigan Compiled Laws § 488.14, which is part of the MEFTA.

T-Mobile moved to dismiss, arguing the EFTA does not provide for indemnification or contribution and preempts both MEFTA and any state common-law claim for indemnification or contribution. The District Court agreed.

On appeal, the Sixth Circuit upheld the District Court’s decision.

First, recognizing that the EFTA does not contain an express right to indemnification or contribution, the Sixth Circuit Court (the “Court”) used a four-factor analysis in determining whether the EFTA provided for an implied remedy and, if not, whether such remedy exists under common law.

The four factors the Court considered in construing the EFTA to determine whether “Congress intended to create the private remedy” sought by the plaintiff were: “(1) the statutory text—specifically, whether the language indicates that the statute was enacted for the special benefit of a class of which [the plaintiff] is a member”; (2) the statute’s legislative history; (3) the purpose and structure of the statute’s scheme; and (4) the likelihood that Congress intended to supersede or supplement existing state remedies.

Based on the above, the Court determined that Congress designed the EFTA to benefit consumers, “even at the expense of financial institutions”, the EFTA requires financial institutions to investigate and resolve consumer-reported unauthorized electronic fund transfers, and the EFTA creates a cause of action for consumers, not financial institutions. Further noting that Congress deliberately omitted indemnification and contribution from the EFTA, and that the EFTA’s legislative history remains silent about whether Congress intended indemnification or contribution rights for financial institutions, the Court held that none of the relevant factors weighed in favor of finding an implied right to indemnification for financial institutions under EFTA.

The Court further determined that federal common law (to the extent it exists) does not provide a right to indemnification or contribution in an EFTA action, nor would it be appropriate to create such a right, because the EFTA is a “comprehensive legislative scheme.”

The Court then considered whether the Bank could bring claims for indemnification or contribution under Michigan Compiled Laws § 488.14, which is part of the MEFTA. Unlike the EFTA, § 488.14(1) imposes liability on customers for unauthorized transactions if the financial institution can show “the customer’s negligence substantially contributed to the unauthorized use” of their account. The Court reasoned that because the CFPB has determined that § 488.14 is preempted by the EFTA, the Bank would have no liability for failing to comply with § 488.14, and therefore “[t]hat alone defeats [the Bank’s] claim because, under Michigan law, a plaintiff does not have a right to indemnification or contribution if the plaintiff is not liable for the judgment in the underlying action.”

Finally, the Court considered the Bank’s argument that it had a common-law claim for indemnification under Michigan law to offset its federal EFTA liability. However, the Court determined that the EFTA also preempts this claim:

“As discussed above, financial institutions do not have a right to indemnification under the EFTA. So allowing financial institutions to seek indemnification under state law for liability it has incurred under the EFTA is inconsistent with federal law. The EFTA thus preempts Michigan First’s state-law indemnification claim.”

This decision underscores the critical importance of diligently maintained fraud prevention strategies and tactics to enable financial institutions to manage risks, while providing desired levels of customer service and, of course, compliance with applicable law. At least in the Sixth Circuit, it appears likely the buck stops with the bank when it comes to EFTA reimbursement expense, even if the reimbursable unauthorized transfers are due to a third party’s inaction.

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