## Facts

- Provident provided a warehouse line of credit to Morningstar Mortgage Bankers, used to fund mortgage loans pending sale to investors; Morningstar had repayment problems and Provident intermittently suspended advances.
- After learning of an alleged forgery connected to Morningstar, Provident demanded full repayment within ten days.
- Morningstar’s CEO represented that land-sale proceeds would be wired into Morningstar’s deposit account at Provident for setoff against Morningstar’s debt to Provident.
- Instead, Morningstar drew funds on a separate warehouse line of credit from Regions and caused those funds to be wired through Fedwire (via Regions’ correspondent) into Morningstar’s deposit account at Provident.
- After the wire arrived, the sending bank notified Provident that the funds “may have been sent in error.”
- The next morning, before receiving later fraud-related pleadings, Provident exercised setoff and applied the entire account balance to Morningstar’s indebtedness to Provident.
- Regions demanded return of the wired funds, asserting they were fraudulently diverted; Provident refused.
- Regions sued on state-law theories including conversion, unjust enrichment, receipt of stolen property, and wrongful setoff; the district court granted summary judgment to Provident on the ground that U.C.C. Article 4A preempted the claims.

## Issues

1. Whether U.C.C. Article 4A preempted Regions’ state-law claims arising from the Fedwire funds transfer.
2. Whether, even if state-law claims were available, Regions produced evidence creating a genuine dispute that Provident knew or should have known the wired funds were fraudulently obtained before Provident exercised setoff.

## Decision

- The Eleventh Circuit affirmed summary judgment for Provident.
- The court assumed, without definitively deciding, that Article 4A did not preempt Regions’ state-law claims.
- On the merits, Regions failed to raise a triable issue that Provident knew or should have known the funds were fraudulently obtained at the time of the setoff.
- The equivocal “may have been sent in error” notice, Provident’s awareness of Morningstar’s financial distress, and the timing of the setoff were insufficient to establish the required level of notice.
- Information received after the setoff (including fraud-related pleadings) could not establish Provident’s knowledge at the relevant time.

## Legal Principles

- A recipient/depository bank that credits a customer’s account from a wire transfer and applies the balance to a contractual or lawful setoff is not liable to a third party absent proof the bank knew or should have known the funds were fraudulently obtained or subject to a superior claim at the time it acted.
- General suspicion about a customer’s financial condition or past irregularities does not, without specific indicators tied to the incoming transfer, establish constructive knowledge that the particular funds are fraudulent or misdirected.
- An equivocal notification that a transfer “may have been sent in error,” without more, does not amount to notice of theft, fraud, or lack of authorization sufficient to bar setoff.
- When claims depend on the recipient’s wrongful retention of funds, failure to prove the recipient’s contemporaneous knowledge (actual or constructive) is dispositive on summary judgment, regardless of whether Article 4A displaces related state-law remedies.

## Conclusion

The court upheld judgment for the recipient bank because the record did not support a finding that the bank had sufficient notice—before exercising setoff—that the wired funds were fraudulently diverted from another lender.


Regions Bank v. The Provident Bank, Inc., 345 F.3d 1267 (11th Cir. 2003)