UCC: Practical Application, Part V

Problem 12
You call your good customer because he is overdrawn for the first time you can ever remember. The customer says that's impossible. Even though he hasn't even opened his statements for over a year, there is plenty of money in the account - YOU must be mistaken. Later that day he comes in with a bag full of statements - now opened. Many large checks paid during the past year bear forged signatures, he tells you, and he wants his money back for all of them. What is your liability? What questions can you - should you - ask?

Do You Owe Him Big-Time?
No, you don't. And there are many, many questions you can ask him. Not the least of which is whether he knows the perpetrator!First, let's look at your liability as if you might be responsible for all those forgeries. (Ed. note: Very doubtful!) That is covered by: Section 4406. Duty of customer to discover and report unauthorized signature or alteration. First the section covers the fact that you must provide a statement that the customer can check. In the case of stolen mail, please note this section does not say that the financial institution is responsible for actually putting the statement in the hands of the customer. It says the bank sends or makes available the statement. (a) Statement of account.- A bank that sends or makes available to a customer a statement of account showing payment of items for the account shall either return or make available to the customer the items paid or provide information in the statement of account sufficient to allow the customer reasonably to identify the items paid. The statement of account provides sufficient information if the item is described by item number, amount and date of payment.

Therefore, if a customer says they couldn't report the forgeries to you any sooner than they did because they didn't receive the statement(s) due to theft, or some other reason, that's not the fault nor the liability of the financial institution, as long as you put the statements in the mail to your address of record or otherwise made them available.

This section also spells out what your customer is responsible for: (c) Duty of customer.- If a bank sends or makes available a statement of account or items pursuant to subsection (a), the customer must exercise reasonable promptness in examining the statement or the items to determine whether any payment was not authorized because of an alteration of an item or because a purported signature by or on behalf of the customer was not authorized. If, based on the statement or items provided, the customer should reasonably have discovered the unauthorized payment, the customer must promptly notify the bank of the relevant facts.

The UCC explains "reasonable promptness." In a later section, the UCC terms 30 days to be the outside limit of "reasonable." But there is another section of the code that also applies here that says you can vary your agreement with your customer, so long as you do so in good faith with ordinary care. Section 4-103. Variation by Agreement ...(a) The effect of the provisions of this Article may be varied by agreement, but the parties to the agreement cannot disclaim a bank's responsibility for its lack of good faith or failure to exercise ordinary care or limit the measure of damages for the lack or failure. However, the parties may determine by agreement the standards by which the bank's responsibility is to be measured if those standards are not manifestly unreasonable.

Take a look at your customer deposit agreement. Somewhere on there it will say something to the effect that "...you have ten days to examine your statement and report to us any unauthorized payment or discrepancy, ..." Some financial institutions will have 14 days noted instead of ten. Others will have nothing at all in the wording. Ten days has become the standard of the industry. If there is no wording - no variance in the agreement regarding that time - the UCC says the customer has 30 days to report a discrepancy. In essence, your liability on the forgeries is extended to 30 days unless the ten days is in your agreement.

If the customer does not report in a timely manner (your number of days in agreement), the UCC says the customer is "...precluded from asserting against the bank." In other words, the customer can't come to the bank with a claim for paying a forged maker's signature if the customer has not complied with his "duty" and therefore the bank is not notified within the time limit.

(d) Effect of failure to report unauthorized signature or alteration.- If the bank proves that the customer failed, with respect to an item, to comply with the duties imposed on the customer by subsection (c), the customer is precluded from asserting against the bank: 1. the customer's unauthorized signature or any alteration on the item if the bank also proves that it suffered a loss by reason of the failure; and...

Applying the preceding section along with the following part of the code that has to do with the amount of time a customer has to make a claim are two of the most difficult of these rules to understand. We'll continue and go more in depth with this section in the next training page.

Editor's Note: We are running a series of training pages to address some of the confusion that sometimes occurs when trying to apply the Uniform Commercial Code to claims. For complete UCC text for your state, please go to www.BankersOnline.com and click on Launch Pad. Once on that screen click on UCC on the list on the top of the page, then on Article 4. Once on that page, click on "state rules". Only relevant part of sections will be included in these pages.

Copyright © 2003 Bankers' Hotline. Originally appeared in Bankers' Hotline, Vol. 13, No. 4, 6/24