Unauthorized Item Disputed - What Do the Regs Say?

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Question:

What do the regulations say about how long a client has to dispute an unauthorized item that was paid on their bank statement? We have a client that is claiming a forged check item after sixty days. The only thing that I could find was the Reg E rules regarding electronic items.

Answer:

For forged check claims, you look to your state's version of UCC section 4-406 to determine whether the depositor's claim is timely. If there is only one check involved, 4-406 gives the customer a year to make the claim (180 days in Florida, but check your state's law). Your deposit contract may include language that attempts to shorten that one-year period (you can't depend on statement notices to impose that change; it needs to be a contractual provision).

You might benefit from looking at the timing issue from a different perspective. Suppose that your customer noticed the forged item three days after it posted to the account (because he diligently reviews his account transactions online) and entered a claim at that time. You'd agree, I think, that the customer would be entitled to a refund for the unauthorized payment even though you missed the midnight deadline and can't send the item back. The customer's delay past sixty days doesn't affect your ability to prevent any other forgeries (unless there are subsequent forgeries by the same wrong-doer) so your liability shouldn't change.

Your bank might have a defense to the customer's claim if the bank can claim under UCC 3-406 that the customer's negligence substantially contributed to the forgery of the check. Also under 3-406, your customer can counterclaim that you failed to use ordinary care in paying the check. If your customer's claim prevails in court, the court can allocate liability between you and the customer based on your relative blame for the forgery. When you start considering using 3-406 as a defense against your customer's claim, you should think about the cost of pursuing the claim and the lining of attorney's pockets and consider negotiating with your customer on how much you can settle.

First published on BankersOnline.com 2/02/09