Banks are regularly sued by customers who discover that someone has forged or added an unauthorized signature to a check that has been honored by the drawee.
It also happens that the wrongdoer presents a series of forged or altered checks in increasing amounts, becoming bolder with each incident. Having once honored a forged check, though, the Uniform Commercial Code offers the bank a defense where the “same wrongdoer” has presented a series of checks that could have been rightly dishonored by the drawee-bank in the first instance.
Utah Code Ann. Section 70A-4-406(1) requires a bank to provide notice sufficient for the customer to ascertain any item that the drawee-bank has honored. That obligation is satisfied when the bank sends the customer an image of the check or when the bank’s statement describes the item by number, amount, and date of payment. However, the customer has a parallel obligation to pay attention to the information received from the bank:
“If a bank sends or makes available a statement of account or items pursuant to Subsection (1), the customer must exercise reasonable promptness in examining the statement or the items to determine whether any payment was not authorized because of an alternation 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.”
Section 70A-4-406(4)(b) goes on to provide that if the fraud was committed by the “same wrongdoer” before the bank received notice from the customer of the unauthorized signature or alteration, and after the customer had a sufficient period “not exceeding thirty days” in which to ascertain the fraud, the customer is precluded from claiming that the item was wrongly honored. Thus, if the subsequent forged or unauthorized item is paid after the customer had a reasonable time (but not over thirty days) to alert the bank regarding the first item, and before the customer’s notice, then the customer cannot assert a claim against the bank for wrongfully honoring the subsequent altered or unauthorized items. In other words, if the customer, having received sufficient notice from the bank, fails to timely notify the bank, and if the bank pays in good faith subsequent items presented by the same wrongdoer, the customer — and not the bank — bears the loss.
Note, though, that the “safe harbor” of sending the customer a sufficient notice that the item has been honored does not mean that the customer cannot prevail, where circumstances are such that the customer should not reasonably have discovered the fraud. That is a matter determined on a case by case basis. UCC Official Comments, Revised Comment §4-406(1).
The customer has one more arrow to shoot at the bank, however: In those situations where the customer shows “that the bank failed to exercise ordinary care in paying the item and that the failure substantially contributed to loss.” Section 3-103(1)(g) of the Utah Uniform Commercial Code defines “ordinary care” on the part of a bank in this way:
In the case of a bank that takes an instrument for processing for a collection or payment by automated means, reasonable commercial standards do not require the bank to examine the instrument if the failure to examine does not violate the bank’s prescribed procedures and the bank’s procedures do not vary unreasonably from general banking usage not disapproved by this chapter or Title 70A, Chapter 4, Uniform Commercial Code – Bank Deposits and Collections.
If the bank does not exercise “ordinary care”, as that term is defined above, then the fault of the bank can be compared to the customer’s own fault for purposes of determining liability and damages. But, where the bank’s automated check processing systems and procedures are not unreasonably different from other banks in the locality, and the checks were honored in the ordinary course and in good faith, then the customer will not be able to overcome the “same wrongdoer” defense.
Thus, the bank can, under the right circumstances, circumscribe its potential liability for honoring forged or altered items presented by the same wrongdoer.
This post was written by attorney Rick L. Knuth