Monday, May 3, 2010

Thirty Day Countdown to Disaster: Customer Consequences Under UCC 4-406(d)(2)

Litke v. City National Corp., (April 29, 2010) 201 WL 1712702 (not published)

Giving teeth to what must effectively be the shortest statute of limitations in the world (30 days) for commonly encountered situations, the California Court of Appeal denied relief to an 82 year-old bank account holder defrauded by his long-time bookkeeper.

In Litke v. City National Corp. (April 29, 2010) 201 WL 1712702 (not published), an 82 year-old bank customer held accounts for more than 15 years. He protected himself by requiring two signatures on checks not signed by him or his relative. The account holder received canceled checks and statements monthly. Unfortunately, he did not discover the fraud until the bank contacted him about a suspiciously large check (just under $10,000) flagged by the bank’s automatic fraud detection filters. The account holder’s subsequent review disclosed that over the course of more than six years, his bookkeeper embezzled nearly $380,000 by forging 180 checks.

The account holder sued the bank but was turned away cold. Under California’s version of UCC 4-406(d)(2) (California Commercial Code Section 4406(d)(2)) a bank account holder who receives regular monthly statements must discover and report the first fraudulent or forged check within 30 days; otherwise the account holder is barred from suing the bank to recover for subsequent forgeries by the same wrongdoer paid by the bank in good faith, unless the bank was negligent. In addition, there is a statutory one-year period for reporting each forgery, dating from when the applicable bank statement or canceled check is presented. Since the forgeries were all the work of a single wrongdoer, and the account holder could not prove that the bank was negligent, the account holder was barred from any recovery.

The account holder unsuccessfully argued various theories, such as estoppel, the bank’s failure to manually review each signature, alleged discrepancies between the signature cards and the account disclosures. The court sided with the bank based on the UCC’s policy that “there is little excuse for a customer not detecting an alteration of his own check or a forgery of his own signature.”

The court of appeal did not explain why it declined to publish the decision, but we may assume the court thought the situation common enough, and the law so well settled, that the opinion did not break new ground. It’s a cautionary reminder about how vulnerable businesses are to fraud. Failing to discover a forged or altered check returned with a monthly bank statement is a 30 day countdown to disaster.

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