When Does Your Responsibility For Forged Checks End?

July 9, 2013 at 8:56 am 2 comments

New York’s Court of Appeals is going to be taking a look at one of the erstwhile principles of check negotiations.  Considering that the issue it is examining impacts virtually every credit union, the ultimate decision by New York’s highest court is worth keeping an eye on.

In a notice to the bar to organizations that might be interested in submitting a brief on the case, the Court of Appeals summarized the issue at hand as follows:

Under New York’s Uniform Commercial Code, a bank may be liable to its customer when it pays a check on a forged signature.  The bank may avoid such liability, however, when it makes statements of the accounts and the alleged forged item is available to the customer and the customer fails to report the alleged forgery to the bank within one year.    Here, the parties by agreement shorten the one-year period.  One of the issues on appeal is whether a bank and its customer may shorten the statutory time period provided for in UCC 4-406 within which the customer must make a claim to its bank for payment of an altered or forged item. (quoted verbatim)

The UCC is one of a shrinking number of financial laws that isn’t written or interpreted on the assumption that consumers are helpless fools powerless to protect themselves against financial institutions.  The existing division of labor makes perfect sense.  Members shouldn’t be on the hook for withdrawals they didn’t authorize or play a role in facilitating but they should be responsible for reading their bank statements.  After all, who better than a member to put the credit union on notice that money is being illegally taken from an account.  You should take a look at your account agreement.  Chances are, you give your members less than a year to notify you of forged signatures.  If you don’t, you should consider shortening the one year period customers have to report forgeries.  But don’t make any changes until after Clemente Bros. Contracting Corp, et al V. Hafner-Milazzo, et al is decided.

The case involves the type of situation that almost all of you have run into.  The construction company has a business account with Capital One Bank.  Wouldn’t you know it, the company’s secretary was forging her signature and making unauthorized withdrawals from the business account.  The business noticed the forgeries within a year, but Capital One’s account agreement gave the business 14 days to notify the bank of the forgery.

One of the intriguing questions about the case is why the Court of Appeals has decided to take it at this time.  In ruling that Capital One was not liable for the unauthorized withdrawals, the Appellate Division was not interpreting the UCC in a novel way.  Perhaps the Court of Appeals wants to take a fresh look at the statute and reexamine when the defenses laid out in subdivision 2 of the statute don’t apply.  For example, one plausible, although I believe inaccurate interpretation of the statute, is that the authority of financial institutions to shorten the one year notice period doesn’t apply when a financial institution’s own negligence contributed to the forgery.  The problem with this argument is that it undermines the longstanding understanding that banks and credit unions had about being able to create drop-dead deadlines for putting them on notice for check forgeries not to mention a perfectly reasonable interpretation of the statute.

But let’s not get ahead of ourselves.  Just put any changes to your account agreement langauge regarding unauthorized checks on hold until this case is ultimately decided, probably sometime in the fall.

Entry filed under: Legal Watch, New York State. Tags: , , , , .

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Authored By:

Henry Meier, Esq., General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association.

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