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UCC: Practical Application, Part VI

Problem 11 - continued:

Re: Liability of the bank on checks paid during the past year bearing forged signatures:

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

  2. the customer's unauthorized signature or alteration by the same wrongdoer on any other item paid in good faith by the bank if the payment was made before the bank received notice from the customer of the unauthorized signature or alteration and after the customer had been afforded a reasonable period of time, not exceeding 30 days, in which to examine the item or statement of account and notify the bank.

Let's look at this section a little bit at a time. First of all, the phrase "...the customer is precluded from asserting against the bank..." means your customer can't make that claim against you, his forged signature, or any alteration on the check if you also will take a loss (which you will if you reimburse him for the check you already paid out); if the perpetrator is a repeat offender - you've had this same problem with the same customer and the same crook previously; and if the customer had a reasonable period of time to examine the statement and notify you. Reasonable period. Ten days after he or she got the statement? Or, if your agreement does not specify the number of days limit, then your customer has up to 30 days.

Now it gets even more complicated. If this is as far as you read, you could assume the UCC says your customer can only make a claim on the bank if the forgery is discovered within ten days (or up to 30) after getting the statement. But the next part says differently.

(f) Statutes of limitations applicable to customer - Without regard to care or lack of care of either the customer or the bank, a customer who does not within one year after the statement or items are made available to the customer (subsection (a)) discover and report the customer's unauthorized signature on or any alteration on the item is precluded from asserting against the bank the unauthorized signature or alteration...

So here we find the customer has a whole year to make a claim for a forged signature or alteration. BUT, during that year, he or she may only make a claim for the first statement in which the forgery or alteration appears, and as many days into the following statement as are in your agreement. For instance, let's suppose the customer comes in to you in September and tells you there are forgeries in his statements from May, June, July and August. Let's also assume his statements are cut at the end of each month. Then his claim is limited to checks you paid in May, and as many days into June as is in your agreement. If you have ten days in your customer contract, he had ten days after he got his statement in June to notify you. Assuming your statements are available to him by the 5th of June, then he would have ten more days to notify you, or up to the 15th of June. Your bank's liability then would be all the checks paid in May and also any forgeries or alterations paid up to the 15th of June. The rest of the checks paid in June and during the months of July and August are not your responsibility.

But are any of them your responsibility or liability? Let's look at some of the defenses you have in your favor.

  1. Was the signature authorized? In some situations, the customer will attempt to claim the signature was unauthorized when, in fact, it was the signature of the customer or some other authorized signer on the account. Never accept a customer's claim without investigating.
  2. Was the signature made by a representative? If a representative had lawful authority to sign the check on the customer's behalf, the customer is bound by the representative's signature.
  3. Was the signature "ratified"? The customer may have ratified the signature as an authorized signature. Examples include situations where a customer has, for years, allowed someone not on the signature card to sign checks on the account. Another example is where the customer knows about the forgery but does not report it, or where the customer asks the bank not to report it to the police and attempts to seek restitution through a private agreement with the wrongdoer.
  4. Did the customer actually suffer a loss? If the customer did not actually suffer a loss, the customer is not entitled to have the account recredited. Investigate who made the unauthorized signature and how the proceeds of the check were used. If they were used for the benefit of the customer, or the customer received the funds, there was no loss, and no recrediting is required. This problem frequently turns up in pre-divorce cases where one of the marriage partners has an account, and the checks have been forged by the other. If the checks were beneficial to both parties (e.g. Utility bill payments, Mortgage payments, etc.) there was no loss.
  5. Has the customer been negligent? If the customer's negligence substantially contributed to the paying of an item bearing a forged signature (or contributes to the loss), the customer is precluded from asserting the forgery against a person (including the bank) who, in good faith, paid the instrument or took it for value or collection. Note, however, that if the bank is trying to assert that the customer is precluded due to negligence from passing on the loss and the bank itself has failed to exercise ordinary care, and its failure substantially contributed to the loss, the loss will be allocated between the bank and the customer according to the extent to which the failure of each to exercise ordinary care contributed to the loss.

See the article on page 2 of this issue for further illustration.

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 3. Once on that site, click on "state rules". Only relevant parts of sections will be included in these pages.

Copyright © 2003 Bankers' Hotline. Originally appeared in Bankers' Hotline, Vol. 13, No. 5, 7/22

First published on 07/22/2003

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