Douglas Companies, Inc. v. Commercial National Bank of Texarkana
Nearly everything that could go wrong did in this case. A bank under-encoded a large check, shorting its depositor $216,000. The depositor didn't catch the error for several months. The bank sent its adjustment request to the wrong address. The drawer of the check went bankrupt. The result, decided the Eighth Circuit Court of Appeals, is that the depository bank, which created the problem with its encoding error, was liable not only for the underpayment to its depositor, but also for the legal fees incurred by its customer and by the payor bank.
The court's decision points out the limited scope of many banks' attempts to shorten their depositors' timeframes for claiming errors on deposit accounts. The bank in this case had argued that its contractual language required Douglas to report the deposit error in 60 days. The court found that the contract only addressed depositors' responsibilities under UCC section 4-406, which deals with check alterations and unauthorized signatures, not with deposit errors.