Liability For Stolen Business Checks

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Question:

A longtime customer's employee has stolen checks from his business account. The employee was not an authorized signer on the account. Isn't there a provision in the UCC that says the bank is not liable for unauthorized signatures if the suspect is an employee?

Answer:

The answer is, not exactly.

What you are probably thinking about is Section 3405 of the UCC, which covers "EMPLOYER'S RESPONSIBILITY FOR FRAUDULENT INDORSEMENT BY EMPLOYEE.
http://www.law.cornell.edu/ucc/3/3405.html

The more likely basis upon which the bank may be able to defend against the claim will be on the grounds that the customer's negligence substantially contributed to the making of the forgeries. (Obviously, just having checks stolen wouldn't have created a problem. They must have then been written and forged for any loss to occur.)

How were the blank checks safeguarded?

Who had access to them?

What kind of internal controls were in place?

Did the business customer utilize positive pay? Does your institution offer it?

When and how did the business become aware that the checks were stolen?

What steps did they take after learning of the stolen checks?

Take a look at 3406.

Want to learn more about positive pay and how it can protect your customers and reduce your institution's fraud losses? Read:
Value Added Benefits of Positive Pay

First published on BankersOnline.com 11/5/01