Banking Litigation Alert August 2014

Banking Litigation Alert August 2014

Top New York Court Allows Parties to Amend UCC Notice Requirement for Forged Checks

In a decision consistent with similar holdings in other states, New York’s Court of Appeals recently held that a bank and its customer could agree to shorten the UCC’s one-year reporting period for unauthorized signatures.  See Clemente Bros. Contracting Corp. v. Hafner-Milazzo, 2014 WL 1806924 (May 8, 2014).  In Clemente, the plaintiff corporation alleged that a secretary had stolen over $300,000 from corporate bank accounts and lines of credit over the span of two years, from January 2008 through December 2009.  The plaintiff notified the bank of the issue in February 2010, or within two months of the secretary’s most recent transgressions.  Soon thereafter, the bank declared that the outstanding amount of the line of credit was due and payable, and the plaintiff sued the secretary and the bank, alleging that it should not be forced to repay th e loan because the money was stolen.

UCC 4-406 holds that, if a bank sends a customer an account statement along with a list of items paid, “the customer must exercise reasonable care and promptness to examine the statement and items to discover his unauthorized signature or any alteration on an item and must notify the bank promptly after discovery thereof.”  N.Y. U.C.C. Law § 4-406(1).  The UCC proceeds to state, “a customer who does not within one year from the time the statement and items are made available to the customer discover and report his unauthorized signature or any alteration on the face or back of the item . . . is precluded from asserting against the bank such unauthorized signature or indorsement or such alteration.”  N.Y. U.C.C. Law § 4-406(4).  Essentially, this provision creates a safe harbor for banks after one year has passed.

In Clemente, however, the plaintiff corporation signed a resolution as a condition precedent to obtaining the loan that stated that it must notify the bank “within fourteen calendar days of the delivery or mailing of any statement of account and cancelled check, draft or other instrument for the payment of money of any claimed errors in such statement, or that [Clemente Brothers'] signature upon any such returned Instrument was forged, or that any such Instrument was made or drawn without the authority of [Clemente Brothers].”  Thus, under the terms of the agreement, the two-month gap from the secretary’s last transgressions until the plaintiff’s notification to the bank was long enough that the bank was not liable for any of the fraudulently-disbursed money.

At issue before the Court was whether this agreement could supersede the UCC’s one-year requirement.  UCC 4-103 holds that parties may not reach an agreement that disclaims the bank’s responsibility for its own lack of good faith or failure to exercise ordinary care, but can agree to “determine the standards by which such responsibility is to be measured if such standards are not manifestly unreasonable.”  N.Y. U.C.C. Law § 4-103.  The Court held that the shortening of the reporting window to fourteen days was not “manifestly unreasonable,” and that the parties were bound by this new timeframe.  The Court did, however, limit this holding to situations in which the corporate client “either is financially sophisticated or has the resources to acquire professional guidance,” and that such a short timeframe would be manifestly unreasonable if the client is an individual or small family business.

For a copy of the decision, please contact Michael O’Donnell at