By Craig W. Smith, J.D., Author, CCH Deposit Law Notes.
A question frequently asked is can a drawee bank shorten or “cut down” the one-year notice period for reporting forged signatures under the terms of its deposit account agreement? The general answer to this question is yes since the UCC states that its provisions may be varied by agreement between the bank and its customer.
One year is the maximum time the Uniform Commercial Code gives a customer to notify his or her bank that it has paid a check over the customer’s forged signature. This notification period begins on the date the statement containing or describing the forged item is mailed to the customer or made available for the customer’s inspection (Revised UCC § 4-406(f)).
The bank that pays a forged item is the drawee bank and the customer whose signature is forged is the drawer. If the drawer fails to inform the drawee bank within the one-year notice period, the drawer is absolutely precluded from recovering the forged item from the bank. This rule applies even if the customer can demonstrate that the bank failed to exercise ordinary care in paying the forged item.
The one-year time limitation to report the payment of items bearing the drawer’s forged signature is the standard by which a bank’s responsibility for the payment of a forged check is measured. In other words, a bank’s responsibility for exercising ordinary care in paying its customers’ checks lasts for one year. If during that period a customer notifies the bank that it has paid a check bearing the customer’s forged signature, then it may be liable to the customer for all or a part of the forged item if it failed to exercise ordinary care in paying the item. If, however, the customer fails to notify the bank of the forgery within the one-year period, then the bank is not liable for the forgery even if it failed to exercise ordinary care in paying the forged item.
It is this standard by which a bank’s responsibility is measured that can be varied by agreement as long as the variation is not manifestly unreasonable (Revised UCC § 4-103(a)). For example, the court in the following recently decided case determined that an agreement reducing the time within which a forged signature must be reported from one year to sixty days was not manifestly unreasonable.
THE FACTS. Miranda Construction Corporation maintained a checking account at First Union National Bank. On July 24, First Union paid a $50,000 check drawn on Miranda’s account bearing the drawer’s forged signature. Miranda received the statement containing the forged item during the first week of August and notified the Bank of the forgery on November 9, over 90 days later. Miranda then sued First Union to recover the forged item.
THE ARGUMENTS. First Union argued that it is not liable for the forged item since Miranda failed to notify it of the forgery within 60 days after the statement containing the item was mailed as required under the terms of the Deposit Account Agreement. Miranda argued that the contractual provision reducing the time forged signatures must be reported from one year to 60 days is manifestly unreasonable and constitutes an unenforceable disclaimer of the bank’s liability.
THE COURT DECISION. The court pointed out that the issue in this case is whether the one-year notice requirement set out in the UCC may be shortened to 60 days under the terms of the deposit agreement. The court first found that the 60-days notice provision contained in the deposit agreement is a reasonable variance of the one-year provision in the UCC.
It then found that 60 days is not only objectively reasonable, but that the evidence presented also establishes that the 60-days notice was entirely reasonable as applied to Miranda. It pointed out that Miranda’s representative testified that he reviewed the July statement and all the other statements for 1997 and 1998 in a couple of hours. Based upon this testimony, the court observed that the time needed to review the July statement was only a fraction of a couple of hours. Accordingly, it ruled that the 60-day period set forth in the deposit agreement provided more than adequate and reasonable time for Miranda to have reviewed the July statement and reported the forged signature.
The court next found that the cut-down provision at issue does not constitute an unenforceable disclaimer of the bank’s liability. It noted that the agreement does not absolve First Union of its duties to use ordinary care and act in good faith. Further, the provision neither bars the depositor from suit nor excuses First Union from liability for its failure to exercise ordinary care. The court stated that all the deposit agreement does is to reduce the time within which Miranda must provide notice; it changes no other duties between the parties. Based upon its findings, the court entered judgment in favor of First Union National Bank. W.J. Miranda Construction Corp., Inc. v. First Union National Bank, 40 UCC Rep Serv 2d 8 (FL 1999).
It is clear that the provisions of the UCC may be varied by agreement as long as the variations are reasonable and do not disclaim a bank’s responsibility to act in good faith or to exercise ordinary care in the performance of a responsibility it is required to perform under the UCC.
Implicit in the prohibited variations is the notion that a bank cannot by contract eliminate a basic right granted to a depositor under the provisions of the UCC. For instance, the UCC provides that a depositor has the right to stop payment on checks he or she has issued. If a bank by agreement eliminates this right, it has also, although not expressly, eliminated its duty to exercise ordinary care in following a customer’s valid stop payment order. Since the expressed elimination of this basic right to stop payment includes the implicit elimination of a bank’s duty to exercise ordinary care, it would be considered a prohibited variation of the provisions of the UCC.