© Neal A. Klegerman
The Nevada Supreme Court recently addressed issues surrounding check forgery. C. Nicholas Pereos, Ltd. v. Bank of Am., N.A., 131 Nev. Adv. Rep. 44 (Nev. 2015) Section 4-406 of the UCC governs the relationship between a bank and its customer.
- A bank that sends or makes available to a customer a statement of account showing payment of items for the account shall either return or make available to the customer the items paid or provide information in the statement of account sufficient to allow the customer reasonably to identify the items paid. The statement of account provides sufficient information if the item is described by item number, amount and date of payment.
- If the items are not returned to the customer, the person retaining the items shall either retain the items or, if the items are destroyed, maintain the capacity to furnish legible copies of the items until the expiration of 7 years after receipt of the items. A customer may request an item from the bank that paid the item, and that bank must provide in a reasonable time either the item or, if the item has been destroyed or is not otherwise obtainable, a legible copy of the item.
- If a bank sends or makes available a statement of account or items pursuant to subsection 1, the customer must exercise reasonable promptness in examining the statement or the items to determine whether any payment was not authorized because of an alteration of an item or because a purported signature by or on behalf of the customer was not authorized. If, based on the statement or items provided, the customer should reasonably have discovered the unauthorized payment, the customer must promptly notify the bank of the relevant facts.
- If the bank proves that the customer failed, with respect to an item, to comply with the duties imposed on the customer by subsection 3, the customer is precluded from asserting against the bank:
(a) His or her unauthorized signature or any alteration on the item, if the bank also proves that it suffered a loss by reason of the failure; and
(b) His or her unauthorized signature or alteration by the same wrongdoer on any other item paid in good faith by thebank 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.
- If subsection 4 applies and the customer proves that the bank failed to exercise ordinary care in paying the item and that the failure substantially contributed to loss, the loss is allocated between the customer precluded and the bank asserting the preclusion according to the extent to which the failure of the customer to comply with subsection 3 and the failure of the bank to exercise ordinary care contributed to the loss. If the customer proves that the bank did not pay the item in good faith, the preclusion under subsection 4 does not apply.
- 6. Without regard to care or lack of care of either the customer or the bank a customer who does not within 1 year after the statement or items are made available to him or her (subsection 1) discover and report his or her unauthorized signature or any alteration on the item, is precluded from asserting against the bank the unauthorized signature or the alteration. If there is a preclusion under this subsection, the payor bank may not recover for breach of warranty under NRS 104.4208 with respect to the unauthorized signature or alteration to which the preclusion applies.
In 2010, the customer, a law firm, discovered that a long time employee had been embezzling money since 2006. The law firm had removed the employee as a signatory on the account but the employee nonetheless deposited law firm checks and wrote and signed checks for her own use. Moreover, the employee without knowledge of the law firm had enrolled the firm online banking which had the effect of the bank ceasing to mail statements to the law firm. The law firm sued the bank based on the losses from the unauthorized signatures and also for the failure to make statements available pursuant to subsection 1 of UCC 4-406 although he had picked up statements which did not include copies of the cancelled checks. The district court granted summary judgment to the bank finding that the statements provided were sufficient and thus the claims were time barred pursuant to subsection 6 of UCC 4-406.
The Nevada Supreme Court explained that generally the statute absolves a bank of liability for its payment on an unauthorized transaction when it provides the customer with information that would allow the customer to identify any unauthorized transactions and then the customer fails to act timely in response to an unauthorized transaction reflected therein.
Without regard to whether the bank or the customer did not exercise care, the customer is precluded from asserting the unauthorized signature against the bank if the customer does not discover and report the unauthorized transaction within one year after a statement complying with subsection is made available to the customer.
The Nevada Supreme Court reversed the summary judgment and remanded to the district court. The Nevada Supreme Court held that there were issues of fact as to the manner and delivery of the statements provided to the customer by the bank. The court also held that the 30 day requirement for the customer to act with respect to the second or subsequent in a series of forgeries by the same forger pursuant to subsection 4 did not apply if the bank did not pay the item in good faith as provided in subsection 5. Thus if the bank did pay an item in good faith, claims by a customer would not be precluded even if the customer did not act within 30 days after the customer had the opportunity to examine the forged item or bank statement.
Perhaps most noteworthy, the court also held that the one year statute of repose in subsection 6 applied separately to each alleged forgery even if committed by the same forger. The court held that unlike the 30 day rule in subsection 4 which applies to the second or later forgeries by the same forger, the one year statute of repose in subsection 6 does not differentiate between a single forgery and multiple forgeries by the same forger. Among other things, the facts of the case point to the risk of the availability of online banking in a small business setting where there may not be the more extensive internal controls of a large business. It may be that a small business which does not avail itself of online banking should advise the bank accordingly and that any efforts should be blocked unless confirmed in person by an authorized signatory. Whether or not such advice would be binding or effective is unclear but it would seem helpful in litigation with the bank in the event of a forgery based on or abetted by an unauthorized use of online banking.