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  • Posted on: Sep 4 2019

Unscrupulous bookkeepers or other employees have great potential to embezzle money using forged or other types of bogus checks.  In such instances, Article 4 of New York’s Uniform Commercial Code (“Bank Deposits and Collections”) is implicated.  “Articles 3 and 4 of the UCC envisions a series of shifting burdens of risk with respect to forged checks.”  Putnam Rolling Ladder Co. v. Manufacturers Hanover Trust Co., 74 N.Y.2d 340, 345 (1989).  Under Article 3 of the UCC, a check containing a forged signature is “wholly inoperative as that of the person whose name is signed.” New York UCC 3-404(1).

According to New York’s UCC, the bank’s liability is not without bounds, for:

The UCC, however, imposes certain reciprocal duties on the customer. Failure to comply with those duties shifts the burden of loss from bank to customer. UCC 4-406 imposes upon a customer the duty to inspect its statement and canceled checks with reasonable care and promptness. Failure to do so results in preclusion of any claim against the bank for repeated forgeries by the same wrongdoer after the first such forged check and statement reflecting it are made available to the customer.  This rule reflects the fact that the customer is generally in a better position than the bank to prevent repetition of forgery. A skillful forgery may not be detected by even a careful bank inspector, but the customer to whom the canceled check and statement are returned should know whether or not it actually intended to authorize payment of its funds to the named payee (see, UCC 4-406, comment 3). Thus, the shifting burden of loss is intended as well to encourage the parties to use reasonable care in situations where, from a systemic point of view, that is the efficient loss-avoidance mechanism.

Finally, UCC 4-406 (3) shifts the loss of even repeated forgeries back to the bank when the customer, although in breach of its own duty to inspect its canceled checks and statements, is able to establish that the bank lacked ordinary care in paying the forged checks…. By reallocating the burden of loss to the bank the Code thus encourages proper business practices on the part of banks as well as their customers.

Putnam, 74 N.Y.2d at 345 – 46 (footnote omitted).

In Putnam, the defendant bank paid 37 checks written by Putnam’s bookkeeper containing forged signatures of Putnam’s officers. Ultimately, the Putnam Court found that because “plaintiff adduced sufficient evidence of the bank’s lack of ordinary care in paying the 37 forged checks (thereby avoiding preclusion under UCC 4-406[2] for its own negligence), and the bank offered no evidence whatever of general rules or usage, judgment should have been awarded to plaintiff in the undisputed amount of its loss.

The Appellate Division, Second Department addressed these issues in Redgrave Electrical Maintenance, Inc. v. Capital One, N.A., 161 A.D.3d 801 (2018).  Plaintiff’s bookkeeper in Redgrave, forged 20 checks over a six-month period that were honored by defendant bank.  The Second Department affirmed supreme court’s denial of bank’s motion for summary judgment seeking to dismiss plaintiff’s causes of action for negligence and negligent misappropriation in its payment of the forged checks.  In its decision the Redgrave Court followed the Court of Appeals’ blame shifting analysis in Putnam.  Among other things, the Redgrave Court recognized that “the loss of repeated forgeries may be shifted back to the bank in the circumstance where the bank failed to use ordinary care in paying forged checks.”  Redgrave, 161 A.D.3d at 802 (citations omitted).  As to what constitutes “ordinary care,” the Redgrave Court stated:

With regard to the issue of ordinary care, UCC 4–103(3) provides that “in the absence of special instructions, action or nonaction consistent with clearing house rules and the like or with a general banking usage not disapproved by this Article, prima facie constitutes the exercise of ordinary care.” Thus, under this “safe harbor” provision, a bank can ensure that its conduct at least prima facie meets an ordinary care standard, by showing that it acted in accordance with general banking rules or practices (see UCC 4–103[3]). However, it is the bank, as the party that benefits from the “safe harbor” provision, that bears the burden of proving general clearing house rules or general banking usage in order to establish ordinary care.

Redgrave, 161 A.D.3d at 802 (some citations omitted).  While the Redgrave Court found that the bank established that Redgrave “failed to exercise reasonable care and promptness to examine its bank statements and to timely notify the bank of the checks allegedly forged by [the bookkeeper],” it “did not meet its burden of showing that it acted in accordance with general banking rules or general clearing house rules, and, therefore, it failed to demonstrate prima facie that it exercised ordinary care in paying the forged checks.”  Redgrave, 161 A.D.3d at 802 – 803 (citations omitted).

On September 3, 2019, the Appellate Division, First Department, decided Weiser v. Citigroup, Inc., in which plaintiffs alleged that “their long-time bookkeeper … perpetrated a fraud against them over a period of seven years, presenting checks drawn on their checking account with Citibank to plaintiff Dr. Weiser for signature, representing that the checks were for payment of business expenses, and later altering the checks to add her own personal credit card account number, and using the checks to pay her own credit card bills.”  Among other things, the First Department affirmed the dismissal of certain claims against Citibank because they were “barred by plaintiffs’ failure to satisfy a condition precedent to suit created by [the time limitation provisions of] UCC 4-406(4) and Citibank’s checking account rules and regulations as set forth in its CitiBusiness Client Manual” under both of which discrepancies had to be timely reported.

Further, in rejecting Plaintiffs’ contention that Citibank’s knowledge of the bookkeeper’s fraud should act as an estoppel to its raising UCC 4-406 as a bar to plaintiffs’ suit, “the record demonstrate[d] that, far from concealing the fraud, Citibank gave plaintiffs all the documentation they needed to discover it.”  In that regard, the Court found that the account statements and cancelled checks forwarded by Citibank to plaintiffs were sufficient for that purpose.  Indeed, the cancelled checks “showed [the bookkeeper’s] personal credit card number written on the ‘re:’ line.”

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