I. GENERAL RULES REGARDING FORGERIES AND ALTERATIONS
An “unauthorized” signature is defined in U.C.C. § 1-201(43) as a signature “made without actual, implied or apparent authority and includes a forgery.” An unauthorized drawer’s signature on a check is treated as an unauthorized signature that is ineffective unless ratified (See, U.C.C. § 3-403). Furthermore, under U.C.C. § 4-401(1), a bank may only charge items that are “otherwise properly payable” and if the bank pays a check with an unauthorized signature, this provision is violated. If the check is not properly payable from the depositor’s account and if the account was charged, then a recredit is in order.
In the case of a forgery, the drawee bank is generally held to know and recognize its own customer’s signature and the bank cannot generally recover from the innocent holder to whom it paid. The oft-cited case of Price v. Neal, 3 Burr. 1354, 97 Eng.Rep. 871 (1762) held that once a drawee bank has paid or certified an item on which the drawer’s signature was forged, the drawee bank cannot reverse final payment. This ruling is codified in U.C.C. § 3-418.
As state above, the drawee bank must recredit the account and may not return the check to the depository bank for credit. This is because the drawee bank had until the midnight deadline to either pay or return the check. The code recognizes that the drawee bank had the ability to check the signature, refuse to pay the check and return it to the depository bank prior to the midnight deadline, thereby escaping liability. If after paying the check, the drawee bank attempts to return the check to the depository bank, the depository bank should mark the check as a late return and send it back to the drawee bank.
These protections to the customer are balanced, however, with certain responsibilities, namely:
A. the customer’s obligation to exercise ordinary care in the custody and drawing of checks (If the customer’s failure to exercise ordinary care contributes substantially to an alteration of the check or the making of a forged signature, then the customer is precluded to assert liability against a person who, in good faith pays the check or takes if for value or for collection, unless that person also fails to exercise ordinary care in paying or taking the check which substantially contributes to loss. In such case, the loss is allocated between the customer and the person on a “comparative” basis --See, U.C.C. § 3-406); and
B. the customer’s duty to promptly examine statements and checks and notify bank of any forgeries or alterations (See, U.C.C. § 4-406).
Should the customer neglect or fail in the duties described in A and B above, the customer may possibly lose the right to any recredits, being “precluded from asserting” the forgery or alteration against the bank, particularly if the bank has exercised ordinary care in fulfilling its duties.
Generally, forged drawer signatures must be reported to the drawee bank within one year from the date of the bank statement that is received by the customer. If the bank is not negligent and has exercised ordinary care, the bank may gain a defense a claim of forgery against the customer if the customer failed to perform his or her duty to notify the bank.
The drawee bank may also attempt to shift its liability for loss to the depository bank under a warranty theory found in U.C.C. § 4-207 if it can be proved that the depository bank breached its transfer warranty by taking the checkwith actual knowledgethat the drawer’s signature was not authorized. It should be noted however that the likelihood of recovery is slim in that the depository bank must have actual knowledge of the forged or unauthorized signature and not just have taken the check without checking out the signature.
II. DRAWER’S AGENT
In the case of an agent of the drawer, when such agent exceeds his or her authority, the agent is an unauthorized signer. In such case however, the agent as unauthorized signer is personally liable even if the agent used a name other than his or her own name.
III. RATIFICATION
Although an unauthorized drawer’s signature on a check is treated as an unauthorized signature that is ineffective, the drawer may ratify the forger’s signature by word or by deed (See, U.C.C. § 3-403). Ratification involves the retroactive adoption of the unauthorized signature by the person whose name is signed. Ratification may also occur as a result of the conduct of the drawer or the drawer’s statements. For example:
Although ratification will relieve the forger of liability on the check, it does not affect the forger’s liability to the drawer and it does not affect any criminal law violations.
IV. DUTIES UNDER U.C.C. § 4-406(a)-(e)
A. Bank Statements
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.
B. When Checks are not Returned to Customer
If the checks are not returned to the customer (e.g., the bank utilizes a truncation process), the person retaining the checks must either retain the checks or, if the checks are destroyed, maintain the capacity to furnish legible copies of the checks until the expiration of seven years after receipt of the checks. A customer may request a check from the bank that paid the check and that bank must provide, within a reasonable time, either the check or, if the check has been destroyed or is not otherwise obtainable, a legible copy of the check (See, U.C.C. § 4-406).
C. Customer Duty to Examine and Notify
If a bank sends or makes available a statement of account or checks pursuant to Paragraph A. above, the customer must exercise reasonable promptness in examining the statement or the checks to determine whether any payment was not authorized because of an alteration of an check or because a purported signature by or on behalf of the customer was not authorized. If, based on the statement or checks provided, the customer should reasonably have discovered the unauthorized payment, the customer must promptly notify the bank of the relevant facts.
D. Customer Failure to Timely Examine or Notify
If the bank proves that the customer failed, with respect to a check, to comply with the duties imposed on the customer (by Paragraph C.,above), the customer is precluded from asserting against the bank:
1. the customer’s unauthorized signature or any alteration on the check, if the bank also proves that it suffered a loss by reason of the failure; and
2. the customer’s unauthorized signature or alteration by the same wrongdoer on any other check paid in good faith by the bank 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 check or statement of account and notify the bank [See, U.C.C. § 4-406(d)].
The 30-day time frame for a customer to examine a bank statement for unauthorized signatures or alterations may be modified by agreement to either shorten or lengthen the customer examination period.
E. Bank Failure to Exercise Ordinary Care
If Paragraph D., above applies and the customer proves that the bank failed to exercise ordinary care in paying the check 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 C., above 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 check in good faith, the preclusion under Paragraph D., above does not apply.
V. THE ONE-YEAR RULE
Without regard to care or lack of care of either the customer or the bank, a customer who does not withinone year after the statement or checks are made available to the customer discover and report the customer’s unauthorized signature on or any alteration on the check is precluded from asserting against the bank the unauthorized signature or alteration. If this preclusion is applicable, the payor bank may not recover for breach of warranty under U.C.C. § 4-208 (presentment warranties) with respect to the unauthorized signature or alteration to which the preclusion applies (See, U.C.C. § 4-406(f)).
VI. THE UCC’S STATUTES OF LIMITATIONS
There is a general three-year statute of limitations under UCC Article 4 to enforce an obligation, duty or right after the cause of action accrues (See, U.C.C. § 4-111). As stated above, there is a one-year statute of limitations for unauthorized signature or alterations. A bank is allowed to modify the time frame for reporting and notification by agreement with its customer so long as the shorter time limit set by the bank is reasonable and imposed in good faith (See, U.C.C. § 4-406). The Nebraska Supreme Court rendered a decision (Mandolfo v Mandolfo) relating to the three-year statute of limitations under the Uniform Commercial Code in 2011, in which it was alleged that a bank had allowed checks made payable to a corporation to be wrongfully deposited into another individuals personal account. In applying the three-year statute of limitations under U.C.C. § 3-118(g) the court determined that the discovery rule did not apply to toll the time limit for actions for conversion under the U.C.C. The provisions of U.C.C. § 3-118(g) provide “unless governed by other law regarding claims for indemnity or contribution, an action (1) for conversion of an instrument, for money had and received, or like action based on conversion…must be commenced within three years after the cause of action accrues.” The court held that the discovery rule does not apply to cases involving negotiable instruments and as a result, the cause of action accrues and the limitations period begins running when the instruments are converted, regardless of when the account holder actually learns of the conversion.
Note in Comparison: In the case of unauthorized or forged indorsements, there is a three-year statute of limitation.
SAMPLE Affidavit of Forgery OR UNAUTHORIZED SIGNATURE ON A CHECK, DRAFT OR OTHER INSTRUMENT
State Of Nebraska )
) Ss.
County Of Cornhusker )
Check, Draft, Instrument Number Date On Item Name Of Payee Amount
I did not sign the check(s), draft(s) or other instrument(s) listed above either as maker or indorser;
I did not receive the proceeds of the check(s), draft(s) or other instrument(s);
This affidavit of forgery is made voluntarily and for the purpose of obtaining the proceeds of the check(s), draft(s) or other instrument(s) credited against my account;
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(Notary Seal)
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My commission expires: