In “check fraud” litigation, bank customers often sue their banks after learning that someone has made a forged or otherwise unauthorized signature on the front of one or more of the customer’s checks. It often turns out that the fraudster has perpetrated the scheme over a long period of time and has made unauthorized signatures on many different checks. This article offers a brief overview of the “same wrongdoer” rule, an important defense that is available to banks in such cases under the Uniform Commercial Code (“UCC”) as adopted in Massachusetts.
A. Relevant UCC Provisions.
M.G.L. c. 106, § 4-406(a) describes a bank’s duty to provide notice to account holders that the bank has paid a check:
A bank that sends or makes available to the customer a statement of account showing payment of items1 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.
Section 4-406 goes on to require that bank customers exercise reasonable promptness in examining their bank statements:
If a bank sends or makes available a statement of account or items pursuant to subsection (a), 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 a 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.
M.G.L. c. 106, § 4-406(c).
The UCC then states, in relevant part:
If the bank proves that the customer failed, with respect to an item, to comply with the duties imposed on the customer by subsection (c), the customer is precluded from asserting against the bank . . . the customer’s unauthorized signature or alteration by the same wrongdoer on any other item 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 item or statement of account and notify the bank.
M.G.L. c. 106, § 4-406(d)(2).
B. Rationale For The Rule.
UCC section 4-406 imposes upon a bank customer the duty to promptly examine its monthly statements and to notify the bank of any unauthorized transactions. If the customer fails to report the first forged check within 30 days, it is precluded from recovering for any additional checks forged by the same wrongdoer. The underlying justification for the rule is simple: one of the most serious consequences of the failure of a customer to examine its statements is that it gives the wrongdoer the opportunity to repeat his misdeeds. Clearly, the customer is in the best position to discover and report small forgeries before the same wrongdoer is emboldened and attempts a larger misdeed.
In order to trigger a customer’s duty to examine its bank statements and cancelled checks and promptly report any frauds, a bank is required simply to “send or [make] available” bank statements to the customer. See M.G.L. c. 106, § 4-406(a). The UCC defines the term “send” as “to deposit in the mail or deliver for transmission by any other usual means of communication with postage or cost of transmission provided for and properly addressed. . . .” M.G.L. c. 106, § 1-201(38).
Where the bank has sent its customer monthly statements listing the serial number, payment date, and amount of each check drawn on the account, and the customer has failed to timely notify the bank of the first fraudulent check in an on-going fraud, it is the customer, not the bank, who must bear the loss of subsequent checks forged by the same wrongdoer, provided that the bank paid the checks in good faith. 2
UCC section 4-406(e) may alter the outcome under the same wrongdoer rule by imposing a comparative fault scheme, but only in situations where “the customer proves that the bank failed to exercise ordinary care in paying the item and that the failure substantially contributed to loss.” The UCC defines “ordinary care” as follows:
“Ordinary care” in the case of a person engaged in business means observance of reasonable commercial standards, prevailing in the area in which the person is located, with respect to the business in which the person is engaged. In the case of a bank that takes an instrument for processing for collection or payment by automated means, reasonable commercial standards do not require the bank to examine the instrument if the failure to examine does not violate the bank’s prescribed procedures and the bank’s procedures do not vary unreasonably from general banking usage not disapproved by this Article or Article 4.
M.G.L. c. 106, § 3-103(a)(7).
In situations where the defendant bank uses automated systems to process checks and where the bank’s check processing practices and procedures are not shown to vary unreasonably from banking standards prevailing in the area, the plaintiff will be unable to meet its burden of proving that the bank failed to exercise “ordinary care.” The comparative fault scheme of UCC § 4-406(e) will not likely apply, and the bank will be entitled to the complete defense set forth in the “same wrongdoer” rule.
Where applicable, the “same wrongdoer rule” can be powerful defense for a drawee bank that finds itself embroiled in check fraud litigation. A bank should, of course, consult knowledgeable counsel, such as Fitch Law Partners LLP, in order to assess all factual and legal defenses that may come into play in a given lawsuit.
1 A “check” is an “item” under the UCC.
2 “Good faith” is defined in the UCC as “honesty in fact and the observance of reasonable commercial standards of fair dealing.” See M.G.L. c. 106, § 3-103(a)(4). “Although fair dealing is a broad term that must be defined in context, it is clear that it is concerned with the fairness of the conduct rather than the care with which an act is performed.” See M.G.L. c. 106, § 3-103(a)(4), UCC Official Comment 4.