The legal basis for liability in check fraud losses is found in the Uniform Commercial
Code (UCC), which was revised in 1990. The UCC now places responsibility for check
fraud losses on both the bank and its customers. Responsibility for check issuers
and paying banks falls under the term "ordinary care." Ordinary care requires account
holders to follow "reasonable commercial standards" prevailing in their area and
for their industry or business. Under Sections 3-403(a) and 4-401(a), a bank can
charge items against a customer's account only if they are "properly payable" and
the check is signed with an authorized signature. If a signature is forged, the
account holder may still be liable if one of the following exceptions applies: First,
if account holders' own failures contributed to a forged or altered check, they
may be restricted from seeking restitution from the bank. Section 4-406 requires
customers to reconcile their bank statements within a reasonable time and report
unauthorized checks immediately. Typically, this means reconciling bank statements
as soon as they are received, and always within 30 days of the bank sending the
statement. Second, the concept of "comparative negligence" in Sections 3-406(b)
and 4-406(e) can also shift liability from the bank to the account holder. If both
the bank and the account holder have failed to exercise ordinary care, a loss may
be allocated based on how each party's failure contributed to the loss. The internal
controls used by a company when issuing checks will be questioned to determine negligence.
Since banks are not required to physically examine every check, companies may be
held liable for all or a substantial portion of a loss, even if the bank did not
review the signature on the fraudulent check.
Read your bank contracts and Disclosure Agreements to understand
your liability for fraud losses under the revised Uniform Commercial Code. This
includes the small print on signature cards and Disclosure Statements. A bank’s
intentions must be stated clearly to prevail against a customer in a check fraud
case. Accordingly, banks are re-writing their signature card agreements and adding
new provisions to their Disclosure Statements.