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Consumer Banking and Payments Law: 3.9.3 Presentment Warranties

Under the UCC, the party presenting a check to the drawee for payment and previous transferors of the check make three warranties to the drawee bank. If any of these warranties is breached, the drawee bank can pass the loss associated with improperly paying a check back to a prior holder of the check. Since these warranties are only made by the presenter and transferors, they are not made by the drawer, who merely issues the check.

The three presentment warranties made to the drawee bank are:

Consumer Banking and Payments Law: 3.10.1.1 Introduction

Normally, if the drawer’s signature is forged, the check is not properly payable, and the drawee bank must re-credit the depositor’s account.548 Similarly, if there is an alteration of the check, the check is only properly payable from the drawer’s account according to its original terms.549

Consumer Banking and Payments Law: 3.10.1.2 The Bank’s Duty If It Provides the Customer with a Bank Statement

Except in Massachusetts and New York, if the bank does make a bank statement available to its customers, the bank must either return the “items” (checks) to the customer or give the customer information “sufficient to allow the customer reasonably to identify the items paid.”557 Even if the bank sends a bank statement, it is not required to return copies of the checks with the bank statement,558 although the bank is free to obligate itself to send copies of checks to a particular custom

Consumer Banking and Payments Law: 3.10.1.3.1 General

Once the bank has made a bank statement available to its customer, the customer has a duty to examine “with reasonable promptness” the bank statement and items returned by the bank for unauthorized drawers signatures and alterations.577 If the statement is sent to the bank customer, not held by the bank, this duty commences when the statement is sent, not when it is received.578

Consumer Banking and Payments Law: 3.10.1.3.4 Variations of bank statement rule by the account agreement

Courts have generally upheld provisions in bank deposit contracts that shorten the time periods contained in the bank statement rule, sometimes requiring that the shortened periods not be manifestly unreasonable.598 Bank account agreements also may require the customer to notify the bank of errors in writing—by contrast, the UCC obligates the customer to “notify” the bank without specifying the method599—or expand the scope of the custom

Consumer Banking and Payments Law: 3.10.1.4 Effect on Result If Bank Does Not Observe Ordinary Care or Good Faith

If the customer does not abide by his or her duties under the bank statement rule, the customer is precluded from requiring that the bank re-credit his or her account unless the customer can prove that the drawee bank did not exercise ordinary care601 and “that failure substantially contributed to loss.”602 If the drawee bank failed to exercise ordinary care that substantially contributed to loss, the loss will be allocated by using comparative negligence.60

Consumer Banking and Payments Law: 3.10.1.5 Issue Preclusion If No Notice by Bank Customer in One Year

Ordinarily, a customer loses all rights in regard to the payment of a check with a forged drawer’s signature or alteration if the customer does not give the bank notice of the forgery or alteration within one year from the date on which the statement was made available to the customer.612 A few courts have ruled that U.C.C. § 4-406(f) does not distinguish between single or multiple incidents of forgery and, as a result, the statute of repose runs from each successive forgery.613

Consumer Banking and Payments Law: 3.10.1.6 Duty to Examine the Bank Statement for Other Inaccuracies

The bank statement rule governs the depositor’s duty to examine the bank statement for forgeries of the drawer’s name and alterations. Several courts have held that customers also have a duty to examine the bank statement for other errors, such as whether the amount of the check was encoded properly, using reasonable care.622 Although this duty exists, it cannot be properly folded into the bank statement rule through the customer agreement.623

Consumer Banking and Payments Law: 3.10.2 The Negligence Rule

Normally, if the drawer’s signature is forged, the check is not properly payable, and the drawee bank must re-credit the depositor’s account.624 Similarly, if there is an alteration of the check, the check is only properly payable from the drawer’s account according to its original terms.625

Consumer Banking and Payments Law: 3.10.3 The Imposter Rule

In general, if a payee or special indorsee’s signature is forged, the check is not properly payable out of the drawer’s bank account unless and until the proper parties indorse the check.651 The drawer also has no drawer’s liability, because the check is not presented and dishonored.652 The drawer also has no liability on the underlying obligation, which is not revived until there is presentment and dishonor.653

Consumer Banking and Payments Law: 3.10.4 Common Law Ratification of a Forged Signature

If the drawer’s signature is forged, the victim of the forgery can validate the forgery through the ratification doctrine.663 This ratification may occur after a forgery by conduct as well as express statements.664 The comment explains that ratification may be found, for example, “from the retention of benefits received in the transaction with knowledge of the unauthorized signature.”665 The UCC incorporates the common law principles that apply to

Consumer Banking and Payments Law: 3.11 Accord and Satisfaction

The accord and satisfaction rules in the revised UCC can be advantageous to consumers, but only consumers who are well-informed will be able to take advantage of them. One of the chief advantages of accord and satisfaction is that it provides consumers with a non-judicial, quick, and inexpensive method to resolve a dispute.669 The consumer can take advantage of accord and satisfaction when the consumer is the debtor.

Consumer Banking and Payments Law: 3.12.1.1 Generally

The Check Clearing for the 21st Century Act, popularly known as Check 21, was enacted in October of 2003, with an effective date of October 28, 2004.683 Check 21 allows institutions to unilaterally decide to truncate all paper checks.684 The Act defines the term “truncate” as meaning the “removal of an original paper check from the check collection or return process and sending to a recipient, in lieu of such original paper check, a substitute check or, by agreement, information relating to the

Consumer Banking and Payments Law: 3.12.1.2 Justification for Check 21 and Implications for Consumers

The main goal of Check 21 is to eliminate the necessity of original paper checks being physically transported all over the country and instead to facilitate the electronic transfer of an image of a check or other information about it.689 The Federal Reserve and the banking industry sought to decrease dependence on a system relying on the transportation of physical paper checks, which was slow, costly, and inefficient.690

Consumer Banking and Payments Law: 3.12.4 Consumer Awareness Notices

The Check 21 Act required every bank to provide a notice explaining substitute checks to those who were customers of a bank on the effective date of the Act.704 no later than the first regularly scheduled communication with the consumer after the effective date of the Act.705 The notice must also be provided to new customers at the time at which the customer relationship is initiated.706 The notice must be provided to each consumer of the bank who

Consumer Banking and Payments Law: 3.12.5.1 Right to Require Bank to Reinvestigate

The Check 21 Act does not provide federal rights concerning unauthorized check payments or related issues. What it does is provide federal rights when the substitute check process, as opposed to the processing of the underlying original check, causes consumer injury.717 This might happen, for example, if conversion of the paper check to an electronic image and back to a substitute check results in the check’s being paid twice or if the substitute check does not accurately reflect the original check.

Consumer Banking and Payments Law: 3.12.5.2 Receipt of the Substitute Check

A consumer must at some point have received a substitute check to make an expedited re-credit claim.726 However, the consumer does not have to be in possession of the substitute check when he or she submits a claim for a re-credit.727 According to the FRB, the re-credit is not available to a consumer who receives only an image of a substitute check.728 Although that consumer is not entitled to a re-credit, unless he or she has received a substitute

Consumer Banking and Payments Law: 3.12.5.3 Time Frame for Submitting a Claim

The consumer must submit a re-credit claim within forty calendar days after either the bank mails a periodic statement to the consumer or the substitute check is made available to the consumer, whichever is later.731 The bank is required to give the consumer an additional “reasonable amount of time” if the consumer’s inability to meet the forty-day deadline is due to extenuating circumstances.732 A consumer who does not file a claim within the deadline loses the right to use the re-credit proced