Beatty, Paul F

Budd, Ruth R

Hilgendorff III, Hugo A

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Article 4: Bank Deposits and Collections

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Boston College Law ReviewVolume 7 | Issue 4 Article 97-1-1966Article 4: Bank Deposits and CollectionsPaul F. BeattyRuth R. BuddHugo A. Hilgendorff IIIFollow this and additional works at: http://lawdigitalcommons.bc.edu/bclrPart of the Banking and Finance Law CommonsThis Uniform Commercial Code Commentary is brought to you for free and open access by the Law Journals at Digital Commons @ Boston CollegeLaw School. It has been accepted for inclusion in Boston College Law Review by an authorized administrator of Digital Commons @ Boston CollegeLaw School. For more information, please contact nick.szydlowski@bc.edu.Recommended CitationPaul F. Beatty, Ruth R. Budd, and Hugo A. Hilgendorff III, Article 4: Bank Deposits and Collections, 7B.C.L. Rev. 888 (1966), http://lawdigitalcommons.bc.edu/bclr/vol7/iss4/9BOSTON COLLEGE INDUSTRIAL AND COMMERCIAL LAW REVIEWARTICLE 4: BANK DEPOSITS AND COLLECTIONSSECTION 4-406. Customer's Duty to Discover and ReportUnauthorized Signature or Alteration'TUBER GLASS CO. V. FIRST NAT'L BANK138 N.W.2d 157 (Wis. 1965)Plaintiff maintained a checking account with the defendant. Plaintiff'spresident, R. C. Huber, and his wife were the only persons authorized tosign checks on the corporation's behalf. Plaintiff's bookkeeper, Miller, hadforged thirty-eight checks drawn on the plaintiff's account over a three-yearperiod. Miller alone had reconciled the account each month. Before theforgeries were discovered, Miller committed suicide. After their discovery,plaintiff commenced an action to recover the amount defendant had paid outon the forged checks. The trial court entered judgment for the plaintiff, find-ing as a matter of fact that the defendant had been "negligent in notdetecting the 'forgeries" and that the plaintiff "was not negligent." Thesupreme court reversed.Since the defendant had established that it had processed all checks in aprescribed manner, the court held that it had sustained its burden of showingthat it had acted reasonably and diligently. In a footnote, the court noted thatSection 4-406(3) of the Code now places the burden of proving a bank'snegligence on a depositor.The court also found that, even if the defendant had been negligent,plaintiff could recover only in the absence of negligence on its own part.The court held, moreover, that since plaintiff had never attempted toreconcile the bank account but had left this task solely to Miller, it hadnot acted reasonably. The court concluded that, as a minimum, plaintiff'sduty included "(I) a comparison of the cancelled checks with the checkstubs; (2) a comparison of the statement balance with the checkbookbalance; and (3) a comparison of the returned checks with the checks listedon the statement."COMMENTBasically, the liability of a bank under the Code for payment of a forgedcheck is not dependent upon its or a customer's negligence; a bank whichpays a forged check is absolutely liable for the amount of the check. Sec-tions 4-401, -406(2), -406, Comment 4. Under Section 4-406(1), however,a customer is obliged to examine each bank statement when made availableand to notify the bank promptly of any unauthorized items. If the bankestablishes that the customer has failed to "comply with the duties imposedby" Section 4-406(1), the customer is generally precluded from assertingany unauthorized signature against the bank, Section 4-406(2), and thusfrom recovering the amount of any forged checks. Under Section 4-406(3),on the other hand, the preclusion of Section 4-406(2) will not apply if thecustomer establishes "lack of ordinary care on the part of the bank . ."This is in contrast with the instant case which held that, even if the888UNIFORM COMMERCIAL CODE ANNOTATIONSdefendant bank had acted without due care, the plaintiff could not recoversince he had been negligent.Under this view, Section 4-406(4) becomes operative. That sectionprovides: "Without regard to care or lack of care of either the customer orthe bank," a customer who does not discover and report an unauthorizedsignature within one year "from the time of the statement" (three years foran unauthorized indorsement), "is precluded from asserting against thebank such unauthorized signature . . . ." This is to say that, assuming acustomer does not comply with Section 4-406 (1), but he does establishlack of ordinary care on the part of the bank, Section 4-406(3), the cus-tomer can recover only the amount of those forged checks which werereturned to him during the year prior to discovery and report of the forgeries.R.R.B.ARTICLE 5: LETTERS OF CREDITSECTION 5-109. Issuer's Obligations to its CustomerFAIR PAVILIONS, INC. V. FIRST NAT'L CITY BANK264 N.Y.S.2d 255 (App. Div. 1965)Plaintiff Pavilions contracted to construct a building for Exhibitions atthe World's Fair. The contract contained a provision for termination shouldspecified occurrences come to pass. Exhibitions then contracted with Willard,pursuant to which Willard had the defendant bank issue an irrevocableletter of credit in favor of plaintiff. The letter provided that the creditcould be cancelled after a certain date on receipt by defendant of anaffidavit issued by an officer of Willard "to the effect that one or more ofthe events described in . . . [the termination provision of the contract be-tween plaintiff and Exhibitions] has occurred." Before the final payment hadbeen made to plaintiff, defendant received an affidavit stating that " 'one ormore of the events . . . have occurred,' " and notified plaintiff that thecredit had been terminated. None of the specified occurrences had in factcome to pass. Plaintiff then commenced an action for damages resulting fromthe cancellation of the credit. Defendant, in turn, moved for summary judg-ment, which the lower court denied.The Appellate Division granted defendant's motion on the ground that,under the terms of the letter of credit, defendant could cancel the creditmerely on receipt of the affidavit without making an investigation as to itsaccuracy. The court, citing Sections 5-109 and -115, determined that, althoughthe letter of credit was by its terms irrevocable, with the result plaintiff'sconsent to any modification of its terms would have been required, defendantcould be held only to its engagement and was therefore empowered to termi-nate the credit upon receipt of the affidavit from Willard.COMMENTAlthough the court cited certain Code sections as applicable to thecase, the result of the case could not be dependent upon these sections, since889

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