The American Bankers Association profiled the following M&P case on August 1 in its “UCC/Uniform Law News” publication:
Litigation
NOTABLE UNIFORM LAW RELATED CASE LAW
Kentucky Supreme Court Addresses Issues of First Impression under the UCC and Rules in Favor of Bank on Major Check Fraud Case
In June, the Supreme Court of Kentucky rendered its unanimous opinion in favor of Commonwealth Bank & Trust Company in Mark D. Dean, P.S.C. v. Commonwealth Bank & Trust Company. The plaintiff, a Kentucky law firm, suffered financial losses when an employee embezzled in excess of $800,000, in part by writing checks on the firm’s bank accounts over several years. The employee was an authorized individual signatory on the firm’s bank account. Over three years after the last activity on the account, plaintiff filed suit for recovery against defendant bank on common law theories and claims that the bank violated Uniform Commercial Code Articles 3 and 4 by failing to protect the bank account from theft.
The Kentucky Supreme Court held the employee’s signature was not an unauthorized signature under UCC Article 4-406, because the employee had apparent authority to sign the check by virtue of the signature card on file at the bank. The Court pointed out that the bank could not police whether the authorized signatory exceeded the scope of his or her authority when writing valid checks on an existing account.
The Court ruled in favor of the bank refining the bounds of an individual’s responsibility to monitor their bank accounts. According to the opinion of the Court, “a bank cannot be liable for checks paid on unauthorized signatures as long as the bank sends the required statements to the customer and makes the checks available, and the customer does not exercise reasonable care in discovering and reporting the unauthorized signatures.”
The Court also held the claims were barred by the three-year statute of limitations. The account holder was in the best position to identify suspicious activity in its bank accounts. Finally, in considering an issue of first impression, the Kentucky Supreme Court held that the Uniform Commercial Code is intended to occupy the field to the exclusion of common law claims in the areas in which it provides comprehensive rights and remedies, such as the check fraud loss provisions of Articles 3 and 4.
John T. McGarvey is a member of the ABA Working Group on the Uniform Commercial Code and was one of the Morgan & Pottinger, P.S.C., attorneys representing the bank. Mr. McGarvey notes that the Court points out that bank customers are allowed a reasonable opportunity to discover fraud on their accounts and it has to be done within the time frame specified under state law.
Read the Supreme Court of Kentucky opinion here.
