Okla. Stat. tit. 12A § 4-406

Current through Laws 2024, c. 378.

Section 4-406 - Customer's Duty to Discover and Report Unauthorized Signature or Alteration

(a) A bank that sends or makes available to a customer a statement of account showing payment of items 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.

(b) If the items are not returned to the customer, the person retaining the items shall either retain the items or, if the items are destroyed, maintain the capacity to furnish legible copies of the items until the expiration of seven (7) years after receipt of the items. A customer may request an item from the bank that paid the item, and that bank must provide in a reasonable time either the item or, if the item has been destroyed or is not otherwise obtainable, a legible copy of the item.

(c) If a bank sends or makes available a statement of account or items pursuant to subsection (a) of this section, 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 the 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.

(d) 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) of this section, the customer is precluded from asserting against the bank:

(1) The customer's unauthorized signature or any alteration on the item, if the bank also proves that it suffered a loss by reason of the failure; and

(2) 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 thirty (30) days, in which to examine the item or statement of account and notify the bank.

(e) If subsection (d) of this section applies and the customer proves that the bank failed to exercise ordinary care in paying the item and that the failure substantially contributed to loss, the loss is allocated between the customer precluded and the bank asserting the preclusion according to the extent to which the failure of the customer to comply with subsection (c) of this section and the failure of the bank to exercise ordinary care contributed to the loss. If the customer proves that the bank did not pay the item in good faith, the preclusion under subsection (d) of this section does not apply.

(f) Without regard to care or lack of care of either the customer or the bank, a customer who does not within one (1) year after the statement or items are made available to the customer (subsection (a) of this section) discover and report the customer's unauthorized signature on or any alteration on the item is precluded from asserting against the bank the unauthorized signature or alteration. If there is a preclusion under this subsection, the payor bank may not recover for breach of warranty under Section 4-208 of this title with respect to the unauthorized signature or alteration to which the preclusion applies.

Okla. Stat. tit. 12A, § 4-406

Laws 1961, SB 36, p. 130, § 4-406; Amended by Laws 1991, SB 25, c. 117, § 128, eff. 1/1/1992.

Oklahoma Code Comment

1. Sub sections 4-406(a) and (b) are designed to recognize improvements in check processing technology by facilitating check truncation and electronic information processing. However nothing in the UCC mandates the use of such technology.

2. Sub section 4-406(c) imposes a duty on bank customers to exercise reasonable promptness in examining their bank statements after the statement is sent or made available, and to notify the bank promptly of any unauthorized drawer's signature or alteration. This includes a duty to inquire if the statements are not received by the customer at the expected time. See, e g., Mesnick v. Hempstead Bank, 106 Misc. 2d 624, 434 N.Y.S.2d 579 (Sup. Ct. 1980) (customer's duty imposed even though statements were intercepted). If the customer fails to meet this duty, then the customer will be precluded from asserting an unauthorized signature or alteration if the bank proves the delay prevented recovery from the wrongdoer or otherwise caused loss to the bank. UCC § 4-406(d)(1). For example, such evidence might show that the bank could have recovered some or all of the proceeds paid had the customer acted more promptly.

In addition, the customer will be precluded from asserting an unauthorized signature or alteration by the same wrongdoer as to any item paid after the customer has had a reasonable time (not exceeding 30 days) to notify the bank of the improper payment. UCC § 4-406(d)(2) and Official Comment 3. Unlike sub section 4-406(d)(1), this does not require the bank to prove any loss resulting from the customer's delay. The 30-day period in sub section 4-406(d)(2) is the maximum time that may be deemed reasonable for notifying the bank, and is not intended to permit a customer to delay notifying the bank for 30 days in every circumstance. Moreover, consistent with Section 1-204 , the time period may be altered. The facts of the case will determine whether the customer had reason to delay giving such notice, up to a maximum of 30 days. Under Section 1-102 , the bank and its customer may establish, in the deposit contract or otherwise, what they consider to be a reasonable notice period within the 30-day maximum set forth in the statute, so long as the standard is not manifestly unreasonable.

3. Sub sections 4-207(d) and 4-208(e) contain a 30-day notice requirement, requiring a claimant to give the warrantor notice of any breach of warranty within 30 days after the claimant has "reason to know" of the breach. Thus, a bank receiving notice of a forgery or alteration from its customer also has a maximum of 30 days to notify prior parties who may be liable for breach of warranty This notice period runs from the time notice is received, not from the time of the transaction. If, however, the bank's customer is precluded from asserting the forgery or alteration against the bank by reason of the one-year limitation period in sub section 4-406(f), then the bank is likewise precluded from asserting a breach of warranty against prior parties.

4. In order to facilitate truncation, a bank is not required to return its customers' checks or supply the payees' names with the customer's monthly statement. Thus, certain alterations, and even forgeries, may not be detectable from the minimum information required (i.e., item number, amount and date of payment). See UCC § 4-406 (a). However, the scope of the preclusion is reduced accordingly. See UCC § 4-406(c).

Other preclusions that may apply appear in Sections 3-404 , 3-405 and 3-406 . A preclusion as to improper indorsements was deleted from pre-revision Section 4-406, and now is embodied in Section 4-111 . To the extent the customer is precluded from asserting an unauthorized signature or alteration, sub section 4-406(f) prevents the bank from asserting breach of a presentment warranty under Section 3-417 or 4-208 .

In addition, a bank sued by its customer for wrongful payment will be subrogated to the rights of the party it paid under Section 4-407 , and may avoid liability by showing that the customer owed the obligation paid and therefore suffered no loss by reason of the payment. See Cooper v. Stock Yards Bank of Okla. City, 644 P.2d 123 (Okla. Ct. App. 1981).

5. Generally, the customer will be deemed to have received the bank statement if it is sent or made available in accordance with banking practice or the customer's instructions. Thus, the customer who relies on a dishonest agent or entrusts review of the statement to a person who forges checks on the account will be responsible for any resulting loss. Westport Bank & Trust Co. v. Lodge, 164 Conn. 604, 325 A.2d 222 (1973), is one example. A pre-Code case to the contrary, First National Bank of McAlester v. Mann, 410 P.2d 74 (Okla. 1965), appears to have been rejected by enactment of the UCC.

6. One of the most controversial cases construing section 4-406 was Commercial Cotton Co. v. United California Bank, 163 Cal. App. 3d 511, 209 Cal. Rptr. 551 (1985), where the customer delayed more than a year before notifying the bank of forged items paid on his account, and then sued the bank for reimbursement of all the forged items paid plus punitive damages. The court excused the customer's noncompliance with Section 4-406 on grounds that the bank owed its customers a special fiduciary duty of care and good faith, which duty was breached by the payment of forged items and the bank's refusal to recredit the account. Commercial Cotton was subsequently rejected by several California courts, including the court that previously had issued the Commercial Cotton opinion. See Price v. Wells Fargo Bank, 213 Cal. App. 3d 465, 261 Cal. Rptr. 735 (1989), Copesky v. Superior Court (San Diego Nat'l Bank), 229 Cal. App. 3d 678, 280 Cal. Rptr. 338 (1991). Recent Oklahoma cases also cast doubt on the argument that a special relationship exists between a bank and its customers. See Rodgers v. Tecumseh Bank, 756 P.2d 1223 (Okla. 1988); Frontier Fed Sav. & Loan Ass'n v. Commercial Bank , N.A., 806 P.2d 1140 (Okla. Ct. App. 1990).

While revised section 4-406 does not direct address this issue, it does so indirectly by deleting the pre-revision provision that eliminated the customer preclusion when the bank failed to exercise ordinary care in paying an item. Instead, sub section 4-406(e) provides a comparative negligence standard for allocating liability when the customer violates Section 4-406, and the bank's failure to exercise ordinary care substantially contributes to the loss. The new definition of ordinary care in sub section 3-103(a)(7) and the predicate that the bank's failure to exercise such care must "substantial contribute" to the loss make it unlikely that a customer will avoid the preclusion in sub section 4-406(d) in a case like Commercial Cotton. If a bank does violate its duty of ordinary care, and this substantially contributes to the loss, the result will be application of a comparative negligence standard under sub section 4-406(e), rather than shifting all of the loss onto the bank as in Commercial Cotton.

However, the bank will still lose the customer preclusion in sub section 4-406(d) if it does not pay the item in good faith, under sub section 4-06(e). If the bank in Commercial Cotton had paid the forged items in bad faith, the court would have been correct in holding that the bank's ability to assert a preclusion against its customer was lost, and sub section 4-406(e) confirms that result. It appears, however, that Commercial Cotton did not involve good faith, but rather the bank's duty of ordinary care. The 1992 revisions to sub sections 3-103(a)(7) and 4406(e) and (f) , and the subsequent case law rejecting the Commercial Cotton view of the bank-customer relationship, should help clarify this distinction.

7. A survey of Oklahoma banks by the Oklahoma Bankers Association indicates that many banks process smaller items entirely by automation. Thus, some forgeries and alterations may not be detected. Nonetheless, if the bank follows its procedures on this, and the procedures do not vary unreasonably from general banking usage, the bank has used ordinary care. UCC § 3-103(a)(7).

8. When the customer meets the obligations of timely examining the statement and reporting a forged or alteration, a cause of anion based on the bank's payment of an item over a forged drawer's signature will accrue when the customer demands that the account be recredited. Cf. Walker & Walker, Inc. v. Liberty Nat'l Bank & finest Co., slip op., 64 Okla. B.1. 1496, 1993 W.L 150651 (Okla. May 11, 1993). The procedural posture of Walker only presented the court with the narrow question of when this cause of action accrued for purposes of the general statute of limitations on written contracts under 12 O.S. § 95 (First). The court did not determine when the limitations period commences if the drawer's signature was forged. The preclusion under this Section would still apply if the customer failed to examine the bank statement and report the unauthorized drawer's signature.