Under UCC § 4-406(f), a customer must discover and report any unauthorized signature or alteration on a check to its bank within one year after a statement or check is made available to the customer. Absent timely notice, the customer’s claim against its bank is precluded regardless of bank negligence. A bank by contract may vary the provisions of UCC Article 4 but “cannot disclaim” its “responsibility for its lack of good faith or failure to exercise ordinary care or limit the measure of damages for the lack of failure.” Rev. UCC § 4-103(a). As an additional limitation, the parties may only “determine by agreement the standards by which the bank’s responsibility is to be measured if those standards are not manifestly unreasonable.” Id.
In Clemente Bros. Contracting Corp. v. Aprile Hafner-Milazzo, 2014 N.Y. LEXIS 1003 (N.Y. May 8, 2014), the New York Court of Appeals recently addressed whether a customer agreement reducing the UCC’s one-year notice period to 14 days was enforceable. (Although New York has not adopted Revised UCC Article 4 (1990), the provisions applicable here are substantially similar.) In a split 5-2 decision, the court held that a bank may cut-down the one-year notice by agreement as long as the modification is not manifestly unreasonable. Specifically, the court held that the 14-day period was enforceable in cases where the customer is “a corporate entity that either is financially sophisticated or has the resources to acquire professional guidance.” Id. at *17. In this case, the court noted that the customer had numerous employees, regularly moved hundreds of thousands of dollars in and out of its accounts, had the resources to make an informed decision about opening an account at its bank and to monitor its accounts once a month within 14 days of each statement, and critically, had executed a corporate resolution containing the 14-day notice provision. Id. at *16-17. In dicta, the court observed that a 14-day period could be manifestly unreasonable for unsophisticated customers, small family businesses, or consumers, in which cases a 30- or 60-day period may be appropriate. Id. at *17.
One other court has upheld a 14-day notice period, Borowski v. Firstar Bank Milwaukee, N.A., 579 N.W.2d 247, 251 (Wis. App. 1998), though commentators have suggested such a short period is manifestly unreasonable because it can serve effectively to enable a bank to escape liability as an outright disclaimer. Several other courts, however, have enforced 60-day notice periods. See, e.g., Peters v. Riggs Nat’l Bank, N.A., 942 A.2d 1163, 1168 (D.C. 2008); National Title Ins. Corp. Agency v. First Union Nat’l Bank, 559 S.E.2d 668, 672 (Va. 2002); American Airlines Employees FCU v. Martin, 29 S.W.3d 86, 96 (Tex. 2000).
While the New York decision provides authority for varying the UCC’s one-year notice provision to as little as 14 days for many commercial customers, the case is also a reminder that a one-size-fits-all approach may not be appropriate, with longer reporting periods potentially required for other types of customers. Indeed, in 2001 the Uniform Law Commissioners circulated a draft amendment to section 4-406 that would have made any shortening of the one-year period to less than 90 days unenforceable against a consumer.
For further information, contact Salvatore Scanio at sscanio@ludwigrobinson.com or 202-289-7605, or Robert Ludwig at rludwig@ludwigrobinson.com or 202-289-7603.