Highest New York Court Answers Important Question for Banks and Everyone Who Has a Checking Account06/09/2014 | Summer 2014 Newsletter
On May 8, the highest appellate court in New York decided that (i) our bank clients can force their depositors to review cancelled checks for accuracy within weeks after they are returned and (ii) our other major business clients lose the right to claim that a check shouldn’t have been paid if they don’t promptly report a forgery or other defect.
Whether the rule applies to personal checking accounts, or checking accounts of family businesses, is still unanswered. But ignoring those envelopes of returned checks, or those internet notices that your checks are available for viewing, can be costly.
If a bank is presented with a forged check for payment, the bank is supposed to return it unpaid. If the bank instead pays the check and deducts it from the depositor’s account, the depositor has the right to get the money back. However, New York law also provides that the depositor must report a forgery, alteration or unauthorized endorsement of a check within one year after the bank sends the check and the account statement, or makes it available, to the customer. If the customer throws an unopened envelope of checks into the drawer and never looks at them, or if the customer fails to look at the checks made available on the internet, then the customer may get stuck with the loss caused by the forgery or alteration of the check.
The question that the court answered was whether the bank and the customer can agree to reduce the one year period to as little as 14 days. The answer, at least when the depositor is a sophisticated business customer, is yes. You may say,“But I never agreed to look at my checks that fast!” The response of your bank, if it is on the ball, should be, “Look at your deposit account agreement. It’s right there. And once a year we send you a reminder.”
Thus, make sure that you promptly look at your checking account statement. Verify that you actually signed all of your checks and that there are no other irregularities, such as an increase in the amount of any check. All of our bank clients should make sure that there is appropriate language limiting the review period in the checking account agreement. When possible, they should have the customer individually initial that limit. Reminders of the obligation to promptly review statements should be included in notices to customers and on their Internet banking websites.
An important additional word to the wise — business customers should always make sure that the person who reviews the paid checks is not the same person as the one who is in charge of the checkbook. In my experience representing banks for 38 years, the most common source of forgeries is the bookkeeper or other finance department staff person who uses ease of access to the checking account to embezzle a few dollars, and sometimes more than just a few.
The ability to reduce the time period to 14 days may not apply to personal checking accounts and accounts of small family businesses. The reduction in the time period must be reasonable. The court recognizes that “It could well be unreasonable for banks to…impose an exacting 14-day limit on unsophisticated customers, small family businesses, or individual consumers, including, for example, the elderly, people suffering from certain disabilities, or others for whom the 14-day rule could be too unforgiving.” However, that will depend on the specific facts, and we recommend that all of our clients should protect themselves by looking at their account statements promptly and not just rely on the ability to claim that they were unsophisticated.
About the author: Jay L. Hack is a partner at Gallet Dreyer & Berkey, LLP and head of the firm’s banking department. Mr. Hack’s practice focuses on providing a full range of legal services to banks and other financial institutions. Mr. Hack can be reached at email@example.com.