Banks have long been a favorite target for lawsuits when their customers don’t take basic steps to oversee their employees who later bilk the customer for millions of dollars over the course of untold years. Customers often try to hold the bank liable for some nuance in the fraud, like a bookkeeper who issues company checks without signatory authority or an employee who makes an irregular indorsement to cash stolen checks. These claims effectively transform banks into insurers against embezzlement, and some of these claims have gained traction in court. But such depositor claims will now face an uphill climb. Last week a unanimous Washington State Supreme Court held that a signature by a non-payee on the back of a check acts as an indorsement that triggers the one-year time bar for reviewing statements and reporting fraud. A customer who doesn’t report the fraud within a year can’t recover against the bank—nor can other banks in the collection chain be liable for breach of warranty claims—regardless of the bank’s culpability, if any.
In Travelers Cas. & Sur. Co. v. Wash. Trust Bank, Case No. 92483-0 (Wash. Nov. 3, 2016), an employee embezzled Social Security benefits paid to her nonprofit agency on behalf of its disabled clients. The agency employee—an authorized signer on the pooled account where the benefits were deposited—drew checks payable to their clients and third-party service providers. But those checks were never delivered to the identified payees. The employee instead signed her own name to the back of each check and cashed them over the counter at the agency’s bank. She walked away with nearly $600,000 before admitting her embezzlement in a suicide note. After paying the agency’s insurance claim, the insurer sued the bank to recover the stolen funds.
The Court held that any signature is presumptively effective as an indorsement under the UCC when the signature is applied to the back of a check without other unambiguous evidence to the contrary. Such a signature is effective even if signed by someone other than the named payee and in a form other than in the name of the payee. In Travelers the signature of the employee in her own name constituted an indorsement, even when made on the back of checks issued to third-party payees like landlords and other vendors.
The Court also addressed whether the absolute time bar of UCC 4-406(f) applied. Section 406(f) sets out a bank customer’s duty to discover and report unauthorized signatures, indorsements, or alterations to checks. Depositors have only one year from receipt of an account statement to discover an unauthorized indorsement. After a year, the customer is barred from recovering against the bank, provided that the bank sends account statements that contain information sufficient to identify the items paid (item number, amount, date of payment, and a telephone number that the customer may call to request a copy of an item) and makes the items available at the request of the customer. Here, the bank sent statements to the agency and made complete copies of the checks available online. Even though the statements did not reveal the indorsement at issue, this was all that was required to invoke the statement defense, the Court held.
Despite the good news for banks in this decision, the Court also cautioned that “a bank fails to exercise ordinary care as a matter of law in paying a check to a person other than a named payee when the check lacks a payee’s indorsement.” This failure to exercise ordinary care may not matter in cases where a customer fails to review account statements, in which case UCC 4-406(f) bars the claim. But in cases where a customer does timely review account activity and report fraud, the bank may be held responsible for the customer’s losses if there is no proper payee indorsement.
The full reach of this case is yet to be determined, given the unique circumstances presented in it. At the very least, banks can take comfort that in Washington the one-year time bar remains alive and well. Depositors who fail to timely review account statements cannot look to their banks as insurers against embezzlements that could have been prevented if they had more responsibly managed their businesses.