Espresso Roma Corporation v. Bank of America, N.A

Brief Fact Summary. Appellants appeal from a judgment dismissing their complaint. An employee of the appellants forged company checks in an amount over $330,000. Synopsis of Rule of Law. A “customer is precluded from making a claim against the bank for unauthorized payment unless the customer notified the bank no more than 30 days after the first forged item was included in the monthly statement or canceled checks and should have been discovered.”

Facts. David S. Boyd is the president of Espresso Roma Corporation and Pacific Espresso Corporation. All three entities are the appellants in this case (the “appellant”). Starting in October 1997, Joseph Montanez, and bookkeeper of the appellants downloaded company programs, stole blank checks, and printed company checks on his home computer to pay his personal bills. Montanez removed the forged cancelled checks when he sorted through the mail. The forgeries were not discovered until after Montanez left the company and Boyd found a cancelled check with a signature that he did not recognize. Upon further investigation, Boyd discovered that Montanez forged company checks in an amount totaling more than $330,000. The trial court granted summary judgment in favor of the appellee Bank of America (the “appellee”) on the ground that appellants are precluded from asserting forgeries processed more than one year before the forgery was reported.

Issue. Was the trial court correct in granting summary judgment in favor of Bank of America?

Held. Yes. The Court of Appeals held that the trial court properly granted the appellee’s motion for summary judgment on the ground that UCC Section: 4406(d) and (e) “precludes the appellants from asserting claims against the appellee for unauthorized payments of checks drawn on their checking accounts, and that appellants failed to create a triable issue of fact as to whether they failed to exercise ordinary care in paying the items and that the failure contributed to their loss.” UCC Section: 4406(d) states “the customer is precluded from making a claim against the bank for unauthorized payment unless the customer notified the bank no more than 30 days after the first forged item was included in the monthly statement or canceled checks and should have been discovered.” The checks were presented for payment between October 1997 and May 1999, but the appellants did not discover the forgery until May 15, 1999. The court found that despite having a means of discovering the forgery, more than a year lapsed before appellants discovered and reported the forgeries, well beyond the 30 days specified in Section: 4406. Section 4406(e) outlines that the issue preclusion in Section: 4406(d) applies unless the customer can establish that the bank, “failed to exercise ordinary care in paying the item and that the failure contributed to [the] loss.” The court sited the holding in Story Road Flea Market, Inc. v. Wells Fargo Bank that explained that ordinary care as cited in Section: 4406 (e) is a ” ‘professional negligence’ standard of care which looks at the procedures utilized in the banking industry rather than what a ‘reasonable person’ might have under the circumstances.” The appellee uses a “‘bulk file bookkeeping’ check processor” which processes checks automatically; therefore, each check is not visually examined. Testimony on behalf of the appellee stated that the appellee’s “practices and procedures are consistent with those of all other large ‘bulk file bookkeeping’ banks in California.” The court found that this statement “established that the reasonable industry standard prevailing in the area for simi larly sized banks was to bulk process checks through and automated system that employs fraud filters, but does not include sight review of individual checks for signature verification.” Therefore, the court held that the appellee’s banking procedures conformed to industry standards.

Discussion. The appellants called their own expert who testified that he inquired into banking practices of the surrounding areas. He testified that banks make decisions for payment of items at the branch where the account is kept and have the capacity to check signatures for forgeries. He also stated that the banks would manually examined checks which would result in overdraft, were unsigned, or exceed a certain amount. The court held that the appellants’ expert based his opinion without a showing that comparable banks in the area select individual checks for review. The expert failed to create a material issue of fact and the court supported this finding by citing section 3103 that states “reasonable commercial standards do not require the bank to examine the instrument if the failure to examine does not violate the bank’s prescribed procedures and the bank’s procedures do not vary unreasonably from general banking usage.”