Brief Fact Summary.
Zapata Corporation’s employee was issue fraudulent checks under the company’s account. Zapata did not realize the forged checks, despite the fact that it received the account statement from its bank. A couple months later, Zapata realized that its bank had been issuing payment for the forged checks and brought suit against its bank to recover the amount of the forged check. The federal district court ruled in the banks favor, and Zapata appealed.
Synopsis of Rule of Law.
Under UCC § 4-406, a bank payment procedure satisfies the “ordinary care” standard when the procedure is consistent with the practices in the banking industries and the procedure is deemed reasonable, pursuant to a cost-benefit analysis.
Thus, a bank exercises ordinary care when it pays a check in good faith and in accordance with the reasonable commercial standards of the banking industry.View Full Point of Law
Between March and July 1985, one of Zapata Corporation’s (Zapata)employee’s forged a number of company checks, all checks were between $150 and $800. The bank, Rhode Island Hospital Trust National Bank (Bank) paid each check. On or around April 11, the payments reflected in the account statement for the first time. Because Zapata did not scrutinizethe statements, it did not realize the forgeries until July. At that point, Bank had issued payments on the forged checks at an amount totaling $109,247.16. Thereafter, Bank broughtthis action against Zapata on the grounds that under UCC § 4-406 Bank wasentitled to receive reimbursement for the forgeries, despite the fact that it was negligent in failing to discover and report them, because Bank was not exercising “ordinary care.” Bank introduced evidence that its actions were consistent with prevailing bank industry norms, as Bankwould only examined signatures on checks between $100 and $1,000 if Bank had reason to believe the check was suspicious or if that specific check was randomly selected to be inspected, a procedure performed on about one percent of checks within that dollar range. Additionally, Bank presented into evidence that its procedure of not examining all signatures on checks between $100 and $1,000 was a cost-effective procedure that did not lead to a substantial increase in forgeries. Thereafter, a federal district court held in Bank’s favor, finding Zapata was not entitled to reimbursement. Zapata appealed.
Whether, under UCC § 4-406, a bank payment procedure satisfies the “ordinary care” standard when the procedure is consistent with the practices in the banking industries and the procedure is deemed reasonable, pursuant to a cost-benefit analysis.
Yes, under UCC § 4-406, a bank payment procedure satisfies the “ordinary care” standard when the procedure is consistent with the practices in the banking industries and the procedure is deemed reasonable, pursuant to a cost-benefit analysis.
Pursuant tothe UCC§ 4-406, a bank customer cannot recover payments made on forged checks when there was multiple forgeries, rather than just one, when the customer fails to promptly report the forgeries to its bank within a reasonable time period, not exceeding 14 days after receiving the account statement that reflects the forgeries. The only excerption under the provision is that the customer may be entitled to recovery of the forged checks if the customer is able to establish that the bank failed to use “ordinary care.” In this case, Zapata has failed to meet its burden in establishing that the Bank failed to use ordinary care.When a bank is practicing in a manner that conforms to general banking industry customs, the practice is deemed to be a prima facie case of ordinary care. Thus, to rebut this prima facie showing the customer is required to establish that the bank’s practice is unreasonable or arbitrary. Further, Zapata has not successfully established that Bank’s procedure of processing checks in the $100 to $1,000 range is unreasonable or arbitrary. Therefore, the lower court’s decision is affirmed.