1

06- 1546- cv J
. W al t er Thom ps on U
. S. A
. , I nc. v. Bank of A m er i ca C or por at i on UN ITED STA

TES CO URT OFAP P EALS F OR TH E S ECO N D CI RCU IT Aug us t T erm, 200 7 (Argued: November 8, 200 7 Decide d: March 4, 2008) Do cket No . 06 -1 546 -cv J. W ALT ER T HOMP S ON , U.S .A. , I NC .,

Plainti ff-App ellee, B AN K O F A M ERI CA C OR P OR A T I ON ,

Defenda nt an d Third-Pa rty Plaintiff-Ap pellee, v. F I RST B A NKA MER I C A NO ,

T hir d-P art y De fendant -A ppella nt, T HE F ED ERAL RES ERVE B AN K O F ATLAN TA ,

T hir d-P art y De fendant -A ppella nt . B ef or e: M C L

A U G H L IN , C AB R ANES , and S ACK , Circuit Jud ges. Drawer of a chec k, J. Wal ter Thom pson, U.S.A., Inc. (“JWT”), brought an ac tion, arising froma stol ench ec k tha t w a s alt er ed a ndca she d b y ape rsonoth ertha n th e i nte nd ed pa ye e, again st drawee /payor bank, Bank of America (“BoA”), for neglige nce a nd violations of BoA’s dut ies purs uant to the Unifo rm C om me rc ia l C od e ( “U .C .C .” ). BoAfil ed athi rd-p a rty co mp lain t a gain st Fi rst BankAmerica no and the FederalReserve Bank of Atla nta, colle cting and presenting ba nks, allegi ng breache s of the presentment warranties owed to BoA. The United States Distr ict Court for the So uthern D is tr

ict of New York ( Den ny Chin , Judge

) gra nte d su mma ry

ju dgme nt i n favo r of J W

T again stT he p ar t i es ag r ee t hatt he a ppl i cab l e l aw t o t hi s di s put e i s t hatof N ew Je r s ey a nd G eor gi a, wher e t he e vent s at 1 iss u e o c c u r r e d
. B e c a u se b o th sta te s h a v e a d o p te d th e 1 9 9 0 R e v ise d U n ifo r m C o m m e r c ia l C o d e , th e c ita tio n s h e r e in r e f e r t o t h a t v e r s i o n o f

t h e U. C. C. 2 BoA and, in turn, in favor of B oA ag ainst the third- party defendant ba nks. The thir d-party presenting and coll ecting ba nks appeale d. We hold that (1) the drawer’s allege d failures do not const itute neglig ence , pursuant to U.C.C. § 3-406; (2) the drawer’s alleg ed post-alteration failures will not preclude
r eco ver y f or th e lo s s as s oci ate d wi than al te r ed c hec k u nd er th e “s ub s tan ti al co ntr

ib ut io n” t es t o f U .C.C. § 3-406; (3) the pay or bank acte d in good faith and, a ccordingly , the lac k-of-good- faith exce ption to the pr es entmen t w arr ant

y, see i d. 4-208(a), did not apply ; and (4) the District Court did not err in granting summary judgment to the payor bank e ven though the ba nk had not ye t reimburs ed the drawe r of the chec k for the fr aud. Af firmed
. I NA B. S CHER , Dav is & Gilb er t L

LP , N ew Yo r k, N Y, fo r P

lai ntiffAppellee J. Wa lter Thompson, U.S.A., Inc. R ONA L D M. N EU MA NN (D avi d B . Ch enk in , on the brief

), Zeic hn er Ellman& K

r aus e L LP , N ew Yo r k, N Y, fo r D ef en dant and T hir d-P art y Pl aint iff -A ppellee, Ba nk o

f A mer ic a Co rpo rat io n. W I L L I A M D. W

ALL ACH , McCa rter & English LLP, Newark, NJ, for T hird-Pa rty-Defendants-App ellants First BankAmerican o, Federal Reserve

Bank of Atlanta
. J OS É A. C AB R ANES , Circuit Jud ge : This appea l involves the allocation of lia bility for altered chec ks outlined in Articles 3 and 4 of the Uniform Commercial C ode (“U.C .C.” ) and the operation of the che ck coll ection system. The 1 U.C. C. allo cat es lia bilit

y f or a s to lenor

alt er ed c hec k am ong the var io us par ti es invo lve d i n the c hec k collec tion process . Plaintiff-appellee J. Walter Thompson (“JWT”) is the dr awe r of the che ck. Bank of America(“BoA”) is the payor bank and the draw ee of the che ck. The Federal R eserve Bank of Atlanta (“Atlanta Fed” ) is a collec ting bank a nd a presenting bank. First B ancoA mericano (“FBA”) is the dep os it ary ban k, acollect

ing ba nk , an d a p r es ent

ing ba nk
.3

We ar e as kedto det ermi ne ( 1) whe th er J WTact ed n egl

ige nt ly i n f ail ing t o t ake c er tain p r even ti ve
mea s ur es up onlearni ng o f p r io r fr audonit s che cki ng a cco un t w ith B oA an d, if

s o, whe th er

th at neg lig enc e “s ub s tan ti ally co ntr ib ut ed” to th e ch eck f

r aud , ther eby

barr ing J WTfr omob taini ng a recovery pu r s uan t t o U .C.C. § 3- 406 (a) , post at 6; (2) whether BoA ac ted in good faith in pa ying the altered che ck and, if BoA did not, whether the lack -of- good-faith exce ption to the presentment
warr ant y, see U.C. C. § 4 -2 08, post

at 8, bars its claims for

breach of the presentment warranty ag ainst the two presenting and colle cting bank s; and (3) whether a district court may grant summary judgment to a payor bank for losses associated with apresenting bank’s breach of the presentment warranty before the payo r ban k h as r eim bu r s ed the d r awer fo r th e am ount

of th e alt er ed c hec k. BAC KGROUND A. The C he ckC olle ctio n Pro ce ss In the normal functioning of the check c ollection proce ss , the “drawe r” of a checkiss ues to the “payee” a che ck d r awn o n anacco un t o f the d r awer at the “ dr awee b ank .” The c hec k thenfl ows “downs tr eam ” thr ough the b ank ing s ys te m, fr omth e dr awer to th e pay ee an d ult

im ate ly t o the d r awee ban k (als o d es cr

ib ed as th e payor

ban k, see i

d. § 4- 105 (3)) , whichis or der ed t o m ake p aym ent , see i d. § 4- 104(a)(8). The payment, in turn, “flows upstr eam” through the va rious int ermediary ba nks, making its way f r omth e dr awee/ payo r

ban k t o the p ayee’ s acco un t. See Ja me s J. W hi te & R ob er t S . S um me rs, Uni fo rm Commer

ci al Co de 544 -4 5 (4th ed. 1995) (“Whi te & Summers”) (des cribing the flow of chec k and payme nt through the check processing syst em); U.C. C. § 4-105(4) (defining “intermediary ba nk”). The paye e’s ban k, whi ch i s th e f ir s t t o r ecei

ve the c hec k, i s kn ownas th e “d epo s it ary ban k.” Id
. § 4- 105 (2). The other intermediary banks serve as “collec ting banks” or “presenting banks” at various points in the collec tion process . A “c ollecting bank” is a ba nk, other than the pay or bank, that handle s a checkfor collect io n. Id
. § 4- 105 (5 ). A “p r es ent

ing ba nk ” is a ban k, o th er

th an the p ayor

ban k, that

pr es ent s an it em f or paym ent . Id

. § 4-105(6). An intermedia ry bank ca n serve as both a collec ting bank a nd aT he U
. C
. C
. d eterm i ne s w hich of t he va ri ou s parti es i nv olve d i n the ch ec k p roc essi ng syst em w i l l be ar the c ost 2 of f r aud bas ed on whet her t he f r aud ar i s es f

r om ( 1) a f

or ge d drawer ’ s s i gn at ure , ( 2) a f or ge d endor s em ent , or ( 3) an a lte r a tio n to th e in str u m e n t. W h il e l iab ilit y fo r p a y m e n t of e it h e r a n alte re d o r a fo rg e d c h e c k l ies w it h the d ra w e e / p a y o r b a n k p u rsu a n t t o U
. C
. C
. § 4-40 1, t he d raw ee / pa yo r ba nk m ay sue “u pstream ” for a bre ac h o f t he pre sen t m en t w arra nty. I n the ca se o f a f or ge d s i gn at ure , t he p r es ent m entwarr ant y i s l i m i t ed t o t he war r ant y t hatt he p r es enti ng ba nk h as no knowl edge t he d r a w e r ’s sig n a tu r e is fo r g e d
. S ee U
. C
. C
. § 4- 208( a) ( 3)
. G ener al l y, l i abi l i t y f or a chec k wi t h a f

orged signa turel i es wi t h t he dra w ee/pay or ba nk. I n t he c as e of a f or ge d endor s e m e nt , l os s es g ener al l y r es t wi t h t he p ar t y who ac cept ed t he c heck f r om th e fo r g e r o r th e fo r g e r h im se lf. Se eid. § 3- 405( b) cm t . 1. The l os s as s oci at ed w i t h a n al te re d check t ypi cal l y r es t s wi t h t he par t y who t ook i t f

r om t he wr ong doer
. The pr es ent m entwarr anti es s hi f t t he l os s es f

or t he a l t er at i on t o t he p r es ent i ng b a n k s, see U .C .C . § 4 -2 0 8 (a )(2 ), a n d u ltim a te ly to th e d e p o sita r y b a n k
. T h is a llo c a tio n re fle c ts th e a b ility o f p a r tie s to d e te c t th e fo r g e r y a n d p r e v e n t th e lo ss . Wacho vi a B ank, N
. A
. v. F oste r B a n csh a res, In c., 4 5 7 F
. 3 d 6 1 9 , 6 2 2 (7th C ir. 2 0 0 6 ). A f or ge d drawer s i gn at ure ca n m os t r eadi l y be det ect ed by t he d r a w e e / p a y o r b a n k , w h ic h is p r e su m e d to b e fa m ilia r w ith th e sig n a tu r e o f its c u sto m e r . Id
. A fo rg e d e n d o rse m e n t, h o w e v e r , i s m o r e e a sily d e te c te d b y th e d e p o sito r y b a n k , w h ic h is lik e w ise p r e su m e d to k n o w its c u sto m e r ’s sig n a tu r e . Fi nal l y, r ul es f

or l os s s hi f

t i ng as s oci at ed w i t h a l t er at i on r es t on t he a s s um pt i on t hatal t er at i on c an be m os t ea s i l y det ect ed b y th e p a r ty w h o re c e iv e s th e c h e c k in th e fir st in sta n c e . Id
. 4 pr es ent ing ba nk . T he c hec k co lle ct io n s ys te m i n a n ormal , u nco mp lic ate d cas e is dep ict ed gr aphically i n the appendi x to this opinion. B
. Li abilit

y f or St ol en an d Al te r ed Ch ecks Ar ti cles 3 an d 4of

th e U. C.C. o ut

lin e a s che me f

or all ocat ing the l os s r es ul ting f

r oman al te r ed chec k among the pa rties involved in the chec k processing s ystem. When adrawer issues an instrument such as a chec k, the drawe r “set[s] it afloat upon a sea of strangers” and, in so doing, “voluntarily e nters in to a r elat

io n wi thlat er

ho ld er s whi ch j us ti fi es im po s it io n o f a du ty of car e.” Id
. § 3- 406 cmt . 1 (internal quotation marks omitted). When a c heck is stolen, altered, a nd later presented for payment, lo sses r esu lt . Th e U .C .C . a ll oc a te s li a bili ty for the se l osse s thr ough wh a t on e c ou rt h a s de scrib ed a s a bu r den -s hi ft

ing f r amework, Putnam Rolling Lad der Co. v. Mfrs. Hanove r Trust Co. , 74N. Y.2 d 3 40, 345 (1 989 ), com bi nedwith p r

in cip les of com par ati

ve n egl ige nce , see U.C. C. § 3 -4 06 c mt . 4; see also Whi te & Su mm er s , ante , at 5 66- 67. We de s cr ib e that fr amework b r

ief ly b elo w. 2 (1) Drawee/pa yor bank lia bility When adrawer’s account is cha rged for an altered che ck, the draw er may a ss ert a claim for br eachof U.C. C. § 4 -4 01 “ do wns tr eam ” agains t the d r awee/ payo r ban k. S ect

io n 4 -4 01 o f the U .C.C.
s tat es th at aban k m ay ch arge i ts cus to mer ’s acco un t o nly wh en the b ank is pr es ent ed w

ith “a n i te m thatP u rsu a n t t o U
. C
. C
. § 4 -4 0 1 (a): 3 A ba nk m ay cha r ge ag ai ns t t he a ccountof a cus t om er an i t em t hati s pr oper l y pa yab l e f r om t hat acc ount eve n t houg h t he c har ge cr eat es an ove r dra f t . A n i t em i s pr oper l y pa yab l e i f i t i s aut hor i z ed by t he c us t om er an d i s i n a ccor dance w i t h a ny a gr eem entbetw een t he c us t om er an d bank
. Se cti on 3-4 06 ( a) read s as f oll ow s: 4 A per s on whos e f ai l ure t o ex er ci s e or di nar y ca r e s ubs t anti al l y co nt r i but es t o a n a l t er at i on o f an i ns t r um entor t o t he m aki ng of a f or ge d s i gn at ure on an i ns t r um enti s pr ecl uded f r om as s er t i ng t he a l t er a t i on o r t he f

or g er y a g a i ns t a p er s on who , i n g oo d f a i t h, p a ys t he i ns t r um en t o r t a ke s i t f or v a l ue or f or col l ecti on. S p e c ifi c a ll y , S e c ti o n 3 -4 0 6 (b ) pr o v id e s tha t: 5 i f t he p er s on a s s er t i ng . . . pr ecl us i on [pur s uant t o s ubs ecti on( a) ] f ai l s t o ex er ci s e or di nar y ca r e i n pa yi ng or 5 is pr op erly p ayab le f

r omth e acco un t. ” A ch eck that is fo rgedor

has an al te r ed p ayee i s no t “ pr op erly 3 paya ble.” U. C.C . § 4-401 cmt. 1. In most cases, a drawee /payor bank i s s trictly liable for charging its
cus to mer ’s acco un t f

or a f or gedor alt er ed c hec k p ur s uan t t o S ect io n 4 -4 01. See, e.g. , Travele rs Cas. & Su r. Co. of Am. v. Wells Fargo Bank N.A. , 37 4 F .3d521 , 52 5 ( 7th Ci r . 20 04) (“ [O ]r di nar ily a ban k is s tr

ict ly liable for charging a customer’s account with a n amount that the customer had not authorized the bank to pay. . . . ”) ; Lo r-

Ma r/ T o to , I nc. v. 1s t Co ns ti tut io n B ank , 87 1 A. 2d110 , 11 5 ( N. J . Super . Ct . Ap p. Di

v. 2005) (noting this pr

inciple of strict liability a s a matter of New Jers ey law). After the drawee /payor ban k dis cov er s th at a n al te r ed c hec k h as bee n ch argedagai ns t the d r awer ’s acco un t, th e dr awer is ent it ledto hav e it s acco un t c r edi te d f or th e am ount

of th e ch eck. See Whi te & Summ er s , ante , at 552
. Section 3-406(a

) protects a party who paid a che ck ag ainst suit by any party who c ontributed to th e alt er ati on . Acc or di ngl y, wh er e a dr awer ’s ownneg lig enc e co ntr

ib ut ed t o the al te r ati on , the d r awer is precluded from “assert

ing the al teration” against a drawee/pa yor bank that “in g ood faith, pays the in s trum ent

or tak es it fo r value o r fo r collect io n. ” U. C.C. § 3- 406 (a)
. T he U .C.C. def in es “go odfaith, ” 4 gen er ally, as “ho nes ty

infa ct andth e ob s er

van ce o f r eas on abl e co mm er cial s tan dar ds of

fair deal ing.” Id
. § 3 -10 3(a )(4 ). Whe n m ul tipl e p a rti es a re ne glig en t, Se ctio n 3 -40 6(b) a ll oc a te s li a bili ty for the lo ss
a ssoc ia te d with a n alt er ed ch ec k “ a cc ordin g t o th e e xt en t to wh ic h th e f ail ure of e a ch to e xe rc ise
or di nar y car e co ntr

ib ut ed t o the l os s .” 5t aki ng t he i ns t r um entan d t hatf ai l ure s ubs t anti al l y co nt r i but es t o l os s , t he l os s i s al l oca t ed betw een t he p er s on p re c lu d e d an d the p e rso n as se rting the p re c lu sion ac c o rd ing to th e e x ten t t o w h ich the fa il u re o f e a c h to ex erc i se o rd i na ry c are co ntri bu t ed t o the l oss. U
. C
. C
. § 3 -4 0 6 (c) p lac e s the b u rd e n o f p ro v ing n e g li g e n c e o n the p a rty as se rting p re c lu sion p u rsu a n t t o su b se c ti o n (a) o r a fa il u re to e x e rc ise o rd ina ry c a re p u rsu a n t t o su b se c ti o n (b).
6 I n o r der to avo idlia bilit

y un der Sect io n 4 -4 01 f

or char ging it s cus to mer ’s acco un t f or an al te r ed chec k, the drawe e/pay or bank must pr ove that (1) its cust omer, the drawer, wa s negligent; (2) the drawer’s neglige nce “substantially c ontributed” to the alteration; and (3) the drawe e/pay or bank paid the che ck i n “goo d f

aith. ” T he d r awer

may , inturn, as s er t the d r awee/ payo r ban k’s ownneg

lig enc e in taking a n altered che ck. The drawe r mus t establish that (1) the drawe e/pay or bank was negligent, a nd (2) that the drawee/pa yor bank’s neglig ence contributed to the loss . Liability will then be a lloca ted on th e bas is of

com par ati

ve f aul t. Travele rs

, 73 7 A. 2dat 6 94. (2) Li abilit

y of th e de po s it ary ban k, p r es ent ing ba nk s , an d co lle ct

ing ba nk s A dr awee/ payo r

ban k m ay als o as s er t c lai ms “up s tr eam ” agains t the p r es ent ing ba nk , a collect ing ba nk , an d the d epo s it ary ban k f or th e lo s s as s oci ate d wi thth e alt er ed c hec k. I n ad di ti on , a dr awee/ payo r

ban k m ay br

ing a b r eachof

warr ant y act io n again s t any party

who pr es ent ed the al te r ed chec k for payment. In most cases, “[t]hese warranty ac tions will continue up the c ollection c hain to the par ty who to ok fr omth e [wr ongdo er

] o r to th e [wr ongdo er

] him s elf .” Pe ri ni Co rp. v. F

ir st Nat . B ank , 55 3 F. 2d398 , 40 4 ( 5th Cir . 19 77) (an alyz ing pr evi ou s ver s io n o f the U .C.C. ). The banks involved in the c heck c ollection proce ss extend two type s of warr anties: presentment and transfer warranties. Section 4-208 sets out the presentment warranty given by depositary and collect ing ba nk s whe n p r es ent

ing a ch eck t o the d r awee/ payo r ban k f or paym ent . I t p r ov

id es , in relevant pa rt, that: I f a n unacc ept ed d r af

t i s pr es ent ed t o the d r awee f or paym ent or accep tan ce an d the d r awee pays or acce pts the draft, (i) the pers on obtaining pa yment or acc eptance , at the time of pr es entmen t, and(ii) a pr evi ou s tr ans fe r or of th e dr af t, at the t im e of tr ans fe r , warrant to the dra weeT he rem aind er o f t ha t pro visi on rea d s as f oll ow s: 6 (b ) A d ra w e e m a k ing p a y m e n t m a y re c o v e r fr o m a w a rr a n to r d a m a g e s fo r b re a c h o f w a rr a n ty e q u a l to t he a m ount pa i d by t he dr awee l es s t he a m ount t he dr awee r eceived or i s enti t l ed t o r eceive f r om t he dra w er bec aus e of

t he p aym ent . I n a dd i t i on, t he dr awee i s enti t l ed t o co m pens at i on f or ex pens es an d lo ss o f in te r e st r e su ltin g fr o m th e b r e a c h . T h e rig h t o f th e d r a w e e to re c o v e r d a m a g e s u n d e r th is su b se c tio n is n o t a ffe c te d b y a n y fa ilu r e o f th e d r a w e e to e x e r c ise o r d in a r y c a r e in m a k in g p a y m e n t. . .

. ( c) I f a dra w ee a s s er t s a cl ai m f or br eac h of

warr ant y under s ubs ecti on ( a) ba s ed on a n una ut hor i z ed i ndor s em entof

t he dr af t or an al t er at i on o f

t he dr af t , t he war r ant or m ay def end by pr ovi ng t hatt he i ndor s em enti s ef

f ecti ve under Secti on 3

- 404 o r 3- 405 o r t he dr awer i s pr ecl uded under Secti on 3

- 406 or 4- 406 f

r om as s er t i ng ag ai ns t t he dr awee t he una ut hor i z ed i ndor s em entor al t er at i on. ( d) I f (i) a di s hono r ed dra f

t i s pr es ent ed f

or pa ym entt o t he dr awer or an i ndor s er or (i i) an y ot her i t em i s pr es ent ed f

or pa ym entt o a pa r t y ob l i ge d t o pa y t he i t em , an d t he i t em i s pa i d, t he p er s on obt ai ni ng pa ym entan d a pr i or t r ans f er or of t he i t em warr antt o t he p er s on m aki ng pa ym enti n g ood fa it h tha t t h e w a rr a n to r is, o r w a s, a t t h e ti m e the w a rr a n to r tra n sfe rr e d the i tem , a p e rso n e n ti tl e d to e n f o r c e t h e i t e m o r a u t h o r i z e d t o o b t a i n p a y me n t o n b e h a l f o f a p e r s o n e n t i t l e d t o e n f o r c e t h e i t e m. T he p er s on m aki ng pa ym entm ay r ecov er f r om an y war r ant or f

or br eac h of

warr ant y a n a m ount equal t o t he a m ount pa i d pl us ex pens es an d l os s of i nt er es t r es ul t i ng f

r om t he b r eac h. ( e) T he w arra nti es st ated i n su bse cti on s ( a) and ( d ) ca nn ot be d i sclai m ed w i t h re spe ct t o c he ck s. U nl es s noti ce o f

a cl ai m f or br eac h of

warr ant y i s g i ven t o t he war r ant or wi t hi n 30 days af t er t he c la im a n t h a s r e a so n to k n o w o f th e b r e a c h a n d th e id e n tity o f th e w a r r a n to r , th e w a r r a n to r is d i s c h a r g e d t o t h e e x t e n t o f a n y l o s s c a u s e d b y t h e d e l a y i n g i v i n g n o t i c e o f t h e c l a i m. ( f ) A ca us e of

ac t i on f or br eac h of

warr ant y under t hi s s ecti on a ccr ues when t he c l ai m antha s r eas on t o kn ow of

t he b r eac h. U .C .C . § 4 -2 0 8
. 7 that p ays or accepts the draft in good faith th at . . . . the draft h as not been al tered
. U.C.C . § 4-208(a) (empha sis added). Section 3-417 imposes a nea rly identica l presentment warranty on 6 any p ar ty pr es ent ing a ch eck f

or collect io n. Sect io n 4 -2 07 o ut

lin es th e tr ans fe r

warr ant y gi venby c us to mer s andcollect ing ba nk s : (a) A cu s to mer

or collect ing ba nk th at tr ans fe r s an i te m an d r ecei ves a s et tl eme nt

or other consideration warrants to the tr ansferee and to any subs equent coll ecting ba nk that . . . (3) the it em h as no t b eenalt er ed .
. . . (b) If an item is dishonored, a customer or collec ting bank transferr

ing the item a nd receiving settlement or other

consideration is obliged to pay the amount due on the item (i) ac cording to the terms of

the item at the time it wa s tr ansferr ed, or (ii) if the tr ansfer was of an incomplete item, ac cording to its terms when completed a s s tated in Sec tions 3-115 and 3-407. The ob ligati onof

a tr ans fe r or

is owe d t o the tr ans fe r ee an d t o any s ub s equ ent collect ing ba nk th at takes the item in good faith. Atransf eror cannot disclaim its obligation under this subs ection by an i nd or s eme nt

s tat ing that it is mad e “wi th ou t r eco ur s e” o r other wis e di s clai mi ng l

iab ili ty .S e c tio n 4 -2 0 7 fu r th e r p r o v id e s: 7 ( c) A per s on t o whom t he war r anti es under s ubs ecti on ( a) ar e m ade a nd w ho t ook t he i t em i n g ood

fai t h m ay rec ov er fro m t he w arra ntor a s d am ag es for b rea ch of w arra nty a n a m ou nt eq u al t o the l oss s uff er ed as a r es ul t of

t he b r eac h, but notm or e t han t he a m ount of t he i t em pl us ex pens es an d l os s of i nt er es t i ncur r ed as a r es ul t of t he b r eac h. ( d) The warr anti es s t at ed i n s ubs ecti on ( a) ca nnotbe di s cl ai m ed w i t h r es pectt o ch ecks
. U nl es s noti ce of a cl ai m f or br eac h of

warr ant y i s g i ven t o t he war r ant or wi t hi n 30 days af t er t he c l ai m antha s r eas on t o kn ow of

t he b r eac h a nd t he i dent i t y of t he war r ant or , t he war r ant or i s di s cha r ge d t o t he e xt ent of a n y l o s s c a u s e d b y t h e d e l a y i n g i v i n g n o t i c e o f t h e c l a i m. ( e) A ca us e of

ac t i on f or br eac h of

warr ant y under t hi s s ecti on a ccr ues when t he c l ai m antha s r eas on t o kn ow of

t he b r eac h. I n a f eder al cr i m i nalpr ocee di ng f or cr i m i nalche ck f

r aud cons pi r acy , t he g over nm ental l eg ed i n t he i ndi ct m ent 8 t ha t a ch ec k fo r $3 82 , 21 0.15 ha d be en d ep osit ed i nto a bu si ne ss ac co u nt co ntroll ed by a d efe nd an t at F i rst B a n k A m e r ic a n o . S ee S u p e r c e d in g In d ic tm e n t a t 1 4 , U n it ed S ta te s v . D ed

ji, N o. 03- 254 (D
. N
.

J
. O ct . 23, 2003 ) The pa r t i es d o n o t d isp u te th a t th e c h e c k in th a t c a se w a s th e C h e c k a t iss u e h e r e .

FB A i s a t hr ee- br anc h ba nk doi ng bus i nes s i n N ew Je r s ey. 9 8 U.C.C . § 4-207(a)(3), (b). The trans fer warranty of Section 4-207 is given only by bank c ustomer s and 7 collec ting banks, but an identic al transfer warranty contained in S ection 3-416 a pplies to any “pe rs on who tr ans fe r s an i ns trum ent fo r con s id er ati on .” Id

. § 3- 416 (a) . A d r awee/ payo r ban k canbr

ing a warr ant y cau s e of act io n p ur s uan t t o U .C.C. §§ 4- 207 and4- 208 agai ns t “ up s tr eam ” ba nk s th at tr ans fe rr ed analt er ed c hec k an d p r es ent ed i t f or paym ent . See, e.g. , Wa chovia Bank, N.A. v. Fed. Reserve Ba nk o f Ric hmo nd , 338 F.3d 318, 32 1 (4th Cir. 2003). C. Factual Bac kground On October 31, 2001, plaintiff- appell ant JWT, an adve rtis ing ag ency , issued a checkin the
amo un t o f $ 382 ,21 0.1 5 ( “Che ck”) p ayab le t o o ne o f i ts ven do r s , O ut do or Li fe Net work. The Ch eck
was is s uedfr omJ WT ’s che cki ng a cco un t (“Acc ount ”) at B oA. At an unkno wn d ate , anun kn own person altered the paye e on the C heck to “Dive rs ified Busines s Enterpises [sic], Inc” and deposited the 8 C he ckin to a n a cc ou nt m ain tain ed by Dive rsif ie d Bu sin ess E nte rpri ses a t Fi rst Ba nk Am eric a no . FBA

9 then presented the Chec k to the Federal R eserve Bank of New York, whi ch, in turn, presented it to the Fe der al Res er

ve B ank of At lan ta. T he A tl ant a F ed thenpr es ent ed i t t o B ank of Ame r ica v ia B oA’ sJW T al so took ce rt ain othe r gen era l pre ve nti ve m ea su res w e n ee d no t d i scu ss for the p rese nt pu rpo ses. 10 9 chec k processing facility in Georgia . BoA debited $382 ,210.15 from the Acc ount of J WT and transmitted the payment back “ upstr eam” through the ba nk colle ction system to F BA, which, pr es um ably, d epo s it ed the f un ds in to th e acco un t h eldby D ive r s if iedB us in es s Ent erpr

is es . L ate r , J WT discovered that the pay ee of the C heck ha d been a ltered, notified BoA the same day of the alteration and the fac t that BoA had made apayme nt on the altered C heck, a nd sought to have its Account
cr edi te d f or th e am ount

of th e Che ck. B oA didno t c r edi t the A cco un t b ut , in s te ad, dem and ed that FB A r emi t the p r oce eds of th e Che ck t o B oA. FB A r ef us ed t o d o s o. At the time of the events at issue, BoA had a program in plac e to identify potentially fraudulent chec ks (the “Pos itive Pay Program” or “Positive Pay”), and JWT subscribed to this service during the relevant time pe riod. Posit ive Pay permitted BoA to match check numbe rs , dates, and a mounts on the 10 chec ks that were presented to BoA with a list provided by JWT prior to payment of a c heck. If the Posit ive Pay Progr am identified adiscrepancy i n any of this inform ation, BoA would not make payme nt on the chec k. At the time of the instant fraud, Pos itive Pay di d not have the c apabi lity of matching paye e nam es (“ paye e ma tc hi ng”), a cap abilit y that argua bly wo ul d h ave d et ect ed the f r audher e. Prior to the payment of the C heck, te n other inst ance s of check fraud or attempted check fraud
occ urr ed o n ch ecks is s uedfr omJ WT ’s Acco un t. At leas t o ne o f thes e in s tan ces invo lve d the s im pl e alt er ati onof

a pay ee n ame . B oA c r edi te d the A cco un t f or th e am ount

of th at alt er ed c hec k, s o J WTdi d not suf fer a loss associated with that ea rlier payee alteration. A nother of the ins tances involve d both the alt er ati onof

a pay ee n ame alo ng w

ith the al te r ati onof

th e am ount

of th e ch eck. B oA’ s Po s it

ive Pay
s ys te m d et ect ed thi s par ti cul ar fr audandJ WT ’s acco un t w as no t c har ged . T he l os s es s uf

fe r ed b y J WT
as s oci ate d wi thth e r emaining pr io r in s tan ces of

fr audwas les s th an $ 9,0 00. D. Procedural Histor

y After JWT dis covered the fraud at issue here and BoA refused to credit its Acc ount for theS e c ti o n 4 -1 0 3 p ro v id e s in re lev a n t pa rt: 11 T he e ff

ectof t he p r ovi s i ons of

t hi s A r t i cl e m ay be v ar i ed by a gr eem ent , but t he p ar t i es t o t he ag ree m en t ca nn ot d i sclai m a ba nk ’ s respo nsibi l i t y fo r i t s l ac k o f goo d fai t h o r fai l u re to ex erc i se or di nar y ca r e or l i m i t t he m eas ure of dam ag es f

or t he l ack or f

ai l ure . H owever , t he p ar t i es m ay d eterm i ne by agre em en t t he st an d ard s by w hich t he ba nk ’ s respo nsibi l i t y is t o b e m ea su red i f t ho se s t andar ds ar e no t m ani f es t l y unr eas ona bl e. U
. C
. C
. § 4- 103( a)
. I t i s notcl ear under what t heor y J W T as s er t ed t hi s Secti on 4

- 103 c l ai m ag ai ns t BoA
. N ei t her t he D istr ic t C o u r t’s o r d e r n o r th e p a r tie s’ b r ie fs o n a p p e a l a d d r e ss U .C .C . § 4 -1 0 3
.

A l t ho u gh F B A w as no t a pa rt y to JW T ’ s acti on aga i nst B oA , F B A op po sed t he m oti on ba sed on t he t he ory 12 th a t U .C .C . § 4 -2 0 8 (c ), see an te , n ot e 8, g a ve i t a “ s t a t ut or y r i g ht ” t o do s o. The D i s t r i ctCour t “ a s s um e[ d] [ wi t ho ut d e c id in g] th a t F B A h a [d ] th a t rig h t.” FB A al s o op pos ed B oA ’ s m ot i on f or s um m ar y j udgm entag ai ns t FB A an d t he At l ant a Fed. FB A con cedes t hat i f t he At l ant a Fed’ s l i abi l i t y i s af f i r m ed on a ppea l , t he At l ant a Fed w oul d be en t i t l ed t o r ecov er f r om FB A i n a n a ct i on f or a br eac h of

t he t r ans f

er warr ant y. 10 amount of the Chec k, JWT brought this action a gainst BoA. JWT allege d that BoA was neglig ent and that BoA had viola ted its duties under U.C.C . §§ 4-103 and 4-401 (the provision governing whe n items 11 are “properly pay able” ). BoA, in turn, f iled athird-part

y complaint against F BA and the Atla nta Fed for vio lat io ns of U.C. C. §§ 3 -4 16 (

tr ans fe r warr ant y) , 3- 417 (p r es entmen t w arr ant y) , 4- 207 (tr ans fe r
warr ant y) , an d 4 -2 08 (

pr es entmen t w arr ant

y) , see ante notes 6, 7 and ac company ing text (text of provisions). After the completion of discovery, JWT moved for s ummary judgment ag ainst BoA, and BoA moved for s ummary judgment ag ainst FB A and the A tlanta Fed. FBA opposed JWT’s motion on the
mer it s bu t B oA didno t. T he D is tr ict Cou r t gr ant ed b oth m ot

io ns , co ncluding that

B oA w as s tr

ict ly 12 liable to JWT f

or charging JWT’s Account for an item not “properly paya ble,” U. C.C . § 4-401(a). The Cou r t al s o co nclud ed that

FB A andth e At

lan ta F ed h ad b r each ed the p r es entmen t w arr ant ies th ey h ad ext end ed t o B oA und er

U.C. C. § 4 -2 08. The C ou rt re je ct ed FBA ’s a rgu me nt tha t sum ma ry ju dgme nt w a s in a pp rop ria te be ca use qu es ti on s of

fa ct exi s te d as to whe th er

J WTwas neg

lig ent withi n the m eaning o f U .C.C. § 3- 406 (a) , see, ante , n ot e 4 an d acc om panying t ext , infailing t o p r even t the c hec k f r aud . F B A as s er te d that

J WThad neg lig ent ly f ail ed t o r es po ndapp r op r

iat ely a ft er

learni ng o f p r evi ou s che ck f r audonit s Acco un t.11

Specific ally , FBA faulted JWT for (1) not closing the Account or (2) instituting a pa yee matching pr ogr am t o d et ect

fu tur e f r aud . F B A andAt

lan ta F ed ar

gue onapp eal that

a ju ry co ul d h ave f

oundth at JWT’s f ailure to take these preventive mea sur es “subs tantially contributed” to the alteration of the Chec k, and, if so, that JWT would be preclude d from r ecove ry against B oA while BoA would be pr eclu dedfr omr eco ver

y agains t F B A andth e At

lan ta F ed. See

U.C.C . § 3-406(a). The C ourt
co nsi de re d th e t enpri or i nc id en ts of ch ec k fr a udonthe Ac co un t a ndde te rmi ne d th a t no ne of the se instances “suggest[ed] that the mere act of keepi ng the ac count open ‘substantially contributed’ to the alt er ati on ” of

th e Che ck. T he Co ur t s imila rly r ejec te d F B A’s s ugg es ti on s th at J WT ’s failur e t o t ake
r eme di al m eas ur es —s uchas in s ti tu ting p ayee m atc hi ng, a pr oce s s un availab le at th e t im e—s ub s tan ti ally contributed to the fr aud. Finally, the C ourt r ejec ted as pure conjec ture FB A’s suggestions that JWT or B oA c ouldhav e be en inv ol ved , n egl ige nt ly o r other wis e, wi thth e cr

imin al ch eck f

r audcon s pi r acy that ob tainedandalt er ed the Ch eck. DISCUSSI ON We r evi ew de novo a di s tr

ict cour t’ s gr ant

of s um mar y ju dgm ent , d r awing all

r eas on abl e in fe r enc es infa vo r of th e no n- mo ving pa r ti es , see, e.g . , Konits v . Valley Stream C

ent. High Sch. Dist. , 39 4 F .3d121 , 12 4 (2 d Ci r . 20 05) ; Carn ey

v. P hil ippo ne, 332 F.3d 163, 16 7 (2d Cir. 2003), which in this case are FBA and the Atlanta Fed. We c onclude tha t JWT’s alle ged failures do not constitute negligenc e within the me aning of U.C. C. § 3 -4 06, andth at J WT ’s all egedpo s t- alt er ati onneg lig enc e co ul d n ot

hav e s ub s tan ti ally
co ntrib ute d to the ch ec k a lt er a ti on , a s re quire d to pre cl ud e r ec ov ery u nd erU. C .C . § 3-4 06 . W e a lso hold that the standard of “good faith” for a drawee/pa yor bank under the U.C .C. is one that c ommands a “d ut y of fair deal ing” an d n ot

a “d ut y of car e.” I n l

igh t o f the ap pl

icab le s tan dar d, we co nclud e that BoA did not violate its duty of fair dealing a nd therefore did not act in bad faith. Finally, we hold that a drawee /payor bank i s not r equired to reimburs e the drawe r before pr ocee ding ag ainst the collec ting12

ban ks fo r br eachof warr ant y. A. Whethe r allega tions of BoA’s and JWT’s neglig ence are sufficient to defeat summary judgment The presentment s cheme outline d in the U.C .C. “ shift s los ses up the colle ction str eam to pr es ent ing an d d epo s it ary ban ks .” Fed. Re se rve B ank , 338 F.3d at 321. Acc ordingly, the drawe e/pay or bank that pa ys an altered c heck in g ood faith may bring a n action for damage s against the presenting ban ks fo r br eaching the p r es entmen t w arr ant y. See U.C.C . § 4-208(b). In a ca se such as this , in whic h a che ck h as bee n al te r ed, th e us ual r es ul t w ill be that th e pr es ent

ing ba nk s ar e s tr

ict ly l iab le t o the d r awer
a ndthe drawe e/ pa yo r ba nk for b re a ch in g the pre sen tme nt w a rra nty . Th e e xc ep ti on s to thi s re sul t a rise whe n ei th er

th e dr awee/ payo r

ban k la ckedgoo d f

aith i n p aying the d r af

t, see i d. § 4-208(a), or when the dr awer faile d t o ex er cis e or di nar

y car e which“s ub s tan ti ally co ntr ib ut e[d ]” to th e alt er ati onof

th e ch eck, id. § 3- 406 (a) . B ecau s e ne ither of th es e exc ept

io ns app ly i n thi s cas e, we af firm the D is tr

ict Cou r t’ s
s um mar y ju dgm ent

infa vo r of J WTandB oA. (1 ) Dr awer ’s all egedneg lig enc e pur s uan t t o U .C.C. § 3- 406 (a) T he p r im ary is s ue o n thi s app eal i s whe th er J WT ’s failur e t o t ake c er tain p r even ti ve m eas ur es af te r learni ng o f p r evi ou s fr audonth e Acco un t c on s ti tu te d n egl ige nce whi ch “ s ub s tan ti ally
con tr ib ut e[d ], ” id. § 3-406(a), to the al teration of the Chec k. FBA and AtlantaFed contend that, upon learning of the prior instances of f raud, JWT should have (1) closed the Acc ount and (2) institut ed a paye e matching

syst em to detect future fraud. They argue that JWT’s failure to take these steps constituted negligenc e that subst antially contributed to the alteration of the che ck and JWT s hould, th er ef or e, b e es to pp ed f

r omas s er ting the al te r ati onagai ns t B oA. The Four th Circuit addressed the iss ue of drawer negli gence in Feder al Re se rve B ank , a ca se arising fr omth e thef

t an d al te r ati onof

a che ck d r awn o n anacco un t f r omwhi ch s ix c hec ks hadbee n s to len pr evi ou s ly. 338 F. 3d at 324. The defenda nt in that action conte nded that the drawe r’s f ailure to im pl eme nt

cer tain p r ecau ti on ary me as ur es to pr even t c hec k thef t— s pec if ically, s ending ch ecks viaan13

elec tronic funds transf

er syst em or Federal Express rather than through the mail—c onstitut ed a fai lure to exer cis e or di nar

y car e that “s ub s tan ti ally co ntr

ib ut ed t o the al te r ati on .” Id
. at 323. The Fourth Circuit rejec ted this argument. Because the prior theft s “constitut ed a ve ry small percentage ” of the che cks is s uedby the d r awer , wer e r elat ive ly r emo te inti me, andwer e co mmitte d b y in di vid ual s th en bel iev ed t o b e incus to dy, th e dr awer ’s dec is io n t o co nt in ue u s ing r egular

mail t o s endit s che cks har dly
amo un te d t o “afailur e t o ex er cis e or di nar y car e, m uchles s a f

ailur e t o ex er cis e or di nar

y car e that
s ub s tan ti ally co ntr

ib ut ed t o the al te r ati on .” Id
. at 3 24. Her e, F B A andth e At

lan ta F ed c on te ndth at, inlig ht of th e pr io r in s tan ces of

fr aud , J WT
s ho ul d h ave ( 1) clo s ed the A cco un t an d ( 2) in s ti tu te d a p ayee m atc hi ng s ys te m t o d et ect fu tur e f r aud
. Based on the facts befor e us, howeve r, we conc lude that ordinary ca re did not compel JWT to adopt either of th es e me as ur es . As th e Di s tr ict Cou r t o bs er

ved , the p r evi ou s in cid ent s of alt er ed c hec ks resulted in de min imis loss es compared to the significant costs which JWT would have incurred by closing the Acc ount. In addition, FBA came forward with no evide nce showing tha t had JWT closed the Acc ount and drawn che cks on a different account, the ne w ac count would have bee n less s usceptible to chec k theft, thereby ave rting the theft giving rise to this litigation. Under these circumstances, closing the Acc ount would not have be en a rea sonable, much le ss a nec essary, exercise of ordinary care. With
r es pec t t o F B A’s s ugg es ti onth at J WTs ho ul d h ave i mp lem ent ed p ayee m atc hi ng, th e r eco r d s ho ws th at paye e ma tc hi ng w as no t avail abl e t o J WTandB oA at th e t im e of th e pr es entmen t o f the Ch eck. J WT
r eas on ably r eli ed o n B oA’ s Po s it ive Pay f r auddet ect

io n s er vic e with the t ech no lo gic al l imit ati on s th at exi s te d at th e t im e. J WT ’s failur e t o u tiliz e an unavail abl e t ech no lo gy canhar dly be s aidto con s ti tu te a “f ailur e t o ex er cis e or di nar

y car e” p ur s uan t t o U .C.C. § 3- 406
. We f ur th er ho ldth at adef

ens e bas ed o n a d r awer ’s all egedpo s t- alt er ati onneg lig enc e is fo r eclo s ed b y the p lai n l ang uag e of U.C. C. § 3 -4 06. Whena dr awer ’s ownneg lig enc e “s ub s tan ti ally
co ntrib ute s” t o th e a lt er a ti onof ach ec k, the drawe r is “ pre cl ud ed from a sser ti ng the alt er a ti on ” a gain stI t s houl d be no t ed, however , t hatt he s ubs t anti al

- cont r i but i on r ul e does notcon f or m t o t he p r i nci pl e t hatt he 13 p a r ty w h o c a n b e st p r e v e n t th e lo ss b e a r s th e b u r d e n fo r th e lo ss . S ee a nte , n o te 4
. T h e su b sta n tia l c o n tr ib u tio n ru le m ea ns that a d raw er w i l l ne ve r be ar the b ru nt of i t s ow n fail u re to t ak e c ertai n p rev en t i ve m ea su res or to ad op t st ate-oft he- ar t warn i ng t echn i ques f or che ck a l t er at i ons . The s ubs t anti al

- cont r i but i on r ul e r es t s on t he n ot i on t hatal t er at i on c an b e st b e d e te c te d b y th e b a n k w h ic h fir st ta k e s th e c h e c k fr o m th e w r o n g -d o e r , see an ten o te 4 an d ac c o m p a n y ing tex t. In so m e i n stan c e s, su c h as the alte ra ti o n o f th e p a y e e n a m e , i t m a y b e tha t t h e p a y o r b a n k o r d ra w e e w o u ld b e b e st su it e d to d e te c t th e fr a u d
. S ee F oste r B a n csh a res, 457 F. 3d at 622- 23 ( not i ng t hat“ m oder n co pyi ng t echn ol og y” m ay r ender t he di s t i ncti on b etw een f

or ge r y a nd al t er at i on, an d i t s l os s al l oca t i on r ul es , obs ol et e)
. Al t houg h t he s ubs t anti al

- cont r i but i on r u l e ma y n o t r e f

l e c t c o mp a r a t i v e a d v a n t a g e i n p r e v e n t i n g l o s s e s a s s o c i a t e d wi t h a l t e r e d c h e c k s , i t i s t h e r o l e o f t h e U. C. C. dra f t er s , nott hi s C our t , t o det er m i ne whet her t he r ul e s houl d be r econ s i dere d i n l i gh t of t he c han gi ng t echn ol og i cal l ands cap e. 14 a col lect ing or pr es ent ing ba nk , s uchas FB A, that pr oce s s es th e ch eck in go odfaith. Id
. § 3- 406 (a) ; see ante no te 6 an d acc om panying t ext . T he O ff ici al Co mm ent s to Sect

io n 3 -4 06 d ef

in e “s ub s tan ti al
con tr ib ut io n” a s an ac ti onwhi ch i s “a co ntr ib ut ing cau s e of

th e alt er ati on. . . anda s ub s tan ti al f act or in bringing it about.” U.C .C. § 3-406 cmt. 2. The Comments also provide certain e xamples of neglig ent conduct that would satisfy this tes t, including: (a ) a drawer who w rites the amount of the chec k in a
man ner th at m akes it

eas y t o al te r

th e am ount

and(b) a d r awer

who mails th e ch eck t o the wr ong payee. Id
. § 3-406 cmt. 3. A ccordingly , “while the principal c ause of the alteration may be the ac t of a [thirdpar ty wr ong- do er

], things th at m ake the [

wr ong- do er ’s] j ob eas ier ” m ay co ns ti tu te neg lig enc e that “subst antially contributes” to the alteration of a che ck and the refore pr eclude s a claim ba sed on the alt er ati on . Whi te & Summ er s , ante , at 571 ; see also Fed. Re

serve B ank , 33 8 F .3d at 324-25 (“[T]he 13
un a mb iguo us te rms o f [S ec ti on3-4 06 ] p rov id e ade fe nse to the [p re sen ti ng ba nk ] o nly i f [the drawe r’s] neg lig enc e s ub s tan ti ally co ntr

ib ut ed t o the al te r ati on .”) ; Zambia N at’ l Commer ci al B ankLtd. v. F

idelit y In t’ l Ba nk , 85 5 F . Supp . 13 77, 138 7 (S.D .N .Y. 199 4) (“ [U]n der § 3- 406 th e ban k m us t e s tab lis h n ot mer ely th at the c us to mer

was car eles s , b ut

th at the c us to mer ’s neg

lig enc e s et th e s tag e f

or , o r ins om e way pr ov id ed the wr ongdo er

with the o pp or tuni ty

to mak e the unau th or

izeds ign atur e.”); Fidelity Bank v. Uni ted Nat ’l B anko

f Was h. , 630 F. Supp. 16, 19 (D.D.C. 1985) (noting that abank’s mishandling of a chec k “increa sed the poss ibility that a n unauthorized person would be a ble to forge the paye e’s name andpo s e as th e in te nd ed p ayee”). The lack of pay ee ma tching ca nnot, as a matter of logic, have “substantially c ontributed” to theB o A ’s n e g lig e n c e w o u ld h a v e b e e n a t iss u e o n ly a s p a r t o f th e c o m p a r a tiv e fa u lt a n a ly sis se t fo r th in U .C .C . § 14 3 -4 0 6 (a ), (b ). S ee a nte , not es 4- 5 a nd acc om pan yi ng t ext( t extof pr ovi s i ons )
. I f

J W T ha d been pr ecl uded f r om as s er t i ng th e a lte r a tio n a g a in st B o A a s a re su lt o f J W T ’s o w n n e g lig e n c e , see U
. C
. C
. § 3- 406( a) , t hen J W T coul d have as s er t ed t hat BoA ha d “ f

a i l [ ed] t o ex er ci s e or di na r y ca r e i n pa yi ng o r t a ki ng t he i ns t r um en t a nd t ha t f a i l ur e s ub s t a nti a l l y co nt r i bu t e[ d] t o [t he] l oss , ” see id. § 3- 406( b)
. Becaus e we hav e co ncl uded t hatJ W T was notneg l i ge nt , t he r em ai ni ng ques t i on i s one of B o A ’s g o o d fa ith in p a y in g th e c h e c k
. T he i s s ue of

BoA ’ s al l eg ed neg l i ge nce i s nota ques t i on i n i t s pr es ent m entwarr ant y cl ai m ag ai ns t FB A an d t he A tla n ta F e d
. C

f. Id. § 4- 208( b) ( “The r i gh t of t he dr awee t o r ecov er dam ag es under t hi s s ubs ecti on i s notaf f ect ed by a ny fa il u re o f th e d ra w e e to e x e rc ise o rd ina ry c a re i n m a k ing p a y m e n t. ” ). 15 alt er ati onat i s s ue in thi s lit igat io n. A pay ee m atc hi ng m ech ani s m i den ti fi es che ck f r audwhe n analt er ed che ck i s pr es ent ed t o the d r awee/ payo r ban k f or paym ent , inother

wor ds , af te r th e alt er ati onhas alr eady occ urr ed. B ecau s e thi s te chn ol ogy det ect s alt er ati on s af

te r th e f act , b ut do es no t p r even t them inth e f ir s t ins tan ce, J WT ’s all egedfailur e t o ad op t p ayee m atc hi ng c ann ot hav e “co ntr

ib ut ed” or “s et th e s tag e” f

or th e alt er ati on . We ther ef

or e co nclud e that

J WT ’s all egedfailur es to tak e cer tain pr even ti ve m eas ur es s ugg es te d b y F B A he r e di d n ot con s ti tu te neg

lig enc e whichs ub s tan ti ally
con tr ib ut ed t o the al te r ati onof

th e Che ck. (2) Dr awee/ payo r

ban k’s all egedlack

of goo d f aith p ur s uan t t o U .C.C. § 4- 208 (a) U.C. C. § 4 -2 08(a) o ut

lin es th e pr es entmen t w arr ant y ow ed t o a d r awee/ payo r ban k that pays an alt er ed c hec k ingoo d f

aith. See ante no te 6 an d t ext acco mp anying (

te xt of pr ov is io n) . G oo d f

aith, in turn, is def

in ed as “ho nes ty

infa ct andth e ob s er

van ce o f r eas on abl e co mm er cial s tan dar ds of

fair deal ing.” U.C. C. § 3 -1 03(

4) . T her ef

or e, i f adr awee/ payo r

ban k p ays an al te r ed c hec k ingoo d f aith, it
r ecei ves th e be nef

it of th e pr es entmen t w arr ant

y ands hi ft s th e lo s s to th e pr es ent ing ba nk s . The good faith requirement incorporates s tandards of honest y and fai r dealing but not of neg lig enc e. I n o th er

wor ds , the goo d f

aith r equ ir eme nt do es no t i mp os e a s tan dar d o f c ar e bu t, r ath er , a standard of

fai r deali ng . Se e F ed. Reser ve B ank , 33 8 F .3dat 3 22- 23; Whi te & Summ er s , ante , at 573
. 14 B ecau s e F B A has no t alleg ed that B oA ac te d unf

air ly o r di s ho nes tly, thi s di s tinct

io n i s fa tal

to FB A’s
argum ent th at B oA didno t ac t in go odfaith. FBA and the Atlanta Fed poi nt to no action or inaction that woul d suggest, much less es tablish,16

th at B oA didno t ac t w

ith “h on es ty

infa ct .” I ns te ad, th ey s ugg es t that B oA ac te d n egl

ige nt ly b ecau s e it should have closed the A ccount of its own accord or employe d more advanc ed fraud detection
ca pa bili ti es, suc h a s pa ye e m a tc hi ng . W hile the se a ll eg ed fail ure s, i f pro ve n, migh t a rgu a bly e sta blish neg lig enc e, they

do no t d emo ns tr ate a lack of “ho nes ty infa ct ” or

a f ailur e t o “o bs er

v[e] . . . r eas on abl e commercialstandards of

fair dealing .” U.C .C. § 3-103(4). Indeed, the Fourth Circuit has held that a payor bank’ s r elia nce on aPosit ive Pay syst em, instead of on other methods of fraud detection, pr eclu deda f

in di ng o f alack

of goo d f aith. Se e F

ed. Reser ve B ank , 33 8 F .3dat 3 23. We co nclud e, therefore, that BoA acted in good faith within the meaning of Section 4-207 and c an properly claim the ben ef it of th e pr es entmen t w arr ant

y. In s um, the Distr

ict Court properly granted summary judgment to JWT and BoA. FB A and the Atlanta Fed have pointed to no materia l disputes of fact on the issue of J WT’s allege d neglig ence or B oA’ s lack

of goo d f aith. B. Whethe r the District Court prematurely granted summary judgment in favor of BoA before BoA r eim bu r s ed J WTfo r

th e alt er ed c hec k FBA and the Atlanta Fed c ontend that the Distr ict Court erroneously granted summary ju dgm ent to B oA. T hey

qu es ti onwhe th er

B oA h as , infa ct , in curr ed a l os s as s oci ate d f r omth e Che ck i n lig ht of B oA’ s dec is io n t o d elay

cr edi ting J WT ’s Acco un t f or th e am ount

of th e lo s s . W e f in d n o re quire me nt i n th e t ex t of U. C .C . § 4-2 08 sugge sti ng tha t adrawe e/ pa yo r ba nk mu st firs t credit the drawer’s account with the amount of the loss before it can bring a presentment wa rranty act io n again s t the p r es ent

ing ba nk s to r eco ver

th at l os s . Se ct

io n 4 -2 08( b) s tat es th at “ [i

]f th e dr awee
acc epts the draft (

i) breach of wa rranty is a defense to the obligation of the ac ceptor, and (ii) if the
acc eptor makes payment with respect to the draft , the ac ceptor is entitled to recover from a warrantor fo r br eachof warr ant y the am ount s s tat ed in thi s s ub s ect io n. ” T ho s e am ount s in clu de b oth d amag es “equal to th e am ount

pai d b y the d r awee l es s th e am ount th e dr awee r ecei

vedor is ent it ledto r ecei

ve from the drawe r be ca use of the pa ym en t” a s we lla s “c om pe nsa ti onfor e xp en ses a ndlo ss of i nte re st17

r es ul ting f r omth e br each .” U .C.C. § 4- 208 (b). Cou r ts hav e r ou tinely gr ant ed s um mar y ju dgm ent

infa vo r of a pay or ban k that hadno t y et
r eim bu r s ed the d r awer . See, e.g. , Fi rs t N at’ l B anko f N eednah v . S ec . N at’ l B anko f S pri ng field , No. 80-0026-f, 198 1 U. S. D is t. LE XI S 15 495 , at *10 -1 1 ( D. M as s . N ov . 5, 198 1) (gr ant ing s um mar

y ju dgm ent

to dr awer against payor bank and, a t the same time, granting summary judgment to pay or bank against collecting ban k) ; cf. Foste r Bancshares, 45 7 F .3dat 6 22 (af firmi ng d ecla r ato ry ju dgm ent th at d epo s it ary ban k was
r equ ir ed t o i nd emnif

y dr awee/ payo r

ban k f or br eachof pr es entmen t w arr ant

y) . T he f act s of this li tiga ti ondo no t c om pe l adi ffe re nt r esu lt . Ju dgme nt h a s be enen te re d a gain st BoAinfavo r of J W T;
acc ordingly, there is nothing premature in finding FBA and the AtlantaFed liable , in due course, to B oA. T he D is tr

ict Cou r t’ s gr ant

of s um mar y ju dgm ent

was pr op er . CONCLUSI ON For the reasons s tated above , we c onclude tha t (1) J WT’s allege d failures do not const itute neglig ence within the mea ning of U.C.C . § 3-406; (2) JWT’s allege d post- alteration negligenc e could not hav e s ub s tan ti ally co ntr

ib ut ed t o the c hec k al te r ati on ; (3) B oA ac te d i n go odfaith an d, acco r di ngl y, wa s entitled to pursue a clai m for br eac h of the presentment warranty; and (4) the Distr ict Court did not err in granting summary judgment to BoA before BoA reimbur sed JWT f or the loss arising fromthe alt er ati onof

th e Che ck. The ju dgme nt o f th e D ist ric t C ou rt i s AF F IRME D
.18 Paye e

Col le ct ing Bank Paye e Drawe r

Dep ositary Bank Chec k

Payment Payment Payment Dep os it Chec k Col le ct ing Bank Pres ent Chec k Drawe e /Payor Bank Prese nti ng Bank

Prese nti ng Bank Pres ent Chec k Pres ent Chec k

Debits

dr awer ’s acc ount & transmit s payme nt Depo si tary Bank Appendix

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