Title: National Title Insurance v. First Union Bank
Citation: N/A
Docket Number: 010346
State: Virginia
Issuer: Virginia Supreme Court
Date: March 1, 2002

Present:  All the Justices 
 
NATIONAL TITLE INSURANCE 
CORPORATION AGENCY 
 
v.  Record No. 010346  OPINION BY JUSTICE CYNTHIA D. KINSER 
 
 
 
 
 
 
 
    March 1, 2002 
FIRST UNION NATIONAL BANK 
 
FROM THE CIRCUIT COURT OF FAIRFAX COUNTY 
Henry E. Hudson, Judge 
 
 
Pursuant to the provisions of Code § 8.4-406(f), a 
bank’s customer is precluded from asserting against the 
bank an unauthorized signature or alteration on an item if 
the customer fails to report such fact to the bank within 
one year after a statement of account showing payment of 
the item is made available to the customer.  The 
dispositive issue in this appeal is whether a bank and its 
customer may, by contractual agreement, shorten the one-
year period provided in Code § 8.4-406(f).  Because we 
conclude that Code § 8.4-103(a) permits the parties to vary 
that time period, we will affirm the judgment of the 
circuit court holding that an agreement reducing the period 
to 60 days is binding on the parties. 
FACTS AND MATERIAL PROCEEDINGS 
 
National Title Insurance Corporation Agency (National 
Title) opened an escrow checking account with First Union 
National Bank (First Union) in April 1996.  At that time, 
the parties entered into a “DEPOSIT AGREEMENT AND 
DISCLOSURES For Non-Personal Accounts” (Deposit Agreement) 
that defined and governed the relationship between them.  
The provisions of Paragraph 12 of that Deposit Agreement, 
which are at issue in this appeal, absolve First Union of 
any liability for paying an item containing an unauthorized 
signature, an unauthorized indorsement, or a material 
alteration if National Title does not report such fact to 
First Union within 60 days of the mailing of the account 
statement describing the questioned item.  In pertinent 
part, Paragraph 12 states: 
You should carefully examine the statement and 
canceled checks when you receive them.  If you 
feel there is an error on the statement, or that 
some unauthorized person has withdrawn funds from 
the account, notify us immediately.  The 
statement is considered correct unless you notify 
us promptly after any error is discovered.  
Moreover, because you are in the best position to 
discover an unauthorized signature, an 
unauthorized [i]ndorsement or a material 
alteration, you agree that we will not be liable 
for paying such items if . . . (b) you have not 
reported an unauthorized signature, an 
unauthorized [i]ndorsement or material 
alterations to us within 60 days of the mailing 
date of the earliest statement describing these 
items . . . . 
 
 
Subsequently, First Union paid two checks 
ostensibly drawn on National Title’s account, both of 
which were counterfeit checks and were not executed by 
an authorized signatory to the account.  The first 
check, paid in November 1998, was described in an 
 
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account statement mailed on December 5, 1998, and the 
second check, paid in December 1998, was described in 
National Title’s account statement mailed on January 
5, 1999.  National Title did not report either of the 
unauthorized signatures to First Union within 60 days 
of the mailing of the respective account statements 
describing the two checks. 
 
After First Union refused to credit National Title’s 
account in the amounts paid on the two checks bearing 
unauthorized signatures, National Title filed a motion for 
judgment seeking to recover its losses from First Union.  
In its answer, First Union asserted, among other things, 
that National Title was precluded from making this claim 
because it had failed to report the unauthorized signatures 
within the 60-day time period specified in Paragraph 12 of 
the Deposit Agreement between the parties. 
 
Ruling on the parties’ cross-motions for summary 
judgment, the trial court concluded that First Union and 
National Title could contractually reduce the one-year 
period for reporting unauthorized signatures set forth in 
Code § 8.4-406(f) and that the 60-day period agreed upon by 
the parties in this case is not “manifestly unreasonable” 
under the provisions of Code § 8.4-103.  The court 
therefore denied National Title’s motion for summary 
 
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judgment and granted First Union’s motion, entering 
judgment in favor of First Union.  National Title now 
appeals from that final judgment. 
ANALYSIS 
 
 
Title 8.4 of Virginia’s Uniform Commercial Code (UCC) 
establishes the rights and duties between banks and their 
customers with regard to deposits and collections.  A bank 
may charge against the account of its customer only those 
items that are properly payable from that account.1  See 
Code § 8.4-401(a).  Items bearing unauthorized signatures, 
such as the checks in this case, are not properly payable.  
Id.
However, a customer has certain duties with regard to 
discovering and reporting an unauthorized signature or 
alteration on an item.  If a bank sends or makes available 
to its customer a statement of account showing payment of 
items for the account, “the customer must exercise 
reasonable promptness in examining the statement or the 
items to determine whether any payment was not authorized 
because of an alteration of an item or because a purported 
                     
1 The term “ ‘[i]tem’ means an instrument or a promise 
or order to pay money handled by a bank for collection or 
payment.”  Code § 8.4-104(9).  The term “ ‘[c]ustomer’ 
means a person having an account with a bank or for whom a 
bank has agreed to collect items . . . .”  Code § 8.4-
104(5). 
 
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signature by or on behalf of the customer was not 
authorized.”  Code § 8.4-406(c).  A customer must promptly 
report to the bank any unauthorized payment that the 
customer “should reasonably have discovered” based on the 
statement or items provided.  Id. 
If a customer fails to comply with these duties, the 
customer is precluded from asserting against the bank the 
unauthorized signature or alteration on the item.  Code 
§ 8.4-406(d)(1).  However, if a customer establishes that 
the bank “failed to exercise ordinary care in paying the 
item and that the failure substantially contributed to 
loss, the loss is allocated between the customer precluded 
and the bank asserting the preclusion according to the 
extent” that the failure of each party contributed to the 
loss.  Code § 8.4-406(e).2  Finally, if a customer does not 
discover and report an unauthorized signature or alteration 
on an item within one year after the statement or items are 
made available to the customer, the customer is thereafter 
precluded from asserting against the bank the unauthorized 
signature or alteration.  Code § 8.4-406(f).  This 
preclusion applies irrespective of whether the bank paid 
                                                             
 
2 If a bank does not pay an item in good faith, the 
preclusion under Code § 8.4-406(d) as to the customer does 
not apply.  Code § 4.6-406(e). 
 
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the item containing the unauthorized signature or 
alteration in good faith.  Halifax Corp. v. First Union 
Nat’l Bank, 262 Va. 91, 101, 546 S.E.2d 696, 703 (2001). 
On appeal, National Title first argues that Code 
§ 8.4-406(f) is a statute of repose, i.e., a rule of 
substantive law, and that the one-year period set forth in 
that section is, therefore, not subject to contractual 
modification by the parties.  Next, National Title posits 
that Paragraph 12 of the Deposit Agreement imports the time 
bar established in Code § 8.4-406(f) into subsection (c), 
thereby rendering the preclusion in subsection (f) 
meaningless.  National Title further asserts that Paragraph 
12 impermissibly changes the comparative negligence 
provisions established in Code § 8.4-406(e) and reinstates 
the concept of contributory negligence into Code § 8.4-
406(c).  Finally, National Title contends that the 60-day 
time limit for reporting an unauthorized signature or 
alteration on an item is “manifestly unreasonable,” but 
that, if Paragraph 12 is enforceable, the 60-day limit 
should be construed as the parties’ definition of 
“reasonable promptness” in determining comparative 
negligence, rather than as an absolute bar to National 
                                                             
 
 
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Title’s claim against First Union.3  We do not agree with 
National Title. 
The issue in this appeal is whether a bank may, 
through a contractual agreement with its customer, shorten 
the one-year period provided in Code § 8.4-406(f) to a 
period of 60 days.  In Halifax Corp., 262 Va. at 101, 546 
S.E.2d at 703, we characterized that one-year period as a 
statutorily prescribed notice that operates as “a condition 
precedent to the customer’s right to file an action against 
the bank to recover losses caused by the unauthorized 
signature or alteration.”  Accord Euro Motors, Inc. v. 
Southwest Fin. Bank & Trust Co., 696 N.E.2d 711, 716 (Ill. 
App. 1998); First Place Computers, Inc. v. Security Nat’l 
Bank of Omaha, 558 N.W.2d 57, 59 (Neb. 1997); Brighton, 
Inc. v. Colonial First Nat’l Bank, 422 A.2d 433, 437 (N.J. 
Super. Ct. App. Div. 1980), aff’d, 430 A.2d 902 (N.J. 
1981); Weiner v. Sprint Mortgage Bankers Corp., 235 A.D.2d 
472, 474 (N.Y. App. Div. 1997); American Airlines Employees 
Fed. Credit Union v. Martin, 29 S.W.3d 86, 95 (Tex. 2000).  
This condition precedent does not limit a customer’s claim 
                     
3 In making its arguments, National Title asserts that 
cases decided prior to the revisions that were effective 
January 1, 1993, to Article 4 of Virginia’s UCC are 
inapplicable.  We do not agree because the relevant 
provisions in former Code § 8.4-406(4) were virtually 
 
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against a bank but requires that the customer first perform 
the duty to discover and report any unauthorized signature 
or alteration on an item before bringing suit against the 
bank.  However, that characterization of subsection (f) as 
a condition precedent is not, as National Title suggests, 
determinative of the question whether a customer and a bank 
can, by agreement, shorten the one-year period.  The 
provisions of Code § 8.4-103(a) provide the analytical 
framework for resolving that question. 
 
Code § 8.4-103(a) states that 
[t]he effect of the provisions of this title may 
be varied by agreement but the parties to the 
agreement cannot disclaim a bank’s responsibility 
for its lack of good faith or failure to exercise 
ordinary care or limit the measure of damages for 
the lack or failure.  However, the parties may 
determine by agreement the standards by which the 
bank’s responsibility is to be measured if those 
standards are not manifestly unreasonable. 
 
According to Official Comment 2 regarding § 4-103 of 
the UCC, “[s]ubsection (a) confers blanket power to 
vary all provisions of the Article by agreements of 
the ordinary kind.”  Thus, this statute allows a bank 
and its customer to vary by agreement the effect of 
the provisions of Title 8.4 as long as the agreement 
does not: (1) “disclaim a bank’s responsibility for 
                                                             
unchanged by the revisions and now appear in Code § 8.4-
406(f). 
 
8
its lack of good faith,” (2) “[disclaim a bank’s 
responsibility for its] failure to exercise ordinary 
care,” or (3) “limit the measure of damages for the 
lack or failure.”  Code § 8.4-103(a). 
 
The clause in Paragraph 12 of the Deposit 
Agreement reducing the one-year period in Code § 8.4-
406(f) to a period of 60 days does not run afoul of 
these limitations on the authority to vary the effect 
of the provisions of Title 8.4.  The Deposit Agreement 
does not absolve First Union of its duty to exercise 
ordinary care or good faith, nor does it limit the 
measure of damages.  Instead, Paragraph 12 merely 
varies the effect of Code § 8.4-406(f) in that the 
period of time in which National Title must report an 
unauthorized signature or alteration on an item, 
without having its claim for losses precluded by the 
bar in subsection (f), is shortened from one year to 
60 days.  Cf. Borowski v. Firstar Bank Milwaukee, 579 
N.W.2d 247, 251 (Wis. Ct. App. 1998).  This reduction 
in the length of the statutory notice period is 
consistent with the concept embodied in Code § 8.4-
406(f) that a bank can be held potentially liable for 
paying an item containing an unauthorized signature or 
alteration only for a limited period of time.  Thus, 
 
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we conclude that a bank and its customer may 
contractually shorten the one-year period contained in 
Code § 8.4-406(f) and that First Union and National 
Title did so in Paragraph 12 of the Deposit Agreement. 
 
Notwithstanding this reduced time period, if National 
Title complies with its duty to exercise reasonable 
promptness in examining its account statement and reporting 
any unauthorized signature or altered item, First Union 
remains liable for paying an item bearing an unauthorized 
signature or alteration.  Likewise, the comparative 
negligence provisions contained in Code § 8.4-406(e) remain 
in effect during the 60-day period after First Union makes 
available to National Title a statement showing payment of 
items from National Title’s account.  Thus, the provisions 
of Paragraph 12 at issue do not alter the scheme of 
liability between banks and their customers as set forth in 
Code § 8.4-406. 
 
Contrary to National Title’s argument, our 
decision in Becker v. National Bank & Trust Co., 222 
Va. 716, 284 S.E.2d 793 (1981), is distinguishable.  
There, we held that a provision in a note allowing a 
mere assignee to negotiate the note was an attempt to 
“equate a ‘holder’ with a mere possessor and to make 
‘due negotiation’ synonymous with delivery accompanied 
 
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only by assignment[,]” thereby altering the “meaning 
of the inviolable terms ‘due negotiation’ and ‘holder 
in due course.’ ”  Id. at 721, 284 S.E.2d at 795-96.  
In reaching this conclusion, we noted that the 
Official Comment to the relevant provision of the UCC 
stated that private parties cannot change the meaning 
of such terms as “holder in due course” or “due 
negotiation.”  Id. at 719, 284 S.E.2d at 794-95.  In 
contrast, Paragraph 12 merely reduced the effective 
period of time during which First Union is potentially 
liable for paying an item containing an unauthorized 
signature or alteration.  It did not alter the meaning 
of terms inviolable to the UCC. 
 
Finally, National Title contends that the 60-day 
period for reporting unauthorized signatures or 
alterations is “manifestly unreasonable” under Code 
§ 8.4-103(a).  As used in subsection (a), this term is 
the test for determining the validity of an agreement 
that sets the standards by which a bank’s 
responsibility for its lack of good faith or failure 
to exercise ordinary care is to be measured.  While it 
is not necessary for us to decide in this case whether 
the test of manifest unreasonableness also applies to 
a determination regarding the validity of a reduction 
 
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in the time period contained in Code § 8.4-406(f), we 
will utilize that standard in this appeal since it is 
the one advanced by National Title.  In doing so, we 
conclude that the 60-day time limitation set forth in 
Paragraph 12 of the Deposit Agreement is not 
“manifestly unreasonable.”  Other jurisdictions have 
likewise upheld the validity of reductions in the one-
year period provided in Code § 8.4-406(f) to periods 
similar to or shorter than 60 days.4  See, e.g., Parent 
Teacher Ass’n v. Manufacturers Hanover Trust Co., 524 
N.Y.S.2d 336, 340 (N.Y. Civ. Ct. 1988); American 
Airlines, 29 S.W.3d at 96-97; Borowski, 579 N.W.2d at 
252-53. 
 
A condition precedent such as the one set forth 
in Code § 8.4-406(f) recognizes that a customer is in 
a better position than a bank to know whether a 
signature is authorized or an item has been altered.  
See American Airlines, 29 S.W.3d at 92.  A reduction 
in the one-year period allowed in subsection (f) to a 
period of 60 days encourages diligence by a customer 
and is “‘in accord with public policy by limiting 
disputes in a society where millions of bank 
                     
4 We do not decide today whether a period shorter than 
60 days would be “manifestly unreasonable.” 
 
12
transactions occur every day.’ ”  Basse Truck Line, 
Inc. v. First State Bank, 949 S.W.2d 17, 22 (Tex. App. 
1997) (quoting Parent Teacher Ass’n, 524 N.Y.S.2d at 
340). 
CONCLUSION 
 
For these reasons, we will affirm the judgment of 
the circuit court.5
Affirmed. 
                     
5 National Title also claims that the circuit court 
engaged in “blue penciling” because Paragraph 12 of the 
Deposit Agreement pertains not only to unauthorized 
signatures and alterations, but also to unauthorized 
indorsements.  According to National Title, the inclusion 
of unauthorized indorsements renders Paragraph 12 “illegal” 
because the reference to unauthorized indorsements in 
former Section 4-406(4) of the UCC was deleted and the 
current provisions of Section 4-406 impose no duty on a 
drawer to discover unauthorized indorsements.  See Official 
Comment 5.  Since this case does not involve any 
unauthorized indorsements, we reject National Title’s 
argument.  The circuit court merely considered the 
provisions of Paragraph 12 at issue and did not address the 
validity of other provisions.  Thus, the circuit court did 
not attempt to modify the Deposit Agreement or otherwise 
engage in “blue penciling.” 
Similarly, we find no merit to National Title’s 
argument that the 60-day limit should be construed as the 
parties’ definition of “reasonable promptness.” 
Finally, we note that the circuit court’s final order 
incorporates by reference its letter opinion.  We do not 
agree with all the rulings contained in that letter 
opinion, some of which are the subject of assignments of 
error.  Since those particular rulings are not germane to 
the Court’s opinion, we do not reach those assignments of 
error. 
 
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