2023 New Mexico Statutes › Chapter 55 - Uniform Commercial Code › Article 4 - Bank Deposits and Collections › Part 4 - RELATIONSHIP BETWEEN PAYOR BANK AND ITS CUSTOMER › Section 55-4-406 - Customer's duty to discover and report unauthorized signature or alteration.

(a) A bank that sends or makes available to a customer a statement of account showing payment of items for the account shall either return or make available to the customer the items paid or provide information in the statement of account sufficient to allow the customer reasonably to identify the items paid. The statement of account provides sufficient information if the item is described by item number, amount and date of payment.
(b) If the items are not returned to the customer, the person retaining the items shall either retain the items or, if the items are destroyed, maintain the capacity to furnish legible copies of the items until the expiration of seven years after receipt of the items. A customer may request an item from the bank that paid the item, and that bank must provide in a reasonable time either the item or, if the item has been destroyed or is not otherwise obtainable, a legible copy of the item.
(c) If a bank sends or makes available a statement of account or items pursuant to Subsection (a), 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 signature by or on behalf of the customer was not authorized. If, based on the statement or items provided, the customer should reasonably have discovered the unauthorized payment, the customer must promptly notify the bank of the relevant facts.
(d) If the bank proves that the customer failed, with respect to an item, to comply with the duties imposed on the customer by Subsection (c), the customer is precluded from asserting against the bank:
(1) the customer's unauthorized signature or any alteration on the item if the bank also proves that it suffered a loss by reason of the failure; and
(2) the customer's unauthorized signature or alteration by the same wrongdoer on any other item paid in good faith by the bank if the payment was made before the bank received notice from the customer of the unauthorized signature or alteration and after the customer had been afforded a reasonable period of time, not exceeding thirty days, in which to examine the item or statement of account and notify the bank.
(e) If Subsection (d) applies and the customer proves 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 to which the failure of the customer to comply with Subsection (c) and the failure of the bank to exercise ordinary care contributed to the loss. If the customer proves that the bank did not pay the item in good faith, the preclusion under Subsection (d) does not apply.
(f) Without regard to care or lack of care of either the customer or the bank, a customer who does not within one year after the statement or items are made available to the customer (Subsection (a)) discover and report the customer's unauthorized signature on or any alteration on the item is precluded from asserting against the bank the unauthorized signature or alteration. If there is a preclusion under this subsection, the payor bank may not recover for breach of warranty under Section 55-4-208 NMSA 1978 with respect to the unauthorized signature or alteration to which the preclusion applies.
History:
1953 Comp., § 50A-4-406, enacted by Laws 1961, ch. 96, § 4-406; 1992, ch. 114, § 191.
OFFICIAL COMMENTS
UCC Official Comments by ALI & the NCCUSL. Reproduced with permission of the PEB for the UCC. All rights reserved.
1. In order to impose on its customer the duty stated in subsection (c) to examine a statement or the returned items and report unauthorized signatures of the customer or alterations, the bank must comply with subsection (a) in sending or making available to the customer a statement of the account. Whether the bank returns to the customer the items paid is a matter for bank-customer agreement. If the agreement is that the bank does not return the items paid, a general standard is stated that the customer must be given information "sufficient to allow the customer reasonably to identify the items paid." If the bank supplies its customer with an image of an item, it complies with this standard. But a safeharbor rule is provided. If the item is described by item number, amount, and date of payment, the bank does comply. This information was chosen because it can be obtained by the bank's computer from the check's MICR line without examination of the items involved. The other two items of information that the customer would normally want to know - the name of the payee and the date of the item - cannot currently be obtained from the MICR line. The safeharbor rule is important in determining the feasibility of payor or collecting bank check retention plans. A customer who keeps a record of items written will have sufficient information to identify the item on the basis of item number, amount and date of payment. But customers who don't keep records may not. The policy decision is that accommodating these customers is not as desirable as accommodating others who keep more careful records at less cost to the check collection system and, thus, to all customers of the system. It is expected that technological advances may make it possible for banks to give customers more information in the future in a manner that is fully compatible with automation or truncation systems. At that time the Permanent Editorial Board may wish to make recommendation for an amendment revising the safe harbor requirements in the light of those advances.
2. Subsection (b) applies if the items are not returned to the customer. Check retention plans may include a simple payor bank check retention plan or the kind of check retention plan that would be authorized by a truncation agreement in which a collecting bank or the payee may retain the items. Even after agreeing to a check retention plan, a customer may need to see one or more checks for litigation or other purposes. The customer's request for the check may always be made to the payor bank. Under Subsection (b) retaining banks may destroy items but must maintain the capacity to furnish legible copies for seven years. A legible copy may include an image of an item. This Act does not define the length of the reasonable period of time for a bank to provide the check or copy of the check. What is reasonable depends on the capacity of the bank and the needs of the customer. This Act does not specify sanctions for failure to retain or furnish the items or legible copies; this is left to other laws regulating banks.
See
Comment 3 to Section 4-101 [55-4-101 NMSA 1978]. Moreover, this Act does not regulate fees that banks charge their customers for furnishing items or copies or other services covered by the Act, but under principles of law such as unconscionability or good faith and fair dealing, courts have reviewed fees and the bank's exercise of a discretion to set fees.
Perdue v. Crocker National Bank
, 38 Cal.3d 913 (1985) (unconscionability);
Best v. United Bank of Oregon
, 739 P.2d 554, 562-566 (1987) (good faith and fair dealing). In addition, Section 1-203 [55-1-203 NMSA 1978] provides that every contract or duty within this Act imposes an obligation of good faith in its performance or enforcement.
3. Subsection (c) imposes on the customer the duty to examine for and report unauthorized payments. Subsection (d)(2) changes former Subsection (2)(b) by adopting a 30-day period in place of a 14-day period. Although the 14-day period may have been sufficient when the original version of Article 4 was drafted in the 1950s, given the much greater volume of checks at the time of the revision, a longer period was viewed as more appropriate. The rule of Subsection (d)(2) follows pre-Code case law that payment of an additional item or items bearing an unauthorized signature or alteration by the same wrongdoer is a loss suffered by the bank traceable to the customer's failure to exercise reasonable care in examining the statement and notifying the bank of objections to it. One of the most serious consequences of failure of the customer to comply with the requirements of Subsection (c) is the opportunity presented to the wrongdoer to repeat the misdeeds. Conversely, one of the best ways to keep down losses in this type of situation is for the customer to promptly examine the statement and notify the bank of an unauthorized signature or alteration so that the bank will be alerted to stop paying further items. Hence, the rule of subsection (d)(2) is prescribed, and to avoid dispute a specific time limit, 30 days, is designated for cases to which the subsection applies. These considerations are not present if there are no losses resulting from the payment of additional items. In these circumstances, a reasonable period for the customer to comply with its duties under subsection (c) would depend on the circumstances (Section 1-204(2)) [55-1-204 NMSA 1978] and the Subsection (d)(2) time limit should not be imported by analogy into Subsection (c).
4. Subsection (e) replaces former Subsection (3) and poses a modified comparative negligence test for determining liability. See the discussion on this point in the Comments to Sections 3-404 [55-3-404 NMSA 1978], 3-405 [55-3-405 NMSA 1978], and 3-406 [55-3-406 NMSA 1978]. The term "good faith" is defined in Section 1-201(b)(20) [55-1-201 NMSA 1978] as including "observance of reasonable commercial standards of fair dealing". The connotation of this standard is fairness and not absence of negligence.
The term "ordinary care" used in subsection (e) is defined in Section 3-103(a)(7) [55-3-103 NMSA 1978], made applicable to Article 4 by Section 4-104(c) [55-4-104 NMSA 1978], to provide that sight examination by a payor bank is not required if its procedure is reasonable and is commonly followed by other comparable banks in the area. The case law is divided on this issue. The definition of "ordinary care" in Section 3-103 [55-3-103 NMSA 1978] rejects those authorities that hold, in effect, that failure to use sight examination is negligence as a matter of law. The effect of the definition of "ordinary care" on Section 4-406 [55-4-406 NMSA 1978] is only to provide that in the small percentage of cases in which a customer's failure to examine its statement or returned items has led to loss under Subsection (d) a bank should not have to share that loss solely because it has adopted an automated collection or payment procedure in order to deal with the great volume of items at a lower cost to all customers.
5. Several changes are made in former Section 4-406(5) [55-4-406 NMSA 1978]. First, former subsection (5) is deleted and its substance is made applicable only to the one-year notice preclusion in former Subsection (4) (Subsection (f)). Thus if a drawer has not notified the payor bank of an unauthorized check or material alteration within the one-year period, the payor bank may not choose to recredit the drawer's account and pass the loss to the collecting banks on the theory of breach of warranty. Second, the reference in former Subsection (4) to unauthorized indorsements is deleted. Section 4-406 [55-4-406 NMSA 1978] imposes no duties on the drawer to look for unauthorized indorsements. Section 4-111 [55-4-111 NMSA 1978] sets out a statute of limitations allowing a customer a three-year period to seek a credit to an account improperly charged by payment of an item bearing an unauthorized indorsement. Third, Subsection (c) is added to Section 4-208 [55-4-208 NMSA 1978] to assure that if a depositary bank is sued for breach of a presentment warranty, it can defend by showing that the drawer is precluded by Section 3-406 or Section 4-406(c) and (d) [55-3-406 and 55-4-406 NMSA 1978, respectively].
ANNOTATIONS
Compiler's notes.
— This section was enacted as 55-5-406 NMSA 1978 due to a typographical error, but has been set out by the compiler as 55-4-406 NMSA 1978.
The 1992 amendment,
effective July 1, 1992, rewrote this section to the extent that a detailed comparison would be impracticable.
Common law claims are precluded.
— Section 55-4-406 NMSA 1978 precludes common laws claims for negligence and breach of contract in transactions involving forged checks.
Associated Home & RV Sales, Inc. v. Bank of Belen
, 2013-NMCA-018, 294 P.3d 1276.
Where plaintiffs' employee, who was employed to assist with bookkeeping and balancing plaintiffs' accounts, forged 211 checks over an eighteen month period; and when defendant refused to repay plaintiffs for the losses, plaintiffs sued defendant for common law claims of negligence and breach of contract, plaintiffs' common law claims were precluded by Section 55-4-406 NMSA 1978.
Associated Home & RV Sales, Inc. v. Bank of Belen
, 2013-NMCA-018, 294 P.3d 1276.
Application of statute of limitations to serial forgery.
— The one-year period to bring a claim for forgery begins to run anew when each statement in a series is sent to the customer, regardless of whether the same wrongdoer is responsible for the forgery.
Associated Home & RV Sales, Inc. v. Bank of Belen
, 2013-NMCA-018, 294 P.3d 1276.
Where plaintiffs' employee, who was employed to assist with bookkeeping and balancing plaintiffs' accounts, forged 211 checks over an eighteen month period; the bank had provided plaintiffs statements on a monthly basis, including photocopies of cancelled checks; and plaintiffs notified the bank of the forgeries eighteen months after the plaintiffs received the first account statement with forged checks, plaintiffs were entitled pursue their claims against the bank for lack of ordinary care only for the forgeries that had occurred within one year after plaintiffs notified the bank of the forgeries.
Associated Home & RV Sales, Inc. v. Bank of Belen
, 2013-NMCA-018, 294 P.3d 1276.
Breach of duty of ordinary care.
— Where plaintiffs' employee, who was employed to assist with bookkeeping and balancing plaintiffs' accounts, forged 211 checks over an eighteen month period; the bank had provided plaintiffs statements on a monthly basis, including photocopies of cancelled checks; the bank provided the statements directly to the employee and plaintiffs acknowledged receiving the statements; plaintiffs' senior officers reviewed the statements after the employee did and had an opportunity to detect the forgeries; and plaintiffs alleged that the bank was negligent and offered evidence that the bank broke its promise not to accept checks made out to cash unless an officer presented the check, signatures on the checks differed from those on the signature cards on file with the bank, and check amounts exceeded the teller limits but were cashed without supervisor approval; and plaintiffs alleged that the bank was negligent, plaintiffs' allegations were sufficient to raise a genuine issue of material fact that, if proved, the jury might find that the bank breached a duty of ordinary care.
Associated Home & RV Sales, Inc. v. Bank of Belen
, 2013-NMCA-018, 294 P.3d 1276.
Bank not insulated from own negligence.
— It is certainly not the intention of this section to allow a bank to be insulated from the effect of its own negligence.
Rutherford v. Darwin
, 1980-NMCA-087, 95 N.M. 340, 622 P.2d 245, cert. quashed
sub nom., First Nat'l Bank v. Rutherford
, 95 N.M. 426, 622 P.2d 1046 (1981).
Law reviews.
— For comment on Cooper v. Albuquerque Nat'l Bank, 75 N.M. 295, 404 P.2d 125 (1965), see 6 Nat. Resources J. 142 (1966).
Am. Jur. 2d, A.L.R. and C.J.S. references. —
1 Am. Jur. 2d Accounts and Accounting § 40; 10 Am. Jur. 2d Banks §§ 511, 515 to 519.
Construction and effect of statutes relieving bank from its liability to depositor for payment of forged or raised check unless within a specified time after the return of a voucher representing payment he notifies the bank as to the forgery or raising, 50 A.L.R.2d 1115.
Bank's liability for payment or withdrawal on less than required number of signatures, 7 A.L.R.4th 655.
Construction and application of UCC § 4-406, requiring customer to discover and report unauthorized signature, in cases involving bank's payment of check or withdrawal on less than required number of signatures, 7 A.L.R.4th 1111.
9 C.J.S. Banks and Banking §§ 417, 418, 424, 434, 435, 437, 438.