Opinion ID: 1985062
Heading Depth: 1
Heading Rank: 3

Heading: Duty to examine account statements under agreements governing bank accounts and under Iowa Code section 554.4406.

Text: Each of the three accounts was governed by an agreement containing the following language: STATEMENTS  If you [the cemetery] do not notify us [the bank] of an unauthorized signature or alteration within a reasonable time (not to exceed 14 days) after we send or make available to you your statement and items: (1) you cannot assert the unauthorized signature or alteration against us, even if we are unable to show a loss due to your failure and, (2) you cannot assert any unauthorized signatures or alterations by the same wrongdoer on items paid by us after the reasonable time mentioned above elapses, but before we receive your notice. We lose these protections if we fail to exercise ordinary care in paying an item with an unauthorized signature or alteration, unless you do not notify us of the problem within 60 days of when we send or make available to you the statement and items. You must also report any other account problem (e.g. erroneous statement of passbook entry, missing signature, unauthorized endorsement, etc.) within this 60-day period or lose your right to assert the problem against us. (Emphasis added.) The quoted language from the agreements tracks with Iowa Code section 554.4406 of Iowa's Uniform Commercial Code. [1] The record reveals that statements to the cemetery from defendant bank showing transactions for the three accounts were dated approximately every three months. The cemetery recognizes that it had a duty under the written agreements governing the accounts to examine its bank statements and further admits that it delegated this duty to Starla. The cemetery seems to contend, however, that it was excused from any duty it had to examine its bank statements because the bank, in the first instance, breached the agreements by transferring funds pursuant to Starla's verbal instructions rather than transferring funds from the savings accounts to the checking account upon the required number of signatures as the bank had agreed to do under the agreements governing the accounts. The cemetery thus contends that it had no duty to tell the bank that the bank had breached its own agreements. Additionally, the cemetery contends that Iowa Code section 554.4406 is not applicable to the facts of this case because the section only addresses situations involving unauthorized signatures or altered instruments, not lack of a required signature to make a withdrawal from an account as is the case here. Upon our review, we conclude the district court properly entered judgment in favor of defendant bank. Iowa Code section 554.3403(2) provides, [i]f the signature of more than one person is required to constitute the authorized signature of an organization, the signature of the organization is unauthorized if one of the required signatures is lacking.  (Emphasis added.) [2] In other words, the absence of a signature required to make a withdrawal constitutes an unauthorized signature. Thus, section 554.3403(2) clearly applies to the facts of this case. Therefore, pursuant to section 554.3403(2), section 554.4406, and the language of the agreements governing the accounts, the cemetery had a duty to examine its account statements and notify the bank of any transactions that had been made without the required authorized signatures. Cf. Husker News v. South Ottumwa Sav. Bank, 482 N.W.2d 404, 408 (Iowa 1992) (noting that Iowa Code § 554.4406 creates a duty owed by a bank customer to a bank but does not extend any duties to parties outside the bank-customer relationship). As the trial court found, if the cemetery had examined its statements, it surely would have noticed that the $60,000 sum it had deposited in the Mathys account and the funds in the other savings account were being depleted. The cemetery's next step or duty would have been to contact the bank about the withdrawals from the two savings accounts at which time the bank would have explained that it made the transfers to the checking account according to Starla's instructions. The cemetery, however, did not examine its statements nor take any follow-up action. The fact that the cemetery relied on Starla to examine the bank statements did not relieve it of its own duty to examine the statements and notify the bank of any unauthorized signatures or alterations. This is because [m]isplaced confidence in an employee will not excuse a depositor from the duty of notifying the bank of alterations on items paid from the depositor's account. K & K Mfg., Inc. v. Union Bank, 129 Ariz. 7, 628 P.2d 44, 48 (Ct.App. 1981), criticized on other grounds in Schoenfelder v. Arizona Bank, 165 Ariz. 79, 796 P.2d 881, 890 n. 6 (1990). See also Pine Bluff Nat'l Bank v. Kesterson, 257 Ark. 813, 520 S.W.2d 253, 258 (1975) (depositor is not excused from duty of examining bank account statements by entrusting its performance to an incompetent or dishonest agent in the absence of reasonable diligence in supervising the agent's conduct); Kiernan v. Union Bank, 127 Cal. Rptr. 441, 444, 55 Cal.App.3d 111, 115 (Cal.Ct.App.1976) (The fact that the employee of a bank's customer has concealed a forgery does not obviate the customer's responsibility to examine [its] own statements.); Jersey Steel v. Warburton, 139 N.J. 536, 655 A.2d 1382, 1387 (1995) (noting that a customer is not excused from the duty to examine canceled checks and account statements and to notify bank of irregularities simply because it entrusted performance of these duties to an incompetent or dishonest agent, but holding that bank failed to exercise ordinary care in paying items). Not only was the cemetery not excused from its duty of examining the bank account statements, but it also is charged with knowledge of information contained in those statements. See K & K, 628 P.2d at 48 (depositor is chargeable with the knowledge of all facts a reasonable and prudent examination of bank statement would have disclosed if made by an honest employee); Pine Bluff Nat'l Bank, 520 S.W.2d at 258 (depositor is charged with knowledge of all facts that a reasonable and prudent examination of bank statement would disclose if made by one who had not participated in the unauthorized withdrawals); Rainbow Inn, Inc. v. Clayton Nat'l Bank, 86 N.J.Super. 13, 205 A.2d 753, 761 (1964) (depositor is charged with knowledge of all facts that a reasonable and prudent examination of the statement would have disclosed if made by a person who had not participated in the forgeries); George Whalley Co. v. National City Bank, 55 Ohio App.2d 205, 380 N.E.2d 742, 747 (1977) (noting that rule imputing knowledge to customer/employer is particularly appropriate where customer/employer permitted same employee to both prepare checks and reconcile statements without supervision). Under section 554.4406(5), the trial court found the cemetery had failed to prove that the bank did not observe reasonable commercial standards, i.e., failing to exercise ordinary care in paying the items and in not paying the items in good faith. Plaintiff cemetery does not challenge this finding on appeal. Thus, the trial court did not assess the comparative fault of the cemetery and the bank under section 554.4406(5). Finally, we point out that section 554.4406(6) does not apply here because the cemetery presented no evidence regarding whether it reported the problems to defendant bank within one year of the last bank statement. We thus conclude that plaintiff cemetery is precluded under section 554.4406(4) from asserting against the bank plaintiff's claims concerning unauthorized (or no) signatures or alterations (forgeries) in the checks or accounts. For these reasons, we need not address whether the cemetery's agreements with the bank were modified by a course of dealing between the bank and the cemetery.