Part 7- Credit, Chapter 34: Checks and Electronic Transfers, Doc 3 - Edubirdie

University:
Indiana University Bloomington
Course:
Financial and Managerial Accounting: Information for Decisions - John J. Wild
Academic year:

2024
Views:

333

Pages:

2
Author:

bratrochanter

Summary: Legal Responsibilities in Checking Account Fraud and Forged Checks 1. Bank and Customer Duties for Account Protection: o Bank’s Duty of Care: Banks must handle checks with ordinary care, typically following commercial standards such as examining large checks or random sampling. Automated processing allows banks to skip individual checks under certain thresholds unless otherwise specified. o Customer’s Duty to Examine Statements: Customers are required to promptly review monthly statements and report any unauthorized transactions, such as forgeries or alterations, in a reasonable timeframe (typically 30 days). Failure to promptly report a discrepancy can bar the customer from recovering losses on future fraudulent checks by the same wrongdoer. 2. Handling Altered Checks: o Unauthorized Alterations: If a check is altered after being written, such as by raising the amount, banks are generally liable unless the customer’s negligence contributed to the alteration. If both the customer and bank are negligent, liability may be split based on comparative negligence. o High-Risk Scenarios and Bank Programs: Banks may offer protective services like Positive Pay, a fraud detection system that cross-checks issued checks against incoming transactions. Customers who decline such programs may limit their recovery options, as courts may consider the decision not to use available protections a contributing factor to the loss. 3. Case Law Illustrations: o Cincinnati Insurance Co. v. Wachovia Bank: Schultz Foods suffered losses from a check-washing scam after declining Wachovia’s Positive Pay program. The court ruled that Schultz Foods’ choice not to use fraud protection waived its claim against the bank, since it did not follow preventive measures agreed upon in the deposit agreement. o Union Planters Bank, N.A. v. Rogers: Helen Rogers, whose caretaker forged multiple checks, failed to examine her bank statements promptly. This delay barred her from recovering for subsequent forged checks as she did not fulfill her duty to monitor her account closely, enabling continued fraud. 4. Statutory Protections and Limits: o One-Year Reporting Limit: Under the UCC, customers have a maximum of one year to report unauthorized signatures or alterations. After this period, claims against the bank are typically voided. o Death or Incompetence: Banks can continue honoring checks from a deceased or newly incompetent person’s account for up to 10 days post-mortem, unless notified otherwise by legal heirs or representatives. These rules emphasize the shared responsibility between banks and customers in preventing and mitigating fraud, assigning liability based on which party was in the best position to detect and prevent the unauthorized activity.

Related Documents

Part 7- Credit, Chapter 34: Checks and Electronic Transfers, Doc 3

Part 7- Credit, Chapter 34: Checks and Electronic Transfers, Doc 3 - Page 1

Part 7- Credit, Chapter 34: Checks and Electronic Transfers, Doc 3 - Page 2

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