84-4-406. (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 30 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 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 K.S.A. 84-4-208 with respect to the unauthorized signature or alteration to which the preclusion applies.
History: L. 1965, ch. 564, § 232; L. 1991, ch. 296, § 105; February 1, 1992.
KANSAS COMMENT, 1996
This section is identical to the 1995 Official Text. The section is derived from the former 84-4-406. The former subsection (1) has been redrafted into the current subsections (a), (b) and (c). In subsection (d), the time limits in the former subsection (2) have been increased from 14 days to 30 days for the customer to discover wrongdoing and notify the bank. Subsection (e) imposes comparative negligence instead of the contributory negligence in the former subsection (3), and adopts the new ordinary care standard in 84-3-103(a)(7), as directed by 84-4-103(c), which does not require visual examination. Subsection (f) amends the former subsection (4), retaining the one year statute of limitations for the customer's signature and alterations, but deleting any reference to discovering forgeries. The other amendments are stylistic and are not meant to change the substantive law.
This section precludes a depositor from getting his account recredited in case of forgery or material alteration when the depositor is negligent in failing to report the dirty deed in a timely manner. Under subsection (a) the bank has a duty to return the items, or to make the items available, or to provide a statement by item number, amount and date of payment. Subsection (b) then requires that if the items are not returned, legible copies must be available for seven years.
If the bank has complied with subsections (a) and (b), the customer has a duty to "exercise reasonable promptness" to determine whether a payment was unauthorized and notify the bank of a forgery or material alteration. The duty begins when the items or statement are made available to the customer, providing respectively for check return or check truncation, where a bank holds the checks, but the drawee sends a printout of the activity in the account. Pre-UCC Kansas case law is substantially in accord with the rules of subsections (a), (b) and (c). Herbel v. Peoples State Bank, 170 K. 620, 228 P.2d 929 (1951).
Subsection (f) sets forth a one-year outer time limit within which the customer must report any forgeries of his signature or material alterations. It has deleted the former three-year limitation for discovering forged indorsements. This limit is the time for the customer to report the problem to the drawee bank. The statute of limitations is contained in 84-3-118. Subsection (f) also requires the drawee bank to invoke the defenses available under this section as a condition of recovering from collecting banks on a warranty theory based upon a forged signature or a material alteration if it has recredited the customer's account.
Subsection (d) deals with liability for the initial forgery or alteration, and for repeated forgeries or alterations on the same account. Paragraph (1) deals with the first forged or altered item. If the customer has not reported it with "reasonable promptness" (probably within 30 days), the customer is liable for the item if the bank can show that it suffered loss by reason of the customer's failure to report the wrongdoing. As a practical matter this will require the bank to prove that it could have caught the wrongdoer and recovered the funds. Paragraph (2) deals with later, repeated fraud by the same wrongdoer regarding the account. Under paragraph (2), if the drawer breaches the requirement to report the first in a string of forgeries or alterations, and if the same wrongdoer repeats the tampering with respect to an item paid more than 30 days after the first item and statement were made available to the customer, the bank may refuse to recredit the customer's account for the second and subsequent items. The rule does not require any other showing of "loss" by the drawee bank. The purpose of the rule is to protect the bank from repeated forgeries without regard to negligence, so long as failure to report the first forgery did constitute negligence by not complying with subsection (c). As a practical matter, the drawer should act within 30 days on the first item to avoid liability on later items.
The leading Kansas decision on the "repeater rule" is Coleman v. Brotherhood State Bank, 3 K.A.2d 162, 592 P.2d 103 (1979), where the customer's failure to report a forgery of her signature on her checks precluded her from obtaining a recrediting of her savings account, on which withdrawal orders had also been forged by her estranged husband. Even though the depositor had not received her annual savings account statement, her failure to discover the imbalance reflected on her checking account monthly statement imposed a duty to inquire concerning the savings account within the former 14-day period. The Kansas court of appeals concluded that the savings account nonnegotiable withdrawal orders were "items," thus triggering the "repeater rule."
Subsection (e) codifies a rule of comparative negligence. If the customer is able to establish lack of ordinary care on the part of the drawee bank in paying a forged or altered item, the customer's negligence in failing to report the forgery or alteration will be compared with the bank's lack of care in determining loss. For example, if the bank fails to examine signatures and thus allows a check to be paid even though the forgery of the drawer's signature was detectable, the customer and the bank will share the loss on a basis of their relative fault, as determined by the fact finder. Under the final sentence of the subsection, if the customer can show that the bank was not in good faith, the customer's negligence in not promptly reporting the wrongdoing will be ignored and the bank will be liable for the forgery or alteration. It will still have its presentment warranty actions against the wrongdoer, however.
CASE ANNOTATIONS
1. Declaratory judgment action (60-1701) held improper avenue on burden of proof issues in dispute over unauthorized drawer's signature (84-3-406). Wichita Computer & Supply, Inc. v. Mulvane State Bank, 15 Kan. App. 2d 258, 260, 805 P.2d 1255 (1991).
2. Whether bank could shift liability for forged checks paid before expiration of customer's reporting time examined. In re Mid-American Clean Water Systems, Inc., 159 B.R. 941, 946 (1993).
3. Failure of bank customer to report unauthorized signature of instrument within one year precludes assertion of unauthorized activity against bank. Henrichs v. Peoples Bank, 26 Kan. App. 2d 582, 583, 992 P.2d 1241 (1999).
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