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Lor-Mar/Toto, Inc. v. 1st Constitution Bank

A-6139-03T2 (N.J. Super. App. Div. 2005) (Unpublished)

BANKS; CHECKS; UCC — Under the UCC, a bank and its customer may shift their risks of loss in the event a fraudulent check is presented for payment if they have a clear and unambiguous agreement; otherwise, a bank is strictly liable to its customer for checks it honored that were not properly payable.

A customer maintained a checking account with a bank. The customer provided the bank with a corporate resolution authorizing the bank to honor checks drawn on its account if the checks were signed by any one of four authorized officers. Later, the customer advised the bank that the signatures of two of the officers would be stamped on its checks. The customer discovered that five unauthorized checks were honored by the bank. The checks contained what appeared to be the stamp of one of the authorized officers, but also contained an unauthorized signature. The checks were also a different stock and color than the customer’s standard checks. The checks also bore the same check numbers as authentic checks that were already honored by the bank. The bank honored all five checks and charged the customer’s account. For each of the checks, the customer signed an affidavit attesting that each was a forgery and had not been signed or authorized by the customer. The bank recovered some of the money paid on the forged checks. The customer sued the bank for the balance of the money charged from its account. The customer claimed that under the New Jersey Uniform Commercial Code (UCC), N.J.S.A. 12A:4-401, a bank is held strictly liable to the customer if it honors checks that were not “properly payable.” The customer claimed that since the checks contained a forged signature, they were not “properly payable” under the UCC; therefore the bank was required to refund the money. The bank claimed that it exercised reasonable commercial standards in honoring the checks and that it honored the customer’s resolution which permitted stamped signatures. The lower court found that the customer notified the bank, within the time required by statute, that the checks were unauthorized, and therefore the bank could not charge the customer’s account for the fraudulent checks. On appeal, the bank argued that since the customer authorized stamped signatures, it assumed the risk that a stamped check might be reproduced or stolen. The Appellate Division affirmed. The Court found that the UCC, as adopted in New Jersey, permits the bank and its customer to shift their risks of loss in the event a fraudulent check is presented for payment. However, the agreement to shift that risk must be clear and unambiguous. It held that since there was no agreement between the bank and the customer to shift the risk for fraudulent checks to the customer, the bank is strictly liable to the customer for checks it honored that were not “properly payable.”

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