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The Same Old Wrongdoer Blues: Creative Fraud Leaves Employer Holding the Bag for Fraud on its Account

Articles 3 and 4 of the UCC provide a roadmap for addressing how to allocate liability for the various mistakes, embezzlements and forgeries that have followed the payments system since its invention several centuries ago.  While as a general rule a customer is not liable for forgeries and other fraud on its account there are several exceptions where the risk of loss can be shifted back to the customer. One of those situations is what practitioners refer to as the “same wrongdoer rule” found in section 4-406(d)(2). The rule says that when the bank sends a customer their statement, the customer has a certain time period, usually 30 days, to review the statement and notify the bank of any unauthorized signatures or alterations. Should the customer fail to flag such transactions then the UCC shifts the risk of loss for all subsequent forgeries by the same wrongdoer to the customer. This result is modified somewhat by the following subsection, 4-406(e) which provides that if there are subsequent forgeries by the same wrongdoer and the customer establishes that the bank failed to exercise ordinary care then the loss is allocated between the customer and the bank unless the customer can show that the bank did not pay the item in good faith in which case all risk is shifted to the bank.

Section 4-406 also provides that without regard to lack of care by either party, a customer who fails to discover and report unauthorized items or any alteration within 60 days after the statement is made available to the customer is precluded from asserting a claim against the bank.

These issues were recently applied in the recent case of Ducote v. Whitney National Bank.   On July 25, 2014, David Ducote, Avery Interests, LLC, Jebaco, Inc., and Iberville Designs filed suit against Whitney and Ducote’s former employee, Michelle Freytag (“Freytag”), alleging that Freytag, in her position as Ducote’s executive assistant, had obtained fraudulent credit cards from Whitney on plaintiffs’ accounts, made personal charges on the cards, and transferred funds from plaintiffs’ accounts to pay the balance on these credit cards. The petition alleged that plaintiffs were not responsible for the charges because the contract on the credit card agreements was null, or alternatively that the credit card agreements should be rescinded because of the fraud committed by Freytag. The petition further alleged that Freytag could not have accomplished this theft without the assistance of Whitney, which failed to follow established procedures and facilitated Freytag’s theft. Whitney responded by denying all liability and argued that the claims were barred by various provisions of the UCC, one of which was Section 4-406.

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Cleaning Out the Attic: Making Sense of Cash and Treasury Management Agreements

Everyone has that pile of objects in the basement or the attic that over the years just keeps growing in size. It could be old toys no longer used but saved for use by the grandchildren, old clothes you think you might wear again someday, or the furniture from your parents’ house that you hated to give up but really had no room for in your own house. In the banking context, the pile of objects closely resembles the cash management agreements many banks use. Many of these agreements were first put in use years ago when the bank decided to offer ACH services in addition to the normal commercial deposit account. Eventually the bank added wire transfer and a money market sweep account to the suite of options. Oftentimes banks use a separate form for each of the available services, some of which may or may not conflict with the other forms that were developed over a 10- or 20-year period.

Technology, cyber-risks and the ways people initiate transfers of funds have changed over time and will continue to change in the near future. If you haven’t updated your cash management agreements in several years, now may be a good time to review that pile of documents and agreements and consider what items needs to be addressed. A good way to handle such a review is to combine the separate agreements into one master agreement. Consolidating the documents in such a manner ensures that all of the definitions are consistent and any security processes are addressed across the entire platform.

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