- COAKY Holds Negligence Claim Against Bank for Check-kiting Scheme Can Be Barred By Account Owner's Failure to Review Bank Account Statements
- June 14, 2012 | Author: David V. Kramer
- Law Firm: Dressman Benzinger LaVelle psc - Crestview Hills Office
- In Mark D. Dean, P.S.C. v. Commonwealth Bank & Trust Co., 2010-CA-00050 (rendered 4/6/12), the Kentucky Court of Appeals considered an appeal of a summary judgment dismissing claims against a bank by a commercial escrow account holder whose bookkeeper had embezzled money by kiting checks. The trial court dismissed a claim under the Uniform Commercial Code (UCC) based on the Code's three-year statute of limitations, and dismissed associated common law claims as having been displaced by the UCC. On appeal, the customer argued that the UCC claim, even though it was made nearly four years after the matter was brought to the customer's attention, was not time-barred since the UCC's three-year limitations period should be deemed to have been tolled until the bank's negligence was discovered.
The Court, in an opinion by Judge Glenn Acree, rejected that argument and held instead that the customer's failure to inspect its monthly statements - even though they were being intercepted and diverted by the bookkeeper - barred the claim under the substantive provisions of the UCC, specifically Code Sections 4-403 and 4-406(6) (KRS 335.4-403 and 355.4-406(6)). Those sections require a bank customer to inspect account statements in a prompt and reasonable fashion (4-403), and allow the customer one year after the statement is made available to the customer to discover and report any unauthorized signature or alteration (4-406(6)). The Court held that the customer had unreasonably failed to comply with its duties to monitor the account, and as a result the customer did not discover and report the kiting scheme in a timely fashion. Thus, the UCC claim was barred substantively, not based on limitations.
Though the Court declined to address whether the UCC's three-year SOL is subject to a discovery rule, the Court nevertheless considered whether the failure of Dean to discover the kiting scheme was reasonable or not, since Official Comment 1 to 4-406 requires consideration of whether the customer should have reasonably discovered the unauthorized payment. The Court found the customer's failure to oversee the bookkeeper's work was not reasonable and that the scheme should have been discovered sooner with reasonable diligence.
Finally, the Court found that the failure of the customer to comply with its UCC obligations barred not just the UCC claim, but any common laws claim for relief relating to the check-kiting scheme.
The decision highlights not just the need for internal oversight and control over a company's finances (including not having one person sign checks, or not having the same person who signs checks review bank statements), but also the duty of any bank checking account owner to promptly inspect account statements for unauthorized charges or alterations to checks.
The opinion was designated for publication but is not yet final. Decisions that are not final may not be cited as precedent.