The plaintiff, Halifax, had to bear liability after its comptroller embezzled in excess of $1 million through the issuance of more than 80 fraudulent checks written between 1995 and 1997. The company discovered the fraud in 1999. The court ruled in First Union’s favor because it had paid the checks, largely in reliance of UCC § 4-406, which states:

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 on or any alteration on the item is precluded from asserting against the bank the unauthorized signature or alteration.

CASE QUESTIONS

1. What duty does Section 4-406 impose on the bank customer?

2. What kind of controls should a company have in order to avoid this kind of liability?