Present: All the Justices
NATIONAL TITLE INSURANCE
CORPORATION AGENCY
v. Record No. 010346 OPINION BY JUSTICE CYNTHIA D. KINSER
March 1, 2002
FIRST UNION NATIONAL BANK
FROM THE CIRCUIT COURT OF FAIRFAX COUNTY
Henry E. Hudson, Judge
Pursuant to the provisions of Code § 8.4-406(f), a
bank’s customer is precluded from asserting against the
bank an unauthorized signature or alteration on an item if
the customer fails to report such fact to the bank within
one year after a statement of account showing payment of
the item is made available to the customer. The
dispositive issue in this appeal is whether a bank and its
customer may, by contractual agreement, shorten the one-
year period provided in Code § 8.4-406(f). Because we
conclude that Code § 8.4-103(a) permits the parties to vary
that time period, we will affirm the judgment of the
circuit court holding that an agreement reducing the period
to 60 days is binding on the parties.
FACTS AND MATERIAL PROCEEDINGS
National Title Insurance Corporation Agency (National
Title) opened an escrow checking account with First Union
National Bank (First Union) in April 1996. At that time,
the parties entered into a “DEPOSIT AGREEMENT AND
DISCLOSURES For Non-Personal Accounts” (Deposit Agreement)
that defined and governed the relationship between them.
The provisions of Paragraph 12 of that Deposit Agreement,
which are at issue in this appeal, absolve First Union of
any liability for paying an item containing an unauthorized
signature, an unauthorized indorsement, or a material
alteration if National Title does not report such fact to
First Union within 60 days of the mailing of the account
statement describing the questioned item. In pertinent
part, Paragraph 12 states:
You should carefully examine the statement and
canceled checks when you receive them. If you
feel there is an error on the statement, or that
some unauthorized person has withdrawn funds from
the account, notify us immediately. The
statement is considered correct unless you notify
us promptly after any error is discovered.
Moreover, because you are in the best position to
discover an unauthorized signature, an
unauthorized [i]ndorsement or a material
alteration, you agree that we will not be liable
for paying such items if . . . (b) you have not
reported an unauthorized signature, an
unauthorized [i]ndorsement or material
alterations to us within 60 days of the mailing
date of the earliest statement describing these
items . . . .
Subsequently, First Union paid two checks
ostensibly drawn on National Title’s account, both of
which were counterfeit checks and were not executed by
an authorized signatory to the account. The first
check, paid in November 1998, was described in an
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account statement mailed on December 5, 1998, and the
second check, paid in December 1998, was described in
National Title’s account statement mailed on January
5, 1999. National Title did not report either of the
unauthorized signatures to First Union within 60 days
of the mailing of the respective account statements
describing the two checks.
After First Union refused to credit National Title’s
account in the amounts paid on the two checks bearing
unauthorized signatures, National Title filed a motion for
judgment seeking to recover its losses from First Union.
In its answer, First Union asserted, among other things,
that National Title was precluded from making this claim
because it had failed to report the unauthorized signatures
within the 60-day time period specified in Paragraph 12 of
the Deposit Agreement between the parties.
Ruling on the parties’ cross-motions for summary
judgment, the trial court concluded that First Union and
National Title could contractually reduce the one-year
period for reporting unauthorized signatures set forth in
Code § 8.4-406(f) and that the 60-day period agreed upon by
the parties in this case is not “manifestly unreasonable”
under the provisions of Code § 8.4-103. The court
therefore denied National Title’s motion for summary
3
judgment and granted First Union’s motion, entering
judgment in favor of First Union. National Title now
appeals from that final judgment.
ANALYSIS
Title 8.4 of Virginia’s Uniform Commercial Code (UCC)
establishes the rights and duties between banks and their
customers with regard to deposits and collections. A bank
may charge against the account of its customer only those
items that are properly payable from that account. 1 See
Code § 8.4-401(a). Items bearing unauthorized signatures,
such as the checks in this case, are not properly payable.
Id.
However, a customer has certain duties with regard to
discovering and reporting an unauthorized signature or
alteration on an item. If a bank sends or makes available
to its customer a statement of account showing payment of
items for the account, “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
1
The term “ ‘[i]tem’ means an instrument or a promise
or order to pay money handled by a bank for collection or
payment.” Code § 8.4-104(9). The term “ ‘[c]ustomer’
means a person having an account with a bank or for whom a
bank has agreed to collect items . . . .” Code § 8.4-
104(5).
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signature by or on behalf of the customer was not
authorized.” Code § 8.4-406(c). A customer must promptly
report to the bank any unauthorized payment that the
customer “should reasonably have discovered” based on the
statement or items provided. Id.
If a customer fails to comply with these duties, the
customer is precluded from asserting against the bank the
unauthorized signature or alteration on the item. Code
§ 8.4-406(d)(1). However, if a customer establishes 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” that the failure of each party contributed to the
loss. Code § 8.4-406(e). 2 Finally, if a customer does not
discover and report an unauthorized signature or alteration
on an item within one year after the statement or items are
made available to the customer, the customer is thereafter
precluded from asserting against the bank the unauthorized
signature or alteration. Code § 8.4-406(f). This
preclusion applies irrespective of whether the bank paid
2
If a bank does not pay an item in good faith, the
preclusion under Code § 8.4-406(d) as to the customer does
not apply. Code § 4.6-406(e).
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the item containing the unauthorized signature or
alteration in good faith. Halifax Corp. v. First Union
Nat’l Bank, 262 Va. 91, 101, 546 S.E.2d 696, 703 (2001).
On appeal, National Title first argues that Code
§ 8.4-406(f) is a statute of repose, i.e., a rule of
substantive law, and that the one-year period set forth in
that section is, therefore, not subject to contractual
modification by the parties. Next, National Title posits
that Paragraph 12 of the Deposit Agreement imports the time
bar established in Code § 8.4-406(f) into subsection (c),
thereby rendering the preclusion in subsection (f)
meaningless. National Title further asserts that Paragraph
12 impermissibly changes the comparative negligence
provisions established in Code § 8.4-406(e) and reinstates
the concept of contributory negligence into Code § 8.4-
406(c). Finally, National Title contends that the 60-day
time limit for reporting an unauthorized signature or
alteration on an item is “manifestly unreasonable,” but
that, if Paragraph 12 is enforceable, the 60-day limit
should be construed as the parties’ definition of
“reasonable promptness” in determining comparative
negligence, rather than as an absolute bar to National
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Title’s claim against First Union. 3 We do not agree with
National Title.
The issue in this appeal is whether a bank may,
through a contractual agreement with its customer, shorten
the one-year period provided in Code § 8.4-406(f) to a
period of 60 days. In Halifax Corp., 262 Va. at 101, 546
S.E.2d at 703, we characterized that one-year period as a
statutorily prescribed notice that operates as “a condition
precedent to the customer’s right to file an action against
the bank to recover losses caused by the unauthorized
signature or alteration.” Accord Euro Motors, Inc. v.
Southwest Fin. Bank & Trust Co., 696 N.E.2d 711, 716 (Ill.
App. 1998); First Place Computers, Inc. v. Security Nat’l
Bank of Omaha, 558 N.W.2d 57, 59 (Neb. 1997); Brighton,
Inc. v. Colonial First Nat’l Bank, 422 A.2d 433, 437 (N.J.
Super. Ct. App. Div. 1980), aff’d, 430 A.2d 902 (N.J.
1981); Weiner v. Sprint Mortgage Bankers Corp., 235 A.D.2d
472, 474 (N.Y. App. Div. 1997); American Airlines Employees
Fed. Credit Union v. Martin, 29 S.W.3d 86, 95 (Tex. 2000).
This condition precedent does not limit a customer’s claim
3
In making its arguments, National Title asserts that
cases decided prior to the revisions that were effective
January 1, 1993, to Article 4 of Virginia’s UCC are
inapplicable. We do not agree because the relevant
provisions in former Code § 8.4-406(4) were virtually
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against a bank but requires that the customer first perform
the duty to discover and report any unauthorized signature
or alteration on an item before bringing suit against the
bank. However, that characterization of subsection (f) as
a condition precedent is not, as National Title suggests,
determinative of the question whether a customer and a bank
can, by agreement, shorten the one-year period. The
provisions of Code § 8.4-103(a) provide the analytical
framework for resolving that question.
Code § 8.4-103(a) states that
[t]he effect of the provisions of this title may
be varied by agreement but the parties to the
agreement cannot disclaim a bank’s responsibility
for its lack of good faith or failure to exercise
ordinary care or limit the measure of damages for
the lack or failure. However, the parties may
determine by agreement the standards by which the
bank’s responsibility is to be measured if those
standards are not manifestly unreasonable.
According to Official Comment 2 regarding § 4-103 of
the UCC, “[s]ubsection (a) confers blanket power to
vary all provisions of the Article by agreements of
the ordinary kind.” Thus, this statute allows a bank
and its customer to vary by agreement the effect of
the provisions of Title 8.4 as long as the agreement
does not: (1) “disclaim a bank’s responsibility for
unchanged by the revisions and now appear in Code § 8.4-
406(f).
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its lack of good faith,” (2) “[disclaim a bank’s
responsibility for its] failure to exercise ordinary
care,” or (3) “limit the measure of damages for the
lack or failure.” Code § 8.4-103(a).
The clause in Paragraph 12 of the Deposit
Agreement reducing the one-year period in Code § 8.4-
406(f) to a period of 60 days does not run afoul of
these limitations on the authority to vary the effect
of the provisions of Title 8.4. The Deposit Agreement
does not absolve First Union of its duty to exercise
ordinary care or good faith, nor does it limit the
measure of damages. Instead, Paragraph 12 merely
varies the effect of Code § 8.4-406(f) in that the
period of time in which National Title must report an
unauthorized signature or alteration on an item,
without having its claim for losses precluded by the
bar in subsection (f), is shortened from one year to
60 days. Cf. Borowski v. Firstar Bank Milwaukee, 579
N.W.2d 247, 251 (Wis. Ct. App. 1998). This reduction
in the length of the statutory notice period is
consistent with the concept embodied in Code § 8.4-
406(f) that a bank can be held potentially liable for
paying an item containing an unauthorized signature or
alteration only for a limited period of time. Thus,
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we conclude that a bank and its customer may
contractually shorten the one-year period contained in
Code § 8.4-406(f) and that First Union and National
Title did so in Paragraph 12 of the Deposit Agreement.
Notwithstanding this reduced time period, if National
Title complies with its duty to exercise reasonable
promptness in examining its account statement and reporting
any unauthorized signature or altered item, First Union
remains liable for paying an item bearing an unauthorized
signature or alteration. Likewise, the comparative
negligence provisions contained in Code § 8.4-406(e) remain
in effect during the 60-day period after First Union makes
available to National Title a statement showing payment of
items from National Title’s account. Thus, the provisions
of Paragraph 12 at issue do not alter the scheme of
liability between banks and their customers as set forth in
Code § 8.4-406.
Contrary to National Title’s argument, our
decision in Becker v. National Bank & Trust Co., 222
Va. 716, 284 S.E.2d 793 (1981), is distinguishable.
There, we held that a provision in a note allowing a
mere assignee to negotiate the note was an attempt to
“equate a ‘holder’ with a mere possessor and to make
‘due negotiation’ synonymous with delivery accompanied
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only by assignment[,]” thereby altering the “meaning
of the inviolable terms ‘due negotiation’ and ‘holder
in due course.’ ” Id. at 721, 284 S.E.2d at 795-96.
In reaching this conclusion, we noted that the
Official Comment to the relevant provision of the UCC
stated that private parties cannot change the meaning
of such terms as “holder in due course” or “due
negotiation.” Id. at 719, 284 S.E.2d at 794-95. In
contrast, Paragraph 12 merely reduced the effective
period of time during which First Union is potentially
liable for paying an item containing an unauthorized
signature or alteration. It did not alter the meaning
of terms inviolable to the UCC.
Finally, National Title contends that the 60-day
period for reporting unauthorized signatures or
alterations is “manifestly unreasonable” under Code
§ 8.4-103(a). As used in subsection (a), this term is
the test for determining the validity of an agreement
that sets the standards by which a bank’s
responsibility for its lack of good faith or failure
to exercise ordinary care is to be measured. While it
is not necessary for us to decide in this case whether
the test of manifest unreasonableness also applies to
a determination regarding the validity of a reduction
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in the time period contained in Code § 8.4-406(f), we
will utilize that standard in this appeal since it is
the one advanced by National Title. In doing so, we
conclude that the 60-day time limitation set forth in
Paragraph 12 of the Deposit Agreement is not
“manifestly unreasonable.” Other jurisdictions have
likewise upheld the validity of reductions in the one-
year period provided in Code § 8.4-406(f) to periods
similar to or shorter than 60 days. 4 See, e.g., Parent
Teacher Ass’n v. Manufacturers Hanover Trust Co., 524
N.Y.S.2d 336, 340 (N.Y. Civ. Ct. 1988); American
Airlines, 29 S.W.3d at 96-97; Borowski, 579 N.W.2d at
252-53.
A condition precedent such as the one set forth
in Code § 8.4-406(f) recognizes that a customer is in
a better position than a bank to know whether a
signature is authorized or an item has been altered.
See American Airlines, 29 S.W.3d at 92. A reduction
in the one-year period allowed in subsection (f) to a
period of 60 days encourages diligence by a customer
and is “‘in accord with public policy by limiting
disputes in a society where millions of bank
4
We do not decide today whether a period shorter than
60 days would be “manifestly unreasonable.”
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transactions occur every day.’ ” Basse Truck Line,
Inc. v. First State Bank, 949 S.W.2d 17, 22 (Tex. App.
1997) (quoting Parent Teacher Ass’n, 524 N.Y.S.2d at
340).
CONCLUSION
For these reasons, we will affirm the judgment of
the circuit court. 5
Affirmed.
5
National Title also claims that the circuit court
engaged in “blue penciling” because Paragraph 12 of the
Deposit Agreement pertains not only to unauthorized
signatures and alterations, but also to unauthorized
indorsements. According to National Title, the inclusion
of unauthorized indorsements renders Paragraph 12 “illegal”
because the reference to unauthorized indorsements in
former Section 4-406(4) of the UCC was deleted and the
current provisions of Section 4-406 impose no duty on a
drawer to discover unauthorized indorsements. See Official
Comment 5. Since this case does not involve any
unauthorized indorsements, we reject National Title’s
argument. The circuit court merely considered the
provisions of Paragraph 12 at issue and did not address the
validity of other provisions. Thus, the circuit court did
not attempt to modify the Deposit Agreement or otherwise
engage in “blue penciling.”
Similarly, we find no merit to National Title’s
argument that the 60-day limit should be construed as the
parties’ definition of “reasonable promptness.”
Finally, we note that the circuit court’s final order
incorporates by reference its letter opinion. We do not
agree with all the rulings contained in that letter
opinion, some of which are the subject of assignments of
error. Since those particular rulings are not germane to
the Court’s opinion, we do not reach those assignments of
error.
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