New Jersey has adopted provisions of Article III and IV of the Uniform Commercial Code which govern the allegation of check-fraud losses, N.J.S.A. 12A: and 12A:4-406.

While subsection 1 of N.J.S.A. 12A:4-406 establishes a customer’s duty to discover and report promptly unauthorized signatures or alterations upon receipt of their bank statement, subsection 2 states that the customer is precluded from asserting claims against the bank, if the bank can establish that customer breached this duty. This is generally done by the time frames in which a customer contacts the bank regarding any unauthorized signatures or alterations. However, subsection 3 states that subsection 2 will not apply if the customer establishes lack of ordinary care on the part of the bank paying the item. N.J.S.A. 12A:3-406 says that a customer is stopped from recovery against a payor bank where his negligence substantially contributes to the loss, however, this is contingent upon the payor bank having paid the instrument in good faith and in accordance with a reasonable commercial standards of the drawees or payor’s business.

Given the foregoing, therefore, where there is proof either that the banks procedures are below industry standards or that the bank’s employees failed to exercise care in paying checks, the defense of the customer’s negligence is unavailable to the bank. The result is that the bank is then obligated to cover the losses of the customer, therefore, when a bank has set forth policies and procedures for accepting checks for deposit or cash, these procedures must be adhered to. Adherence to the procedures should protect the bank from ultimate liability in the case of fraud, unauthorized signatures, and alterations, where the bank’s policies in and of themselves are consistent with the ordinary procedures in banking industry, are commercially acceptable, and are in compliance with the Laws of the State of New Jersey.

In particular, reviewing endorsements where indicated by policies in confirming that checks are properly endorsed for deposit to the account of the named payee. This matter was recently ruled upon in New Jersey Steel Corp. vs. Warburton, by the New Jersey State Supreme Court. In that case, Wilbert Warburton was stealing checks from the New Jersey Steel Corp. writing the checks to fictitious payees with names of a company similar to his own, and was endorsing the checks ‘for deposit’ followed by the account number for his actual bank account. These checks were routinely deposited by Midlantic Bank who was both the depository and payor bank, despite the facts of the inconsistency between the payee and the deposit numbers on the back, and that many checks were over $10,000.00 in amount.

Pursuant to Midlantic’s own policies, any deposit of five of fewer checks required the teller to read each endorsement to verify that they were correct and any single check over $10,000.00 had to be initialed by two tellers to evidence a thorough review. These procedures were not followed. The trial court determined the fraud upon Wilbert Warburton’s part and also determined that the checks were endorsed for a deposit to an account other then that of the named payee. With many of the checks being in excess of $10,000.00, yet not bearing any teller’s initials, the Court further concluded that Midlantic’s failure to thoroughly review the endorsements was a violation of the ordinary procedures of the banking industry, as well as a violation of their own internal policies, whereupon the Court found for New Jersey Steel Corp. and against Midlantic Bank. Thus, holding Midlantic Bank liable for the monies stolen by Mr. Warburton from New Jersey Steel.

This case was upheld by both the Appellate Division and the Now Jersey Supreme Court. In particular the New Jersey Supreme Court held that a bank is liable for the loss caused by its failure to follow its own policies or to act within generally accepted banking practices in debiting a corporation’s account for checks having forged signatures and missing proper endorsements. This holding was despite New Jersey Steel’s failure to examine the statements and discover the fraud earlier. Had the personnel from Midlantic Bank filed their own policies and procedures, in all likelihood New Jersey Steel would have born the liability for the stolen checks due to their own inattentiveness and failure to act properly upon receiving and reviewing their statements.

Given the foregoing, it is clear that bank policies must be adhered to in order to protect the bank from liability in case of fraud, unauthorized signatures or alterations.