National Title Insurance Corp. Agency v. First Union National Bank

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     some unauthorized person has withdrawn funds from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


                             2
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).


                              4
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).


                                      5
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




                               6
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



                              7
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).

                                8
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,


                              9
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


                              10
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


                              11
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.”

                              12
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.

                                13