Adopting Article Iv: Can Consumers Afford to Rely on the Banks' Good Faith? - Robert A. Fricks

• Jurisdiction: United States,Federal,Georgia
• Publication year: 1994
• Citation: Vol. 46 No. 1

Special Student Contributions

Adopting Article IV: Can Consumers Afford To Rely On The Banks' Good Faith?by Robert Abney Fricks^*

I. Introduction

In 1990 the National Conference of Commissioners on Uniform State Laws and the American Law Institute approved comprehensive changes to Articles 3 and 4 of the Uniform Commercial Code ("U.C.C.").¹ These changes will greatly impact consumer transactions and alter the relationship between banks and their customers. As of December 1994, thirty-six states had adopted the revised Articles.² While most states adopted them as written, some have made changes which provide the consumer with greater protection. The Georgia General Assembly will soon address the issue of whether to adopt the new Articles.³ At issue is whether the revisions warrant added consumer protection.

Part Two of this Article examines the proposed changes in Article 4 that have the greatest impact on consumers and explores the ways other states have dealt with the consumer issues arising from those changes. Part Three addresses the standards that govern the customer-bank relationship and discusses whether legislative amendments to Article 4 are really necessary to protect consumers.

II. The Major Changes of Article 4

A. Postdated Checks

The ability to postdate a check is important to many consumers. However, without legislative action, Georgia's adoption of Revised Article 4 may greatly impede that ability.

Under current Georgia law, a bank may not properly pay a postdated check before the date written on the check.⁴ A bank that prematurely pays a postdated check is liable to its customer for the resulting harm.⁵

Under Revised Article 4, however, a bank may pay a postdated check prior to the date of the check unless the customer has given the bank timely notice of the postdating.⁶ This is a reasonable requirement given the technology utilized by most banks and contemplated by the revision.⁷ What may be unreasonable for consumers is that Revised Article 4 does not require banks to inform their customers of the need to notify.⁸ In addition, Revised Article 4 "does not regulate fees banks charge their customers for a notice of postdating."⁹

One commentator suggests this change in the law "may result in subjecting consumers to 'unspecified unscrupulous practices.'"¹⁰ This commentator believes Georgia's adoption of the Revised Article 4 should be "an invitation to individual legislators to determine whether their unfair and deceptive practices laws are adequate to protect consumers in these circumstances."¹¹ In fact, several states have chosen to alter the language of Revised Article 4 and regulate fees that banks may charge for a notice of postdating.¹²

Some states require banks to accept a specified number of notices without charge.¹³ Others simply deny banks the right to charge their customers any fee for notice of postdating.¹⁴ Yet the majority of states adopted the revision as written, leaving courts to review fees in light of "principles of law such as unconscionability or good faith and fair dealing¹⁵

B. Bank Statements ... Or A Lack Thereof Under 4-406

Consumers are quite accustomed to receiving a thick envelope from their bank in the mail each month. This envelope usually contains a bank statement along with the month's canceled checks. While some consumers never even open their bank statement, others rely heavily upon it. Regardless of its utility, sending paid items along with a statement in the mail comes at a substantial expense to banks.¹⁶

Under Revised Article 4, it is unlikely that consumers will continue to receive their canceled checks in the mail. Automated check processing makes the physical transfer of checks unnecessary.¹⁷ The collecting bank merely retains the check and transfers the pertinent information electronically.¹⁸ While not receiving a copy of canceled checks may be unsettling to some consumers, the drafters thought this concern was outweighed by the decreased cost to the check collection system as a whole.¹⁹

Thus, in lieu of returning the actual items to the customer, banks are only required to maintain the capacity to furnish a copy of any canceled check for seven years.²⁰ However, the revision is silent about both the fee a bank may charge its customer for a copy and the time in which to honor the customer's request.²¹

While current Georgia law does not require banks to return paid items to the customer,²² the retention of checks is, perhaps, the most controversial of the Article 4 revisions. Despite the controversy, a majority of states have adopted the revised section as written. A number of states have, however, enacted legislation requiring banks to produce a specified number of canceled checks to customers free of charge.²³ Other states require banks to provide a telephone number for customers to call and request copies of canceled checks.²⁴ And one state requires banks to offer at least one account, at a reasonable charge, that provides for the return of all items or legible copies to the customer.²⁵

C. Discovering Forgeries and Alterations Under 4-406

Current Georgia law places a duty on bank customers to exercise reasonable care and promptness in examining their bank statements and canceled checks for unauthorized signatures or alterations.²⁶ A customer's failure to notify the bank precludes recovery.²⁷ Further, if the unauthorized signature or alteration was made by the same wrongdoer and the customer fails to report it within fourteen days after receiving the statement, recovery against the bank may also be precluded.²⁸ Current law does, however, afford consumers some protection if they can establish lack of ordinary care on the part of the bank.²⁹

Without regard to care or lack of care by the customer or bank, Georgia law places an absolute statute of limitations of sixty days for unauthorized signatures or alterations on the front of the check³⁰ and one year for unauthorized endorsements on the back of the check.³¹ A customer's failure to notify the bank within the applicable statute of limitations precludes recovery.³²

Adopting the Revised Article 4 will represent a major change in this area of Georgia law. Under the revision, the bank must provide a statement of account with "sufficient information" for its customers to reasonably identify the items paid.³³ A statement of account is sufficient if it provides the item number, amount, and date of payment.³⁴ Thus, a customer will be unable to identify the payee or date of the check from the information provided by the bank. Yet, like current Georgia law, the revision imposes a duty on the consumer to exercise reasonable care in examining the information provided by the bank and to promptly notify the bank of any unauthorized signatures or alterations.³⁵

Fortunately, Revised Article 4 may give consumers some added protection. If enacted as written, it would extend the time for reporting alterations by the same wrongdoer from fourteen to thirty days.³⁶ It would also extend the statute of limitations on unauthorized signatures or alterations on the face of the check from sixty days to one year.³⁷

In the event of unauthorized signatures or alterations, Revised Article 4 introduces the concept of comparative negligence to bank deposits and collections.³⁸ Under current Georgia law, if a customer establishes lack of ordinary care on the part of the bank, the loss is shifted to the bank, even in circumstances where the customer might normally be precluded.³⁹ In similar situations under the revision, however, the loss would be allocated between the "customer precluded and the bank asserting the preclusion . . . ."⁴⁰

While comparative negligence may seem to improve a consumer's position, one commentator suggests it may actually make it "infeasible" for consumers to assert their rights.⁴¹ Because a customer must show damages under this standard, it will be more difficult to prevail against a bank that has nothing to lose by litigating.⁴² Further, while the revision is designed to encourage settlements, without the "all or nothing" approach⁴³ of current Georgia law, "at best consumers will obtain settlements far less favorable" under the revision.⁴⁴

Despite these concerns, most states adopting the revised section have done so without substantial change.⁴⁵ The Committee on Consumer Affairs of the New York City Bar, however, has proposed a "carve-out" of the comparative negligence standard. Under its proposal, comparative negligence would not apply to retail consumer accounts when the dispute involves an amount less than the jurisdictional amount for New York Small Claims Court.⁴⁶ In such a case, the loss allocation rules of the current code would apply.⁴⁷

D. The Revision May Increase the Number of Returned Checks

Returned or "bounced" checks create problems for both consumers and banks. If an account has insufficient funds to cover a check at the time it is presented, the check bounces and creates an overdraft. This results in increased cost to the collection process, with the bank passing that cost (plus bank profit) along to its customers.⁴⁸ There is significant variation in the fees Georgia banks charge their customers for bounced checks. Smaller banks in rural areas of the state tend to charge lower fees than banks in urban areas, but even their fees can exceed twenty dollars.⁴⁹

Unfortunately for the consumer, adoption of Revised Article 4 may increase the number of returned check charges. Currently, most banks decide whether to pay a check after they credit daily deposits to the customer's account.⁵⁰ At that point, as long as there are sufficient funds to cover the draft, the check is paid.⁵¹ The revision, however, does not require banks to credit daily deposits prior to debiting checks.⁵² Banks can thus determine whether to pay a check based on an account balance that does not include same-day deposits. The Official Comment to Revised Article 4 suggests this change in the law "eliminates the uncertainty"...