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Florida should permit parties to modify article 4A's notice period by agreement.

In today's age of electronic banking, electronic funds transfers are ubiquitous. In engaging in electronic funds transfers, a bank and its customers have various rights and obligations to ensure that errors and unauthorized transactions are minimized. The bank has to do its part: Adhere to commercially reasonable security procedures. The customer must do his or her part: carefully review his or her statements and timely report to the bank any questionable transactions. These and other duties are outlined in uniform laws, as well as in the parties' account agreement. When they contradict, the account agreement should, and generally does, control because it is the most practical and proximate source of law in the transaction.

Uniform Commercial Code art. 4A identifies the rights and duties for parties to a funds transfer, including the circumstances under which a bank must refund a funds transfer. (1) In general, banks must refund to their customers funds transfers that are neither authorized by the customer nor verified pursuant to a commercially reasonable security procedure. (2) However, in the absence of an agreement to the contrary between bank and customer, if a bank sends its customer a statement identifying a fraudulent transfer, and the customer fails to object to the transfer within one year, the customer forfeits entitlement to a refund of payment. (3) The question explored in this article is whether a bank and its customers are permitted under the Uniform Commercial Code as adopted in Florida to agree to reduce the one-year notification period to, say, 30 days. The answer should be "yes" based upon 1) the reasoning behind Florida courts' decisions construing art. 4's notice period (governing bank deposits and collections); and 2) well-reasoned opinions from other jurisdictions construing art. 4A.

The Policy Behind Variation

The analysis of whether a variation of art. 4A's notification period can be enforced begins with the general provisions of art. 1. Therein, the drafters stated that one of the underlying purposes and polices of the UCC, aside from the simplification and uniformity of modern law governing commercial transactions, is u[t]o permit the continued expansion of commercial practices through custom, usage, and agreement of the parties." (4) Whenever possible, the UCC should be interpreted liberally to promote this goal. (5) Thus, the general rule is that UCC provisions may be varied by agreement. (6) However, the UCC expressly provides that certain provisions cannot be varied; the duties of "good faith, diligence, reasonableness, and care" prescribed by the UCC cannot be disclaimed; and agreed standards to measure performance or reasonable time must not be manifestly unreasonable. (7)

Florida Permits Variation by Agreement Under Art. 4

Article 4, "Bank Deposits and Collections," (8) provides for the rights and duties of parties to a transaction involving an "item," meaning "an instrument or a promise or order to pay money handled by a bank for collection or payment." (9) Article 4 requires banks to include information about the payment of items in account statements. (10) If the bank does so, the customer must act reasonably to discover and report unauthorized payments to the bank. (11) A customer who fails to comply with these duties may forfeit any claims against the bank. (12) Without regard to lack of care, a customer's claims will be precluded if he does not notify the bank of unauthorized signatures within 180 days or unauthorized endorsements within one year. (13) Courts applying Florida law have enforced, and have broadly characterized, the customer's duty to discover and report. (14)

Article 4 generally permits variation of its provisions by agreement, but distinguishes between impermissible disclaimers of responsibility and permissible agreements on standards to measure responsibility:

The effect of the provisions of this chapter 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. (15)

Accordingly, Florida courts have permitted the parties to modify by agreement the time periods for reporting unauthorized activity.

In W.J. Miranda Construction Corp. v. First Union National Bank, No. 98-29112-CA 11, 1999 WL 1567728 (Fla. Cir. Ct. Sept. 24, 1999), the court squarely addressed the issue: "The issue here, however, is whether the [one]-year notice requirement set out in [F.S.] [section]674.406(6) ... may be varied and shortened by agreement to the 60 days set out in the [d]eposit [agreement." The Miranda court held:

The Uniform Commercial Code ("UCC"), as adopted in Florida, expressly permits the parties to agree to vary the provisions of the UCC, so long as the variations do not disclaim a bank's responsibility for failure to exercise good faith and ordinary care, and are not manifestly unreasonable; and this includes the shortening of notification periods otherwise set out in the UCC. The contractual provision at issue here--[p]aragraph 12 of the [d]eposit [a]greement--does not modify or seek to disclaim the bank's responsibility to exercise good faith and ordinary care. Instead, by its terms, it simply shortens, from [one]-year to 60 days, the period prescribed by [section]674.406(6) within which Miranda must notify First Union of a claim concerning an unauthorized signature on one of its checks. All other conditions, requirements and provisions of the UCC remain without change or modification. (16)

Whether an agreement to vary UCC provisions is enforceable will depend on whether a party was disclaiming a statutory obligation. (17) The Miranda court held that shortening the art. 4 notice period from one year (18) to 60 days did not constitute a disclaimer and applied reasoning that is equally applicable to any UCC notice period:

Second, the [c]ourt finds that the cut-down provision at issue does not constitute an unenforceable disclaimer of the bank's liability. It does not absolve First Union of its duty to use ordinary care and good faith. The provision does not bar the depositor from suit and does not excuse liability for any lack of ordinary care by First Union. All the [d]eposit [a]greement does is to reduce the time within which Miranda must provide notice. That is precisely the rationale and holding of courts outside of Florida that have found similar (and, indeed, shorter notice provisions) to be enforceable. As stated, this issue of the enforceability of cut-down provisions in UCC [section]4-406 is one of first impression in Florida, but courts in other states have reviewed and approved their applicability, as have commentators. (19)

Because a modification of art. 4's notice provision does not bar the depositor from suit and does not excuse liability, Florida courts, along with other states' courts, (20) have uniformly held that account agreements may permissibly vary the time period for notice.

Article 4 Reasoning Applies to Art. 4A

Article 4A's provision regarding variation appears simpler: "(1) Except as otherwise provided in this chapter, the rights and obligations of a party to a funds transfer may be varied by agreement of the affected party." (21)

Article 4A's notice period provides a one-year time limit (triggered from receipt of a bank statement identifying the disputed funds transfer) for the customer to notify the bank of an unauthorized transaction. (22) This provision has the same effect as the analogous notice period in art. 4. (23) F.S. [section]670.505 is not truly a statute of repose, even if it resembles one. (24)

Accordingly, art. 4A's notice provision may be amended by agreement, unless there is a specific statute prohibiting such action (i.e., except as otherwise provided), and as long as it does not run afoul of the UCC's art. 1 mandate prohibiting disclaimer of the parties' duties of good faith, diligence, reasonableness, and care.

The variation provisions in art. 1, art. 4, and art. 4A all address the same issue: Has a party attempted to disclaim a statutory duty, thereby frustrating the UCC's policy favoring uniformity? Or have the parties merely agreed on how performance of that duty should be measured, thereby furthering the UCC's policy favoring freedom of contract? (25)

Florida Should Follow the Reasoning of Courts Allowing Amendment of the Notification Period by Agreement

In Priority Staffing, Inc. v. Regions Bank, 2013 WL 5462239 (W.D. La. Sept. 30, 2013), the Western District of Louisiana, applying Louisiana law, held that art. 4A's notice period may be varied by agreement. (26) In that case, the customer sued the bank to recover for losses caused by the customer's employee's fraud. (27) The former employee was the only employee who reconciled the customer's bank statements, transferred funds between the customer's accounts, and maintained accounting and financial practices and procedures. (28) In addition, the customer provided the employee with the username and password for the customer's banking account. (29) The customer sought a refund of every unauthorized debit made by the employee, but the bank argued that the customer should be precluded from recovering for any transfer that occurred more than 30 days before the date that the customer notified the bank of its objection. (30) The court noted that [section]4A-505 provided a one-year notification period by default. (31) However, the court, in relying on the Louisiana equivalents of F.S. [section][section]670.501 and 671.102, held that the parties' agreement to modify the notification period was enforceable. (32)

The Priority Staffing court relied in part on an unpublished Minnesota appellate opinion, which also allowed variation of art. 4A's notice period. (33) That case enforced a contractual 30-day notification period to bar a common law claim (and noted the similarity between art. 4's and art. 4A's variance provisions): "Like [art.] 4, [art.] 4A also provides that the parties may vary by agreement "the rights and obligations of a party to a funds transfer." Minn. Stat. [section]336.4A-501 (2000). The 30-day limitation period in the account agreement therefore time-barred Steffes's conversion claim." (34)

The Unsound Reasoning of Regatos Should Be Rejected by Florida Courts

In Regatos v. North Fork Bank, 257 F. Supp. 2d 632 (S.D.N.Y. 2003), the Southern District of New York held that art. 4A's notice period may not be varied. (35) The Regatos court aptly recognized that freedom to contract is a principal of the UCC. (36) It even stated, correctly, that:

Unless the statute designates a provision as one that may not be varied by agreement, the agreement of the parties will trump the provisions of the UCC. In that sense, "[i]n an electronic funds transfer case an agreement between the parties may be the most significant source of law in the entire transaction." 3 James J. White & Robert S. Summers, Uniform Commercial Code [section]22-3 (4th ed. 1995). (37)

The court acknowledged that "[n]othing in [[section]4A-505] explicitly prohibits the one-year notice provision from being varied by agreement." (38) Notwithstanding these recitations of legislative intent and an accurate plain reading of the statute, however, the court found that the one-year notice provision "strongly implicates" the invariable right of refund. (39) From there, the Regatos court concluded that the art. 4A's notice period may not be varied by agreement. (40)

The Regatos court focused on U.C.C. [section]4A-204, which governs the bank's obligation to refund unauthorized or unenforceable payment orders. Article 4A-204 provides that, if the bank is not entitled to enforce payment, it must refund the payment along with interest. (41) In order to secure the right to recover interest, the customer must notify the bank of the unauthorized transfers within a reasonable time, not to exceed 90 days. (42) The reasonable time to provide notice in order to perfect a right to recover interest may be fixed by agreement, but the bank's duty to refund may not be varied: "Reasonable time ... may be fixed by agreement ..., but the obligation of a receiving bank to refund payment. may not otherwise be varied by agreement." (43)

Accordingly, the parties can determine by agreement what would constitute a reasonable time to place the bank on notice in order to secure a right to interest, but the parties cannot eliminate the bank's obligation to refund unenforceable funds transfers. To be clear, 4A-204 does not prohibit the parties' modification of the one-year condition precedent notice period under 4A-505. The reasonable time mentioned under 4A-204 affects only whether the bank is obligated to pay interest on a refunded payment order. (44) It should not be confused with art. 4A's notice period. (45)

The Regatos court concluded that, since 4A-204 expressly permits variation, but 4A-505 does not, the drafters must have impliedly prohibited variation of the 4A-505 notice period. (46) However, the Regatos decision overlooks the fact that the UCC only bars variation when expressly prohibited. (47) There is no implied statutory bar on variation. Simply put, if the UCC does not expressly state that variation is barred, it is permitted unless the variation would disclaim a party's duty of care or impose a manifestly unreasonable standard. (48) Moreover, allowing variation by agreement comports with the UCC's underlying purpose--permitting the continued expansion of commercial practices through "agreement of the parties." Finally, the Regatos court's implied prohibition reasoning is expressly rejected by the UCC: "The presence in certain provisions of this code of the words 'unless otherwise agreed' or words of similar import does not imply that the effect of other provisions may not be varied by agreement under this subsection." (49)

The Regatos court was seemingly concerned about the bank's ability to draft away statutory liability for accepting unauthorized or unverified payment orders by cutting down on the notice period. In practice, Regatos highlights a valid concern: reducing the notice period from one year to 30 days may effectively reduce the amount a bank must refund to its customer when the customer fails to notice the questionable transactions in his or her statements. However, a shorter notice period (for instance, 30 days) incentivizes the customer to carefully review monthly statements with the same frequency that they are issued--and thereby eliminate any dispute and resulting liability that only festers with time. Both sides have equally persuasive "fairness" arguments. However, the Regatos court went a step too far diverging from interpreting the law to usurping its judicial role and legislating a fairness approach espoused by the customer--to the exclusion of the plain language and intent of art. 4A.

Finally, the Regatos decision conflicts with Florida caselaw--including Miranda; Cheese & Grill Rest., Inc. v. Wachovia Bank, N.A., 970 So. 2d 372 (Fla. 3d DCA 2007); and Bank of Am., N.A v. Putnal Seed & Grain, Inc., 965 So. 2d 300 (Fla. 1st DCA 2007)--that 1) recognize the UCC's express policy of encouraging variance by agreement; and 2) hold that a notice provision is merely a condition precedent to bringing a claim and does not otherwise affect the bank's obligations.

Consistency and Sound Reasoning Should Prevail

In applying Florida law, no court has ever considered whether art. 4A's notice period may be modified. However, numerous Florida and federal cases have permitted variation of art. 4's analogous provisions. Those cases employ broad language and reasoning that are not restricted to specific types of transactions that would apply equally to art. 4A funds transfers. Customers are obligated to examine bank statements and notify the bank of "any claimed errors or unauthorized activity." The UCC, as adopted in Florida, expressly permits parties to agree to vary its provisions, "which includes the shortening of notification periods otherwise set out in the UCC." (50) The modification of a customer's notification period neither modifies or disclaims the bank's obligations; nor does it violate F.S. [section]670.204, which forbids only those variations that "modify the obligation of a receiving bank to refund payment." (51) When the parties have agreed to a shorter notice period, the bank can still be sued and will remain obligated to refund improper funds transfers.

More importantly, in the absence of a statute expressly prohibiting variation by contract, courts should defer to the most significant source of law in the transaction--the parties' account agreement. The bank and its customer should be free to delineate responsibility under the account agreement, including the responsibility of a customer to timely review its statements. To be clear, a bank cannot eliminate the risk that it will be liable for unauthorized transactions, but it should be able to enter into an agreement with its customer that requires the customer to notify the bank within a shortened timeframe in order to perfect a claim based upon such transactions. This "freedom to contract" philosophy is promoted by the UCC, and specifically art. 4A, and should be adopted by Florida courts in permitting variation of the art. 4A notice period.

(1) A "funds transfer" is "the series of transactions, beginning with the originator's payment order, made for the purpose of making payment to the beneficiary of the order." Fla. Stat. [section]670.104(1) (2015). A payment order is "an instruction of a sender to a receiving bank, transmitted orally, electronically, or in writing, to pay ... money to a beneficiary [where] the receiving bank is to be reimbursed by debiting [the sender's account]." Fla. Stat. [section]670.103(1)(c).

(2) See U.C.C. [section]4A-202.

(3) See U.C.C. [section]4A-505.

(4) Fla. Stat. [section]671.102(1)(b) (emphasis added).

(5) See U.C.C. [section]1-103(a)(1).

(6) U.C.C. [section]1-302(a); Fla. Stat. [section]671.102(1) ("This code shall be liberally construed and applied to promote its underlying purposes and policies[.]").

(7) See U.C.C. [section]1-302(b).

(8) Fla. Stat. [section]674.101.

(9) Fla. Stat. [section]674.104(1)(i).

(10) Fla. Stat. [section]674.406(1).

(11) Fla. Stat. [section]674.406(3).

(12) See Fla. Stat. [section]674.406(4).

(13) Fla. Stat. [section]674.406(6).

(14) See Lowenstein v. Barnett Bank of S. Fla., N.A., 720 So. 2d 596, 597 (Fla. 3d DCA 1998) (recognizing that "the customer ha[s] an obligation to examine bank statements and notify the bank" of any claimed errors or unauthorized activity).

(15) Fla. Stat. [section]674.103.

(16) Miranda, 1999 WL 1567728.

(17) See Fla. Stat. [section]671.102.

(18) After Miranda was decided, the default notice period for an unauthorized signature was amended to 180 days. See Fla. Stat. [section]674.406(6).

(19) Miranda, 1999 WL 1567728; see also Cheese & Grill Rest., Inc. v. Wachovia Bank, N.A., 970 So. 2d 372, 374-75 (Fla. 3d DCA 2007) (affirming summary judgment for the bank based in part on the customer's failure to satisfy a contractual duty to review its account statements within 30 days); Bank of Am., N.A. v. Putnal Seed & Grain, Inc., 965 So. 2d 300, 301 (Fla. 1st DCA 2007) ("[R]educing the time period in which Putnal was required to notify the bank of problems or unauthorized transactions from [one] year to 60 days also does not absolve the bank of its duty to exercise ordinary care. The 60-day notice requirement only creates a condition precedent which Putnal must comply with before it may seek reimbursement.").

(20) See Jamison v. First Ga. Bank, 387 S.E.2d 375, 377 (Ga. Ct. App. 1989) (stating in dicta, "regardless whether the deposit slip.could qualify as an altered item within the [UCC], appellant's failure to notify appellee within 60 days of his receipt of the November statement reflecting the discrepancy in his balance resulted in the forfeiture of appellant's right to challenge the statement."); Stowell v. Cloquet Co-op Credit Union, 557 N.W.2d 567 (Minn. 1997) (enforcing a 20-day contractual provision); Canfield v. Bank One, Tex, N.A., 51 S.W.3d 828, 836 (Tex. Ct. App. 2001) (enforcing a 90-day contractual provision and stating that "[c]onditions precedent are consistent with the goals of the UCC and general public policy"); New York Credit Men's Adjustment Bureau, Inc. v. Mfrs. Hanover Trust Co., 343 N.Y.S.2d 538, 540 (N.Y. App. Div. 1973) (holding that agreement requiring notification of suspected forgery within 30 days after statement was sent to customer did not serve to absolve bank of its negligence, but only provided a condition precedent to liability); Borowski v. Firstar Bank Milwaukee, N.A., 579 N.W.2d 247 (Wis. Ct. App. 1998) (approving 14-day notice period); Parent Teacher Ass'n, Pub. Sch. 72 v. Mfrs. Hanover Trust Co., 524 N.Y.S.2d 336, 340 (N.Y. Civ. Ct. 1988) ("Conditions precedent and shortened periods of limitation ... have been routinely accepted in the banking relationship, usually without extensive analysis. Such provisions are not only compatible with statute and case law; they are in accord with public policy by limiting disputes in a society where millions of bank transactions occur every day.") (internal citations omitted).

(21) Fla. Stat. [section]670.501.

(22) Fla. Stat. [section]670.505.

(23) Compare Fla. Stat. [section]674.406(4) (stating that a customer who fails to timely notify the bank is "precluded from asserting" the unauthorized the transaction against the bank) with Fla. Stat. [section]670.505 (stating that a customer who fails to timely notify the bank is "precluded from asserting" that the bank is not entitled to retain payment).

(24) See id. cmt. ("This section is in the nature of a statute of repose for objecting to debits made to the customer's account.") (emphasis added).

(25) See Fla. Stat. [section]671.102 cmt. 2.

(26) Priority Staffing, Inc., 2013 WL 5462239 at *3.

(27) Id. at *1.

(28) Id.

(29) Id.

(30) Id. at *2.

(31) Id.

(32) Id. at *3.

(33) See id. (citing Bonnema v. Heritage Bank NA Willmar, No. C9-01-1940, 2002 WL 1363985 (Minn. Ct. App. June 19, 2002)).

(34) Bonnema, 2002 WL 1363985 at *5.

(35) Regatos, 257 F. Supp. 2d at 642. The Second Circuit subsequently certified the issue to the New York Court of Appeals, which "embrac[ed]" the Southern District's reasoning. See Mendes Regatos v. North Fork Bank, 431 F.3d 394, 394 (citing and characterizing the holding of Regatos v. North Fork Bank, 5 N.Y.3d 395 (2005)). Because the three opinions follow the same reasoning, they are addressed together. All subsequent references to Regatos are to the district court's opinion.

(36) Regatos, 257 F. Supp. 2d at 640.

(37) Id.

(38) Id. at 642.

(39) See id.

(40) The Regatos court appeared to be concerned with protecting what it described as the customer's "absolute right to recover." "If a security procedure is in place, the customer has an absolute right to recover. If a security procedure is in place, and it is followed, the bank is absolved from loss. But if a security procedure is in place and the bank fails to follow it, that is as good as no security procedure at all: the loss reverts to the bank and the customer has an absolute right to recover. This allocation of loss is so integral to the structure of [art.] 4A that it may not be varied by contract." Id. at 643. This concern is misplaced, however, as the court's conclusion is wrong. If there is no security procedure in place, the customer does not have an absolute right to recover. The bank will still have a defense to the customer's claims if it can show that the funds transfer was authorized by the customer under common law principles of agency, including estoppel and ratification (which, of course, implicates the customer's duty to review his statements and report discrepancies). See U.C.C. [section]4A-202. The court's conclusion --that this allocation of loss is so integral to the structure of art. 4A that it may not be varied by contract--is not only buttressed by a flawed reading of art. 4A, but is contradicted by the UCC and the drafters' comments regarding permissible variation.

(41) Art. 4A-204 reads as follows: "(a) If a receiving bank accepts a payment order issued in the name of its customer as sender which is (i) not authorized and not effective as the order of the customer under Section 4A-202, or (ii) not enforceable, in whole or in part, against the customer under section 4A-203, the bank shall refund any payment of the payment order received from the customer to the extent the bank is not entitled to enforce payment and shall pay interest on the refundable amount calculated from the date the bank received payment to the date of the refund. However, the customer is not entitled to interest from the bank on the amount to be refunded if the customer fails to exercise ordinary care to determine that the order was not authorized by the customer and to notify the bank of the relevant facts within a reasonable time not exceeding 90 days after the date the customer received notification from the bank that the order was accepted or that the customer's account was debited with respect to the order. The bank is not entitled to any recovery from the customer on account of a failure by the customer to give notification as stated in this section."

(42) See cmt.2 ("Section 4A-204 is designed to encourage a customer to promptly notify the receiving bank that it has accepted an unauthorized payment order ... [because] in some cases prompt notification may make it easier for the bank to recover some part of its loss from the culprit.... The customer has a duty to exercise ordinary care to determine that the order was unauthorized after it has received notification from the bank, and to advise the bank of the relevant facts within a reasonable time not exceeding 90 days after receipt of notification.... The only consequence of a failure of the customer to perform this duty is a loss of interest on the refund payable by the bank.... Loss of interest is in the nature of a penalty on the customer designed to provide an incentive for the customer to police its account.").

(43) U.C.C. [section]4A-204(b).

(44) See Fla. Stat. [section]670.204.

(45) See Fla. Stat. [section]670.505.

(46) Regatos, 257 F. Supp. 2d at 644 (stating that, because 4A-204 expressly permitted variance by agreement, the failure to include similar language in 4A-505 "is strong evidence that [the legislature] intended the one-year period to be invariable").

(47) See Fla. Stat. [section]671.102(2)(a) ("Except as otherwise provided in this code, the effect of provisions of this code may be varied by agreement.") (emphasis added); Fla. Stat. [section]670.501(1) ("Except as otherwise provided in this chapter, the rights and obligations of a party to a funds transfer may be varied by agreement of the affected party.") (emphasis added).

(48) See Fla. Stat. [section]671.102.

(49) Fla. Stat. [section]671.102(2)(c). The Regatos court also incorrectly stated that [section]4A-204 "explicitly states that a customer's failure to give notice will not disturb her right to refund." Regatos, 257 F. Supp. 2d at 642. Section 4A-204 merely states that a "bank is not entitled to any recovery from the customer on account of a failure by the customer to give notification as stated in this section." Fla. Stat. [section]670.204(1). Whether the bank may recover is a separate issue from whether notice is a condition precedent to the customer's recovery.

(50) Miranda, 1999 WL 1567728.

(51) Fla. Stat. [section]670.204.

Illustration by Barbara Kelley

Peter P. Hargitai is partner in Holland & Knight's Jacksonville office. He focuses primarily on real estate and commercial litigation, and banking operations.
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