Bank Customers Entitled to Actual Notice of Account Activity under New York Law: A Result Influenced by Electronic Funds Transfer

In a case of first impression (Regatos v North Fork Bank), the New York State Court of Appeals has upheld a lower court finding that a foreign customer who has so-called "hold mail" arrangements with his New York bank (allowing the bank not to mail account statements to the customer until requested to do so) is not precluded from claiming that the bank improperly paid on fraudulent cheques merely because the bank's standard form customer agreement requires the customer to notify the bank of account irregularities immediately. On the facts, the customer (Regatos) failed to discover that cheques were fraudulently drawn on his account until well after the period of required notice had elapsed under his customer account agreement with the bank (North Fork Bank). North Fork Bank argued that Regatos ought to be held to the required notice period because the "hold mail" agreement between them allowed the bank to claim that it had given Regatos constructive notice of the account activity. The Court ruled that, independently of the precise wording of the Uniform Commercial Code (UCC) regarding notice periods and of the bank's failure to follow its security procedures, it was unreasonable for a bank's liability to be limited when the customer had received less than actual notice of the account activity. Of particular significance was the Court's reasoning (even though on the facts of this case electronic communications and transfers were not an issue) that in an era of electronic funds transfer (EFT), if North Fork Bank's argument were to prevail, a bank would be able to escape liability for an improper account debit by asserting that account activity had taken place even where the customer may have had no reason to log on to his account: " … the crucial information could be sitting in the bank's possession for weeks, awaiting discovery by the customer". Because this was an appellate court interpreting New York law (a common choice of law in many commercial agreements), the result, by way of a 7-0 unanimous decision, could be influential in cases outside New York. For an article on the case from the New York Law Journal, see http://www.law.com/jsp/article.jsp?id=1129898336695 For the full text of Regatos v North Fork Bank et al, visit: http://www.nycourts.gov/ctapps/decisions/oct05/142opn05.pdf Summary by: The Editor