## Facts

- Schultz Foods maintained a commercial checking account at Wachovia and assented to Wachovia’s deposit agreement.
- The agreement identified fraud-prevention services, including “Positive Pay,” and stated that if the customer did not implement such services, the customer would be precluded from asserting claims against Wachovia for payment of unauthorized, altered, counterfeit, or other fraudulent items.
- Positive Pay required Schultz to transmit check-issuance data so Wachovia could compare presented checks against the issuance file before payment.
- Schultz experienced multiple prior check-fraud incidents while banking with Wachovia; Wachovia recommended closing compromised accounts or implementing Positive Pay.
- Schultz repeatedly closed accounts but declined to implement Positive Pay; Wachovia absorbed earlier fraud losses.
- Schultz issued a check for $153,856.46 to Amerada Hess; thieves intercepted it, altered the payee to “Kenneth Payton,” and Payton deposited it at TCF Bank.
- TCF presented the altered check to Wachovia; Wachovia paid it and charged Schultz’s account.
- By the time Schultz reported the fraud, funds had been wired overseas and could not be recovered.
- Cincinnati, Schultz’s insurer, reimbursed Schultz and sued Wachovia as Schultz’s subrogee, seeking to recover the charged amount.

## Issues

1. Whether UCC § 4-103 permits a bank and commercial customer to vary the UCC § 4-401 “properly payable” rule by contract to allocate loss for altered or fraudulent checks.
2. Whether the deposit agreement validly barred Schultz (and thus Cincinnati as subrogee) from asserting claims for Wachovia’s payment of the altered check because Schultz did not implement Positive Pay.
3. Whether Wachovia’s prior reimbursement of earlier fraud losses waived, modified, or estopped enforcement of the agreement’s loss-allocation provision.

## Decision

- The court granted Wachovia’s motion for summary judgment and dismissed Cincinnati’s complaint with prejudice.
- The court held the deposit agreement permissibly allocated the risk of loss to Schultz when Schultz declined available fraud-prevention services.
- The court held Cincinnati, as subrogee, had no greater rights than Schultz and was bound by Schultz’s contractual bar on claims.
- The court rejected waiver/modification arguments based on Wachovia’s prior voluntary reimbursements, relying on the agreement’s anti-waiver provision and the absence of a contract amendment.

## Legal Principles

- Under UCC § 4-103, parties may vary Article 4 obligations by agreement, so long as the agreement does not disclaim a bank’s duties of good faith or ordinary care.
- A deposit agreement may condition a bank’s liability for altered or fraudulent items on a commercial customer’s adoption of specified fraud-prevention services (e.g., Positive Pay) and may bar claims if the customer declines them.
- A subrogee’s rights are derivative; when the insured’s contract bars recovery for a category of loss, the subrogee is similarly barred.
- A bank’s prior voluntary assumption of losses does not, without more, waive contractual risk-allocation terms, especially where the agreement contains an anti-waiver clause.

## Conclusion

The court enforced a commercial deposit agreement that shifted check-fraud loss to the customer when the customer declined Positive Pay, holding that the agreement permissibly varied the default UCC “properly payable” rule and barred the insurer-subrogee’s claim for an altered-payee check.


Cincinnati Ins. Co. v. Wachovia Bank, Nat’l Ass’n, 2010 WL 2777478 (D. Minn. July 14, 2010)