## Facts

- Espresso Roma Corporation, Pacific Espresso Corporation, and David S. Boyd (d/b/a Hillside Residence Hall) maintained checking accounts at Bank of America.
- The customers employed Joseph Montanez as a bookkeeper.
- From October 1997 through May 1999, Montanez stole blank checks and used a home computer and check-writing software to print checks on the customers’ accounts.
- The checks bore forged signatures and were used to pay Montanez’s personal expenses.
- Montanez controlled incoming mail and removed forged items from bank statements and returned checks to conceal the scheme.
- Bank of America paid the forged checks over time, totaling more than $330,000.
- The customers discovered the forgeries in May 1999 after Montanez left and a cancelled check with an unfamiliar signature was found.
- The customers notified the bank and sought reimbursement; the bank refused, relying on Cal. Com. Code § 4406 and the deposit agreements’ notice limits.

## Issues

1. Whether Cal. Com. Code § 4406(d) and the account agreements precluded the customers’ claims because they failed to timely review statements and report unauthorized signatures.
2. Whether Cal. Com. Code § 4406(e) permitted recovery despite preclusion if the bank failed to exercise ordinary care and that failure substantially contributed to the loss.
3. Whether the customers raised a triable issue of material fact on the bank’s lack of ordinary care sufficient to defeat summary judgment.

## Decision

- The Court of Appeal affirmed summary judgment for Bank of America.
- The customers’ claims were precluded under Cal. Com. Code § 4406(d) as implemented by contract, because notice was not given within the contractual/statutory time limits (including a 30-day notice period and an outside one-year bar).
- The customers did not present evidence creating a triable issue that the bank failed to exercise ordinary care or that any lack of care substantially contributed to the loss under § 4406(e).
- The employee’s concealment of the statements and checks did not excuse the customers’ statutory duty to examine statements and promptly notify the bank.

## Legal Principles

- Under Cal. Com. Code § 4406, a customer must examine bank statements and paid items with reasonable promptness and promptly notify the bank of unauthorized signatures or alterations; failure may preclude claims.
- Deposit agreements may set notice requirements consistent with § 4406, including short notice periods and an outside time bar after statements/items are made available.
- When a customer fails to timely report an initial forgery, § 4406 can bar recovery for later similar forgeries by the same wrongdoer (the “repeater” effect).
- Even if preclusion applies, § 4406(e) allows partial recovery only to the extent the bank failed to exercise ordinary care and that failure substantially contributed to the loss; the customer must produce evidence of the bank’s lack of ordinary care.
- Losses stemming from a customer’s internal employee fraud and weak internal controls are generally allocated to the customer absent proof of the bank’s lack of ordinary care.

## Conclusion

The court held that the customers’ delayed discovery and notice of a long-running employee check-forgery scheme barred their claims under Cal. Com. Code § 4406 and the deposit agreements, and that they failed to raise a triable fact dispute that the bank’s processing of the checks lacked ordinary care or caused the loss.


Espresso Roma Corp. v. Bank of Am., N.A., 100 Cal. App. 4th 525, 124 Cal. Rptr. 2d 549 (Cal. Ct. App. 2002)