## Facts

- Dr. John G. Vowell and his wife maintained an interest-bearing checking account and a savings/money-market account at Mercantile Bank of Arkansas (later Firstar Bank).
- The account agreements required the customers to examine account statements with reasonable promptness and to promptly report unauthorized payments or alterations; failure could shift or allocate losses depending on each party’s ordinary care.
- In June 1997, the Vowells’ adult daughter, Suzan, moved into their home; the Vowells knew she had a history of substance abuse, theft, writing bad checks, and previously stealing their checks and forging signatures.
- The Vowells attempted to secure the checkbook by hiding it under the kitchen sink; their ATM PIN matched their home-security code.
- Suzan found the checkbook, learned the PIN, forged Mrs. Vowell’s signature on multiple checks, and made unauthorized ATM withdrawals over several months.
- The bank sent multiple monthly statements during the period of the fraud.
- After Vowell noticed an unauthorized credit-card transaction, he contacted the bank; the bank froze the accounts, and Suzan was arrested the following day.
- The trial court found (1) the Vowells did not substantially contribute to the forgeries through negligence, (2) the Vowells failed to examine several statements with reasonable promptness, and (3) the bank exercised ordinary care in paying the forged checks.
- The trial court entered judgment for Vowell for $6,014.38 after allocating losses between the parties.

## Issues

1. Whether Vowell’s conduct in safeguarding checks and ATM access failed to meet ordinary care and substantially contributed to the forgeries, precluding recovery under Ark. Code Ann. § 4-3-406.
2. Whether the trial court correctly applied Ark. Code Ann. § 4-4-406(e) to determine which items were barred because the customer did not timely review statements and report unauthorized transactions, particularly for later items by the same wrongdoer.
3. Whether the trial court properly allocated losses under the account agreements in a manner consistent with the UCC loss-allocation and preclusion rules.

## Decision

- The court affirmed the finding that Vowell’s conduct did not substantially contribute to the forgeries; § 4-3-406 did not preclude him from asserting the unauthorized items.
- The court affirmed the finding that the bank exercised ordinary care in paying the items.
- The court reversed in part and remanded because the trial court misapplied § 4-4-406(e) in determining which transactions were precluded and thus incorrectly calculated the recoverable damages.
- The case was remanded for entry of a revised judgment recalculating damages consistent with § 4-4-406(e)’s preclusion scheme.

## Legal Principles

- Under Ark. Code Ann. § 4-3-406, a customer is precluded from asserting a forged signature against a bank that pays in good faith only if the customer’s failure to exercise ordinary care substantially contributed to the forgery; proof burdens are allocated by the statute.
- Under Ark. Code Ann. § 4-4-406, a customer must examine statements with reasonable promptness and notify the bank promptly of unauthorized signatures or alterations.
- Under Ark. Code Ann. § 4-4-406(e), if the customer fails to timely report an unauthorized item, the customer may be precluded from asserting later unauthorized items by the same wrongdoer that the bank pays in good faith before receiving notice (the “repeat wrongdoer” rule).
- Contractual statement-review and loss-shifting provisions may be enforced, but loss allocation must track and remain consistent with the UCC’s statutory preclusion and allocation rules.
- Appellate review of factual findings is for clear error; findings are disturbed only when clearly against the preponderance of the evidence.

## Conclusion

The court held that Vowell was not barred under § 4-3-406 because his conduct was not found to have substantially contributed to the forgeries, but it required a recalculation of damages because § 4-4-406(e) can preclude recovery for later items by the same wrongdoer when the customer fails to timely review statements and report the initial unauthorized transactions.


Mercantile Bank of Ark. v. Vowell, 117 S.W.3d 603 (Ark. Ct. App. 2003)