## Facts

- A Zapata employee stole blank corporate checks and forged numerous checks (mostly $150–$800) drawn on Zapata’s account at Rhode Island Hospital Trust National Bank.
- From March through July 1985, the Bank paid forged checks totaling $109,247.16.
- Bank statements reflecting the forged items began reaching Zapata in early April 1985.
- Zapata did not meaningfully review the statements until July 1985, when it discovered the forgeries and notified the Bank.
- The Bank agreed it must reimburse for forged checks paid before April 25, 1985 (about two weeks after Zapata received a statement showing forgeries), but refused reimbursement for checks paid on or after April 25 under U.C.C. § 4-406(1)–(2).
- The Bank’s processing system reviewed signatures on all checks over $1,000; for checks $100–$1,000, it reviewed signatures only when suspicious, flagged, or randomly selected (about 1%).
- The district court, after a bench trial, ruled for the Bank, finding Zapata’s delayed review triggered § 4-406(1)–(2) and Zapata failed to prove the Bank lacked “ordinary care” under § 4-406(3).

## Issues

1. Whether Zapata’s failure to examine statements with reasonable care and promptness precluded recovery for forged checks paid after the Bank sent statements showing the forgeries under U.C.C. § 4-406(1)–(2).
2. Whether Zapata proved, under U.C.C. § 4-406(3), that the Bank lacked “ordinary care” in paying the forged checks, such that the statutory preclusion would not apply.

## Decision

- The First Circuit affirmed judgment for the Bank.
- The court treated Zapata’s statement-review failure as triggering preclusion under § 4-406(1)–(2) for checks paid on or after April 25, 1985.
- The court held Zapata did not meet its burden under § 4-406(3) to establish that the Bank’s check-verification procedures lacked ordinary care.
- Evidence that the Bank’s procedures matched general banking usage and were economically justified supported a finding of ordinary care, absent proof that the industry practice was unreasonable.

## Legal Principles

- Under U.C.C. § 4-406(1)–(2), a customer must promptly and carefully review bank statements and report unauthorized signatures; failure may bar claims for later forged items reflected in statements.
- Under U.C.C. § 4-406(3), the customer bears the burden to establish the bank’s lack of ordinary care to avoid the statutory preclusion.
- Conformity with general banking usage is prima facie evidence of ordinary care; it is not automatically conclusive, but it creates a strong showing the customer must rebut.
- “Ordinary care” permits cost-justified, statistically effective processing systems; it does not require a bank to examine every signature on every check.
- Proof that forgeries occurred and were not detected, without evidence that the prevailing practice is unreasonable or unfair, is insufficient to show lack of ordinary care.

## Conclusion

Because Zapata failed to timely review its statements and failed to prove the Bank’s industry-standard, cost-justified verification system fell below ordinary care, Zapata was barred from recovering losses on forged checks paid on or after April 25, 1985.


Rhode Island Hosp. Trust Nat'l Bank v. Zapata Corp., 848 F.2d 291 (1st Cir. 1988)