5 N.Y.3d 395 (2005)
The one-year statute of repose in UCC 4-A-505 cannot be modified by agreement, and UCC Article 4-A requires actual, not constructive, notice to trigger the customer’s duty to report unauthorized transfers.
Summary
This case addresses whether a bank can contractually shorten the one-year period for a customer to report unauthorized fund transfers under UCC 4-A-505 and whether “constructive notice” (statements being available but not reviewed) suffices to trigger the customer’s reporting duty. The New York Court of Appeals held that the one-year period cannot be shortened by agreement and that actual notice is required. The Court reasoned that allowing banks to modify the notice period would undermine the incentive for them to adopt robust security procedures. Actual notice provides a clear rule for banks and customers, fostering reliability in electronic fund transfers.
Facts
Tomáz Mendes Regatos had a commercial account with North Fork Bank (formerly Commercial Bank of New York). His agreement required him to report any account irregularities within 15 days of the statement being mailed or made available. The bank held Regatos’s statements instead of mailing them, awaiting his request. On March 23 and April 6, 2001, the bank made unauthorized transfers of $450,000 and $150,000, respectively, from Regatos’s account. The bank failed to follow agreed security procedures to confirm the transfer orders. Regatos discovered the unauthorized transfers on August 9, 2001, when he reviewed his accumulated statements and promptly notified the bank.
Procedural History
Regatos sued the bank in the United States District Court for the Southern District of New York after the bank refused reimbursement. The District Court denied the bank’s motion for summary judgment, holding that the one-year statute of repose could not be shortened by agreement and that the 15-day notice period was unreasonable. A jury found in favor of Regatos, awarding him the principal and interest. The bank appealed to the Second Circuit, which certified questions to the New York Court of Appeals.
Issue(s)
1. Whether the one-year statute of repose established by New York U.C.C. § 4-A-505 can be varied by agreement?
2. In the absence of agreement, does New York U.C.C. Article 4-A require actual notice, rather than merely constructive notice?
Holding
1. No, because the one-year repose period is an integral part of the bank’s obligation to refund payment and cannot be modified.
2. Yes, because Article 4-A requires actual notice, and this requirement cannot be altered by agreement.
Court’s Reasoning
The Court reasoned that UCC 4-A-204 establishes the bank’s obligation to make good on unauthorized transfers, discouraging variation of that obligation by agreement. UCC 4-A-505 provides a one-year period for customers to notify the bank of objections. Allowing banks to vary the notice period would reduce the effectiveness of the one-year period as an incentive for banks to create and follow security procedures. “The bank is not entitled to any recovery from the customer on account of a failure by the customer to give notification as stated in this section.” The court found that the one-year notice limitation is an inherent aspect of the customer’s right to recover unauthorized payments, ensuring a clear rule for banks and customers and preventing uncertainty from varying interpretations of constructive notice. The court emphasized that the purpose of Article 4-A is to promote finality but not to alter the balance between the customer and the bank regarding unauthorized transfers.