38 JULY / AUGUST 2022 Positive Pay Service What if the customer declines? Brett J. Ashton Partner Krieg DeVault LLP bashton@kdlegal.com Krieg DeVault LLP is a Diamond Associate Member of the Indiana Bankers Association. COMPLIANCE CONNECTION This information is provided for general education purposes and is not MRXIRHIH XS FI PIKEP EHZMGI 4PIEWI GSRWYPX PIKEP GSYRWIP JSV WTIGMƤG guidance as to how this information applies to your institution’s circumstances or situation. Question: We have a commercial bank customer who refuses to place positive pay on their account, even though they have recently experienced several cases of check fraud. Fortunately, we have been able to identify and stop payment on each fraudulent check to date. If the customer refuses to accept our positive pay service, are they liable if we suffer a loss due to check fraud? If the bank is liable regardless, can we require the customer to agree to indemnify us from any loss going forward if they don’t use positive pay? Answer: The customer’s liability for future loss in the scenario described above will depend on the nature of the underlying check fraud (forged indorsement, forged check etc.), the extent to which the customer’s negligence contributed to the loss, and whether the bank exercised ordinary care while acting in good faith when paying the fraudulent check. Indiana law with respect to bank deposits and collections is found in Article 4 of this state’s version of the Uniform Commercial Code.1 Ind. Code § 26-1-4-103 provides that the provisions of Article 4 of the IUCC can be varied by agreement, “but that the parties to the agreement cannot disclaim a bank’s responsibility for its lack of good faith or failure to exercise ordinary care or limit the measure of damages for the lack or failure. However, the parties may determine by agreement the standards by which the bank’s responsibility is to be measured if those standards are not manifestly unreasonable.” Indiana law also incorporates the UCC 1 Ind. Code § 26-1-4 2 Ind. Code § 26-1-4-103(b) safe harbor language for banks – making conduct in compliance with federal regulations, operating letters and clearinghouse rules, or any general action not prohibited by Article 4, prima facie evidence of the exercise of ordinary care.2 In the event of a loss due to check fraud where the customer has refused to accept positive pay, the bank could assert its actions were in conformance with applicable federal law and regulations, and the customer’s failure to accept positive pay in light of the described risk of check fraud was not only unreasonable, but constituted negligence that shifts the loss at least partially if not entirely to the customer. Conversely, if the bank charges a fee for the positive pay service, the customer may argue that its refusal to pay additional fees for this service was reasonable, but if the customer has experienced several close calls with check fraud in the past, this becomes more difficult to argue. Alternatively, the bank can require the customer to enter into an indemnification and hold harmless agreement, whereby the customer assumes the risk of loss if they refuse to accept the protections of positive pay. Any agreement shifting risk of loss, however, must not waive the bank’s duty to act using ordinary care and to act in good faith. HB
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