On June 19, 2014, the Supreme Court of Kentucky issued its decision regarding check fraud in the case of Mark D. Dean, P.S.C. v. Commonwealth Bank & Trust Company. This is an important decision for Kentucky banks and employers who authorize employee signatories on company bank accounts.
An employee at a Shelbyville, Kentucky law firm stole over $800,000 from the firm’s escrow account over the course of several years, in part by writing checks on the firm’s bank account. The employer had granted the employee individual signature rights on the bank account. The employer claimed, in addition to multiple common law claims, that the bank violated Articles 3 and 4 of Kentucky’s Uniform Commercial Code (“UCC”) by failing to protect the bank account from theft. The court decided in favor of the bank and addressed a number of interesting issues, some for the first time in Kentucky.
The Kentucky Supreme Court considered whether the employee’s signature constituted an “unauthorized signature,” as defined by KRS Section 355.4-406 of the UCC. The UCC defines “unauthorized signature” to include “a signature made without actual, implied, or apparent authority.” The Kentucky Court of Appeals had held that the signature was “unauthorized” because the employee exceeded the scope of authority granted by the employer. The Supreme Court found that the employee had apparent authority to sign the check by virtue of the signature card on file at the bank. Thus the checks were “properly payable” under KRS Section 355.4-401.
The Court also considered whether the discovery rule can apply to toll the applicable statute of limitations in a case involving the UCC. The discovery rule applies to toll the running of the statute of limitations in certain limited circumstances where, even with the exercise of reasonable diligence, knowledge of the injury, and thus the claim, is not discoverable. The employer claimed that it did not discover the theft until after the applicable statute of limitations period ended, even though the bank was sending monthly account statements. The Court held that the discovery rule did not apply, because reasonable due diligence by the employer, such as reviewing the monthly bank statements, would have potentially exposed the theft, and that the claims were time barred.
Finally, the Court held that certain common law claims are barred where the UCC applies. The Court has previously held that the UCC excludes common law claims unless the legislature specifically states otherwise. The Court held that where the UCC provides a comprehensive remedy, or scheme of remedies, such as in the case of check fraud, related common law claims are excluded.
The Court’s decision in Dean emphasizes that reasonable due diligence and good internal controls by employers are required when dealing with checks and other negotiable instruments. It is important for companies to regularly update their authorized signatory records with the company’s bank to address personnel changes in their organizations, and to review monthly bank statements. It is likewise important that banks maintain complete and accurate records which clearly identify the authorized signatories on bank accounts to protect banks from UCC claims by bank customers relating to employee theft from company deposit accounts.