This article was adapted from an article published in the Fall 2008 issue of the New York State Bar Association Business Law Journal. The author, Jay L.Hack, is a partner in the firm of Gallet Dreyer & Berkey,LLP in New York City.He has been practicing in the field of banking law since 1976. He is a member of the Banking Law Committee of the New York State Bar Association and the secretary-elect of the Business Law Section. He can be reached at jlh@gdblaw.com.

In law school, law students study a case called The TJ Hooper. A federal appellate court, in 1932, decided that a tugboat operator was negligent because the boat didn’t have a radio, even though tugboats generally did not use radios at that time.The court decided that those new fangled radios were inexpensive and easily available, so as technology marched forward, the tugboat industry was required to march along with it.

The same principle explains why, regardless of your age, you have a little puff of air blown into your eye when examined for new glasses. In1974, a court held that an ophthalmologist was negligent for not giving a glaucoma test to a young patient, even though common medical practice was not to give the test to patients under age 40. The test was simple, low cost, and harmless,so failing to give it was negligent, even if the probability of glaucoma was very small.

According to a federal circuit court decision in 2008, the same legal principle applies when it comes to banks implementing technology to discover check fraud. The case involved a $382,210.15 check in which the name of the payee had been altered. The court considered whether a bank had to adopt a procedure to verify payee names on checks before paying those checks.

The plaintiff had written a check payable to Outdoor Life Network, but by the time the check was deposited, the name of the payee had mysteriously changed to Diversified Business Enterprises, Inc. Legally, the ultimate responsibility for an altered item rests with the person who altered it, but since that person has usually disappeared, liability normally lands in the lap of the depositary bank that took the check for deposit. The Uniform Commercial Code in every state provides that the depositary bank warrants to anyone who pays a check that the check has not been altered. Thus, the depositary bank suffers the loss because it was most able to stop the wrongdoer – either it dealt directly with the wrongdoer as its depositor, or indirectly when it accepted a double endorsed check for deposit.

In this court case, the depositary bank, facing a large loss, argued that procedures should have been adopted by other parties to verify that the name of the payee had not been changed after the check was first written. However, this was right at the edge of, and in fact a bit over the edge, of the current level of technology. The court mentioned that the company that wrote the check, a large international advertising firm, participated in a program offered by its bank that allowed the bank to verify that the amount of the check had not been altered before it was presented for payment. The maker of the check uploaded a list of checks it has written listing the amount of each check, and its bank then checked those amounts as checks were presented for payment. If a check didn’t match, the bank would bounce it.

However,the bank did not have the technology to match payee names on presented checks with names previously provided by the company that wrote the checks. Therefore, the failure of the maker of the check or the bank on which it was drawn to use a technology that was unavailable could not be considered a “failure to exercise ordinary care” under the Uniform Commercial Code.

This brings us back to tugboats and glaucoma. Computer data moves back and forth over the Internet with ease, and even my 87 year old mother has Internet banking. Every Tom, Inc., Dick, P.C. and Harry, LLC has at least Quicken to write its checks and track them by computer. This forces us to ask some very difficult questions. Is every bank required to implement the technology that allows it to match check amounts with reports from its customer? If a bank offers that technology, must its checking account customers avail themselves of it? It is very easy to read the court decisions and conclude that the answer to both these question is yes, and if it is not yes today, it will probably be yes very soon.

We must then take the analysis one step further. Is a bank required to implement optical character reading technology that allows it to read the payee’s name on each check it pays? Must its customer then upload a list of all payees to protect against an alteration of the name of the payee? The court in 2008 never addresses this issue directly, but if we go back to a decision in 1932 about radios, and another one in 1974 about glaucoma, we can predict that there will soon come a point in which banks are required to implement enhanced check fraud detection systems, and their customers are required to use those systems, so they protect themselves not only against the thieves, but also against depositary banks that blithely deal with thieves and claim that they should benefit from the prophylactic measures taken by others.