Jerry Kopel

I  Identity theft is increasing in Colorado. Consumers and small business owners with checking accounts need to be aware how much state law was changed 10 years ago, to their present detriment.
Everyone knows federal law governing illegal credit card and electronic fund transfers have limited liability for consumers to generally $50. The remainder is assigned to the banks. But what about checks?
In 1994 a bill was passed in Colorado, pushed by the National Commission on Uniform State Laws, that reduced liability of banks on forgery, and increased bank discretion to hike fees on overdrawn accounts.
The bill had failed to pass the House in 1991,1992, and 1993. By 1994, 30 other states had adopted the bank and other business amendments to Articles 3 and 4 of the Uniform Commercial Code. Colorado joined the pack. Our law took effect Jan. 1, 1995.
The following information includes part of an article by Law Professor Ed Rubin of the University of California who was chairman of the American Bar Association Committee on the Payment System, but who resigned as chair in protest over the commercial code revisions.
The article was written prior to the bill's adoption in Colorado.
"The problem with Articles 3 and 4, as revised, is that they are both inefficient and unfair where consumer checking accounts are involved. They are inefficient because they allocate too much of the loss from fraud and forgeries to consumers, and provide no practical means for consumers to enforce their rights.
"To achieve efficiency (that is, to minimize the social cost of fraud and forgery) losses should be allocated in a manner that maximizes each party's incentive to take precautions against loss. Articles 3 and 4 do not do this.
"They assign more of the loss to consumers and small businesses than is necessary to induce them to take whatever  precautions they  can. At the same time, they assign too little of the loss to banks, which are able to develop new technologies and techniques for loss prevention, but which will not do so as long as they can pass most of the losses onto their customers."
(Kopel: Of course banks that want to keep customers might disregard the unfair authority given them, but that depends on their discretion.)
"Even when the loss is imposed upon the banks...most customers cannot enforce that allocation. The bank, which has possession of the consumer's money, can simply debit the amount from the customer's account.
"The only remedy available a traditional lawsuit, in which consumers must prove their entire case. Since the amounts in question are generally a few hundred to a few thousand dollars, cost of such a lawsuit generally exceeds the expected benefit...Indeed, the revision makes the problem worse by instituting comparative negligence."
(Kopel: Prior to 1995, in a forgery situation, the bank was responsible as long as it was negligent in paying the check, regardless of the conduct of the consumer. Now proof of the bank's negligence will only open the door to a further fact determination of "relative fault" known as comparative negligence. Consumers will have to sue to establish fault, even when the bank's negligence is clear. Back to Professor Rubin.)
"In addition to being inefficient, revised Articles 3 and 4 are unfair...For example, Article 4 allows banks to pay checks in any order they choose, rather than in an order that minimizes returns. Thus, if a customer has a balance of $1000, and written checks of $200, $300, $400, and $900, the bank can pay the $900 check and bounce the other three, charging three return fees instead of one.
"Similarly, the revision explicitly  permits a bank officer to bounce a customer's check without checking the account to see if sufficient funds have been deposited to cover that check.
"...The revision of Article 4 allows banks to "truncate" checks, that is, to transmit the information on the check electronically, rather than sending the physical check...Article 4 entitles (customers) to obtain a copy of the original check, but places no time limits on the bank's obligation to produce the check, nor prescribes any penalty for a failure to do so.
"Thus, consumers who need a copy of their check to prove a forgery, or respond to an IRS audit, or settle a dispute with a merchant, will be entirely at the mercy of a bank -- generally a bank that is not even their own.
"One final example: When a bank mistakenly pays a check despite having received a valid stop order from the customer, the Article assigns the loss to the customer."
Kopel: The above is just a portion of the Rubin report. There are other areas that are anti-consumer beyond those already mentioned. Here are a few:
Accord and Satisfaction: Suppose a customer of Kopel's Department Store sends a letter to the company president, detailing a dispute concerning defective merchandise. Customer encloses a check for payment of the portion of the purchase price equal to the value of the merchandise minus the defect, to be "payment in full". Before 1995, if the company cashed the check, it had accepted it as full payment: Accord and Satisfaction.
Since 1995, if the company had previously printed on its billing statement that disputes should be directed to its consumer relations department, the same check sent instead to the president of the company with the accompanying letter can be cashed, but it doesn't constitute accord and satisfaction. The customer still owes the rest of the money.
Another change: You are not protected by post-dating a check. If it is cashed before that date, the customer is responsible. You cannot keep a check from becoming a negotiable instrument (which will make you liable to a holder in  due course) by putting the word "non-negotiable" on it.
All the concerns voiced by Professor Rubin in this column,  plus the post-dated check and negotiable instrument problems would have been corrected in the Senate under amendments offered in 1994 by then-Sen. Bill Thiebaut. But at the urging of then Sen. Al  Meiklejohn, who was  carrying the bill for the fourth time, the amendments were defeated.
When the irate customer complains to the bank about losses suffered under the 1995 law, the bank employee has the perfect answer. "We didn't do it. It's the legislature's fault."
(Jerry Kopel served 22 years in the Colorado House.)

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