Check Fraud and the Common Law at the Intersection of Negligence and the Uniform Commercial Code

Technology has changed the payments landscape over the last several decades, both for paper-based check payments and electronic funds transfers. A strict reading of the Code probably requires that common law negligence claims in check fraud scenarios be preempted by the Code, making the comprehensive rights and remedies test the most accurate reflection of the Code’s purposes and policies and it should be adopted by all courts. At the same time, other tests and inconsistent results in applying them suggest that the loss allocation rules are perceived as one-sided and the drafters should consider whether there are more equitable ways to allocate check fraud losses during the next revision cycle. But the allocation provisions provide important protections for banks that make maintenance of the check payment systems possible. In the meantime, banking customers should consider moving to electronic payments because they are safer and the rules governing loss allocation are more equitable than those in check fraud loss allocation.