Rhode Island Hosp. Trust Nat’l Bank v. Zapata Corp.

Between March and July 1985, one of Zapata Corporation’s (Zapata)employee’s forged a number of company checks, all checks were between $150 and $800. The bank, Rhode Island Hospital Trust National Bank (Bank) paid each check. On or around April 11, the payments reflected in the account statement for the first time. Because Zapata did not scrutinizethe statements, it did not realize the forgeries until July. At that point, Bank had issued payments on the forged checks at an amount totaling $109,247.16. Thereafter, Bank broughtthis action against Zapata on the grounds that under UCC § 4-406 Bank wasentitled to receive reimbursement for the forgeries, despite the fact that it was negligent in failing to discover and report them, because Bank was not exercising “ordinary care.” Bank introduced evidence that its actions were consistent with prevailing bank industry norms, as Bankwould only examined signatures on checks between $100 and $1,000 if Bank had reason to believe the check was suspicious or if that specific check was randomly selected to be inspected, a procedure performed on about one percent of checks within that dollar range. Additionally, Bank presented into evidence that its procedure of not examining all signatures on checks between $100 and $1,000 was a cost-effective procedure that did not lead to a substantial increase in forgeries. Thereafter, a federal district court held in Bank’s favor, finding Zapata was not entitled to reimbursement. Zapata appealed.