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New York banks cannot give a customer less than a year to object to an allegedly unauthorized funds transfer, a federal judge has ruled in a case of first impression. Southern District of New York Judge Shira A. Scheindlin said last week that although nothing in Uniform Commercial Code Article 4A “explicitly prohibits” the one-year provision from being modified by contract, doing so would “effectively eviscerate” a bank’s absolute duty under the code to refund a transfer if the bank has violated an agreed-upon security procedure. “Consideration of the structure of Article 4A, along with its underlying purpose and policies, leads to the conclusion that the drafters did not intend to permit a bank and its customer to vary the one year notice period by agreement,” Scheindlin wrote in Regatos v. North Fork Bank, 02 Civ. 1068. The ruling arises from a claim by Tomaz Mendes Regatos, who resides in Brazil, against New Commercial Bank of New York, which was acquired by North Fork Bank in November 2001. Regatos opened a deposit account with the bank in 1997. He consistently made wire transfers out of New York through a series of faxes and phone calls with the Brazilian office of the bank, without having to deal directly with the New York office. In late March and early April of 2001, Regatos claims, $600,000 was transferred out of his account without his permission. But Regatos did not complain about the transactions until August of that year because he received bank statements only upon request, not monthly. The bank claims this was standard practice for its customers in Brazil, though Regatos contests whether he agreed to such an arrangement. Under Regatos’ contract with the bank, objections to transfers had to be made within 15 days, not a year as described in UCC Article 4. But the judge said that when New York’s Legislature adopted the UCC, it clearly meant to keep the objection provision at one year since it did not explicitly permit the time period to be varied by agreement, as it had in other sections of the model code. “That the legislature did not do so in the case of Article 4A is strong evidence that it intended the one year period to be invariable,” the judge wrote. The judge rejected the bank’s reliance on New York Credit Men’s Adjustment Bureau Inc. v. Manufacturers Hanover Tr. Co., 343 N.Y.S.2d 338 (Appellate Division, 1st Department, 1973) as “totally inapposite” because it does not deal with Article 4A, which took effect in 1991. “Because neither the New York State legislature nor the drafters of the [UCC] have resolved this inconsistency, and because I cannot certify this question to the New York Court of Appeals … I must decide, for the first time, whether, and to what extent, the one year notice provision may be altered by agreement.” ACTUAL NOTICE Though she concluded that one year was a fixed limit, the judge said that Regatos’ claim could not be summarily dismissed even under the 15-day contract, because he questioned the transaction within 15 days of learning about it. “Article 4A requires actual notice of a funds transfer before the duty to notify is invoked,” the judge wrote. “The Bank knew or should have known that the phrase ‘receive[d] notification’ in section 4A-204, required it to send notice of the transfer to the customer if it wanted to avail itself of any notice time limit. This obligation is not met by waiting for a customer to request a copy of his statement.” The judge added: “Even assuming, arguendo, that the parties could vary the one year notice provision, the fifteen day period would still be invalid. At the very least, the notice period to recover the transferred funds must be read consistently with the ‘reasonable time’ period to receive interest.” Regatos’ claim is set for trial at the end of the month. Eduardo Lopez of Lopez & Romero appeared for Regatos. Eric J. Bressler of Wickham, Wickham & Bressler appeared for North Fork Bank.

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