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In a nationally watched first-impression case involving the widespread use of electronic fund transfers and the regulation of those transactions under New York’s Uniform Commercial Code, the state Court of Appeals held Thursday that a Brazilian businessman is owed a full refund from the New York bank that permitted two unauthorized transfers from his account, representing hundreds of thousands of dollars, even though he did not comply with the bank’s notice requirements. The judges, in addressing two questions certified by the 2nd U.S. Circuit Court of Appeals, unanimously agreed that the one-year statute of repose in the UCC cannot be varied by agreement, that a consumer is entitled to actual and not just constructive notice of account activity and that the entitlement to actual notice cannot be altered through agreement of the parties. Regatos v. North Fork Bank, 142, written by Judge Albert M. Rosenblatt, was eagerly awaited by a financial community dealing with an estimated $1 trillion in transfers daily. The only other state appellate court to address the issues presented in this case, the Minnesota Court of Appeals, an intermediate level court, issued a ruling opposite that of the New York court’s but made clear that its opinion had no precedential value. Thursday’s opinion, on the other hand, established legal precedent as all seven judges on the state’s highest court agreed with the legal reasoning of Southern District Judge Shira A. Scheindlin. The case involved Brazilian businessman Tomaz Mendes Regatos who had a commercial account with what is now the North Fork Bank. Regatos’ contract with the bank required him to notify the institution of any account irregularities within 15 days of when the bank statement was mailed or made available to him. Except to the extent that electronic transfers appeared on the monthly statement, the bank was not required to provide notice of those transactions to the customer. Instead of mailing statements to Regatos, the bank was holding the documents and making them available at his request. That is a common arrangement, especially with foreign clients who, for reasons of privacy or security, do not want bank statements circulated via the mail. In March 2003, the bank received a fund transfer order via fax, and transferred $450,000 out of Regatos’ account without verifying the transaction with him, a precaution required under its own security procedures. The bank apparently did follow one of its security procedures in comparing the signature on the fax to the one it had on file for Regatos, but failed to detect any inconsistencies. A month later, the bank received another transfer request and, again failing to follow security procedures, transferred an additional $150,000 from the account. Regatos learned of the unauthorized transfers four months later when he checked the statements that were being held for him by the bank. He immediately informed the bank, which refused to reimburse the losses on the ground that he had not reported the unauthorized transfers within 15 days of when the statement was available for his inspection, as required under the agreement with the bank. That prompted a federal suit before Scheindlin. Scheindlin denied the bank’s motion for summary judgment, holding that the one-year statute of repose in the UCC — not the agreement between the bank and Regatos — governs. The case then proceeded to trial, where the bank disputed that the transfers were unauthorized. However, the jury concluded that the bank did err, and awarded Regatos a full refund, plus interest, totaling $731,000. The 2nd Circuit then certified technical, legal questions to the state court. BURDEN ON BANK In Thursday’s opinion, Rosenblatt and his colleagues agreed with Scheindlin on every point. “Permitting banks to vary the notice period [in UCC 4-A-202] by agreement would reduce the effectiveness of the statute’s one-year period of repose as an incentive for banks to create and follow security procedures,” Rosenblatt wrote. He said that “while the issue is close,” the court “cannot accept the bank’s argument that the customer’s responsibility to notify the bank of its error is modifiable.” Further, the court said the actual notice requirement is not altered when there is a “hold mail” agreement — when, for instance, the customer specifically asks the bank to hold onto statements until some future point. “Just as the one-year notice of limitation is an inherent aspect of the customer’s right to recover unauthorized payments, the actual notice requirement provides the bedrock for the exercise of that right,” Rosenblatt wrote. Richard J. Montelione of Manhattan, counsel for Regatos, said the ruling “places the burden where it belongs, on the bank.” He said a ruling to the contrary would have eviscerated the one-year statute of repose in the UCC. “The court balanced the rights and obligations of the bank and its customers, and it is very simple: If the bank follows its security procedures it is not liable, and if they don’t they are liable,” Montelione said. “All the bank had to do in this particular case was call the customer and say, ‘Did you fax us this order?’ That’s all they had to do, and they didn’t do it.” Eric J. Bressler of Wickham, Bressler, Gordon & Geasa in Melville, Suffolk County, said the opinion, resolving “issues of great concern to the financial industry,” places an unbalanced and unreasonable burden on banks, while imposing very little responsibility on the customer. “I think the Court of Appeals has allocated risk 100 percent on the financial institutions,” said Bressler, who represented North Fork Bank. Regatos chose not to pick up his statements, Bressler said, adding, “Why does he get the benefit … when he consciously decided to ignore his statements? Obviously, I am disappointed.” Bressler said the bank fought because it questions whether the transfers were really unauthorized, suggesting that a “dishonest partner” may have played a role. “There were all kind of things that led us to believe that this was not what it appeared to be on its face,” Bressler said. The bank is “absolutely not” conceding a mistake, he said. The jury, however, concluded that the bank was entirely at fault.

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