Articles

Texas Tech Law Review

32 Tex. Tech L. Rev. 191 (2001)

DEPOSIT AGREEMENTS BETWEEN BANKS AND THEIR CUSTOMERS: THE TEXAS SUPREME

COURT SETTLES THE SHORTENED NOTICE PROVISION QUESTION

Stephen L. Baskind [FNa1]

Copyright © 2001 Texas Tech University School of Law and Stephen L. Baskind

I. Introduction

Section 4.406 of the Uniform Commercial Code ("Code") imposes a duty on customers of banks to report unauthorized account activity. [FN1] The Code requires the customer to discover and report unauthorized activity within one year from the time the customer's account statement reflecting the transaction is made available. [FN2] Banks commonly reduce the one-year statutory reporting requirement of section 4.406. [FN3] The shortened notice provisions are usually set forth in the deposit agreement between the bank and the customer. [FN4] Whether these shortened notice periods are enforceable is the subject of a recent Texas Supreme Court decision. [FN5]

The Texas Supreme Court approved the shortening of the one-year notice requirement of section 4.406 to sixty days in American Airlines Employees Federal Credit Union v. Martin. [FN6] The Martin court rejected the argument that shortened notice requirements are unenforceable under section 4.406. [FN7] The court articulated the policy considerations supporting enforceability of such provisions. [FN8] This article will analyze the Martin decision and the applicable Code provisions. [FN9]

II. Section 4.406

A. The Customer's Duty

Section 4.406 describes the customer's duty to discover and report unauthorized signatures and alterations. [FN10] The customer's duty arises when the bank sends or makes available to the customer a statement of account showing the payment of items, accompanied either by the items or with sufficient information to allow the customer to reasonably identify the items paid. [FN11] If the bank provides such a statement of account with the relevant information, the customer must exercise reasonable promptness in examining the statement or the items to determine whether any payment was not authorized because of an alteration of an item or an unauthorized signature. [FN12] If the customer should have reasonably discovered the unauthorized payment from the items or statement provided, it is the customer's duty to promptly notify the bank of the relevant facts. [FN13]

The obligations of section 4.406(c) are "duties" of the customer. [FN14] Failure by the customer to discover and report unauthorized activities affects the customer's ability to recover from the bank in connection with the unauthorized transaction. [FN15]

A bank may only charge to a customer's account items that are properly payable. [FN16] An item materially altered or bearing an unauthorized drawer's signature is not properly payable. [FN17] A bank is presumed to know its depositor's signature. [FN18] Thus, as a general proposition, the customer is entitled to reimbursement of his account if the bank charges to the account an item that is not properly payable. [FN19] This right to reimbursement, however, is subject to the provisions of section 4.406 requiring the customer to give notice of unauthorized transactions. [FN20] The customer's failure to give notice may create defenses in favor of the bank, which may preclude reimbursement of the customer's account. [FN21]

B. The Bank's Defenses

There are two principal defenses under section 4.406 predicated on the customer's duty to give notice. [FN22] Each is in the form of a preclusion, that is, the customer's failure to give the requisite notice may preclude the customer from obtaining reimbursement to his account for the unauthorized transaction. [FN23] The first defense is referred to as the "Repeater Rule." [FN24] The second defense is referred to as the "Absolute Notice Requirement." [FN25] Although some courts and commentators confuse these defenses, they are distinct. [FN26] In some situations, both defenses may be applicable. [FN27]

1. The Repeater Rule

The Repeater Rule defense is applicable when there are repeated unauthorized transactions by the same wrongdoer. [FN28] A typical situation giving rise to the Repeater Rule involves an employee who, over a period of several months, forges a customer's or employer's signature on a series of checks. [FN29] The Repeater Rule creates a defense in favor of the bank concerning the unauthorized transactions when the customer fails to discover and report the unauthorized activity within thirty days after the bank provides the customer with an account statement reflecting the unauthorized activity. [FN30]

The time to give notice under the Repeater Rule is thirty days. [FN31] This thirty-day notice requirement is expressly stated within the statute itself, reflecting a legislative intent that, under some circumstances relevant to the relationship between banks and their customers, a thirty day notice provision is appropriate. [FN32] In the pre-1996 Code version of section 4.406, the Repeater Rule contained a fourteen day notice provision. [FN33] Thus, the post-1996 Code version of section 4.406 reflects an intent that thirty days, not fourteen days, is more appropriate. [FN34] This legislative intent, recognizing the validity of a notice provision as short as thirty days, is relevant to the consideration of the enforceability of shortened notice requirements under the Absolute Notice Requirement of section 4.406(d). [FN35]

The Repeater Rule focuses on the beginning of the period of the unauthorized activity and creates a duty for the customer to discover the unauthorized activity at the first possible opportunity (i.e., when the first account statement reflecting the fraud is made available to the customer.) [FN36] The customer's failure to discover the unauthorized activity and notify the bank creates a preclusion in favor of the bank. [FN37] The customer's failure to discover and report precludes the customer from asserting against the bank any later unauthorized transactions by the same wrongdoer. [FN38]

The policy of the Repeater Rule reflects the notion that the customer is in the best position to discover the wrongdoing. [FN39] After the customer has the opportunity to review the first account statement that reflects the wrongdoing, the customer bears the losses later caused by the same wrongdoer. [FN40] The customer is responsible for the losses because the failure to fulfill the duty to discover unauthorized withdrawals usually provides the wrongdoer with the opportunity to continue stealing. [FN41]

The preclusion of the Repeater Rule, unlike the preclusion of the Absolute Notice Requirement, is not absolute. [FN42] If the customer proves that the bank failed to exercise ordinary care in paying the item or items in question and that the failure contributed to the loss, the loss is allocated between the customer and the bank based upon their respective degrees of fault. [FN43] Also, if the customer proves the bank did not pay the item in good faith, the preclusion against the customer is inapplicable. [FN44]

A bank's loss of the Repeater Rule defense due to its failure to exercise ordinary care stands in stark contrast to the Absolute Notice Requirement defense, which applies in favor of the bank without regard to care. [FN45] This distinction is important and carefully written into section 4.406. [FN46] Courts and commentators who do not recognize this important distinction fail to properly interpret and apply the distinct defenses of section 4.406. [FN47]

2. The Absolute Notice Requirement

The Absolute Notice Requirement creates an absolute preclusion against the customer who fails to meet the requirements of his duties under section 4.406. [FN48] This reflects a policy consideration of establishing an absolute time limit on the responsibility of banks for unauthorized transactions. [FN49] If the customer does not discover and report his unauthorized signature or any alteration on an item within one year after receiving the account statement or item reflecting the unauthorized activity, the customer is precluded from asserting the unauthorized signature or alteration against the bank. [FN50]

The preclusion of the Absolute Notice Requirement applies to the customer, notwithstanding the failure of the bank to exercise ordinary care. [FN51] Even if the bank fails to exercise ordinary care in paying the item, the customer must timely discover and report the unauthorized signature or alteration or he is precluded from asserting the unauthorized activity against the bank and, thus, will not be entitled to reimbursement. [FN52] As noted, this is in direct contrast to the Repeater Rule defense. [FN53] Under the Repeater Rule, if the bank is negligent, the loss is apportioned according to the respective fault of the bank and the customer. [FN54] Under the Absolute Notice Requirement, the negligence of the bank is irrelevant, and the customer is precluded if he fails to discover and report in a timely manner. [FN55] It should also be noted that while the Repeater Rule is lost as a defense to the bank if the bank does not pay in good faith by the express provisions of section 4.406(e), the Absolute Notice Requirement of section 4.406(f) does not contain similar language. [FN56] This difference in language raises the question of whether the absence of good faith deprives the bank of the Absolute Notice Requirement defense. [FN57]

The Absolute Notice Requirement of section 4.406(f) provides for a one-year notice requirement. [FN58] Whether this one-year notice requirement can be shortened by agreement is the issue presented in the Martin case. [FN59]

III. The Fair Notice Doctrine

Some commentators contend that the Fair Notice Doctrine applies to shortened notice provisions under section 4.406. [FN60] The Fair Notice Doctrine mandates that a party's effort to disclaim liability for its own negligence must meet two requirements: (1) that a party's intent to be released from liability for its own future negligence must be expressed in unambiguous terms within the contract, and (2) that the clause must be conspicuous. [FN61]

On its face, the Fair Notice Doctrine does not seem to apply to shortened notice provisions under section 4.406 because such provisions are not agreements to protect parties from their own future negligence. [FN62] The purpose of the notice requirement of section 4.406 is to create a specific time limit on claims concerning unauthorized account activity, not to protect a bank from its own negligence. [FN63] Shortening the time requirement does not change the requirement's purpose. [FN64] As discussed below, the Martin court considered and rejected an argument concerning application of the Fair Notice Doctrine to shortened notice provisions. [FN65]

IV. Can the One-Year Absolute Notice Requirement Be Shortened by Agreement?

A. Section 4.103-Variation by Agreement

A proper analysis of whether shortened notice provisions are enforceable begins with reference to the general provisions of Article 4 of the Code, particularly section 4.103(a). [FN66] All provisions of Article 4 are subject to variation under the "blanket power" conferred by section 4.103(a), subject to certain limitations. [FN67] The agreement may be with respect to a single item, or it may be a general agreement between the depository bank and the customer at the time the deposit account is opened. [FN68] The parties' agreement may be proven by various types of evidence. [FN69] Indeed, agreements varying the terms of Article 4 are enforceable under section 4.103(a) so long as the provisions (1) do not disclaim the bank's responsibility for its lack of good faith, (2) do not limit the measure of damages, and (3) do not state a manifestly unreasonable provision. [FN70]

Thus, under section 4.103, it seems apparent that the one-year notice requirement of section 4.406 can be varied by agreement between the customer and bank as long as the three limitations set forth above are satisfied. [FN71] Recognition of the blanket power to vary Article 4 provisions conferred in section 4.103(a) is crucial to a proper analysis of shortened time requirements under section 4.406. [FN72] Commentators and courts which do not properly analyze and apply the provisions of section 4.103(a) may reach the wrong result. [FN73]

B. Cases That Considered Shortening the One-Year Absolute Notice

Requirement Before Martin

1. Texas

Before Martin, two Texas courts considered whether a deposit agreement which imposes an absolute notice requirement shorter than the one-year absolute requirement of section 4.406 is enforceable. [FN74] In Tumlinson v. First Victoria National Bank, the court enforced a sixty-day absolute notice requirement and summarized the law as follows:

By statute, Texas law ordinarily allows a depositor one year to report an unauthorized signature before his claim is cut off. However, Texas law allows parties to a depository agreement to alter their responsibilities by agreement, so long as the agreement does not "disclaim the bank's responsibility for its own lack of good faith or failure to exercise ordinary care." [FN75]

Tumlinson affirmed a summary judgment in favor of a bank concerning forged items for which the customer failed to provide sixty days notice as required by the applicable deposit agreement. [FN76]

Similarly, in Basse Truck Line, Inc. v. First State Bank, the court held that "[t]he parties to a depository agreement may vary by agreement the terms of their relationship, except that no agreement can disclaim a bank's responsibility for its own lack of good faith or failure to exercise ordinary care." [FN77] Basse, like Tumlinson, recognized that shortening the notice requirement involves an agreement under section 4.103(a), and not a waiver of a right. [FN78] Thus, Basse held that a deposit agreement shortening the one- year Absolute Notice Requirement to ninety days was not contrary to public policy. [FN79]

At least one commentator has criticized Tumlinson and Basse, suggesting that neither is correct because the courts failed to follow Texas public policy, particularly policy as set forth in the Texas Civil Practice and Remedies Code. [FN80] The Martin court rejects this suggestion. [FN81] Both Tumlinson and Basse are cited with approval in Martin. [FN82]

2. Other Jurisdictions

Courts of other jurisdictions have recognized and enforced shortened absolute notice requirements. [FN83] These courts analyzed the notice requirement as a duty and recognized that the time allowed for compliance of that duty can be established by agreement. [FN84] One commentator has criticized many of the out of state cases, particularly Parent Teacher Ass'n v. Manufacturers Hanover Trust Co. [FN85] The Martin court cites many out of state cases with approval. [FN86] Indeed, the leading U.C.C. commentators recognize the Absolute Notice Requirement of section 4.406 as a customer's duty, and they further recognize that a bank and its customer may shorten the one-year notice requirement by agreement. [FN87]

C. The Martin Case

The Martin court answered the specific question of whether the one-year Absolute Notice Requirement can be shortened. [FN88] Martin held that shortened notice requirements do not violate Texas public policy or the Fair Notice Doctrine. [FN89] The one-year Absolute Notice Requirement can be shortened by agreement to sixty days. [FN90] Failure to comply with the sixty-day notice requirement precludes the customer's claim. [FN91] The Martin court dealt with the pre-1996 version of the Code, but its holding is unaffected by the 1996 amendments. [FN92]

1. The Background, the Facts, and the Trial Court

a. The Opening of the Account

In 1990 Tim Martin ("Martin") opened a savings account, called a share account, at American Airlines Employees Federal Credit Union ("Credit Union"). [FN93] To open the account, he completed and signed a Credit Union membership application. [FN94] The application provided that his account would be "subject to any and all rules, regulations, bylaws and policies of the Credit Union and its Board of Directors now in effect and as changed, amended or adopted hereafter." [FN95] After opening the account, the Credit Union began to send quarterly account statements to Martin. [FN96]

Almost four years later, the Credit Union adopted a new deposit account agreement. [FN97] The Deposit Agreement and Disclosures ("Deposit Agreement") contained the following language:

1. Account Statements. You are responsible for promptly examining each account statement. Any objection that you may have respecting any item shown on a statement will be waived unless made in writing to us, and received on or before the sixtieth (60th) day following the date the statement is mailed, subject to applicable law. You agree that we will not be liable for any forged or altered item drawn on or deposited to your account if you fail to notify us within that sixty-day period . . . . [FN98]

The Credit Union notified Martin and other members about the Deposit Agreement through newsletters and account statements. [FN99] Additionally, the Credit Union indicated on the account statements that any errors on the statement were to be reported to the Credit Union within sixty days. [FN100] Although the Credit Union did not mail copies of the Deposit Agreement to its members, it notified them that the Deposit Agreement could be obtained at any of the Credit Union's various branches. [FN101] Martin did not pick up a copy of the Deposit Agreement or call the Credit Union to request a copy. [FN102]

b. The Fraud

In June 1995 the Credit Union received a Membership Account Change Card in the mail, adding Molly Blair to Martin's account as a joint owner. [FN103] Molly Blair ("Blair") was already a member of the Credit Union and was also Martin's girlfriend. [FN104] Prior to this time, Blair had added Martin as a signatory to her own account at the Credit Union. [FN105] The change card contained a signature alleged to be Martin's. [FN106] Relying on the change card, the "Credit Union changed the ownership status of [Martin's] account after verifying the . . . information on the card and comparing Martin's purported signature on the change card to his original signature card." [FN107] Martin's signature on the change card was later determined to be a forgery. [FN108]

Between June and November 1995, Blair transferred over $45,000 from Martin's account to her own. [FN109] Of fourteen transfers made, twelve were by phone and two were in person at the Credit Union. [FN110]

When conducting a transfer by telephone, "Blair would call the Credit Union and speak to a teller, who would verify Blair's identity by confirming certain personal and account information." [FN111] The teller would then, following Blair's oral order, "complete the transaction by preparing and signing a 'journal voucher' that identified the date of the transaction, the amount of the transfer, and the accounts involved." [FN112] Following each of these transactions, the journal vouchers were mailed to Martin's proper address. [FN113] The journal vouchers for the two in-person transactions were handed directly to Blair. [FN114] Thus, of the fourteen transfers, twelve journal vouchers were mailed directly to Martin's correct address within a day of the transaction. [FN115]

At the end of each quarterly period, the Credit Union mailed quarterly statements to Martin which reflected the transfers made by Blair. [FN116] The first account statement reflecting Blair's transactions was mailed in July 1995, and the second was mailed in October 1995. [FN117] These "statements documented ten of Blair's transfers (the other four being made after the period covered by the second statement)." [FN118]

The first quarterly statement sent to Martin following Blair's fraud reflected Blair as a joint owner of the account and disclosed the first two withdrawals, totaling $8,000. [FN119] The second quarterly statement also listed Blair as a joint owner and reflected eight more of the withdrawals, totaling $36,500. [FN120]

Although Martin denied receiving the quarterly statements or the journal vouchers, it was undisputed that they were mailed to his correct address. [FN121] Furthermore, the evidence indicated that Martin made no contact with the Credit Union to request a quarterly statement in the event he had not received one. [FN122] In December 1995 Martin conducted a transaction at the Credit Union, "discovered that the balance in his account was not what he expected it to be," and notified the Credit Union immediately of the discrepancy. [FN123]

c. The Trial Court

Martin brought suit against the Credit Union to recover the funds transferred from his account. [FN124] He alleged various theories, including breach of contract, negligence, and breach of the Credit Union's duties as established by Articles 3 and 4 of the Code. [FN125]

The Credit Union defended on the basis of section 4.406, asserting that Martin had failed to give timely notice of the unauthorized transactions. [FN126] The Credit Union contended that its Deposit Agreement reduced the one-year period established by section 4.406 to sixty days. [FN127] Because Martin failed to give notice to the Credit Union concerning ten of the fourteen transactions within the sixty-day time frame, the Credit Union asserted that it was not liable on those transactions. [FN128] The Credit Union asserted the Repeater Rule defense as to the remaining four transactions. [FN129]

Following a bench trial, judgment was entered in Martin's favor for $49,800 plus interest and attorneys' fees. [FN130] The Credit Union appealed. [FN131]

2. The Court of Appeals's Decision

The court of appeals affirmed the trial court's judgment in favor of Martin. [FN132] To determine the applicability of section 4.406, the court of appeals first analyzed the issue of whether the transactions by Blair involved an "unauthorized signature." [FN133] The court of appeals rejected the Credit Union's argument that the tellers' initials on the journal vouchers were unauthorized signatures of Martin. [FN134] The court held that "[b]ecause the tellers' initials were not signatures under . . . section 4.406, and because Blair did not forge Martin's signature, sign her name, or execute or adopt any symbol or mark to authenticate the writing," no unauthorized signature was used to transfer the funds. [FN135] Thus, the court held that the Absolute Notice Requirement and the Repeater Rule defenses of section 4.406 were accordingly inapplicable. [FN136] The court of appeals also held that the transactions did not involve "items" and that section 4.406 was inapplicable. [FN137]

As a fall-back position to its contention that section 4.406 applied, the Credit Union argued that even if section 4.406 was inapplicable, the Deposit Agreement, which required notice within sixty days, barred the claim. [FN138] The court of appeals rejected this argument by an unusual and self-contradictory legal analysis. [FN139] After first holding that section 4.406 was inapplicable due to the absence of "unauthorized signatures," the court of appeals stated that the Deposit Agreement, requiring notice within sixty days, involved a "waiver" of Martin's statutory right, provided by section 4.406, to have up to one year to give notice. [FN140] This holding was apparently based on the court of appeals's conclusion that section 4.406 creates a "right" in favor of the customer. [FN141] Because the Credit Union failed to prove the elements of waiver concerning Martin's right under section 4.406, to wait for up to one year to give notice, the court of appeals held that the Deposit Agreement was not enforceable against Martin. [FN142] Martin's failure to comply with the Deposit Agreement, therefore, created no defense for the Credit Union. [FN143]

3. The Supreme Court of Texas's Decision

In Martin, the Texas Supreme Court expressly held that a bank and a customer can agree to shorten the one-year notice requirement of section 4.406 to sixty days. [FN144] The Martin court rejected the analysis of the court of appeals concerning the absence of an unauthorized signature in the transfers by Blair. [FN145] The court found the presence of unauthorized signatures and, thus, concluded that section 4.406 applied to the transactions. [FN146] The Martin court also rejected public policy arguments, including those based on the Texas Civil Practice and Remedies Code and the Fair Notice Doctrine. [FN147] Martin's failure to comply with the sixty-day notice requirement defeated his claim on those items thereby affected (ten out of fourteen). [FN148] The Martin court, however, upheld the trial court's finding concerning the Credit Union's failure to exercise ordinary care such that the Repeater Rule defense was inapplicable to the last four transfers by Blair. [FN149] Thus, the Martin court reversed in part and affirmed in part. [FN150]

a. Martin's Analysis of Article 4

The Martin court first reviewed Article 4. [FN151] The court noted that Article 4 of the Code establishes the rights and duties between banks and their customers regarding deposits and collections. [FN152] Under Article 4's statutory scheme, a bank is liable to its customer under section 4.401(a) if it charges the customer's account for an item that is not properly payable. [FN153] "An item with an unauthorized signature is not properly payable." [FN154]

The Martin court next articulated that Article 4, in section 4.406, creates at least two defenses, the Repeater Rule and the Absolute Notice Requirement, in favor of the bank paying the item that is not properly payable. [FN155] Concerning the Repeater Rule, the court observed that the customer cannot assert his unauthorized signature against the bank when one wrongdoer makes a series of unauthorized transactions on the same account if the customer fails to discover and report the first transaction within fourteen days of the time his account statement is provided. [FN156] The Martin court further observed that the Repeater Rule defense is lost to the bank if it fails to exercise ordinary care. [FN157]

Concerning the Absolute Notice Requirement, the Martin court noted that the customer is "absolutely precluded from asserting his unauthorized signature" if he fails to discover and report the unauthorized signature within one year after the bank makes the information concerning the transaction available to the customer. [FN158]

b. The Policy of Section 4.406

The Martin court analyzed the policy considerations of section 4.406 and observed that the court of appeals failed to be guided by these considerations. [FN159] The statutory scheme of Article 4 and section 4.406 reflects an underlying policy decision that furthers the Code's objective of "certainty and predictability in commercial transactions." [FN160] The Code facilitates financial transactions, benefitting banks and customers, by allocating responsibility to whoever is best able to prevent a loss. [FN161] Because the customer is more familiar with his own signature and should know if he authorized a transaction, he can more easily prevent further unauthorized activity than the bank, which may process thousands or more transactions daily. [FN162]

The Martin court noted that section 4.406 "acknowledges that the customer is best situated to detect unauthorized transactions on his own account by placing the burden on the customer to exercise reasonable care to discover and report such transactions." [FN163] The customer's duty to exercise ordinary care "is triggered when the bank satisfies its burden to provide sufficient information to the customer." [FN164] Because of this statutory scheme set forth in section 4.406, "if the bank provides sufficient information, the customer bears the loss when he fails to detect and notify the bank about unauthorized transactions." [FN165]

As recognized by the court in Martin, the loss-allocation scheme of Article 4 overrides common-law policy considerations. [FN166] Policy considerations, such as the Fair Notice Doctrine, developed without regard to the bank/customer relationship and the Code's loss-allocation provisions. [FN167] Reliance on policy considerations not specifically applicable to the bank/customer relationship is misplaced. [FN168] By recognizing and applying the Code's clear loss-allocation policy as opposed to general public policy, the Martin court reached the proper result and advanced the commercial law applicable to banks and customers. [FN169]

c. Rejection of the Court of Appeals's Analysis Concerning "Item" and

"Unauthorized Signature"

i. "Item"

Rejecting the court of appeals's analysis, the Martin court held that "the journal vouchers are items with unauthorized signatures sufficient to invoke section 4.406." [FN170] Concerning the term "item," the court began with the definition in section 4.104(a)(7) of the pre-1996 Code, which provides that an item is " 'any instrument for the payment of money even though it is not negotiable but does not include money.' " [FN171] The comments to section 4.104 emphasize that an item can be negotiable or nonnegotiable. [FN172]

The Martin court turned to Black's Law Dictionary for a definition of the term "instrument," which states that an instrument is an "unconditional promise or order to pay a fixed amount of money." [FN173] Applying these definitions to the journal vouchers at hand (which were mailed to Martin contemporaneously with each transfer), the Martin court concluded: "Because the journal vouchers are instruments reflecting Blair's orders to pay a fixed amount of money from Martin's account to her own, they are items." [FN174]

The Martin court noted that its conclusion concerning the "item" issue was consistent with other jurisdictions which have read the term broadly. [FN175] For example, a deposit slip is an item for purposes of invoking a customer's duty under section 4.406. [FN176] In Concrete Materials Corp. v. Bank of Danville, a plant manager deposited groups of checks payable to the corporation for his employer but in the process also withheld a portion of the deposit in cash for himself. [FN177] These cash withdrawals were reflected on deposit slips delivered by the manager to the bank and ultimately were returned with the account statements to the customer. [FN178] However, the employer apparently failed to review the statements and comply with its duties as the customer to review and report unauthorized withdrawals under section 4.406. [FN179]

The customer in Concrete Materials argued that the deposit slip was not an item for purposes of section 4.406; thus, its duty thereunder was not invoked. [FN180] The Concrete Materials court rejected that argument and applied section 4.406. [FN181] The court held:

The term "item" is defined in KRS 355.4-104(g) as "Any instrument for the payment of money even though it is not negotiable . . ." The deposit slip is a receipt evidencing the fact that the bank has received a stated sum, and in some instances, may also be a vehicle for obtaining a cash withdrawal thereby coming within the general definition of the term "instrument" which is anything reduced to writing. [FN182]

Thus, the Concrete Materials court held that the deposit slip was an item for purposes of section 4.406. [FN183] Similarly, the Martin court held that the journal vouchers are items. [FN184]

ii. "Unauthorized Signature"

The second issue considered by the Martin court concerning the application of section 4.406 was whether "the journal vouchers bore the necessary unauthorized signatures." [FN185] The Code provides that " 'signed' includes any symbol executed or adopted by a party with the present intention to authenticate a writing." [FN186] There is no requirement of a complete, subscribed signature. [FN187] The Martin court observed that each of the fourteen journal vouchers bore the initials of the teller who created it and the teller's signature. [FN188] Thus, the court concluded that "the journal vouchers are items with signatures." [FN189]

Martin argued that for section 4.406 to apply, the journal vouchers must contain his unauthorized signature. [FN190] The Martin court correctly dealt with this argument by reference to agency principles. [FN191] Section 4.406 is not limited to mere forgeries. [FN192] Instead, it applies to unauthorized signatures, such as signatures made "without actual, implied or apparent authority." [FN193] The Code "specifically permits a person to appoint an agent or representative to sign on his behalf." [FN194] Noting that the Credit Union tellers made the transfers from Martin's account without authority from Martin, the court held that their signatures on the journal vouchers were unauthorized for purposes of section 4.406. [FN195]

Rejecting Martin's argument that section 4.406 only applies to forged signatures, or only to signatures in the name of Martin, the court properly observed that had Martin himself provided the oral orders to transfer, only the teller's signature would appear on the journal vouchers. [FN196] The presence or absence of a signature in Martin's name does not control the application of section 4.406, instead, the presence or absence of authority controls. [FN197] The Martin court further observed that under Martin's argument, if Blair, acting on the purported authority of the change card, wrote checks for each withdrawal, then only her name, and not Martin's, would appear. [FN198] The Martin court held that "[t]he statute cannot be read so narrowly." [FN199] In any event, applying section 4.406 to Blair's telephone transfer orders was consistent with other jurisdictions' holdings, as Blair's transfers were conceptually no different from traditional savings account withdrawals. [FN200]

The Martin court returned to a consideration of the relevant policy considerations, noting that the Code is to be "liberally construed . . . to promote its underlying purpose and policies." [FN201] Two of these policies are "to permit the continued expansion of commercial practices through custom, usage and agreement of the parties" and "to make uniform the law among the various jurisdictions." [FN202] The Martin court believed that applying section 4.406 to the telephone transfers facilitates the continued expansion of commercial practices because it allows parties engaged in transactions developed since the Code's enactment to anticipate their rights and responsibilities in such transactions. [FN203]

If the court had concluded section 4.406 was inapplicable, then neither the court nor the parties would have meaningful guidance as to allocating the risk of the transactions in question. [FN204] More importantly, the court advanced the purposes of the Code by recognizing that the Credit Union permitted its members (primarily airline employees) to conduct business by phone, which traditionally had been done in person or by check, to accommodate the employees' constant travel. [FN205] Both the Credit Union and its members benefit if the Code's uniform and predictable rules, which apply to analogous situations, also apply to the telephone transfers in question. [FN206]

Additionally, applying section 4.406 to Blair's transactions is consistent with the purpose of section 4.406, which is to place the burden on those best able to detect unauthorized transactions in order to prevent further unauthorized transactions. [FN207] This burden must fall on the customer, who is most familiar with the transaction. [FN208] It is fair to place this burden on the customer when he is provided with enough information to detect an unauthorized transaction. [FN209] Even under the unique facts of Martin, it is appropriate to require Martin to comply with the section 4.406 duties because the journal vouchers provided Martin (on twelve different occasions) with everything he needed to discover Blair's wrongdoing. [FN210] The Martin court concluded: "This information should have been enough to prod Martin to complain that the transaction was unauthorized. Thus, our holding that the journal vouchers are items with unauthorized signatures comports with the purposes of section 4.406." [FN211]

d. La Sara Grain Distinguished

Martin argued that a prior Texas Supreme Court case, La Sara Grain Co. v. First National Bank of Mercedes, held that section 4.406 was inapplicable to oral transfers. [FN212] The Martin court, however, recognized there had been no substantive analysis in La Sara Grain concerning the issue of the applicability of section 4.406 to oral transfers. [FN213] More importantly, the record in La Sara Grain suggested that there were no writings of any kind or any signature that served as the basis of the transfers, unlike Martin where the journal vouchers reflected the transfers. [FN214] The Martin court found the "critical distinction" between Martin and La Sara Grain to be the fact that the Credit Union "sent the journal vouchers to Martin, and those vouchers contained enough information to inform him of Blair's unauthorized transactions," whereas in La Sara Grain no similar information was provided. [FN215]

e. Court of Appeals's "Waiver" Analysis Rejected

The court of appeals, in its opinion, determined that section 4.406 did not apply due to the absence of an unauthorized signature; yet, the court concluded that the deposit agreement involved a waiver of Martin's rights under section 4.406. [FN216] These conclusions were described as "contradictory" by the Martin court. [FN217] The Martin court observed that the Credit Union "more correctly argues that, rather than granting Martin substantive rights, section 4.406 imposed a duty on him to discover and report his unauthorized signature on an item." [FN218] The title to section 4.406 includes the words "Customer's Duty," and the comment thereto is "equally straightforward" in its observation that subsection 4.406(a) states a general duty of a customer to exercise reasonable care and promptness to examine his statement of account and discover unauthorized transactions. [FN219] The court noted the remainder of section 4.406 establishes consequences if the customer fails to comply with the duty described in section 4.406(a). [FN220] To assert a claim based on unauthorized signatures, a customer must comply with the duty to discover and report within one year as provided in section 4.406, absent an allegation that the bank did not act in good faith. [FN221]

In rejecting Martin's and the court of appeals's contention that the one-year period of section 4.406 establishes a substantive right, the Martin court properly recognized that the substantive right of the customer to recover from the bank for unauthorized transactions is found in section 4.401(a), not section 4.406. [FN222] The notice requirement of section 4.406 "is similar to a condition precedent." [FN223] The customer's ability to recover is conditioned upon his discovering and reporting within the specified period. [FN224]

Thus, the Martin court concluded that the court of appeals's waiver analysis was legally deficient. [FN225] In rejecting the contradictory court of appeals's analysis, the Martin court stated:

Because section 4.406 establishes duties and not rights, the court of appeals' analysis of whether the Deposit Agreement adequately identified the right it purported to waive is also misplaced. The question is simply whether the Credit Union and Martin agreed to shorten the notice period of section 4.406 to sixty days and, if so, whether that agreement is enforceable. [FN226]

f. Enforceability of Deposit Agreement

Having rejected the waiver analysis and having concluded that the issue was simply whether the parties agreed to the sixty-day notice provision in the Deposit Agreement, the Martin court turned to section 4.103(a). [FN227] The court recognized that section 4.103(a) permits parties to vary the effect of Article 4's provisions by agreement, as long as the agreement does not " 'disclaim a bank's responsibility for its own lack of good faith or failure to exercise ordinary care' " or " 'limit the measure of damages for such lack or failure.' " [FN228] Section 4.103(a) "confers blanket power to vary all provisions of the Article by agreements of the ordinary kind." [FN229] In absence of "a showing that the standards manifestly are unreasonable, the agreement controls." [FN230]

Although section 4.103(a) grants the power to vary provisions of Article 4 subject to the constraints stated, the Code does not directly answer the question of how parties reach enforceable agreements. [FN231] The Credit Union asserted that certain federal regulations might be helpful to the analysis, but the Martin court analyzed the issue using Texas law. [FN232]

The Martin court observed that when Martin opened his account, he signed a membership application and signature card which stated that he agreed "to any and all rules, regulations, bylaws and policies . . . now in effect and as changed, amended or adopted hereafter." [FN233] The Martin court recognized that the signature cards established a contract between the bank and the customer. [FN234] A contract is created regardless of whether the customer reads all the provisions to which he is agreeing. [FN235]

Although Martin had specifically agreed to the terms and policies in effect when he opened his account, the Credit Union adopted a new Deposit Agreement four years later containing the sixty-day provision. [FN236] Thus, the question was whether Martin was bound by the new agreement. [FN237] The Credit Union did not send a copy of the new agreement to its customers. [FN238] Instead, it notified its customers of the new agreement, made the agreement available, and described the sixty-day time frame on its account statements. [FN239] Martin continued to maintain his account at the Credit Union, but made no effort to obtain the new Deposit Agreement. [FN240] Martin's continuation of his account, coupled with the Credit Union's action in notifying Martin of the new agreement, persuaded the Martin court to hold that "the parties agreed to be bound by the terms of the Deposit Agreement." [FN241] Consequently, the sixty-day notice provision was enforceable. [FN242] This conclusion, the court noted, was consistent with other jurisdictions and the two prior Texas decisions, Tumlinson and Basse, which likewise enforced shortened notice periods. [FN243]

g. Adhesion Contract/Fair Notice Doctrine

Martin argued that the Deposit Agreement containing the sixty-day notice provision was a contract of adhesion (i.e., vague, ambiguous, inconspicuous and, thus, unenforceable). [FN244] Under Texas law, the mere fact that an agreement is an adhesion contract, a standard form contract with nonnegotiable terms, does not determine the outcome; instead, to avoid enforceability, a plaintiff must show that the contract is unconscionable. [FN245] "Adhesion contracts are not automatically void. Instead, the party seeking to avoid the contract generally must show that it is unconscionable." [FN246] In Texas, it is necessary to prove both procedural and substantive unconscionability. [FN247] The procedural aspect of unconscionability is concerned with the assent of the parties and focuses on facts surrounding the bargaining process. [FN248] The substantive aspect of unconscionability is concerned with the fairness of the agreement. [FN249] Because Martin did not establish, and the trial court did not find, that the agreement was unconscionable, Martin's argument failed to show that the Deposit Agreement was adhesionary. [FN250]

Although Martin did not raise the issue directly, the court considered his adhesion contract argument to raise the Fair Notice Doctrine. [FN251] This doctrine mandates that a party's effort to disclaim liability for its own negligence must meet two requirements: (1) that a party's intent to be released from liability caused by its own future negligence must be expressed in unambiguous terms within the contract, and (2) that the clause must be conspicuous, as the Code defines that term. [FN252]

The Martin court expressly rejected the Fair Notice Doctrine. [FN253] The court observed that the Code "does not permit a bank to disclaim liability for its own failure to exercise ordinary care even if the disclaimer is made in proper form." [FN254] Thus, the court correctly recognized that the Fair Notice Doctrine simply does not apply, because a notice-shortening agreement is not an agreement disclaiming liability. [FN255]

The Fair Notice Doctrine does not apply to a notice-shortening provision under the Code. [FN256] The Martin court recognized that the Code "draws a careful distinction between disclaiming liability, which it does not permit the bank to do, and limiting the time period during which a bank can be charged with liability for paying unauthorized items, which it permits the bank to do." [FN257] The Deposit Agreement's sixty-day notice provision, creating a shortened time period and not disclaiming liability, is consistent with this Code policy. [FN258] The Martin court, by recognizing and applying this distinction, properly rejected application of the Fair Notice Doctrine. [FN259]

h. Reasonableness of Notice Provision

Having rejected application of the Fair Notice Doctrine, the Martin court confronted the issue of whether the sixty-day notice requirement is "unreasonably short." [FN260] This issue is raised by section 4.103(a) which requires, for enforceability, that the provision under review be manifestly reasonable. [FN261] Martin did not argue that sixty days was unreasonable. [FN262] Furthermore, other jurisdictions have approved shortened notice provisions from fourteen to sixty days. [FN263] The sixty-day shortened notice requirement is reasonable and enforceable. [FN264]

i. Negligence of Bank Irrelevant to Absolute Notice Requirement

The Martin court also discussed whether the negligence of the bank was relevant to the consideration of enforceability of a shortened notice period. [FN265] Some courts and commentators, apparently confusing the distinctions between the Repeater Rule and the Absolute Notice Requirement, have held or asserted that a shortened notice requirement is only enforceable if there is no evidence that the bank failed to exercise ordinary care. [FN266] The rationale followed by these courts or commentators is that a shortened notice period, in effect, disclaims the bank's responsibility to exercise ordinary care, if the bank in fact has not exercised ordinary care. [FN267]

The Martin court declined to follow this line of reasoning because such reasoning confuses the concept of the bank's ongoing duty to exercise ordinary care in paying the items from a customer's account with the concept that the bank can only be charged with liability for a specific period of time. [FN268] The Martin court's clear legal analysis is proper, as is its rejection of those cases and commentators who confuse the duty of care with the limitation of time to report. [FN269] The Martin court's explanation of its holding on this issue is well reasoned:

Moreover, the Deposit Agreement does not excuse the Credit Union from its ongoing duties to exercise ordinary care and pay only authorized items. So long as the customer complies with the corresponding duty to discover and report within the relevant time period-whether it is one year, sixty days, or something else-the bank can be held liable for any failure to exercise due care. And shortening the notice period does not disclaim the bank's liability for negligence in the future, inasmuch as the time period for notice as to on-going transactions starts over again each time the bank makes a new statement and items available to the customer. [FN270]

j. Texas Civil Practice and Remedies Code Inapplicable

Martin's final argument to avoid the sixty-day notice requirement was based on Texas Civil Practice and Remedies Code section 16.071. [FN271] Other commentators have made similar arguments. [FN272] The Martin court summarily rejected this argument. [FN273]

Section 16.071 declares that a contractual provision "that requires a claimant to give notice of a claim for damages as a condition precedent to the right to sue on the contract" is void if it requires notification within less than ninety days. [FN274] The Martin court held that, by its terms, section 16.071 does not apply to a shortened notice provision under section 4.406. [FN275] A shortened section 4.406 notice provision requires notice of unauthorized transactions, not notice of a claim for damages (i.e., the notice required by section 16.071). [FN276] The purpose of the section 4.406 notice provision is to prevent further unauthorized transactions. [FN277] This is a purpose that distinguishes section 4.406 from section 16.071. [FN278]

There are other reasons that section 16.071 does not apply to a notice-- shortening agreement under section 4.406. For example, under the Repeater Rule, the notice requirement is thirty days (changed from fourteen days in 1996) and is obviously less than the ninety days apparently allowed under section 16.071. [FN279] The Repeater Rule, like section 16.071, was adopted by the legislature. [FN280] It is improper statutory construction to conclude that the legislature deemed unenforceable the thirty-day notice requirement of section 4.406(b) by its adoption of section 16.071. [FN281] It is proper, however, to conclude that section 16.071 is simply inapplicable to the financial institution/customer relationship. [FN282]

In any event, "[w]hen two statutes conflict, the specific controls over the general." [FN283] In addition, a more recent statutory enactment prevails over an earlier one. [FN284] The predecessor of section 16.071, Texas Revised Civil Statute article 5546, was enacted in 1891. [FN285] The original version of section 4.406, with the fourteen-day notice requirement under the Repeater Rule, was enacted in 1967. [FN286] The revised section 4.406, with a thirty-day requirement under the Repeater Rule, became effective on January 1, 1996. [FN287] This leads to the conclusion that the specific and more recent statute concerning a financial institution's relationship with its customers, section 4.406, controls over the general and earlier statute, section 16.071.

All notice requirements under ninety days are not necessarily void under section 16.071. [FN288] When there are valid reasons for shorter time notification requirements, such requirements are enforced. [FN289] For example, the Texas Supreme Court held in St. Paul Mercury Insurance Co. v. Tri- State Cattle Feeders, Inc. that a twenty-four hour notice requirement in a theft insurance policy was not void under the predecessor to section 16.071. [FN290] The Tri-State court noted that "the purpose of the notice is to give the insurer an opportunity to attempt recovery of the stolen objects." [FN291] Similarly, the principal rationale for a customer's duty to discover and report under section 4.406 is to stop the problem in the account, usually caused by a third party wrongdoer, and give all parties an early opportunity to recover the funds in question (e.g., by freezing the wrongdoer's account). [FN292] Thus, unique policy considerations distinguish the time requirements of section 4.406 from the policy considerations of section 16.071. [FN293] As a result, section 16.071 is inapplicable to the relationship of banks and their customers. [FN294]

k. Applicability of Article 4A

Martin also argued that the transactions in question were controlled not by Article 4, but by Article 4A ("Funds Transfers"). [FN295] The Martin court observed that "Article 4A applies to 'funds transfers,' also known in the banking industry as 'wholesale wire transfers.' " [FN296] Although recognizing that Blair's telephone transfers resemble an example contained in the comments to section 4A.104, the court noted that Martin could neither explain how Blair's transfers fit with Article 4A nor explain the effect of the application of Article 4A. [FN297] The court, seemingly impressed that Blair's transfers did not fall within the concept of a "wholesale wire transfer," thus stated: "[W]e conclude that Article 4A does not apply." [FN298]

The Martin court's conclusion that Blair's oral transfers do not fall within Article 4A is correct. Even if the transactions were otherwise "funds transfers" as defined in Article 4A, Article 4A is inapplicable because the transfers in question, initiated by instructions from the recipient, Blair, are in the nature of "debit transfers," which are not within the scope of Article 4A. [FN299] A debit transfer is one in which the "instruction to pay is given by the person receiving payment." [FN300] "The purpose of [section 4A.103(a)(1)(B)] is to include credit transfers in Article 4A and to exclude debit transfers." [FN301] Because Blair, the person receiving the transfer, gave the transfer instructions to the Credit Union, the transfer is in the nature of a debit transfer and is excluded from Article 4A. [FN302]

Even if Article 4A is applicable, Martin's claim is nonetheless barred by the applicable notice period of section 4A.505. [FN303] Under section 4A.505, the customer must give notice of his objections to the funds transfer within one year after receipt of notice of the transfer. [FN304] Section 4A.505 is a "statute of repose." [FN305] This one-year notice period can be shortened by agreement. [FN306] Section 4A.501 states that "[e]xcept as otherwise provided in this chapter, the rights and obligations of a party . . . may be varied by agreement of the affected party." [FN307] Commentators recognize the validity of agreements shortening the one-year notice period of section 4A.505. [FN308] Thus, Martin's failure to give notice within the sixty-day period provided under the Deposit Agreement bars his claim regardless of the applicability of Article 4A. [FN309]

l. Absolute Notice Requirement Precludes Martin's Claim in Part, Repeater Rule

Not Applicable

Having concluded that section 4.406 applied and that Martin did not provide the sixty-day notice required by the Deposit Agreement concerning ten of the transfers by Blair, the Martin court held that Martin's claim on those items was barred. [FN310] Thus, to that extent, the court rendered judgment providing that Martin take nothing on his claims concerning the ten transfers. [FN311]

Martin's notification to the Credit Union of the final four transfers by Blair was within the sixty-day notice requirement. [FN312] The Credit Union asserted that the Repeater Rule defense defeated the claim on those four transfers because Martin had not, within fourteen days after receiving the first account statement reflecting the activity of Blair, discovered and reported the transactions. [FN313] Affirming the court of appeals's holding that the Credit Union was negligent in accepting the account charge card with the forgery of Martin's signature, the Martin court concluded that the Credit Union could not rely on the Repeater Rule, as the defense is only available when the bank exercises ordinary care. [FN314]

This holding reflects the Martin court's recognition of the distinction between the Absolute Notice Requirement and the Repeater Rule. [FN315] While a finding of negligence precludes application of the Repeater Rule, such a finding is irrelevant to the application of the Absolute Notice Requirement. [FN316]

m. The Dissent

Two Martin justices dissented. [FN317] The dissent rejected the majority's conclusion that the oral transfers by Blair involved Martin's unauthorized signature. [FN318] The dissent argued that the tellers' execution of the journal vouchers was for the mere purpose of creating a record of the transactions, and their signatures were not as agents for the account holder to authenticate the transaction. [FN319]

The dissent argued that the tellers were acting as agents for Blair, not Martin. [FN320] Thus, the dissent reasoned, there was no unauthorized signature for Martin to discover pursuant to his duty under section 4.406. [FN321] Furthermore, although Martin's forged signature appeared on the Account Change Card, that card is not an "item" for purposes of section 4.406. [FN322] Rejecting the idea that the Credit Union provided Martin with enough information to invoke his duty to discover and report, the dissent noted that "regardless of how much information the credit union provided to Martin concerning Blair's oral transactions, Martin's unauthorized signature was not involved, and therefore section 4.406 does not apply." [FN323]

This reasoning is a hyper-technical reading of section 4.406 and leads to a problematic result. Clearly, there were unauthorized withdrawals from Martin's account. [FN324] The paperwork generated by the tellers was precisely the same paperwork that would have been generated if Martin himself had conducted the transfers. [FN325] Thus, the journal vouchers and account statements reflected Blair's transactions in precisely the same manner as authorized transactions would have been reflected. [FN326] Concluding that the tellers were not acting as agents for Martin when they followed an oral instruction to withdraw from Martin's account leads to the conclusion that Blair's transactions are taken out of Article 4, leaving the court without the statutory scheme as guidance. [FN327]

After deciding Article 4 does not apply, the dissent initially seemed to conclude that Article 4A applies. [FN328] It states: "Contrary to the Court's assertion, courts considering funds transfers have consistently held that [Article 4] does not apply." [FN329] Yet, after drawing that conclusion, it neither analyzes the case under Article 4A nor confronts the debit/credit transfer issue. [FN330] It is unclear how the dissent would apply the Martin facts to Article 4A. [FN331]

Because of its conclusion that Article 4 did not apply to Blair's transfers, the dissent found itself in the same position as the court of appeals in having to deal with the sixty-day notice requirement in the Deposit Agreement without the guidance of Article 4. [FN332] The dissenting justices apparently chose to follow a similar type of contradictory analysis followed by the court of appeals and first showed that section 4.406 was inapplicable, and then found Article 4 as the source of a right to Martin. [FN333] Such analysis is, according to the dissent, a common-law analysis. [FN334] Because section 4.406 does not apply, the dissent stated, the majority's treatment of the Deposit Agreement's sixty-day notice provision as merely modifying the one-year notice duty of section 4.406 is incorrect. [FN335] Instead, the dissent viewed the Deposit Agreement's sixty-day notice as "a waiver of rights." [FN336] The dissent stated:

Martin is vested with statutory rights of recovery against the credit union. But the Court fails to recognize that the Deposit Agreement places new and more stringent limitations on those rights to the extent it alters the standard established in section 4.401(a). Because the notice provision limits Martin's ability to hold the credit union liable for its negligence, I would treat the provision as a waiver of rights. [FN337]

This analysis seems wrong. Section 4.401 provides only that a bank may not charge its customer's account with an item unless the item is properly payable. [FN338] Section 4.401 is silent on the customer's duty to report; this duty is found in section 4.406. [FN339] The duty of section 4.406 clearly limits the customer's right to recover, just like the Deposit Agreement. [FN340] Yet, under section 4.406, no waiver of rights is involved. [FN341] Instead, section 4.406 creates a duty for the customer as part of the overall risk-allocation scheme carefully laid out by Article 4. [FN342] The dissent rewrites this legislative risk-allocation scheme by applying part of it, section 4.401, and rejecting part, section 4.406. [FN343] The majority's reasoning, in contrast, enhances the allocation scheme and the public policy of Article 4.

Having held that the Deposit Agreement's sixty-day notice provision is a limitation on Martin's right to bring suit under the Code, the dissent holds it is enforceable only if Martin knowingly, voluntarily, and intentionally agreed to the provision. [FN344] The Credit Union did not prove the elements of waiver and could not even show Martin knew of the Deposit Agreement because it did not deliver a copy to him. [FN345] Thus, according to the dissent, Martin "did not waive his right to bring suit by failing to notify the Credit Union of the unauthorized transactions." [FN346] The dissent would affirm the court of appeals's decision. [FN347]

The dissent's analysis seems too narrow. Similar to the court of appeals's opinion, it narrowly construes section 4.406 in such a way that it does not apply. [FN348] This leaves the dissent with nothing to rely on for allocation of loss except the common law. [FN349] The better approach seems to be the one suggested by Hawkland. [FN350] Without regard to the technicalities of unauthorized signature and item, if the information provided is sufficient to allow the customer to detect the unauthorized transaction, the requirements of section 4.406 should be considered satisfied and its duties applicable. [FN351] In this way, the legislatively adopted risk-allocation scheme of the Code will be furthered and enhanced. [FN352]

V. Common-Law Policy v. Code Policy

Martin is important, among other reasons, because of its comparison of common-law policy to Code policy. Martin rejects the argument that general common-law policy should take precedence over Code policy, which is designed specifically to allocate risks between banks and their customers. [FN353]

Arguing in favor of the application of common-law policy, one commentator criticizes the cases which reject such analysis, including all of the Texas cases, Tumlinson, Basse and the Martin court of appeals's decision. [FN354] In stark contrast, the Texas Supreme Court cites Tumlinson and Basse with approval. [FN355]

The Parent Teacher Ass'n case, relied on by the Martin court, has been referred to as a "computer virus." [FN356] Parent Teacher Ass'n, however, has been followed and cited by several courts, including Martin, [FN357] Basse, [FN358] Borowski v. Firstar Bank Milwaukee, N.A., [FN359] and Stowell v. Cloquet Co-op Credit Union. [FN360]

One commentator [FN361] suggests that later New York cases are contrary to Parent Teacher Ass'n, citing primarily Herzog, Engstrom & Koplovitz P.C. v. Union National Bank [FN362] and Farber v. National Westminster Bank USA. [FN363] Neither Herzog nor Farber, however, overrule or even discuss Parent Teacher Ass'n. [FN364] These poorly developed opinions appear to be examples of court decisions in which courts have trouble distinguishing the difference between the Repeater Rule, when bank negligence is relevant, and the Absolute Notice Requirement, when bank negligence is irrelevant. [FN365] The Farber opinion consists of one paragraph concerning section 4.406 and has no meaningful analysis. [FN366] Herzog is equally limited with only two paragraphs of discussion. [FN367] Neither opinion has any discussion of the public policy issues presented in Martin. [FN368]

Another case relied upon by some commentators to be relevant to the validity of Parent Teacher Ass'n is Knight Publishing Co. v. Chase Manhattan Bank. [FN369] Knight, however, does not involve a section 4.406(d) shortened notice provision, but rather an agreement to shorten the U.C.C. three-year statute of limitations period to 180 days. [FN370] Thus, Knight is not even relevant to the issues presented here. [FN371]

It is now clear that Texas common-law public policy will not be given priority over specific Code policy. As noted, section 16.071, by its own terms, simply does not apply. [FN372] Moreover, its suggested application to the shortened notice requirements of section 4.406 violates proper statutory construction. [FN373] The Repeater Rule of section 4.406(d) has a thirty-day notice provision, significantly less than the ninety days allowed by section 16.071. [FN374] Does the ninety-day rule of section 16.071 control the thirty-day notice provision of section 4.406? Of course not. Proper statutory construction provides that the specific statute, section 4.406, controls over the general, section 16.071. [FN375] Furthermore, the more recent section 4.406 controls the earlier section 16.071. [FN376]

In addition, Texas common-law public policy does not always preclude notice provisions of less than ninety days. [FN377] A twenty-four hour notice requirement in a theft insurance policy is not void. [FN378] Thus, there is no absolute Texas public policy, established by section 16.071 or otherwise, that would void a section 4.406 notice period of less than ninety days. [FN379] Also, the Fair Notice Doctrine does not apply to agreements under section 4.103(a) shortening the one-year Absolute Notice Requirement, because such agreements simply do not involve disclaimers of liability. [FN380]

In section 4.103(a), the legislature set forth the various limitations and restrictions on agreements between banks and customers but clearly chose not to include a ninety-day limitation or any reference to section 16.071. [FN381] Thus, there is no valid reason to assume the legislature intended to include the restrictions of section 16.071 in section 4.103 agreements between banks and customers. [FN382] The ninety-day notice rule of section 16.071 has been in effect for 100 years. [FN383] If the legislature desired to create a minimum notice period of ninety days for section 4.103 agreements when it adopted the Code in 1967 or modified it in 1996, it could have easily done so, but it did not. [FN384] The same analysis applies to the Fair Notice Doctrine. The legislature could have chosen to impose the doctrine's requirements to section 4.103 agreements, but it chose not to do so. [FN385] Thus, such restrictions should not be read into section 4.103. [FN386]

With the Martin decision, Code policy considerations take precedence over common-law public policy concerning issues of notice shortening agreements under section 4.406. [FN387] Those Code considerations allow for reasonable shortened notice provisions modifying the one-year notice requirement of section 4.406. [FN388]

VI. Conclusion

The Martin case settles the law in Texas concerning shortened notice agreements that reduce the one-year notice provision of section 4.406. [FN389] Notice shortening agreements are enforceable if they comply with section 4.103(a). [FN390] Common-law public policy considerations set forth in section 16.071 of the Texas Civil Practice and Remedies Code and the Fair Notice Doctrine are inapplicable. [FN391] Under Martin, banks and customers agreeing to shortened notice provisions in Texas can now expect those agreements to be enforced. [FN392]

[FNa1]. Partner at Kleiman, Lawrence, Baskind & Fitzgerald, L.L.P., Dallas, Texas. B.J., University of Texas at Austin, 1973; J.D., Texas Tech University, 1976.

[FN1]. Tex. Bus. & Com. Code Ann. § 4.406(f) (Vernon Supp. 2001). The version of the Code applicable to the Martin case was the one in effect during 1995, before the 1995 amendments, which became effective January 1, 1996. Tex. Bus. & Com. Code Ann. § 3.101 historical note (Vernon Supp. 2001) [Act of June 16, 1995, 74th Leg., R.S., ch. 921, § 9, 1995 Tex. Gen. Laws 4582, 4643]. The earlier version of section 4.406, Act of June 14, 1967, 60th Leg., R.S., ch. 785, § 1, 1960 Tex. Gen. Laws 2343, 2458-59 (amended 1995) (current version at Tex. Bus. & Com. Code Ann. § 4.406 (Vernon Supp. 2001), will be referred to herein as the "pre-1996 Code." The current version of section 4.406, effective January 1, 1996, will be referred to as the "post-1996 Code." Other Code sections herein will also be designated as "pre- 1996 Code" or "post-1996 Code."

[FN2]. Tex. Bus. & Com. Code Ann. § 4.406(f).

[FN3]. See Brief of Amicus Curiae CUNA Services Group, Inc. at 2, Am. Airlines Employees Fed. Credit Union v. Martin, 29 S.W.3d 86 (Tex. 2000) (No. 99-0320). CUNA Services Group, Inc., stated that it had supplied a form of deposit agreement with a shortened notice provision (thirty-three days) to over 1,159 credit unions. Id. Another amicus curiae, Texas Credit Union League, estimated that 4.5 million Texas credit union members had deposit agreements with shortened notice provisions. See Brief of Amicus Curiae Texas Credit Union League at 3, Am. Airlines Employees Fed. Credit Union v. Martin, 29 S.W.3d 86 (Tex. 2000) (No. 99-0320).

[FN4]. See supra note 3 and accompanying text.

[FN5]. Martin, 29 S.W.3d at 99. For a discussion of issues relevant to Martin with a contrary view, see M.H. Cersonsky, Deposit Agreements Between Banks and Their Customers-A Wall of Protection or a Wall with a False Foundation, 31 Tex. Tech L. Rev. 1, 5 (2000).

[FN6]. 29 S.W.3d at 89. The provisions of the older Code, prior to the January 1, 1996 revisions, were in question. The holding in Martin, however, is applicable under the current version. See supra text accompanying note 1.

[FN7]. 29 S.W.3d at 89.

[FN8]. Id.

[FN9]. Interestingly, a copy of Cersonsky's article was filed by Respondent Tim Martin with the Texas Supreme Court on January 26, 2000, the day of oral arguments. The opinion was issued on September 7, 2000. Id. at 86. This article will comment on some the arguments addressed therein.

[FN10]. Tex. Bus. & Com. Code Ann. § 4.406(f) (Vernon Supp. 2001).

[FN11]. Id. § 4.406(a); La Sara Grain Co. v. First Nat'l Bank of Mercedes, 673 S.W.2d 558, 561-62 (Tex. 1984); McDowell v. Dallas Teachers Credit Union, 772 S.W.2d 183, 188 (Tex. App.-Dallas 1989, no writ). Although credit unions differ significantly from banks, for purposes of Article 4 of the Code, American Airlines Employees Federal Credit Union is considered a "bank" under the post-1996 version of Article 4. See Tex. Bus. & Com. Code Ann. § 4.105(1). Section 4.105(1) defines a bank as "a person engaged in the business of banking, including a savings bank, savings and loan association, credit union, or trust company." Id. Under the pre-1996 Code, Articles 3 and 4 of the Texas Business and Commerce Code were expressly made applicable to credit unions concerning the rights, responsibilities, and liabilities of a person regarding an "item." Tex. Fin. Code Ann. § 149.001 (Vernon 1998). Section 149.001 of the Texas Finance Code states:

(a) Chapters 3 and 4, Business & Commerce Code, determine the rights, responsibilities, and liabilities of a person regarding an item drawn on, transferred to, or presented, remitted, collected, settled, negotiated, or otherwise handled by a credit union as if the credit union were a bank, unless otherwise provided by written agreement of the parties.

(b) In this section:

(1) "Credit union" means a credit union authorized to do business in this state under this subtitle or the Federal Credit Union Act (12 U.S.C. Section 1751 et seq.).

(2) "Item":

(A) means an instrument, whether or not negotiable, for the payment of money; and

(B) does not include money.

Id. Whether the language of Texas Finance Code section 149.001(a), "unless otherwise provided by written agreement of the parties," suggests that a credit union and its member can agree to provisions other than those under Articles 3 and 4 is beyond the scope of this article.

[FN12]. Tex. Bus. & Comm. Code Ann. § 4.406(c); see also id. § 4.406 cmt. 1 (stating that the duty is operative only when the bank "sends or makes available a statement of account," otherwise no duty exists under subsection (c)).

[FN13]. § 4.406(c); see also Hatcher Cleaning Co. v. Comerica Bank- Texas, 995 S.W.2d 933, 937-38 (Tex. App.-Fort Worth 1999, no pet.) (noting that the "report" under section 4.406 by the customer need not be written but should make known the specific item on which the unauthorized signature appears).

[FN14]. Tex. Bus. & Com. Code Ann. § 4.406 cmt. 1 (noting that the customer has a duty "to exercise reasonable promptness in examining the statement or the returned item to discover any unauthorized signature of the customer or any alteration and to promptly notify the bank if the customer should reasonably have discovered the unauthorized signature or alteration").

[FN15]. See id. § 4.406(d), (f).

[FN16]. Id. § 4.401(a).

[FN17]. See id. § 4.401 cmt. 1 ("An item is properly payable from a customer's account if the customer has authorized the payment and the payment does not violate any agreement that may exist between the bank and its customer. . . . An item containing a forged drawer's signature or forged indorsement is not properly payable.").

[FN18]. Frost Nat'l Bank v. Heafner, 12 S.W.3d 104, 109 (Tex. App.- Houston [14th Dist.] 2000, no pet.).

[FN19]. Id.; McDowell v. Dallas Teachers Credit Union, 772 S.W.2d 183,187 (Tex. App.-Dallas 1989, no writ); Fidelity & Cas. Co. v. First City Bank, 675 S.W.2d 316, 318 n.3 (Tex. App.-Dallas 1984, writ ref'd n.r.e.).

[FN20]. See generally Tex. Bus. & Com. Code Ann. § 4.406 (requiring notice).

[FN21]. See id. § 4.406(d), (f).

[FN22]. Id.; La Sara Grain Co. v. First Nat'l Bank of Mercedes, 673 S.W.2d 550, 561-62 (Tex. 1984); Hatcher Cleaning Co. v. Comerica Bank-Texas, 995 S.W.2d 933, 937 (Tex. App.-Fort Worth 1999, no pet.).

[FN23]. See Tex. Bus. & Com. Code Ann. § 4.406(d), (f).

[FN24]. See id. § 4.406(d).

[FN25]. See id. § 4.406(f).

[FN26]. See id. § 4.406(d), (f).

[FN27]. See discussion infra Part II.B.1-2.

[FN28]. See Tex. Bus. & Com. Code Ann. § 4.406(d).

[FN29]. See id.

[FN30]. Id. § 4.406(d)(2).

[FN31]. Id.

[FN32]. Id.

[FN33]. Act of June 14, 1967, 60th Leg., R.S., ch. 785, § 1, 1960 Tex. Gen. Laws 2343, 2458 (amended 1995) (current version at Tex. Bus. & Com. Code Ann. § 4.406(b)(2) (Vernon Supp. 2001)).

[FN34]. Tex. Bus. & Com. Code Ann. § 4.406(d) cmt. 2.

[FN35]. See id.

[FN36]. Id. § 4.406(d)(2).

[FN37]. Id. § 4.406(c).

[FN38]. Id. § 4.406(d)(2).

[FN39]. See id. § 4.406 cmt. 1 ("If the customer made a record of the issued checks . . . the customer should usually be able to verify the paid items shown on the statement of account and discover any unauthorized or altered checks.").

[FN40]. See id. § 4.406(d) cmt. 2 ("The policy decision is that accommodating customers who do not keep adequate records is not as desirable as accommodating customers who keep more careful records.").

[FN41]. See id. (noting that while the opportunity is presented for the misdeeds to continue, a way to keep down losses is for the customer to promptly examine the statement and alert the bank of any wrongdoing).

[FN42]. See id. § 4.406(d).

[FN43]. See id. § 4.406(e). The definition of "ordinary care" states that when "a bank that takes an instrument for processing for collection or payment by automated means, reasonable commercial standards do not require the bank to examine the instrument if the failure to examine does not violate the bank's prescribed procedures. . . ." Id. § 3.103(7). The bank's procedures must not differ unreasonably from "general banking usage not disapproved" by Article 3 or Article 4. Id. This definition of ordinary care would most likely cause a different result in the case of McDowell v. Dallas Teachers Credit Union, which held that automated processing of checks amounted to a lack of ordinary care as a matter of law. 772 S.W.2d 183, 188 (Tex. App.-Dallas 1989, no writ).

[FN44]. Tex. Bus. & Com. Code Ann. § 4.406(e). Section 4.104(c) incorporates in Article 4 the definition of good faith set forth in section 3.103(4), which provides that good faith means "honesty in fact and the observance of reasonable commercial standards of fair dealing." Id. § 3.103(4). This is a change of definition made in the post-1996 Code. Id. Under the pre-1996 version, good faith required only "honesty in fact." La Sara Grain Co. v. First Nat'l Bank of Mercedes, 673 S.W.2d 550, 563 (Tex. 1984) ("Good faith is defined as 'honesty in fact in the conduct or transaction concerned.' "). The test for good faith under the pre-1996 version of the Code is the "actual belief of the party in question, not the reasonableness of that belief." Id. The new definition does not, however, require the exercise of ordinary care, but fairness. "Although fair dealing is a broad term that must be defined in context, it is clear that it is concerned with the fairness of the conduct rather than the care with which the act is performed." Tex. Bus. & Com. Code Ann. § 3.103 cmt. 4. "The connotation of this standard is fairness and not absence of negligence." Id. § 4.406 cmt. 4.

[FN45]. Tex. Bus. & Com. Code Ann. § 4.406(f).

[FN46]. Id.

[FN47]. See, e.g., Cersonsky, supra note 5, at 36-37.

[FN48]. Tex. Bus. & Com. Code Ann. § 4.406(f) (noting that a customer who does not, within one year after receiving the statement or items that were made available, discover and report any alteration is precluded from asserting an action against the bank for an unauthorized signature or alteration).

[FN49]. Act of June 14, 1967, 60th Leg., R.S., ch. 785, § 1, 1960 Tex. Gen. Laws 2343, 2458-59 (amended 1995). Comments 5 and 7 to the pre-1996 Code place an "absolute time limit" on the customer's right to make a claim and show a public policy favoring the prompt examination of bank statements by customers and reasonable time limitations on the bank to pay for forged or altered items. Id.

[FN50]. Tex. Bus. & Com. Code Ann. § 4.406(f).

[FN51]. Id.

[FN52]. La Sara Grain Co. v. First Nat'l Bank of Mercedes, 673 S.W.2d 558, 561 (Tex. 1984).

[FN53]. Id.

[FN54]. Tex. Bus. & Com. Code Ann. § 4.406(d).

[FN55]. Id. § 4.406(f).

[FN56]. Id.

[FN57]. In a case under the pre-1996 version of section 4.406, however, the Texas Supreme Court held that absence of good faith resulted in a loss of the Absolute Notice Requirement defense. La Sara Grain, 673 S.W.2d at 568. In American Airlines Employees Federal Credit Union v. Martin, however, the court noted that under section 4.406: "To assert a claim against the bank based on an unauthorized signature (absent any allegation that the bank did not act in good faith), a customer must comply with the duty to discover and report within one year." 29 S.W.3d 86, 95 (Tex. 2000) (emphasis added).

[FN58]. Tex. Bus. & Com. Code Ann. § 4.406(f).

[FN59]. Martin, 29 S.W.3d at 89; Cersonsky, supra note 5, at 15.

[FN60]. See Cersonsky, supra note 5, at 15.

[FN61]. Littlefield v. Schaefer, 955 S.W.2d 272, 274 (Tex. 1997); Dresser Indus., Inc. v. Page Petroleum, Inc., 853 S.W.2d 505, 508 (Tex. 1993); see also Tex. Bus. & Com. Code Ann. § 1.201(10) (Vernon Supp. 2001) (defining the term "conspicuous").

[FN62]. Tex. Bus. & Com. Code Ann. § 4.406.

[FN63]. Id.

[FN64]. But see Dresser, 853 S.W.2d at 508.

[FN65]. See discussion infra Part IV.C.

[FN66]. Tex. Bus. & Com. Code Ann. § 4.103(a).

[FN67]. See id. § 4.103(a) cmt. 2. "The effect of the provisions of this chapter [Article 4] may be varied by agreement, but the parties to the agreement cannot disclaim a bank's responsibility for its lack of good faith or failure to exercise ordinary care or limit the measure of damages for the lack or failure." Id. § 4.103(a).

[FN68]. See id. § 4.103 cmt. 2. As used in section 4.103(a), the term "agreement" has the meaning given to it by section 1.201(3) which provides that an agreement is the bargain between the parties that can be found in the language of the parties or implication from other circumstances. Id. § 1.201(3).

[FN69]. See id. § 4.103 cmt. 2 ("Legends on deposit tickets, collection letters and acknowledgments of items, coupled with action by the affected party constituting acceptance, adoption, ratification, estoppel or the like, are agreements if they meet the test of the definition of 'agreement.' ").

[FN70]. Id. § 4.103(a); see also Parent Teacher Ass'n v. Mfrs. Hanover Trust Co., 524 N.Y.S.2d 336, 338 (N.Y. Civ. Ct. 1988) (noting that the "Code's effort to harmonize the law with its view of commercial reality, and in accord with traditional common law notions of freedom of contract," allows parties to agree between themselves as to a contract of deposit).

[FN71]. See Tex. Bus. & Com. Code Ann. § 4.103(a).

[FN72]. See id. § 4.103(a) cmt. 2.

[FN73]. See Cersonsky, supra note 5, at 39-44.

[FN74]. Basse Truck Line, Inc. v. First State Bank, 949 S.W.2d 17, 21-22 (Tex. App.-San Antonio 1997, writ denied); Tumlinson v. First Victoria Nat'l Bank, 865 S.W.2d 176, 177 (Tex. App.-Corpus Christi 1993, no writ).

[FN75]. 865 S.W.2d at 177 (citations omitted) (emphasis added).

[FN76]. Id.

[FN77]. 949 S.W.2d at 21.

[FN78]. Id. at 21-22.

[FN79]. Id. at 22.

[FN80]. See Cersonsky, supra note 5, at 19-21.

[FN81]. Am. Airlines Employees Fed. Credit Union v. Martin, 29 S.W.3d 86, 96-98 (Tex. 2000).

[FN82]. Id. at 97-98.

[FN83]. Fundacion Museo de Arte Contemporaneo Caracas v. CBI-TDB Union Bancaire Privee, 996 F. Supp. 277, 291 (S.D.N.Y.), aff'd, 160 F.3d 147 (2d Cir. 1998) (thirty-day notice provision approved); Jamison v. First Ga. Bank, 387 S.E.2d 375, 377 (Ga. App. 1989) (sixty-day notice provision approved); Stowell v. Cloquet Co-Op Credit Union, 557 N.W.2d 567, 573 (Minn. 1997) (fourteen-day notice provision approved); Coine v. Mfrs. Hanover Trust Co., 16 U.C.C. Rptr. Serv. 184, 185-86 (N.Y. App. Div. 1975) (fourteen-day notice provision approved); Parent Teacher Ass'n v. Mfrs. Hanover Trust Co., 524 N.Y.S.2d 336, 340 (N.Y. Civ. Ct. 1988) (fourteen-day notice provision approved); Borowski v. Firstar Bank Milwaukee, N.A., 579 N.W.2d 247, 252-53 (Wis. Ct. App. 1998) (fourteen-day notice provision approved as being "not manifestly unreasonable").

[FN84]. See cases cited supra note 83.

[FN85]. See Cersonsky, supra note 5, at 57-58. Cersonsky refers to Parent Teacher Ass'n as the equivalent of a "computer virus." Id. at 57. Parent Teacher Ass'n, however, has been followed by several courts, including Martin. Stowell, 557 N.W.2d at 573-74; Martin, 29 S.W.3d at 96-97; Basse Truck Line, Inc. v. First State Bank, 949 S.W.2d 17, 21 (Tex. App.-San Antonio 1997, writ denied); Borowski, 579 N.W.2d at 252.

[FN86]. Martin, 29 S.W.3d at 97 n.59.

[FN87]. 6B Ronald A. Anderson, Anderson on the Uniform Commercial Code § 4- 103:70 to :82 (3rd ed. 1998) ("In accord with the general principle of permitting the parties freedom to make their own transactions, and of providing a flexibility allowing particular variations in particular and general changes, Code § 4-103 expressly authorizes the parties to vary by agreement the provisions of Article 4 of the Code."); 2 Henry J. Bailey & Richard B. Hagedorn, Brady on Bank Checks 32.07 (2000) ("[A] Texas court[, Tumlinson v. First Victoria National Bank, 865 S.W.2d 176 (Tex. App.-Corpus Christi 1993, no writ),] gave effect to a deposit agreement that required the giving of notice of any check forgery within sixty days after return of the particular bank statement and canceled checks."); 1 Barkley Clark & Barbara Clark, The Law of Bank Deposits, Collections and Credit Cards 3.01[3][c][ii], 10.05[1][c][i] (rev. ed. 1999) (asking "[c]an a drawee bank bind its customer to a provision in the deposit agreement that requires the reporting of forgeries within a shorter time than allowed by § 4-406(4), such as 30 days from the mailing of the statement and canceled checks?" and answering that "[s]uch a contractual provision would appear to be authorized by § 4-103(1), because it is not an attempt by the bank to disclaim its own negligence.") [hereinafter Clark]; 2 Thomas D. Crandall, Michael J. Herbert & Lary Lawrence, Uniform Commercial Code § 17.13.4 (1996) (explaining that the notice period begins when the items are made available to the customer, thus, the period is "calculated separately" for each new statement); 3 Thomas D. Crandall, Michael J. Herbert & Lary Lawrence, Uniform Commercial Code § 18.4 (1996) (stating that an agreement need not meet any formal requirements to be enforceable); 5 William D. Hawkland, J. Fairfax Leary, Jr. & Richard M. Alderman, Uniform Commercial Code Series § 4-103:2 (1999) (summarizing the time frames fixed by the U.C.C. as well as the potential bank agreements attempting to shorten the time frames) [hereinafter Hawkland].

[FN88]. Martin, 29 S.W.3d at 96-97.

[FN89]. Id. at 99.

[FN90]. Id. at 97.

[FN91]. Id. at 99.

[FN92]. Id. at 89.

[FN93]. Id.

[FN94]. Id.

[FN95]. Id.

[FN96]. Id.

[FN97]. Id.

[FN98]. Id.

[FN99]. Id.

[FN100]. Id.

[FN101]. Id.

[FN102]. Id.

[FN103]. Id.

[FN104]. Id.

[FN105]. Id.

[FN106]. Id.

[FN107]. Id. at 89-90.

[FN108]. Id. at 90.

[FN109]. Id.

[FN110]. Id.

[FN111]. Id.

[FN112]. Id.

[FN113]. Id.

[FN114]. Id.

[FN115]. Id.

[FN116]. Id.

[FN117]. Id.

[FN118]. Id.

[FN119]. Id.

[FN120]. Id.

[FN121]. Id.

[FN122]. Id.

[FN123]. Id.

[FN124]. Id.

[FN125]. Id.

[FN126]. Id.

[FN127]. Id.

[FN128]. Id.

[FN129]. Id. at 98.

[FN130]. Id. at 90.

[FN131]. Id.

[FN132]. Am. Airlines Employees Fed. Credit Union v. Martin, 991 S.W.2d 887, 890 (Tex. App.-Fort Worth 1999), rev'd in part and aff'd in part, 29 S.W.3d 86 (Tex. 2000).

[FN133]. Id. at 893.

[FN134]. Id. In rejecting the credit union's argument that the tellers' initials on the journal vouchers were "unauthorized signatures," the court stated:

The Credit Union's focus is misplaced. Its argument focuses on the subsequent clerical actions of its employees rather that Martin's or Blair's actions. Blair made 12 of the transfers orally by telephone with no accompanying written request that funds be transferred. While the Credit Union might not have actually transferred the funds until the vouchers were processed, this internal procedure simply created a record of the completed transaction. This procedure did not transform the oral request into a signature; it created a receipt.

Id.

[FN135]. Id. at 894.

[FN136]. Id. at 897.

[FN137]. Id. at 894-95.

[FN138]. Id. at 892.

[FN139]. See id. at 897-98.

[FN140]. Id. The court of appeals held that in order for the Credit Union to enforce the sixty-day notice provision of the Deposit Agreement against Martin, the Credit Union must prove the elements of waiver. Id. The court held: "Waiver of a statutory right requires a knowing, voluntary, intentional relinquishment of that right. Moreover, a waiver provision must state specifically and separately the right or rights surrendered. Finally, waiver must be clearly proven." Id. at 898 (emphasis added) (citations omitted). Because the Credit Union viewed the notice requirement as a "duty" of Martin, it did not attempt to prove the elements of waiver. Id. This waiver holding is unique to the cases dealing with shortened notice provisions under section 4.406 and was particularly disturbing to the financial institution industry. See cases cited supra note 61. "The fatal content deficiency in the account agreement," according to the court of appeals, "is its failure to mention § 4.406, and to state that this statute's one-year notice provision was being varied by agreement." Brief of Amicus Curiae Texas Credit Union League at 5, Am. Airlines Employees Fed. Credit Union v. Martin, 29 S.W.3d 86 (Tex. 2000) (No. 99-0320). "These matters had to be set forth in the account agreement, the court of appeals held, because the agreement attempted to effect a 'waiver' of a 'statutory right.' This holding is both novel and wrong." Id.

[FN141]. Martin, 991 S.W.2d at 898.

[FN142]. Id. at 898-99.

[FN143]. Id.

[FN144]. Am. Airlines Employees Fed. Credit Union v. Martin, 29 S.W.3d 86, 99 (Tex. 2000).

[FN145]. Id. at 92.

[FN146]. Id.

[FN147]. Id. at 96-98.

[FN148]. Id. at 99.

[FN149]. Id.

[FN150]. Id.

[FN151]. Id. at 91.

[FN152]. Id.

[FN153]. Id.

[FN154]. Id. (citing Putnam Rolling Ladder Co. v. Mfrs. Hanover Trust Co., 546 N.E.2d 904, 906 (N.Y. 1989)).

[FN155]. Id.

[FN156]. Id. Note that the notice time period for the Repeater Rule defense was fourteen days under section 4.406(b)(2) of the pre-1996 Code, but is thirty days under section 4.406(d) of the post-1996 Code. See sources cited supra note 1.

[FN157]. Martin, 29 S.W.3d at 91.

[FN158]. Id.

[FN159]. Id. at 92.

[FN160]. Id.; see also Tex. Bus. & Com. Code Ann. § 1.102 (Vernon 1994) (setting forth the underlying purposes and policies of the Uniform Commercial Code).

[FN161]. Martin, 29 S.W.3d at 92 (citing Putnam Rolling Ladder Co. v. Mfrs. Hanover Trust Co., 546 N.E.2d 904, 908 (N.Y. 1989)).

[FN162]. Id.

[FN163]. Id.; see also Hawkland, supra note 87, § 4-406:3 ("The specified duty of the customer is to use reasonable care and promptness . . . .").

[FN164]. Martin, 29 S.W.3d at 92; see also Hawkland, § 4-406:2 (explaining that the purpose behind the rule of section 4.406 "is to stimulate the assertion from the customer of the unauthorized or altered condition of a debit to the account" and stating that "[r]eceipt of information as to the manner in which the message was initiated, its serial number and amount, should be sufficient to evoke a response from the customer").

[FN165]. Martin, 29 S.W.3d at 92.

[FN166]. See id.; see also Cersonsky, supra note 5, at 19-29 (comparing Texas public policy to New York and Georgia).

[FN167]. Cf. Cersonsky, supra note 5, at 19-29 (commenting on shortened notice provisions that violate Texas public policy).

[FN168]. See id.

[FN169]. See Martin, 29 S.W.3d at 92-94.

[FN170]. Id. at 92.

[FN171]. Id. (quoting Act of June 14, 1967, 60th Leg., R.S., ch. 785, § 1, 1960 Tex. Gen. Laws 2343, 2444 (amended 1995)). In contrast, the post- 1996 Code definition of "item" is "an instrument or a promise or order to pay money handled by a bank for collection of payment. The term does not include a payment order governed by Chapter 4A or a credit or debit card slip." Tex. Bus. & Com. Code Ann § 4.104(a)(9) (Vernon Supp. 2001).

[FN172]. Martin, 29 S.W.3d at 92.

[FN173]. Id. (quoting Black's Law Dictionary 802 (7th ed. 1999)). Section 3.102(a)(5) of the pre-1996 Code not very helpfully defines "instrument" to mean "a negotiable instrument." Act of June 14, 1967, 60th Leg., R.S., ch. 785, § 1, 1960 Tex. Gen. Laws 2343, 2408 (amended 1995). Section 9.105(a)(9) provides a broader definition of instrument applicable to Article 9. Tex. Bus. & Com. Code Ann. § 9.105(a)(9).

[FN174]. Martin, 29 S.W.3d at 92. The Credit Union asserted that the entry of the transfers on the account statements was in and of itself sufficient to satisfy the "item" requirement of section 4.406, particularly to the extent a "writing" was required. Id. at 90. That is, Blair's oral orders were reduced to writing by the Credit Union when its computers recorded the transactions and printed them on the account statements. See id. at 94. This argument is supported by Code commentators. Hawkland, supra note 87, § 4- 104:2. Hawkland observed:

These [electronic or oral orders] are not on paper at all times, but in many instances have the potential of being finely processed as "hard copy" in computer operator's language. This concept is helped by the definition of "written" or "writing" in subsection 1-201(46) as including printing, typewriting "or any other intentional reduction to tangible form." In view of the admonition in Section 1-102 where a liberal construction "to permit the continued expansion of commercial practices," it should not be difficult for a court to find that an "item" can be in electronic form so long as the potential for reduction to hard copy when needed is one of the system's capabilities.

Id. Thus, to the extent that the definition of "item" requires "hard copy," Hawkland suggests that the account statement is sufficient in and of itself, and he explains that "[t]his conclusion should be reached even if the only hard copy produced is by the payor bank on its statement sent to the customer." Id. § 4-406:2; see also John J. Clarke, An Item Is An Item Is An Item: Article 4 of the U.C.C. and the Electronic Age, 25 Bus. Law. 109, 115-16 (1969) (agreeing that reduction of an oral order to the statement satisfies the "item" requirement of section 4.406 "if the customer were able to determine, from the data given, whether the item was properly payable and chargeable to his account").

The views of Hawkland and Clarke were apparently accepted in Sabatino v. Atlantic Savings Bank. 444 S.E.2d 537 (S.C. Ct. App. 1994). In Sabatino, a husband without authority obtained withdrawals from his wife's account in the form of cashier's checks. Id. at 537. The husband forged his wife's endorsement on the cashier's checks. Id. The withdrawals were reflected on the wife's account statements but the checks, being cashier's checks, were not provided to the wife with her account statement. Id. at 538. Thus, the wife had only the entries on her statement by which she could discover and report irregularities. Id. The Sabatino court, nevertheless, applied section 4.406. Id.

[FN175]. Martin, 29 S.W.3d at 92-94; see, e.g., Coleman v. Bhd. State Bank, 592 P.2d 103, 112 (Kan. Ct. App. 1979) ("[S]avings account withdrawal order . . . is both an instrument and an item."); Concrete Materials Corp. v. Bank of Danville & Trust Co., 938 S.W.2d 254, 258 (Ky. 1997) (finding that a deposit slip is an "item"); Borowski v. Firstar Bank Milwaukee, N.A., 579 N.W.2d 247, 253 (Wis. Ct. App. 1998) (holding that a handwritten note requesting a bank to issue a cashier's check is an "item").

[FN176]. See Concrete Materials, 938 S.W.2d at 254.

[FN177]. Id. at 256.

[FN178]. Id.

[FN179]. Id. at 256-57.

[FN180]. Id.

[FN181]. Id. at 257-58.

[FN182]. Id.

[FN183]. Id. at 258.

[FN184]. Am. Airlines Employees Fed. Credit Union v. Martin, 29 S.W.3d 86, 92-93 (Tex. 2000).

[FN185]. Id. at 93.

[FN186]. Id. (quoting Tex. Bus. & Com. Code Ann. § 1.201(39) (Vernon Supp. 2001)). The Code is liberal in its definition of signature. See id. Section 3.401(b) provides that a signature may be made manually or by means of a device or machine and by the use of any name, or by a word, mark or symbol adopted with the present intent to authenticate. Tex. Bus. & Com. Code Ann. § 3.401(b).

[FN187]. Martin, 29 S.W.3d at 93.

[FN188]. Id.

[FN189]. Id.

[FN190]. Id.

[FN191]. Id.

[FN192]. Id. A forgery involves the signing of the name of another. See, e.g., Charter Bank v. Evanston Ins. Co., 791 F.2d 379, 381 (5th Cir. 1986) ("[O]ne who signs his own true name does not commit a forgery . . . ."); Nobles v. Marcus, 533 S.W.2d 923, 926 (Tex. 1976) ("[O]ne who signs his true name, and does not represent himself to be someone else of the same name, does not commit a forgery . . . .").

[FN193]. Martin, 29 S.W.3d at 93 (citing Tex. Bus. & Com. Code Ann. § 1.201(43) (Vernon Supp. 2001)).

[FN194]. Tex. Bus. & Com. Code Ann. § 3.403.

[FN195]. Martin, 29 S.W.3d at 93.

[FN196]. Id.

[FN197]. See id.

[FN198]. Id.

[FN199]. Id. There are other reasons why Martin's argument that only traditional forgeries are covered by section 4.406 should be rejected. See Tex. Bus. & Com. Code Ann. § 4.406. There are various kinds of items which do not bear a traditional signature but which invoke a customer's duty under section 4.406. Id. For example, preauthorized drafts are frequently used by a creditor of a customer to obtain funds from the customer's checking account for recurring payments. See id. Insurance companies commonly use preauthorized drafts with no traditional signatures to collect premiums. See id. These items, unsigned in the traditional manner but computer readable, result in debits to customers' checking accounts. See id. Yet the customer's duty under section 4.406 to discover and report unauthorized transactions should be the same as with ordinary checks. See id. Furthermore, the post- 1996 Code in section 3.104(k) defines one type of unsigned item which can be used to obtain funds from a checking account, namely a demand draft, as follows: " 'Demand draft' means a writing that is not signed by a customer . . . and that is created by a third party under the purported authority of the customer for the purpose of charging the customer's account with a bank." Id. § 3.104(k) (emphasis added). This type of instrument may have the "customer's printed or typewritten name" or the words "no signature required." Id. § 3.104(k)(1)-(3). Section 4.406 should apply to this type of transaction, even though no signature of the customer appears.

[FN200]. Martin, 29 S.W.3d at 93-94.

[FN201]. Id. at 93 (quoting Tex. Bus. & Com. Code Ann. § 1.102(a)).

[FN202]. Id. (quoting Tex. Bus. & Com. Code Ann. § 1.102(a)(2), (3)).

[FN203]. Id.

[FN204]. See id.

[FN205]. See id.

[FN206]. Id.

[FN207]. Id. This burden includes the risk of nonreceipt of account statements. Id. at 94. See Stowell v. Cloquet Co-Op Credit Union, 557 N.W.2d 567, 574 (Minn. 1997) (holding that a deposit agreement between a credit union and its customer which shortened the notice period to twenty days was not unreasonably short, and that once an account statement is mailed to the member's proper address, the member bears the risk of nonreceipt).

[FN208]. Martin, 29 S.W.3d at 94.

[FN209]. Id. This is consistent with the thinking of the Code commentators who suggest that a hyper-technical reading of section 4.406 on the issues of "item" and "unauthorized signature" is inconsistent with its intent. See Clark, supra note 87, 10.05; Hawkland, supra note 87, § 4-406:3.

[FN210]. Martin, 29 S.W.3d at 94. The journal vouchers provided the date and time of the transaction, Martin's account number, the amount of the withdrawal, Blair's account number and the corresponding amount of the deposit to Blair's account. Id.

[FN211]. Id.

[FN212]. Id.; see also 673 S.W.2d 558, 564 (Tex. 1984) (applying section 4.406 to oral transfers).

[FN213]. Martin, 29 S.W.3d at 94.

[FN214]. Id.

[FN215]. Id.

[FN216]. Id.

[FN217]. Id.

[FN218]. Id.

[FN219]. Tex. Bus. & Com. Code Ann. § 4.406 cmt. 2 (Vernon Supp. 2001); Martin, 29 S.W.3d at 95.

[FN220]. Martin, 29 S.W.3d at 95.

[FN221]. Id.; see also discussion supra Part II.B (discussing good faith).

[FN222]. Martin, 29 S.W.3d at 95.

[FN223]. Id.

[FN224]. Id.

[FN225]. Id.

[FN226]. Id.

[FN227]. Id.

[FN228]. Id. (quoting Tex. Bus. & Com. Code Ann. § 4.103(a) (Vernon Supp. 2001)).

[FN229]. Tex. Bus. & Com. Code Ann. § 4.103(a) cmt. 2.

[FN230]. Id.; see also Tex. Bus. & Com. Code Ann. § 1.201(3) (stating the definition of "agreement").

[FN231]. Martin, 29 S.W.3d at 95.

[FN232]. Id. at 95-96; see, e.g., 12 C.F.R. §§ 707.4(c)(1), 707.5(a)(1) (2000). Appendix C to Part 707 of the Code of Federal Regulations, in the Official Staff Interpretations, discusses that notice of new disclosures may be given to existing account holders by a message on the account statement, in a newsletter, or by statement stuffer. Id. If a member requests, a copy of the disclosures must be mailed to the member. Id.

[FN233]. Martin, 29 S.W.3d at 96.

[FN234]. Id.; Stauffer v. Henderson, 801 S.W.2d 858, 861 (Tex. 1990); see also Haseman v. Union Bank of Mena, 597 S.W.2d 67, 69 (Ark. 1980) (explaining that by accepting a passbook a depositor is bound by the rules it contains); Perdue v. Crocker Nat'l Bank, 702 P.2d 503, 509-10 (Cal. 1985) (stating the general rule that a depositor, by accepting a passbook, is bound by the rules it contains).

[FN235]. Martin, 29 S.W.3d at 96; Brown v. Aztec Rig Equip., Inc., 921 S.W.2d 835, 846 (Tex. App.-Houston [14th Dist.] 1996, writ denied); Richard A. Lord, Williston on Contracts § 6.43 (4th ed. 1991).

[FN236]. Martin, 29 S.W.3d at 96.

[FN237]. See id.

[FN238]. Id.

[FN239]. Id.

[FN240]. Id.

[FN241]. Id.

[FN242]. Id.

[FN243]. Id; see cases cited supra notes 74-79.

[FN244]. Martin, 29 S.W.3d at 96. The Official Staff Interpretations in Appendix C to Part 707.3(a)(2) of the Code of Federal Regulations encourages conspicuous notice provisions by stating that "[d]isclosures must be presented in a format that allows members and potential members to readily understand the terms of their account." C.F.R. § 707.3 (2000).

[FN245]. Dillard v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 961 F.2d 1148, 1154 (5th Cir. 1992); Martin, 29 S.W.3d at 96; In re Oakwood Mobile Homes, 987 S.W.2d 571, 574 (Tex. 1999); see also 27 Steven G. Cochran, Texas Practice: Consumer Rights & Remedies § 4.12 (2d ed. 1996) (noting that although the "equality of bargaining power often manifests itself in the form of an adhesion contract," this does not make the contract "unconscionable per se").

[FN246]. Dillard, 961 F.2d at 1154.

[FN247]. See Arkwright-Boston Mfrs. Mut. Ins. Co. v. Westinghouse Elec. Corp., 844 F.2d 1174, 1184 (5th Cir. 1988); Pony Express Courier Corp. v. Morris, 921 S.W. 2d 817, 820-22 (Tex. App.-San Antonio 1996, no writ); Wade v. Austin, 524 S.W.2d 79, 86 (Tex. App.-Texarkana 1975, no writ); see also Tex. Bus. & Com. Code Ann. § 3.302 (Vernon Supp. 2001) (illustrating that a court may refuse to enforce a contract or clause which is unconscionable).

[FN248]. Pony Express, 921 S.W. 2d at 821.

[FN249]. Id.

[FN250]. Martin, 29 S.W.3d at 96.

[FN251]. Id.

[FN252]. Id.

[FN253]. Id. at 96-97.

[FN254]. Id. at 97.

[FN255]. Id.

[FN256]. Cf. Cersonsky, supra note 5, at 48 (discussing how the Fair Notice Doctrine is a common-law test for shortened notification periods). Cersonsky relies on Cumis Insurance Society, Inc. v. Gerard Bank, 522 F. Supp. 414, 421-22 (E.D. Pa. 1981), for the contention that the Fair Notice Doctrine applies to notice-shortening agreements. Gerard involved the issue of the enforceability of a provision concerning the use of facsimile signatures in a corporate resolution which by its terms shifted losses for forged items from the bank to the customer. Id. Notice shortening agreements were not involved in Gerard. Id. The Eleventh Circuit has refused to follow Gerard, noting, among other reasons, that Gerard is inconsistent with Perini Corp. v. First National Bank, 553 F.2d 398 (5th Cir. 1997), as it applied a unique Pennsylvania policy. Arkwright Mut. Ins. Co. v. Nationsbank, N.A., 212 F.3d 1224, 1228-29 (11th Cir. 2000).

[FN257]. Martin, 29 S.W.3d at 97.

[FN258]. Id.

[FN259]. See id.

[FN260]. Id.

[FN261]. Id.; see also Tex. Bus. & Com. Code Ann. § 4.103(a) cmt. 2 (Vernon Supp. 2001) (noting that the agreement controls when it is not shown that the standards were manifestly unreasonable).

[FN262]. Martin, 23 S.W.3d at 97.

[FN263]. Concrete Materials Corp. v. Bank of Danville and Trust Co., 938 S.W.2d 254, 257 (Ky. 1997) (sixty days); Stowell v. Cloquet Co-op Credit Union, 557 N.W.2d 567, 574 (Minn. 1997) (twenty days); Coine v. Mfrs. Hanover Trust Co., 16 U.C.C. Rep. Serv. 184, 185-86 (N.Y. App. Div. 1975) (fourteen days); N.Y. Credit Men's Adjustment Bureau, Inc., v. Mfrs. Hanover Trust Co. 343 N.Y.S.2d 538, 539-40 (N.Y. App. Div. 1973) (thirty days); Parent Teacher Ass'n v. Mfrs. Hanover Trust Co., 524 N.Y.S.2d 336, 339-40 (N.Y. Civ. Ct. 1988) (fourteen days); Borowski v. Firstar Bank Milwaukee, N.A., 579 N.W.2d 247, 250 (Wis. Ct. App. 1998) (fourteen days).

[FN264]. See Martin, 29 S.W.3d at 97.

[FN265]. Id.

[FN266]. Id.; Cersonsky, supra note 5, at 36-38. Cersonsky states: "[T] hese cases show that shortened notification periods contained in a deposit agreement or bank rule are not controlling when there is proof that a bank failed to exercise ordinary care." Id. at 38. This statement seems to ignore that the Absolute Notice Requirement of section 4.406 begins with the phrase: "Without regard to care or lack of care of either the customer or the bank . . . ." Tex. Bus. & Com. Code Ann. § 4.406(f) (Vernon Supp. 2001).

[FN267]. See Martin, 29 S.W.3d at 97.

[FN268]. Id.

[FN269]. See id.

[FN270]. Id.

[FN271]. Id. at 97-98.

[FN272]. See Cersonsky, supra note 5, at 21-22. "It is here [section 16.071] any analysis of a contractual limitations period for a contract arising in Texas should begin." Id. at 21.

[FN273]. Martin, 29 S.W.3d at 97-98.

[FN274]. Id. at 97 (citing Tex. Civ. Prac. & Rem. Code Ann. § 16.071(a) (Vernon 1997)).

[FN275]. Id.

[FN276]. See id.; St. Paul Mercury Ins. Co v. Tri-State Cattle, 638 S.W.2d 868, 869 (Tex. 1982).

[FN277]. Martin, 29 S.W.3d at 97.

[FN278]. See id.

[FN279]. Tex. Bus. & Com. Code Ann. § 4.406(d)(2) (Vernon Supp. 2001); Tex. Civ. Prac. & Rem. Code Ann. § 16.071.

[FN280]. See Tex. Bus. & Com. Code Ann. § 4.406.

[FN281]. See City of LaPorte v. Barfield, 898 S.W.2d 288, 292 (Tex. 1995).

[FN282]. Id. (noting that statutory language will not be read "to be pointless if it is reasonably susceptible of another construction").

[FN283]. Mitchell v. City of Dallas, 870 S.W.2d 21, 23 (Tex. 1994) (citing Tex. Gov't Code Ann. § 311.026(b) (Vernon 1998)); Sam Bassett Lumber Co.