Remotely Created Items And Checks In Texas

Remotely Created Items And Checks In Texas

by Onyinyechi Muilenburg

Banks and other financial institutions have experienced an increase in claims arising out of the use of remotely created checks and items.  This paper provides discussion of liability rules applicable to remotely created checks and items, including as they apply in Texas.

As defined in the Texas UCC, a “remotely-created item” (RCI) is “an item that is created by a third party, other than the payor bank,[1] under the purported authority of the drawer[2] of the item for the purpose of charging the drawer’s account with a bank and that does not bear a handwritten signature purporting to be the signature of the drawer.”[3]  Thus, a remotely-created check is an RCI as defined in the Texas UCC.

Similarly, the Federal Reserve Board’s Regulation CC defines a “remotely created check” (RCC) to mean “a check that is not created by the paying bank and that does not bear a signature applied, or purported to be applied, by the person on whose account the check is drawn….”[4]

1.    May a bank assert its deposit agreement notice provisions and/or Texas UCC Section 4-406 in defending against a claim brought by its customer for the unauthorized payment of RCI’s?

There is a dearth of case law applying UCC Section 4-406 and deposit agreement notice provisions to customer claims based upon unauthorized RCI’s/RCC’s.  The few judicial decisions that have addressed such questions have tended to treat them as unauthorized items on equal footing with forged checks, subject to the notice requirements of UCC Section 4-406.

The recently-decided case of Estate of Clark ex. Rel. Clark v. Toronto Dominion Bank,[5] for example, addressed a bank customer claim that several unnamed persons (John and Jane Doe Defendants) improperly obtained access to his account and made withdrawals through, inter alia, a series of RCC’s drawn payable to various retailers.  The plaintiff claimed that in paying the unauthorized RCC’s against his account, the bank violated various provisions of the Pennsylvania UCC including Section 4-401 (payment of items not properly payable).[6]  The bank defended asserting that the claims on the RCC’s were barred pursuant to the 1-year limitations period of Pennsylvania UCC Section 4-406.[7]  Noting that the RCC’s allegedly were created between July 2009 and May 13, 2010 and that the plaintiff filed the action on October 29, 2010, the court ruled that the claims on the RCC’s created before October 29, 2009 (one year before filing of suit) were barred pursuant to UCC 4-406(f).[8]

Additionally, Regulation CC supports the application of deposit agreement notice provisions to customer claims brought on RCC’s.  Referring to the Regulation’s warranties for remotely created checks (discussed below),[9] the official Commentary states that while a depositary bank cannot assert those warranties against a depositor, it “may, by agreement, allocate liability for such an item to the depositor and also may have a claim under other laws against that person.”[10]  Regulation CC also expressly provides that UCC Section 4-406 may be asserted in defense of such warranty claims on remotely created checks.[11]

Thus, where a bank’s deposit agreement requires a defined period of notice of any “unauthorized” signature on checks, it appears that the bank may assert both Texas UCC Section 4.406 and the bank’s contractual notice defense in defending against customer claims brought on unauthorized RCC’s drawn on the customer account.[12]

2.    What warranty claims may be brought for presentment of unauthorized RCC’s/RCI’s, and who may bring such claims?

The Texas UCC Warranties

Texas is one of the several states to adopt a version of the NCCUSL’s[13] 2002 revisions to the UCC Article 3 and 4 transfer and presentment warranties to include warranties for RCI’s.[14]  The UCC revisions, however, were not uniformly enacted.[15]

Following non-uniform amendments, the Texas UCC added warranties specific to RCI’s to shift loss created by RCI’s from the drawee to the depositary banks.  Specifically, the Texas UCC Presentment Warranties statute provides, in pertinent part:

(a)    If an unaccepted draft is presented to the drawee for payment or acceptance and the drawee pays or accepts the draft, (i) the person obtaining payment or acceptance, at the time of presentment, and (ii) a previous transferor of the draft, at the time of transfer, warrant to the drawee that pays or accepts the draft in good faith that:


(4) with respect to any remotely-created item, that the person on whose account the item is drawn authorized the issuance of the item in the amount for which the item is drawn.[16]

The Texas UCC presentment warranty statute thus gives the drawee bank (acting in good faith) a state law warranty claim against the depositary bank (or previous transferor) for presenting an RCI that was not authorized by the drawee bank’s customer.[17]

Similarly, the Texas Legislature revised the Texas UCC Transfer Warranties statute to provide that:

(a)    A customer or collecting bank that transfers an item and receives a settlement or other consideration warrants to the transferee and to any subsequent collecting bank that:


(6) with respect to a remotely-created item, that the person on whose account the item is drawn authorized the issuance of the item in the amount for which the item is drawn.[18]

Considering the non-uniformity of the UCC warranties for RCI’s, the Texas Legislature limited these warranties in one important respect —  the Texas UCC includes a choice of law requirement that in order to be insulated from liability, the warranty-asserting drawee (payor) bank must operate in a state that also has adopted an RCI warranty provision.[19]  Both the Texas UCC presentment and transfer warranty statutes include this limitation.  The presentment warranty statute provides that:

If as to a particular item (1) a transferee (including a collecting bank) asserts a claim for breach of the warranty under Subsection (a)(4) [for RCI’s], but (2) under applicable law (including the applicable choice-of-law principles) that transferee would not make a warranty substantially similar to the warranty in Subsection (a)(4) if such transferee were a transferor, then that transferee would not receive the warranty in Subsection (a)(4) from any transferor.[20]

Similarly, the Texas UCC transfer warranty statute provides that:

If the warranty under Subsection (a)(6) [for RCI’s] is not given by a transferor or collecting bank under applicable choice of law rules, the warranty is not given to that transferor when that transferor is a transferee or to any prior collecting bank of that transferee.[21]

Commentators have determined that the goal of these provisions was to prevent a warranting state’s depositary and intermediary banks (e.g., a Texas depositary bank) from making the RCI transfer and presentment warranties to drawee banks that operate in states without RCI warranty provisions.[22]  Accordingly, in determining whether the Bank has made a UCC warranty to an out-of-state drawee or other party in relation to RCI’s accepted for deposit and presented or transferred, it is necessary to look to choice-of-law rules and the UCC provisions of the state where the drawee or other party is located.

Before engaging in that analysis, it is also necessary to consider whether the UCC warranties have been preempted by Regulation CC.

Regulation CC Warranties, and the Question of Preemption of the UCC Warranties

Recognizing the lack of uniformity in the area, on November 21, 2005, the Board of Governors of the Federal Reserve issued its rule amending Reg. CC to define “remotely created checks” and to create new federal warranties for the same.  Specifically, the Regulation provides the following warranty language for remotely created checks:

A bank that transfers or presents a remotely created check and receives a settlement or other consideration warrants to the transferee bank, any subsequent collecting bank, and the paying bank that the person on whose account the remotely created check is drawn authorized the issuance of the check in the amount stated on the check and to the payee stated on the check….[23]

Thus, Reg. CC provides a federal warranty by the presenting depositary bank in favor of the drawee bank (among others) that the person on whose account the RCC is drawn authorized it, and in the amount stated on the check.[24]  Unlike the UCC, there is no reciprocity or choice-of-law exception.  The Reg. CC warranties are narrower than the UCC warranties, however, in that the Reg. CC warranties are given only by banks and only to subsequent banks in the collection chain, whereas the UCC warranties also apply to persons other than banks.[25]  However, the Reg. CC warranties are broader in that they include a warranty that the person on whose account the check is drawn authorized the issuance of the check to the “payee” identified on the check.[26]

The extent to which the Reg. CC warranties for RCC’s preempt or displace the UCC warranties for RCI’s remains a matter for judicial interpretation.  As stated in the FRB’s Final Rule:

Section 608(b) of the Expedited Funds Availability Act provides that Board rules prescribed under that Act shall supersede any provision of state law, including the UCC as in effect in such state, that is inconsistent with the Board rules.  To the extent that the state law is inconsistent with the Board’s rules on remotely created checks, the Board’s rules would supersede such law.  The Board will monitor the interaction of state law and Regulation CC, and may take further action at a later time if necessary.[27]

Texas cases have addressed UCC displacement on the same basis (whether state law is inconsistent with the UCC provisions), [28] but do not appear to have yet addressed whether or to what extent the UCC is inconsistent with Reg. CC’s provisions on RCC’s.  While judicial interpretation is necessary to reach a specific conclusion, it appears that the UCC warranty provisions remain actionable and effective to the extent that they are not inconsistent with the Reg. CC warranty provisions, and that otherwise the Reg. CC warranties will preempt and displace the UCC warranty provisions.  This analysis should be made on a case-by-case basis.

3.    Which statute of limitations applies to govern warranty claims brought on unauthorized remotely created checks?

Texas UCC

The UCC Article 3 and 4 presentment and transfer warranties are governed by the UCC 3-year statute of limitations set forth in Texas UCC Sections 4.111 and 3.118(g).  Section 4.111 provides that:  “[a]n action to enforce an obligation, duty, or right arising under this chapter must be commenced within three years after the cause of action accrues.”[29]  Similarly, Section 3.118(g) provides that: “[u]nless governed by other law regarding claims for indemnity or contribution, the following actions must be commenced within three years after the cause of action accrues: … (2) an action for breach of warranty….”[30]

Thus, to the extent applicable, banks may assert a Texas UCC breach of warranty claim, including as to RCI’s, for up to three years after the cause of action accrued.

Regulation CC

Regulation CC sets forth a 1-year statute of limitations for actions brought under the subpart in which the warranty provisions appear.  Specifically, Reg. CC provides:  “Jurisdiction.  Any action under this subpart may be brought in any United States district court, or in any other court of competent jurisdiction, and shall be brought within one year after the date of the occurrence of the violation involved.”[31]  Thus, an action brought on the Reg. CC warranty provisions for remotely created checks must be brought within one year of the date when the alleged violation occurred.


While case authority in this area is lacking, as discussed above, it appears that where Reg. CC provisions on RCC’s apply, the Regulation would likely be held to preempt the UCC.  For the same reasons, on the current state of the law, it appears that such preemption would include preemption of the UCC 3-year limitations period by the Reg. CC 1-year statute of limitations.[32]  This determination, however, remains subject to judicial interpretation.

4.    May a depositary bank assert its deposit agreement notice provisions in defense of a Reg. CC Warranty Claim?

As noted, Regulation CC also expressly states (in Section 229.34(d)(2)) that UCC Section 4-406 may be asserted in defense of Reg. CC warranty claims on RCC’s.  That is, the depositary may assert in defense of a Reg. CC warranty claim that the drawee bank’s customer is precluded from asserting the unauthorized issuance of the check due to failure to comply with UCC Section 4-406.  The Regulation does not state or otherwise address the question whether a depositary bank may assert, in defense of such a warranty claim, that the drawee bank’s customer is precluded from bringing a claim due to failure to comply with the drawee bank’s deposit agreement.  The official Commentary does state that the UCC Section 4-406 defense may be asserted where the customer is precluded from making a claim against the paying bank, which “may be the case, for example, if the customer failed to discover the unauthorized remotely created check in a timely manner.”[33]  In the absence of case law or official Commentary interpreting this Section to provide a defense based upon deposit agreement notice provisions, it should be assumed that the question of whether the defense is limited to Section 4-406 remains one for judicial interpretation.

No information in this article is intended to constitute legal advice.  For specific legal advice, please contact an attorney.

If you have any questions or would like more information about remotely created items and checks in Texas, please contact Rupert Barron at 713.220.9172 or rbarron@

[1] The payor bank is the “bank that is the drawee of a draft.”  Texas Bus. & Comm. Code § 4.105(3).
[2] The “drawer” is “a person who signs or is identified in a draft as a person ordering payment. Id. at §3.103(5).
[3] Id. at § 3.103(16).
[4] 12 C.F.R. § 229.2(fff).
[5] Civ. No. 12-CV-6259, 2013 WL 1159014 (E.D. Pa. Mar. 21, 2013).
[6] 2013 WL 1159014 at *6.
[7] Id. The Pennsylvania UCC titles Section 4-406(f) “Statute of limitations applicable to customer.”  See id. at *7.  That provision, like the uniform provision, provides that “[w]ithout regard to care or lack of care of either the customer or the bank, a customer who does not within one year after the statement or items are made available to the customer (subsection (a)) discover and report the customer’s unauthorized signature on or any alteration on the item is precluded from asserting against the bank the unauthorized signature or alteration….”  Id. (quoting Penn. UCC §4406(f)).  Texas UCC Section 4.406(f) contains the same one-year rule, but is treated as a “statute of repose” as opposed to a statute of limitations.
[8] Id. at *9.
[9] 12 C.F.R. § 229.34(d).
[10] 12 C.F.R. Pt. 229, App. E, § D. 229.34(d).
[11] “If a paying bank asserts a claim for breach of warranty under paragraph (d)(1) of this section, the warranting bank may defend by proving that the customer of the paying bank is precluded under U.C.C. 4-406, as applicable, from asserting against the paying bank the unauthorized issuance of the check.”  12 C.F.R. §229.34(d)(2).
[12] Providing language in the deposit agreement to include specific reference to RCC’s in this context is recommended.
[13] The National Conference of Commissioners on Uniform State Laws.
[14] See Kurt Summers, Remotely-Created Checks: Legislative Reluctance, Reciprocity Requirements, and the Federal Rule that Changes Everything, 38 Tex. Tech. L. Rev. 1179, 1188 (Summer 2006).  The NCCUSL’s amendments for remotely created checks were limited to “remotely-created consumer items.”
[15] Id. at 1189.
[16] Tex. Bus. & Comm. Code§ 4.208(a)(4).
[17] See generally, Quimby v. Bank of America, Civ. No. 08-1056-ST, 2009 WL 3517984, at * 4 (D. Oregon Oct. 15, 2009); In re Redondo Constr. Corp., 411 B.R. 114 (D. Puerto Rico 2009).
[18] Tex. Bus. & Comm. Code § 4.207(a)(6).
[19] See 38 Tex. Tech. L. Rev. 1179, 1190.
[20] Tex. Bus. & Comm. Code §4.208(g).
[21] Id. at §4.207(f).
[22] See 38 Tex. Tech. L. Rev. 1179, 1190.
[23] 12 C.F.R. § 229.34(d)(1).
[24] 12 C.F.R. Pt. 229, App. E, § D. 229.34(d).
[25] Id.; see also, 12 C.R.R. pt. 229, App. E, §D.229.34(d)(3).
[26] Id.
[27] Federal Reserve System Final Rule: Regulations J and CC: Collection of Checks and Other Items by Federal Reserve Banks and Funds Transfers Through Fedwire and Availability of Funds and Collection of Checks, SL051 ALI-ABA 563, 576 (The American Law Institute 2005); see also, 12 C.F.R. § 229.41 (“The provisions of this subpart supersede any inconsistent provision of the U.C.C. as adopted in any state, or of any other state law, but only to the extent of the inconsistency.”); Aresty Int’l Law Firm, P.C. v. Citibank, N.A., 677 F.3d 54, 59 (1st Cir. 2012) (negligence claim preempted by Reg. CC).
[28] See, e.g., Mazon Assocs., Inc. v. Comerica Bank, 195 S.W.3d 800 (Texas UCC preempts principles of common law and equity that are inconsistent with either its provisions or its purposes and policies) (citation omitted).
[29] Tex. Bus. & Comm. Code §4.111; see also, In re Ostrom-Martin, Inc., 192 B.R. 937, 941-42 (C.D. I.. 1996) (“The statute of limitations for bringing a claim for breach of warranty is three years under the 1990 UCC.”); Psak, Graziano, Piasecki & Whitelaw v. Fleet Nat’l Bank, 915 A.2d 42, 47 (N.J. Super. 2007) (noting official comment to UCC 4-111 links the statute to the 3-year limitations period of UCC 3.118(g) for actions for breach of warranty and to enforce other obligations, duties or rights arising under UCC Article 3).
[30] Tex. Bus. & Comm. Code §3.118(g).
[31] 12 C.F.R. § 229.38(g).
[32] See Aresty Intl’l Law Firm, 677 F.3d at 59-60 (rejecting attempt to “bypass Regulation CC’s time limit” for bringing suit, noting that the Massachusetts 3-year limitations period provides a significantly longer filing period than the 1-year period under federal law set forth in 12 C.F.R. §229.38(g); quoting favorably the district court’s statement that “‘[p]ermitting an action for negligence to be brought … within time limits set by state law would expand the remedies possible against banks and thus would be inconsistent with the limitations provided in federal law’”).
[33] 12 C.F.R. Pt. 229, App. E, at D.229.34(d)(4).