The statute of limitations in a case involving a forged check endorsement is based on when the bank customer reasonably discovers it, not when the customer receives the bank statement, says a federal appeals court, in reversing a lower court ruling and holding in favor of a Hartford Financial Services Group Inc. unit.

In May 2015, a general contractor entered into a subcontract with another firm in connection with a hotel construction project in El Segundo, California, according to the underlying ruling in the decision issued Tuesday by the 9th U.S. Circuit Court of Appeals in San Francisco in Navigators Specialty Insurance Co. v. California Bank and Trust et al.

Beginning in January 2016, the subcontractor began forging check endorsements. The contractor filed a claim with Hartford unit Navigators Specialty Insurance Co., which paid the claim, then filed suit against San Diego-based California Bank and Trust in U.S. District Court in Santa Ana, California, charging breach of contract and negligence.

The district court granted summary judgment to California Bank in the case and dismissed the claim as time-barred, holding the statute of limitations starts when the bank customer receives a copy of the bank statement.

The ruling was overturned by a unanimous three-judge appeals court panel, which held the claim accrues when the bank customer should have reasonably discovered the forged endorsement.

“The district court relied on cases involving forged signatures on the front of the check to rule” that the general contractor, and by extension, Navigators, its insurer and subrogee, “was put on inquiry notice of a potential claim the day it received its bank statement,” said the appeals panel ruling.

“This case, however, does not involve forged signatures on the front of the check, but rather forged endorsements on the bank of a check,” it said. “As a practical matter, there is a significant difference between a forged check and a forged endorsement.

“A bank customer can be reasonably expected to discover a forged signature on the front of the check when she receives a copy of the returned check along with the bank statement.

“In contrast, she presumably will not know if there is a forged endorsement on the back of the check because an endorsement is the payee’s signature, not hers,” the ruling said.

Noting there is little case law on this issue, the ruling states based on California’s ununified commercial code, the “limitations period runs from the date at which the bank customer reasonably should have discovered the forged endorsement.

The panel reversed the lower court and remanded the case to determine “the date of reasonable discovery.”

Navigators attorney Daniel S. Bernheim III, a shareholder with Wilentz, Goldman & Spitzer P.A. in Philadelphia, said in a statement, “Any time an appellate court reverses an adverse summary judgment motion, as the appellant, you are pleased. 

“In this matter we respectfully disagreed with the District Court’s interpretations of how the Uniform Commercial Code dovetails with California law in applying the applicable statute of limitations. 

“The Ninth Circuit’s ruling recognizing that the mere issuance of a bank statement to a drawer does not place one on notice of a forged endorsement will return us to the District Court. The UCC is designed to place the risk of loss upon the party who had the best opportunity to stop a fraud and in this case, that party, the depository bank has already agreed to indemnify and assume the defense of the drawee bank (CB&T).   

“Again, if the Code is applied as we submit it should be, we reasonably anticipate a recovery for the plaintiff. Of course, if that was not our analysis we would not have filed the complaint in the first place.”

California Bank’s attorney did not respond to a request for comment.