Illinois Court Confirms: 30 Days to Report Unauthorized Bank Account Activity is Enough

Business and personal lives move fast, and most of us agree there are just not enough hours in the day to attend to every detail. Checking the monthly bank statement for accuracy seems like the last thing on the list. Failing to do it, though, or assigning the task to an employee (especially one who can write checks) can leave you with little recourse if you are the victim of fraud.

The Illinois Appellate Court recently affirmed the dismissal of a customer’s lawsuit against his Bank – not because he wasn’t a victim, he was – he just had not timely reported the fraudulent activity to the Bank, and was left suffering the loss.

In November, 2007, a fraudster took one of the customer’s checks, altered it, and then cashed it for $7,500.00. The customer, however, neglected to review his November statement (on which the fraudulent check appeared) until March 2008. Like most account statements, the customer’s statement said: “Please examine this statement at once. If no error is reported in 30 days, the account will be considered correct.” The Account Agreement, which he received when he opened the account, also contained similar language, including the warning: "If you fail to notify us, you will have no claim against us."

The customer admitted he had failed to report the fraud on time, but argued that (notwithstanding the Account Agreement and Statement) the Illinois version of the Uniform Commercial Code required the Bank to also prove that it suffered a loss as a result of his failure to notify. Because the Bank could not prove any loss, the customer argued that it could not disclaim responsibility for paying the altered check. The trial court disagreed, and dismissed his lawsuit. On appeal, the First District affirmed, agreeing with the trial court that the customer’s own failure to report the fraud in 30 days barred his suit against the Bank. Napleton v. Great Lakes Bank, N.A., 945 NE 2d 111.

The lesson here is plain, and likely applies to all accounts that provide periodic statements, including credit cards, credit unions, and other lenders as well: If you do not report fraudulent activity on time, you may not have any recourse. In addition, with the increasing availability of instant internet access for web-based banking, this 30 day window may well narrow even further, as institutions fight to protect themselves from losses caused by fraud.

A qualified employee benefit plan (e.g. Pension, Profit Sharing, 401(K) and 403(b) plans), protects the value of an employee’s account because it is exempt from the claims of creditors, including a trustee in bankruptcy. This benefit has also been extended to Individual Retirement Accounts (IRAs), although in bankruptcy, the exemption is limited to $1,000,000. Creditor protection applies to IRAs which hold funds that were “rolled over” from a qualified Pension, Profit Sharing, 401(K) or 403(b) plan. Finally, an IRA in which a spouse is named as a beneficiary is creditor protected since the spouse has the right to roll over the funds into his or her own IRA.

The issue that is still unclear is whether this exemption extends to an Individual Retirement Account that is “inherited” from another person who is not a spouse. In other words, if Mary Jones is named as a beneficiary on her mother’s IRA having a balance of $250,000 and her mother dies, is that amount subject to the claims of Mary’s creditors?

A recent decision by a district court in Texas (Chilton v. Moser, 2011 WL 938310, DCTX 3/16/11) reversed a bankruptcy court decision and held that an “inherited IRA” was, in fact, exempt from the claims of creditors and could not be brought back into a bankruptcy estate. The Court concluded that since an inherited IRA is exempt from taxation under the Internal Revenue Code, it was a form of account that Congress intended to be free from creditors.

Although the decision in Chilton was limited in scope to the jurisdiction in which it was decided (Texas), it was a well-reasoned decision and could be followed by other courts around the country. Any individual who is inheriting an IRA and desires to obtain creditor protection should consult with an attorney who is familiar with the current state of the law on this subject.

Your business resources are limited, so you always want to make sure you’re getting the most bang for your buck, but sometimes a bargain can actually turn out to cause more problems than it solves. There are many vendors who offer employment counseling services, including advice on tricky legal issues, as a lower cost alternative to calling your employment attorney.

Aside from the quality of the advice, there are two major issues with this: 1) non-attorney vendors do not have the ability to keep your communications privileged, which means they are discoverable by third parties if a dispute arises and 2) their advice is not protected by malpractice insurance that can pay for the harm you suffer if the advice they give turns out to be completely wrong.

Additionally, though it is illegal for non-attorneys to provide actual legal advice, many vendors try to skirt around the rule by putting disclaimers on their brochures and letters urging you to consult with an attorney, while on the telephone, their representatives are assuring you that there is no need to get a lawyer involved. The lesson – buyers beware.

On June 23, 2011, the Internal Revenue Service (IRS) announced an increase in the optional standard mileage rates for the final six months of 2011. Ordinarily, the IRS updates the rates once a year in the fall for the following calendar year. This year, due to fuel prices, the IRS has made a mid-year change. The change will become effective as of July 1, 2011 and will increase the rate for business miles from 51 cents per mile to 55.5 cents per mile. Though the IRS rate is optional and businesses are free to determine their own rate for mileage reimbursement, the IRS rate is often used by employers as a benchmark for reimbursement to their employees for mileage on work-related trips.

In a recent press release, the U.S. Department of Labor announced the launch of an iPhone application that allows employees to track regular hours worked, breaks and overtime. The app also provides easy links to web pages provided by the Department of Labor for information such as a glossary of terms, contact information and other materials about wage laws.

This is a very important development for employers and employees alike. The Fair Labor Standards Act requires employers to keep accurate records of the hours each non-exempt employee works. The reality is that many employers fail to meet this requirement. Although the law generally puts the onus on employers to track hours, the app benefits employees because in a lawsuit, employees need to provide some evidence of overtime hours worked in order to sustain a claim for unpaid overtime. This app gives employees an easy way to track hours and make sustainable, evidence-based claims for unpaid overtime. Employers can (and should) rebut this evidence by tracking the employees’ hours internally. The differences between the respective documentary evidence should cause overtime disputes to be that much more contested.

Employers should be aware that simply because an employee is paid a salary does NOT mean they are exempt. Employers need to take all necessary precautions to ensure job descriptions and duties comply with the limited exemptions provided under the Fair Labor Standards Act. Also, remember that violations of the Act can result in judgment amounts that include compensation for two times the amount of unpaid overtime, plus the payment of the employee’s attorneys’ fees and costs in prosecuting the action. These are harsh penalties that require employers to be mindful of the many nuances of the Act.

WEDNESDAY, AUGUST 24, 2011
8:00 AM - 9:15 AM CT
70 WEST MADISON, SUITE 1500, CHICAGO

Online communication has exploded beyond emails and text messages to mass participation in social media outlets like Facebook, Twitter, and more. If you don’t believe your employees are using social media both at work and about work, you are wrong. Though the law has been slow to catch up with the changes in technology at the modern workplace, there are some general rules employers can follow in order to minimize risks based on employees’ use of social media. Golan and Christie’s employment attorneys, Margaret Gisch and Laura Balson, are offering this special seminar to educate you about how to apply these rules to your business, whether you are a novice or an expert at social media yourself.

The program is free of charge, and a light breakfast will be provided. Due to space limitations, please RSVP to Christien Cain by calling 312.696.1352 or by emailing ccain@golanchristie.com no later than August 17, 2011 to reserve your spot at the seminar.