The city filed a lawsuit against Kaw Valley State Bank this past summer over several counterfeit checks drawn from a city account, raising allegations that the bank denies.
According to the lawsuit, filed in June in Douglas County District Court, multiple counterfeit checks ranging from $2,500 to $50,000 were debited from the city’s account from late July to early September 2024, totalling more than $133,000. After some reimbursements from the bank, the city is still out $76,802 in fraudulently pulled funds.
The lawsuit centers around how quickly the city must alert the bank to the fraudulent checks to be reimbursed. The city is arguing the checks were reported on time under the account agreement between the city and bank, and thus the bank wrongfully declined to reimburse the city for the checks. The bank is arguing the city failed to notify the bank in time.
According to an account agreement between the city and bank, the city is responsible for reporting certain unauthorized signatures, alterations and forgeries in its account. The agreement lays out both a 30-day and 60-day timeframe for alerting the bank. The dispute lies in which timeframe applies for the fraudulent checks and whether the city met the requirement.
The bank credited the city’s account for some of the checks but declined reimbursement on $76,802 in others.
The lawsuit also alleges the bank did not exercise care in handling the checks. According to the lawsuit, one of the fraudulent checks was cashed in person at the bank’s drive-thru and wasn’t caught by the bank, plus the bank did not require identification, according to the lawsuit. The lawsuit also says five of the fraudulent checks had the same check number, which the bank did not notice.
The lawsuit alleged five counts: violation of the Uniform Commercial Code, breach of contract, conversion, breach of duty of good faith and fair dealing, and failure to exercise ordinary care.
The city is asking for $76,802 in reimbursements for the checks, plus attorney costs and other fees.
In its response to the city allegations, the bank states “the Account Agreement speaks for itself and denies any allegations that are contrary to the express provisions of the Account Agreement.”
The bank further argued that “the Account Agreement requires the City to examine its statement of account with ‘reasonable promptness’ and if the City discovers, or reasonably should have discovered any unauthorized signatures or alterations, the City must promptly notify Kaw Valley of the relevant facts. As between the City and Kaw Valley, if the City failed to do either of those duties, the City will have to either share the loss with Kaw Valley, or bear the loss entirely on its own.”
The bank’s response also said the city “assumed the risk of loss by not reporting earlier fraudulent account activity and by subsequently refusing to close its account at the urging of Kaw Valley.”
Interim City Manager Zack Daniel said the city had no comment on the lawsuit. Kaw Valley State Bank is now Farmers State Bank after a transition earlier this month. CEO Matt Engel did not respond to a request for comment made earlier this week. Lawyers for the city and bank also did not respond to requests for comment.
In April, the City Commission approved a resolution to allow the city to enter into banking services with Mid America Bank.
The city requested a jury trial in the lawsuit.
You can see the city’s document here and the bank’s document response here.
