A Pennsylvania judge's ruling in a recent check-fraud case could wind up coercing more small businesses into buying anti-fraud protection services from their banks.

The case was Schultz Foods Co. vs. Wachovia Corp., which stemmed from Wachovia's decision in 2005 not to cover a nearly $154,000 loss Schultz incurred due to check fraud. After Wachovia covered its losses on three previous occasions, Schultz assumed Wachovia would have its back after a fourth time. But Wachovia balked, triggering the lawsuit.

In August, a federal court sided with Wachovia and threw out the case, largely due to a specially crafted deposit agreement from Wachovia that required Schultz to pay for certain anti-fraud services in order to be covered for losses.

U.S. District Judge Patrick Schiltz ruled that Wachovia had "reasonable" cause for the stipulation because of three prior fraud incidents. Still, Schultz had refused the fee-based "positive pay" service, which could have alerted Wachovia to the stolen check by cross-matching it for possible alterations against a master list of issued checks.

Banks will often cover losses for defrauded retail consumers because Reg E protections put the onus on banks to spot fraud. But Reg E does not cover business fraud losses, and the contract between Schultz and Wachovia overshadowed any expectation from Schultz or its insurer that Wachovia would cover losses becauzse it had done so previously, the court ruled.

Anti-fraud experts think the case should make small businesses more aware of their exposure, and may prompt more banks to follow Wachovia's lead.

The case even attracted the attention of Frank Abagnale, the famed 1960s fraudster-turned-security consultant. "Based upon this lawsuit, banks will almost certainly be reviewing and re-writing their deposit agreements to include the kinds of provisions Wachovia Bank included," Abagnale wrote in a shared memo with SAFEChecks CEO Greg Litster.

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