We cannot comment on whether you have grounds to sue the depository bank. If a court were to conclude that the disputed check was altered rather than forged, we believe that the depository bank could be held liable for violating its presentment warranties — but that outcome depends on whether you can prove that the check was altered. We recommend presenting any evidence to support the scenario you have described (that the check was originally issued with an authorized signature and was later washed and altered) and discussing with bank counsel the likelihood that you will be able to prove that this is an altered item rather than a forgery.

Under the Illinois Uniform Commercial Code (UCC)’s presentment warranties, a depository bank will be held liable for presenting a check for payment with an unauthorized drawer’s signature (i.e., a forged check) only if it knew that the signature was unauthorized. On the other hand, a payor bank can be held liable for breaching the presentment warranty when presenting an altered item for payment even if it did not know that the item was altered.

A drawer’s signature is considered unauthorized if it has been made without actual, implied, or apparent authority, as with a forgery. An item is considered altered if there was “an unauthorized change in an instrument that purports to modify in any respect the obligation of a party” or “an unauthorized addition of words or numbers or other change to an incomplete instrument relating to the obligation of a party.” Our understanding is that a typical alteration by chemical washing is accomplished by leaving the original drawer’s signature intact and washing the check payee and/or amount so that they could be modified.

Regulation CC provides a rebuttable presumption in favor of alteration when there is a dispute between banks over whether a substitute or electronic check should be considered forged or altered (the presumption does not apply if the original check is available for both banks to examine). The depository bank can overcome the presumption of alteration if a preponderance of the evidence shows that the check was issued with an unauthorized drawer’s signature or that the check did not contain an alteration.

According to the scenario you described, your bank is claiming that the check was altered through chemical washing (albeit in a slightly unusual way, since the original drawer’s signature was washed). Additionally, it appears that your bank could assert the presumption of alteration under Regulation CC (assuming that the check is a substitute or electronic check, and the original check is unavailable for inspection).The depository bank seems to be claiming that it has overcome the presumption of alteration because the signature your customer provided on the fraud affidavit does not match the signature on the check, and thus the preponderance of the evidence shows that the check was originally issued with an unauthorized drawer’s signature — i.e., forged — rather than altered.

However, even if the depository bank overcomes the presumption of alteration, your bank would not be prohibited from further litigation with the depository bank to demonstrate that the check was altered. As the Federal Reserve explains in its commentary to the final rule creating the presumption of alteration, the presumption is intended to be a starting point and is not meant to prohibit banks from providing additional evidence to establish whether a check was forged or altered. This sentiment is reflected in the rule itself, which allows the presumption to be overcome when specific evidence is presented and eliminates the presumption entirely if the original check is made available for examination.

As for timing, a cause of action for breach of warranty must be commenced within three years after it accrues. In other words, you have three years from the time you had reason to know of the breach to raise a claim for the depository bank’s beach of its presentment warranties. As you supplied the affidavit of alteration in August 2020, you may still have time to raise your claim. 

For resources related to our guidance, please see:

• Illinois UCC, 810 ILCS 5/3-417(a)(1) and 810 ILCS 5/4-208(a)(1), Presentment warranties (“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 making payment or accepting the draft in good faith that: (1) the warrantor is or was, at the time the warrantor transferred the draft, a person entitled to enforce the draft or authorized to obtain payment or acceptance of the draft on behalf of a person entitled to enforce the draft; (2) the draft has not been altered; and (3) the warrantor has no knowledge that the signature of the purported drawer of the draft is unauthorized.”)

• UCC § 3-417 cmt. 2 (“Subsection (a) states three warranties. Subsection (a)(1) in effect is a warranty that there are no unauthorized or missing indorsements. ‘Person entitled to enforce’ is defined in Section 3-301. Subsection (a)(2) is a warranty that there is no alteration. Subsection (a)(3) is a warranty of no knowledge that there is a forged drawer’s signature.”)

• Thompson v. First BankAmericano, 518 F.3d 128, 131, footnote 2 (2nd Cir. 2008) (“This allocation reflects the ability of parties to detect the forgery and prevent the loss. . . . A forged drawer signature can most readily be detected by the drawee/payor bank, which is presumed to be familiar with the signature of its customer. . . . A forged endorsement, however, is more easily detected by the depository bank, which is likewise presumed to know its customer’s signature. Finally, rules for loss shifting associated with alteration rest on the assumption that alteration can be most easily detected by the party who receives the check in the first instance.”)

• Illinois UCC, 810 ILCS 5/1-201(41) (“‘Unauthorized signature’ means a signature made without actual, implied, or apparent authority. The term includes a forgery.”)

• Illinois UCC, 810 ILCS 5/3-407(a) (“‘Alteration’ means (i) an unauthorized change in an instrument that purports to modify in any respect the obligation of a party, or (ii) an unauthorized addition of words or numbers or other change to an incomplete instrument relating to the obligation of a party.”)

• Regulation CC, 12 CFR 229.38(i)(1) (“Subject to paragraphs (i)(2) and (3) of this section and in the absence of a Federal statute or regulation to the contrary, the presumption in this paragraph applies with respect to any dispute between banks arising under Federal or State law as to whether a substitute check or electronic check transferred between those banks contains an alteration or is derived from an original check that was issued with an unauthorized signature of the drawer. When such a dispute arises, there is a rebuttable presumption that the substitute check or electronic check contains an alteration.”)

• Regulation CC, 12 CFR 229.38(i)(2) (“The presumption of alteration may be overcome by proving by a preponderance of evidence that either the substitute check or electronic check does not contain an alteration, or that the substitute check or electronic check is derived from an original check that was issued with an unauthorized signature of the drawer.”)

• Regulation CC, 12 CFR 229.38(i)(3) (“If the original check is made available for examination by all banks involved in the dispute, the presumption in paragraph (i)(1) of this section shall no longer apply.”)

• Final Rule, Availability of Funds and Collection of Checks, 83 Fed. Reg. 46849, 46849 (September 17, 2018) (“Since the time of these decisions, the check collection system has become virtually all-electronic, and the number of instances in which the original paper check is available for inspection in such cases will be quite low.”)

• Wachovia Bank, N.A. v. Foster Bancshares, Inc., 457 F.3d 619, 621–22 (7th Cir. 2006) (“Had the original paper check not been destroyed, it could be examined and the examination might reveal whether the check had been forged as just described or the payee’s name had been changed by chemical washing of the check or by some other method that utilized rather than replaced the original check.”)

• Final Rule, Availability of Funds and Collection of Checks, 83 Fed. Reg. 46849, 46851 (September 17, 2018) (“In proposing the presumption of alteration, the Board did not intend to eliminate the opportunity for banks to provide additional evidence and engage in further litigation. The presumption was intended to create a uniform starting point that recognized the operational realities of check fraud in the absence of evidence. The comments requesting that the Board specify who can make the determination, what types of evidence would be adequate for overcoming the presumption of alteration, and the time limitation within which the original check must be provided would be matters for the court or other dispute resolution process and are outside of the scope of this final rule. A scanned image of the original check would generally provide no better evidentiary value than a substitute check or an electronic check, and thus the final rule does not permit such an image to overcome the presumption of alteration.”)

• Illinois UCC, 810 ILCS 5/3-118(g) (“An action . . . (ii) for breach of warranty, or (iii) to enforce an obligation, duty, or right arising under this Article and not governed by this Section must be commenced within 3 years after the cause of action accrues.”)

• Illinois UCC, 810 ILCS 5/3-417(f) and 810 ILCS 5/4-208(f) (“A cause of action for breach of warranty under this Section accrues when the claimant has reason to know of the breach.”)