Are we required to reimburse our business customer if a check clears their account and is paid, but the intended payee claims they never received payment? The payee is refusing to provide us with an affidavit stating that they did not receive the check, and the bank of first deposit will not reimburse us without it. Additionally, when a customer notifies us of a potential improper payment, do we need to provide them with credit before receiving reimbursement from the bank of first deposit for breach of its presentment warranties? If we have to provide credit during our investigation, what is the time limit?

We believe that whether you need to reimburse your business customer depends on the specific facts of the situation and your agreement with the customer.

The Illinois Uniform Commercial Code (UCC) states that a bank may charge a customer account for an item that is “properly payable,” but it does not provide a specific timeframe for reimbursing a customer for an improper payment. An item is properly payable if it is authorized by the customer and in accordance with any agreement between the customer and bank. If a bank makes an improper payment, the customer can bring an action and have their account recredited. Consequently, whether you must reimburse your business customer depends on if the payment was “properly payable” according to the specific facts of the situation and your agreement with the customer. Because the UCC does not provide a timeframe for reimbursing a customer for an improper payment, we do not recommend refunding your customer until you have completed your investigation and received reimbursement from the bank of first deposit for breach of their presentment warranties.

Also, we are aware that many account agreements require customers to work with their banks when investigating improper payments, and business account agreements may have even more stringent requirements. For example, Chase’s publicly-available Deposit Account Agreement states that customers must provide all information needed to investigate an alleged error or item and any supporting affidavits and testimony reasonably requested. The agreement also provides that a customer that does not provide the required information forfeits its reimbursement rights and is prohibited from bringing any legal claims related to the check. We recommend reviewing your account agreement for similar provisions.

For resources related to our guidance, please see:

Illinois UCC, 810 ILCS 5/4-401(a) (“A bank may charge against the account of a customer an item that is properly payable from that account even though the charge creates an overdraft. An item is properly payable if it is authorized by the customer and is in accordance with any agreement between the customer and bank.”)

Continental Cas. Co., Inc. v. Am. Nat. Bank and Trust Co., 329 Ill.App.3d 686, 698 (1st Dist. 2002) (“[W]hen a bank makes an improper payment . . . the drawer can bring an action for improper payment under section 4-401(a) and have its account recredited.”)

Illinois UCC, 810 ILCS 5/3-417(a) and 810 ILCS 5/4-208(a), 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.”)

Illinois UCC, 810 ILCS 5/3-417(b) and 810 ILCS 5/4-208(b) (“A drawee making payment may recover from any warrantor damages for breach of warranty equal to the amount paid by the drawee less the amount the drawee received or is entitled to receive from the drawer because of the payment. In addition the drawee is entitled to compensation for expenses and loss of interest resulting from the breach. The right of the drawee to recover damages under this subsection is not affected by any failure of the drawee to exercise ordinary care in making payment. If the drawee accepts the draft, breach of warranty is a defense to the obligation of the acceptor. If the acceptor makes payment with respect to the draft, the acceptor is entitled to recover from any warrantor for breach of warranty the amounts stated in this subsection.”)

Chase Deposit Account Agreement and Privacy Notice, page 18 (June 12, 2022) (“You must notify us in writing of any unauthorized, improper or missing endorsements on checks within six months after the account statement is mailed or made available. For all errors, you must provide us with all information we need to investigate the alleged error or item. You must also file any police reports and provide any supporting affidavits and testimony we reasonably request. If you do not comply with the requirements above, we are not required to reimburse you for any claimed loss, and you cannot bring any legal claim against us in any way related to the check or errors.”)