What rules apply when a business customer seeks restitution from a bank after an employee of the customer stole money from the customer’s deposit account? In this case, an employee forged checks that were made out to “CASH.”

Employees who make checks out to “CASH” present a special problem that has been addressed in several Illinois cases. These cases have held that banks are potentially liable for failing to detect forgeries when employees cash out checks drawn on his or her employer’s account that are made out to “CASH.” See, e.g., Mutual Service Cas. Ins. v. Elizabeth State Bank, 265 F. 3d 601, 613–614 (7th Cir. 2001) (“Put another way, when a drawer owes nothing to a bank but writes a check payable to the bank’s order, the drawer places that check in the bank’s custody, with the expectation that the bank will negotiate the check according to the drawer’s wishes; the bank may not, therefore, treat the check as bearer paper and blindly disburse the proceeds according to the instructions of any individual who happens to present the check to the bank”). Also note that under the common law, Illinois courts see deposit agreements as imposing an implied duty of care on banks in paying checks drawn on their customers’ accounts. See, e.g., Continental Cas. Co., Inc. v. Am. Nat. Bank and Trust Co., 329 Ill.App.3d 686 at 698 (1st Dist. 2002).

There also are other issues that could be used determine the bank’s liability: (1) whether the forged checks were properly payable, and (2) whether the customer alerted the bank to the forgery with “reasonable promptness.”

(1) Was the check properly payable?

Many business entities require multiple signatures on checks, and this question arises in such cases. Customers may have rights to reimbursement under the Uniform Commercial Code if their bank pays a fraudulent check that has only one signature when more are required (and customers might also sue for breach of contract under their deposit agreements). The UCC states that when an organization requires multiple signatures on checks, and a check of the organization is signed by only one signatory, the signature is considered unauthorized. 810 ILCS 5/3-403(b). Because such a check would be unauthorized, it would not be properly payable. 810 ILCS 5/4-401(a). If a bank makes an improper payment of an authorized check, the customer can sue and have its account recredited. Continental Cas. Co., Inc. v. Am. Nat. Bank and Trust Co., 329 Ill.App.3d 686, 698 (1st Dist. 2002), citing In re Ostrom-Martin, Inc. v. First National Bank of Chillicothe, 188 B.R. 245, 252 (1995).

(2) Was the bank alerted to the forgery with reasonable promptness?

With that said, customers are responsible for bringing unauthorized checks to their bank’s attention. Under Section 4-406, customers must review account statements and report unauthorized signatures with “reasonable promptness.” The default rule is that a customer has one year to report unauthorized checks; this can be shortened in the deposit agreement, for example to thirty days. Napleton v. Great Lakes Bank, N.A., 945 N.E.2d 111, 118–119 (1st Dist. 2011). If customers do not fulfill that responsibility, the bank will not be liable unless it failed to exercise “ordinary care.” 810 ILCS 5/4-406(e). While the UCC allows banks and customers to alter its provisions by agreement, they cannot sign away the bank’s responsibility to exercise ordinary care. 810 ILCS 5/1-3025/4-103(a). However, the UCC’s definition of “ordinary care” does not require banks to visually examine check signatures; in the context of a bank processing an instrument “for collection or payment by automated means,” ordinary care does “not require the bank to examine the instrument . . . .” 810 ILCS 5/3-103(a)(7). In essence, ordinary care is a question of fact.