One of our bank board members owns a business. The business mailed a check to a vendor. Forty days after the check was cashed, the vendor notified the business that the vendor did not receive the check. The business customer requested a copy of the check that was cashed and discovered it had been altered. Is the business customer liable for the fraudulent check? Should the payor bank give the business customer credit for the check? Can the business do anything to receive provisional credit or is that subject to bank procedure?

Based on the facts provided, it is difficult for us to determine who is liable for the altered check, and we recommend that your board member review his account agreement with the payor bank and consult with an attorney to assess the various factors discussed below.

In general, a payor bank that pays a fraudulently altered check in good faith and without notice of the alteration may enforce the check against the customer. The payor bank also might be able to avoid liability by proving that the customer’s own negligence substantially contributed to the alteration – if the customer failed to report the alteration with “reasonable promptness,” which could be any reasonable timeframe established in the account agreement.

In addition, the payor bank can make a claim for breach of presentment warranty against the presenting bank. Under the UCC, a bank that presents a draft to a payor bank warrants that the check has not been altered. If the payor bank discovers that the check was altered, the payor bank may hold the presenting bank liable for the losses incurred by paying the check.

In this case, we do not know whether the payor bank paid the check in good faith, whether the customer fulfilled his obligation to report the alteration with reasonable promptness, or whether the presenting bank otherwise breached its presentment warranty. Therefore, we recommend that the customer check his account agreement and consult with an attorney to assess his own rights and obligations, as well as any defenses that may be available to the payor and presenting banks.

For resources related to our guidance, please see:

UCC, 810 ILCS 5/3-407(c) (“A payor bank or drawee paying a fraudulently altered instrument or a person taking it for value, in good faith and without notice of the alteration, may enforce rights with respect to the instrument (i) according to its original terms, or (ii) in the case of an incomplete instrument altered by unauthorized completion, according to its terms as completed.”)

UCC, 810 ILCS 5/4-406(c) (“[T]he customer must exercise reasonable promptness in examining the statement. . . If, based on the statement or items provided, the customer should reasonably have discovered the unauthorized payment, the customer must promptly notify the bank of the relevant facts.”)

UCC, 810 ILCS 5/4-406(e) (A “person whose failure to exercise ordinary care substantially contributes to an alteration of an instrument or to the making of a forged signature on an instrument is precluded from asserting the alteration or the forgery against a person who, in good faith, pays the instrument or takes it for value or for collection.”)

UCC, 810 ILCS 5/3-417 (Both the person obtaining payment of a check and the previous transferor of the check warrant to the drawee making payment or accepting the draft in good faith that at the time of transfer the draft had not been altered, and a payor bank may recover damages for breach of warranty.)

UCC, 810 ILCS 5/4-103(a) (Banks cannot disclaim their responsibility for its lack of good faith or failure to exercise ordinary care or limit the measure of damages for the lack or failure. However, the parties may determine by agreement the standards by which the bank's responsibility is to be measured if those standards are not manifestly unreasonable.)

Napleton v. Great Lakes Bank, N.A., 945 N.E.2d 111, 118–119 (1st Dist. 2011) (Banks may narrow the definition of “reasonable promptness” in a deposit agreement.)

Wachovia Bank, N.A. v. Foster Bancshares, Inc., 457 F.3d 619, 622 (7th Cir. 2006) (If a court cannot determine whether the check was altered or forged, the payor bank (drawee) wins.)