One of our customers is claiming that her daughter stole several checks from her checkbook and forged her signature on checks totaling $800. The customer lives with her daughter and told us that her daughter is a felon and a drug addict. Do we have to reimburse our customer? She notified us about the forgeries within the 30-day deadline established in our account agreement, but we believe that she failed to properly guard her checkbook. This is her second claim of fraud, with the first claim involving her grandson’s unauthorized use of her debit card. Also, can we contact the individual (a local businessman) who cashed the forged checks?

You need to reimburse a customer for forged checks if the customer alerts you to the forgery with “reasonable promptness.” In this case, your customer fulfilled her notice obligation by alerting you about the forged checks within the 30-day notice period established in your account agreement.

However, your bank is not obligated to reimburse the customer if the customer’s own negligence substantially contributed to the making of the forgeries, provided your bank exercised ordinary care and acted in good faith when paying the checks. Moreover, if your bank was found to be negligent in paying the checks, it still would be liable only to the extent of its comparative negligence (the degree of fault attributable to the bank).

In this case, you indicated that the customer may have been negligent because she allowed her daughter access to her checks. However, whether a customer is considered negligent under the Uniform Commercial Code involves a highly specific factual inquiry that ultimately is decided in court. Because there is no bright-line rule, we recommend that you consult with your bank counsel and provide them additional facts before deciding not to reimburse your customer.

We also recommend that you do not contact the businessman who cashed the checks to discuss the forgeries. Such a communication likely would violate state and federal customer privacy laws. Regulation P generally prohibits a bank from disclosing nonpublic personal information about a consumer, including “the fact that an individual is or has been one of your customers or has obtained a financial product or service from you.” The Illinois Banking Act similarly prohibits a bank from disclosing a customer’s financial information. There are a number of exceptions to these restrictions, but we do not believe any would apply in this case.

We note that if you do reimburse your customer, nothing prevents you from reporting the incident and the amount of your loss to the police. It is possible that a court in a criminal proceeding involving the daughter might order her to reimburse your institution if it incurred a loss, and the filing of a police report could place the fact and amount of your loss into the record of any related criminal proceeding. However, it may be necessary for your bank to sue the daughter directly for reimbursement of any losses.

For resources related to our guidance, please see:

UCC, 810 ILCS 5/4-302(a) (“If an item is presented to and received by a payor bank, the bank is accountable for the amount of . . . a demand item . . . whether properly payable or not, if the bank, in any case in which it is not also the depositary bank, retains the item beyond midnight of the banking day of receipt without settling for it or, whether or not it is also the depositary bank, does not pay or return the item or send notice of dishonor until after its midnight deadline . . . .”)
UCC, 810 ILCS 5/3-401 (“A person is not liable on an instrument unless . . . the person signed the instrument . . . .”)

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 5/3-406(a) (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 5/3-406(b) (“Under subsection (a), if the person asserting the preclusion fails to exercise ordinary care in paying or taking the instrument and that failure substantially contributes to loss, the loss is allocated between the person precluded and the person asserting the preclusion according to the extent to which the failure of each to exercise ordinary care contributed to the loss.”)
Chicago Heights Currency Exch., Inc. v. Par Steel Products and Serv. Co., Inc., 463 N.E.2d 829, 830 (Ill. App. 1st Dist. 1984) (“The UCC does not define the negligence that will support the section 3-406 defense and instructs that this issue is left strictly to the fact finder on a case-by-case basis.”)
Regulation P, 12 CFR 1016.3(q)(2)(i)(C) (“Personally identifiable financial information includes . . . The fact that an individual is or has been one of your customers or has obtained a financial product or service from you . . . .”)
Illinois Banking Act, 215 ILCS 5/48.1(c) (“Except as otherwise provided by this Act, a bank may not disclose to any person, except to the customer or his duly authorized agent, any financial records or financial information obtained from financial records relating to that customer of that bank unless . . . .”)