We would not recommend relying on your account agreement to avoid liability to a customer for forged checks that your customer reported in a timely manner, but we note that we cannot provide legal advice. We recommend working with bank counsel to review and analyze your account agreement’s provisions with respect to the customer’s responsibility for fraudulent items in light of the Uniform Commercial Code (UCC) provisions and case law discussed below.

Your customer is likely entitled to reimbursement from your bank for the forged checks since the customer notified you of the fraud with “reasonable promptness,” and your question does not suggest that your customer was negligent in a way that contributed to the forgeries. Under the Uniform Commercial Code (UCC), your customer generally should not be held liable on a check unless it signed the check, and a check with a forged drawer’s signature or indorsement is not properly payable.

The UCC does permit account agreements to vary the effect of its provisions, and Illinois courts have allowed banks and customers to agree to narrow the timeframe that customers have to report unauthorized payments. However, the UCC also expressly provides that a bank cannot disclaim its responsibility for its lack of good faith or failure to exercise ordinary care. Additionally, any variations in an agreement must not be “manifestly unreasonable.”

While we are not aware of any Illinois case law on this point, at least two out-of-state courts have examined the validity of provisions in account agreements that disclaim a bank’s liability for fraudulent checks.

In a Minnesota case, the court concluded that a bank’s deposit agreement could require a customer to disclaim liability for fraudulent checks when Positive Pay (a fraud detection service) was offered to and declined by its customer. The bank in that case was not required to reimburse its customer. However, in a similar case before a federal appellate court, the court concluded that an account agreement improperly disclaimed the bank’s duties to act in good faith and exercise ordinary care. In that case, the account agreement absolved the bank of liability for any fraudulent transactions when the customer declined to enroll in nondescript anti-fraud products designed to discover or prevent the type of fraud at issue.

Based on the reasoning in these cases, it does not appear that your bank could rely on the disclaimer of liability in your account agreement to avoid liability for the timely-reported forged checks. While we have not reviewed your bank’s account agreement, it appears that it did not mention or offer fraud detection services to your customer—a fact that was present in both of the cases discussed above, only one of which found in the bank’s favor.

For resources related to our guidance, please see:

• Illinois UCC, 810 ILCS 5/3-401 (“A person is not liable on an instrument unless . . . the person signed the instrument . . . .”)

• Illinois UCC, 810 ILCS 5/4-401, cmt. 1 (“An item containing a forged drawer’s signature or forged indorsement is not properly payable.”)

• Illinois 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.”)

• Illinois UCC, 810 ILCS 5/4-103(a) (“The effect of the provisions of this Article may be varied by agreement, but the parties to the agreement cannot disclaim a bank’s 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.”)

• Aliaga Med. Ctr., S.C. v. Harris Bank N.A., 2014 IL App (1st) 133645 ¶ 14 (1st Dist. 2014) (“[T]he UCC permits that ‘[t]he effect of [its] provisions *** may be varied by agreement.’ As such, the Napleton court found that it is ‘clearly permissible’ to enforce a shorter notification timeframe established by a bank customer's account agreement with its bank.”)

• Illinois UCC, 810 ILCS 5/4-406(f) (“Without regard to care or lack of care of either the customer or the bank, a customer who does not within one year after the statement or items are made available to the customer. . . . discover and report the customer’s unauthorized signature on or any alteration on the item is precluded from asserting against the bank the unauthorized signature or alteration.”)

• Illinois UCC, 810 ILCS 5/3-103(a)(4) (“‘Good faith’ means honesty in fact and the observance of reasonable commercial standards of fair dealing.”)

• Illinois UCC, 810 ILCS 5/3-103(a)(7) (“‘Ordinary care’ in the case of a person engaged in business means observance of reasonable commercial standards, prevailing in the area in which the person is located with respect to the business in which the person is engaged. In the case of a bank that takes an instrument for processing for collection or payment by automated means, reasonable commercial standards do not require the bank to examine the instrument if the failure to examine does not violate the bank’s prescribed procedures and the bank’s procedures do not vary unreasonably from general banking usage not disapproved by this Article or Article 4.”)

• Illinois UCC, 810 ILCS 5/3-103, cmt. 5 (“The second sentence of subsection (a)(7) is a particular rule limited to the duty of a bank to examine an instrument taken by a bank for processing for collection or payment by automated means. This particular rule applies primarily to Section 4-406 and it is discussed in Comment 4 to that section. Nothing in Section 3-103(a)(7) is intended to prevent a customer from proving that the procedures followed by a bank are unreasonable, arbitrary, or unfair.”)

• Illinois UCC, 810 ILCS 5/4-406, cmt. 4 (“The term ‘good faith’ . . . includ[es] ‘observance of reasonable commercial standards of fair dealing.’ The connotation of this standard is fairness and not absence of negligence. The term ‘ordinary care’ . . . provide[s] that sight examination by a payor bank is not required if its procedure is reasonable and is commonly followed by other comparable banks in the area. . . . The effect of the definition of ‘ordinary care’ on Section 4-406 is only to provide that in the small percentage of cases in which a customer’s failure to examine its statement or returned items has led to loss . . . a bank should not have to share that loss solely because it has adopted an automated collection or payment procedure in order to deal with the great volume of items at a lower cost to all customers.”)

• Cincinnati Ins. Co. v. Wachovia Bank, N.A., 2010 U.S. Dist. LEXIS 70670 at *20 (D. Minn. 2010) (“Wachovia acted reasonably in requiring Schultz Foods either to implement Positive Pay or to assume responsibility for fraud-related losses that could have been prevented by Positive Pay. . . . Under these circumstances, the Court holds that the relevant provisions of the deposit agreement are not ‘manifestly unreasonable’ for purposes of § 4-103(a) and are ‘reasonable under the circumstances’ for purposes of § 4-103(d).”)
   
• Majestic Bldg. Maint., Inc. v. Huntington Bancshares, Inc., 864 F.3d 455, 456–57, 463 (6th Cir. 2017) (“The section of the Agreement at issue in this case states:

[W]e have available certain products designed to discover or prevent unauthorized transactions, including unauthorized checks and ACH debits, forgeries, and alterations (all such activities referred to as ‘fraud’). While no such product is foolproof, we believe that the products we offer will reduce the risk of loss to you from fraud. You agree that if your account is eligible for those products and you choose not to avail yourself of them, then we will have no liability for any transaction that occurs on your account that those products were designed to discover or prevent, nor will we have any duty to re-credit your account for any such losses.

* * * * *

Plaintiff’s contention is quite simple: the provision at issue improperly disclaims Defendant’s duties to act in good faith and exercise ordinary care. We find that Plaintiff states a plausible claim that the provision unreasonably disclaims all liability under the circumstances of this case.”)