Customer vs. Bank Liability

Under the UCC, banks are not responsible for verifying signatures on checks, but a payor bank will be liable to a customer for paying a forged check if the customer informs the bank of the forgery with “reasonable promptness.”

The general rule as to forged checks is that the customer is not liable. 810 ILCS 5/3-401, 4-401. (In contrast, a payor bank may enforce an altered check — a check with an authorized signature that has an unauthorized change — against the customer. 810 ILCS 5/3-407.) However, Section 4-406 gives banks a major defense: if a customer does not alert the bank to the forgery with “reasonable promptness,” the bank will not be liable unless it failed to exercise “ordinary care.” 810 ILCS 5/4-406(e). Even if the bank did not exercise ordinary care, if the customer is also negligent, banks are liable only to the extent that they are comparatively negligent (unless they did not pay the check in good faith). As the Napleton case demonstrates, banks can narrow the definition of “reasonable promptness” in a deposit agreement, so that customers have only a thirty-day window in which to report forged checks. Napleton v. Great Lakes Bank, N.A., 945 N.E.2d 111, 118–119 (1st Dist. 2011)810 ILCS 5/4-103(a).

Further, 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 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.” 810 ILCS 5/3-103(a)(7). (The definition of “ordinary care,” from Article 3, applies to Article 4 as well. 810 ILCS 5/4-104(c).)

Bank vs. Bank Liability

Forgery: If a customer refuses to reimburse a bank for a forged check, the payor bank (drawee) must eat the loss, unless an upstream collecting bank breached the presentment warranties in Section 3-417 (for example, if the depositary bank knew that the check was forged). 810 ILCS 5/3-417(a)5/4-208(a).

Alteration: On the other hand, if a customer refuses to reimburse a bank for an altered check, the UCC requires the depositary bank to eat the loss; the payor bank (drawee) can hold the depositary bank liable for a breach of the presentment warranties. Id.810 ILCS 5/4-208(c)5/4-406 (“If there is a preclusion under this subsection, the payor bank may not recover for breach of warranty under Section 4-208 with respect to the unauthorized signature or alteration”). Other defenses, such as the imposter defense, are also available. 810 ILCS 5/3-404.)