What is our potential liability for a check with four payees that was deposited in a customer’s account? The check has four endorsements, but we did not see the endorsements happen and did not verify the signatures. Could we be liable for an unauthorized endorsement? What is the statute of limitations for a claim?

Under the Uniform Commercial Code (UCC), your bank could be liable under its presentment warranties to the payor bank if one of the indorsements turns out to be unauthorized. When forwarding the check to the payor bank for payment, your bank is warranting that all of the check’s indorsements are authorized.

In the event one of the signatures is not authorized, the payor bank would have three years in which to bring a claim against your bank for the check. Note, however, that if the payor bank were to bring such a claim, your bank potentially could limit its losses by bringing a claim against your customer. By transferring the check to your bank, your customer also is warranting (to your bank) that all of the indorsements are valid and authorized. In such case, your bank also would have three years in which to bring a claim against your customer in court, subject to a requirement to notify your customer within thirty days after learning of the payor bank’s claim.

For resources related to our guidance, please see:

UCC, 810 ILCS 5/3-417(a)(1) and 810 ILCS 5/4-208(a)(1) (“If an unaccepted draft is presented to the drawee for payment or acceptance and the drawee pays or accepts the draft, (i) the person obtaining payment or acceptance, at the time of presentment, and (ii) a previous transferor of the draft, at the time of transfer, warrant to the drawee that pays or accepts the draft in good faith that: (1) the warrantor is or was, at the time the warrantor transferred the item, a person entitled to enforce the item . . . .”)

UCC § 3-417 cmt. 2 (“Subsection (a)(1) in effect is a warranty that there are no unauthorized or missing indorsements.”)

UCC, 810 ILCS 5/3-416(a)(1) and 810 ILCS 5/4-207(a)(1) (“A person who transfers an instrument for consideration warrants to the transferee and, if the transfer is by indorsement, to any subsequent transferee that: (1) the warrantor is a person entitled to enforce the item . . . .”)

UCC § 3-416 cmt. 2 (“Subsection (a)(1) in effect is a warranty that there are no unauthorized or missing indorsements.”)

UCC, 810 ILCS 5/3-118(g) (An action “(1) for conversion of an instrument, for money had and received, or like action based on conversion [or] (ii) for breach of warranty . . . must be commenced within 3 years after the cause of action accrues.”)

UCC, 810 ILCS 5/3-416(d) and 810 ILCS 5/4-207(d) (“. . . Unless notice of a claim for breach of warranty is given to the warrantor within 30 days after the claimant has reason to know of the breach and the identity of the warrantor, the warrantor is discharged to the extent of any loss caused by the delay in giving notice of the claim.”)