A customer’s son stole her checkbook and forged her signature to cash several checks. The customer notified us of the forgeries within 30 days from the date of her account statement, as required by our account agreement. Since the bank missed its 24-hour deadline for returning the checks, is the bank liable to the customer for the forged checks?

In general, a bank on which a check is drawn that does not return a check before its midnight deadline is liable for the check, but your bank may have a few defenses against liability.

In the context of a forgery, you will need to reimburse the customer for the amount of a forged check if the customer alerts you to the forgery with “reasonable promptness” (provided that your bank acted in good faith and exercised “ordinary care”). Financial institutions may narrow the definition of “reasonable promptness” in account agreements, and an Illinois court has held that a 30-day notification window — such as the one established in your account agreement — is reasonable. Consequently, in this case, the customer has fulfilled their notification obligation.

However, your bank is not obligated to reimburse the customer for the amount of the forged checks 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 in paying the checks. Moreover, if your bank was negligent or did not act in good in paying the check, your bank still would be liable only to the extent of its comparative negligence.

In addition, you may be able to seek recourse from the presenting bank if it violated its presentment warranties, including that it had no knowledge that the signature on the check is forged. In such a case, your bank would have three years in which to bring a claim, subject to a requirement to notify the presenting bank within thirty days after learning of the customer’s claim of forgery.

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.”)

Napleton v. Great Lakes Bank, N.A., 408 Ill.App.3d 448, 452 (1st Dist. 2011) (Banks may 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.)

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.”)

UCC, 810 ILCS 5/4-302(b) (“The liability of a payor bank to pay an item pursuant to subsection (a) is subject to defenses based on breach of a presentment warranty (Section 4-208) or proof that the person seeking enforcement of the liability presented or transferred the item for the purpose of defrauding the payor bank.”)

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.”)