IBA Compliance Connection

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We have a customer who is claiming several checks paid from her account were forged. They are from two to six months old. I do not understand our account agreement, which provides 30, 60, or 120 days to report unauthorized checks. Some of the checks are less than 60 days old. In addition to the reporting deadline ambiguity, we are suspicious about her forgery claims for a number of reasons. What protections does the bank have against paying these claims?

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We recommend consulting with bank counsel to clarify the time period for reporting unauthorized transactions defined by your account statement and disclosures.

Under the Uniform Commercial Code (UCC), in most circumstances, 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” (i.e., within one year of receiving an account statement, or a shorter time period defined by your account agreement).

Additionally, 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).

If your customer alerted the bank about the alleged forgeries outside of 30 days, your bank may be able to refuse reimbursement — but only if the 30 day period applies, and not the 60 or 120 day periods mentioned in your account agreement. Also, if your customer alerted the bank about the alleged forgeries within the required time period, and your bank wishes to refuse reimbursement on other grounds (such as the customer’s negligence), we recommend consulting with bank counsel.

For resources related to our guidance, please see:

  • 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 5/4-406(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 (subsection (a)) 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. . . .”)

  • UCC, 810 ILCS 5/4-103(a) (“The effect of the provisions of this Article may be varied by agreement . . . .”)

  • Napleton v. Great Lakes Bank, N.A., 945 N.E.2d 111, 118–19 (1st Dist. 2011) (“Here, the parties agreed pursuant to the terms of the Account Agreement that plaintiff was required to timely discover any unauthorized transactions and notify the bank in order to preserve his claim. . . . because plaintiff failed to notify the bank of the forgery within 30 days, the trial court did not err in finding that plaintiff had no claim against defendant.”)

  • 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: (1) a demand item . . . whether properly payable or not, if the bank, in any case in which it is not also the depository bank, retains the item beyond midnight of the banking day of receipt . . . .”)