Whether your bank should deny this claim is a business decision to be made based on the available facts and the likelihood of your success in court. In other words, whether your bank is liable to the payor bank for a breach of warranty is a question for a court to decide based on the facts presented. The payor bank may present the drawer’s check register in support of the claim that the check was altered; however, whether this is sufficient proof of a breach of warranty will depend on the other evidence and testimony presented. Accordingly, we strongly recommend reviewing this matter with your bank counsel to determine the best course of action.

When a depository bank presents a check to a payor bank, it makes three presentment warranties, including a warranty that the check has not been altered. If your bank violated any of these warranties, it may be liable to the payor bank for the altered check. However, your bank may be able to raise some defenses to the presumption of liability.

For example, your bank may have a defense if the drawer authorized your customer to complete the payee line of the check, meaning that the check was not “altered” according to UCC. Even if the drawer did not authorize your customer to complete the check, you still may have a defense if the drawer substantially contributed to the alteration by leaving the payee line blank.

Additionally, the payor bank could be precluded from making a claim against your bank if its customer failed to make a timely report of the alteration. The general rule is that a customer must report an alteration within one year after a statement showing the check is made available to them. In this case, it appears that the drawer reported the alteration within one year, as the affidavit was signed within one year of the posting date for the check. However, it is possible that the payor bank shortened the customer’s period for reporting unauthorized checks in its account agreement with the customer, in which case your bank may be able to assert this defense. Needless to say, without more facts, it is impossible to say whether this defense could apply in this case.

It also is possible that your bank could assert an equitable defense against the payor bank, based on the fact that the customer provided a receipt showing that the intended payee of the check, the business, did in fact receive the check and credited the customer’s account for the amount of the check. Illinois courts have applied “intended payee” and ratification defenses in cases of forged or missing endorsements, but we are not aware of any Illinois court applying this defense in the case of an alteration. Nevertheless, it may provide another avenue worth exploring with your bank counsel.

For resources related to our guidance, please see:

• UCC, 810 ILCS 5/3-417(a) and 810 ILCS 5/4-208(a) (“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: . . . (2) the draft has not been altered; . . .”)
   
• Wachovia Bank, N.A. v. Foster Bancshares, Inc., 457 F.3d 619, 622 (7th Cir. 2006) (“[T]he presenting bank warrants that the check hasn’t been altered since its issuance.”)
   
• UCC, 810 ILCS 5/3-407(a) (“‘Alteration’ means (i) an unauthorized change in an instrument that purports to modify in any respect the obligation of a party, or (ii) an unauthorized addition of words or numbers or other change to an incomplete instrument relating to the obligation of a party.”)
   
• UCC, 810 ILCS 5/3-407(c) (“A payor bank or drawee paying a fraudulently altered instrument or a person taking it for value, in good faith and without notice of the alteration, may enforce rights with respect to the instrument (i) according to its original terms, or (ii) in the case of an incomplete instrument altered by unauthorized completion, according to its terms as completed.”)
   
• UCC Official Comments, § 3-407, Comment 2 (“If blanks are filled or an incomplete instrument is otherwise completed, subsection (c) places the loss upon the party who left the instrument incomplete by permitting enforcement in its completed form. This result is intended even though the instrument was stolen from the issuer and completed after the theft.”)
   
• UCC, 810 ILCS 5/4-406(e) (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 5/3-417(c) (“If a drawee asserts a claim for breach of warranty under subsection (a) based on an unauthorized indorsement of the draft or an alteration of the draft, the warrantor may defend by proving that the indorsement is effective under Section 3-404 or 3-405 or the drawer is precluded under Section 3-406 or 4-406 from asserting against the drawee the unauthorized indorsement or alteration.”)
   
• 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. . . . 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.”)
   
• 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 or altered checks.)
   
• Conder v. Union Planters Bank, N.A., 384 F.3d 397, 401 (7th Cir. 2004) (“The [intended payee] rule provides that if a bank transfers a check without a proper endorsement but the transfer is to a person whom the drawer of the check wanted (or would if consulted have wanted) to have the money, the bank is not liable for any loss the drawer may have suffered as a result of the transfer, since the transfer would have gone through even if the bank had insisted that the check be properly endorsed.”)
   
• Sanwa Bus. Credit Corp. v. Continental Ill. Nat. Bank and Trust Co., 247 Ill.App.3d 155, 162, 164–165 (1st Dist. 1993) (“Under Tonelli, a bank may avoid liability for the face value of unendorsed checks if it demonstrates that the proceeds of a check reached the intended payee for the intended purpose. In doing so, the drawee shows that the drawer suffered no loss. . . . We would affirm the circuit court on the basis of ratification as well. In a similar case . . . [o]ur supreme court ruled in favor of the bank because the drawer had received a benefit for the bank’s payment of the check (the promissory note) and had accepted a payment on the note . . . .”)
   
•  In re Ostrom-Martin, Inc. v. First Nat’l Bank of Chillicothe, 188 B.R. 245, 255 (B.Ct. C.D.Ill. 1995) (“The intended payee defense is similarly aimed at preventing a drawer from being unjustly enriched by recovering for an improperly paid check when the proceeds of the check in fact were received by the payee intended by the drawer and the drawer suffered no damages caused by the improper payment. The defense ‘is based on the view that the drawer should not be permitted to recover from the drawee bank where he has suffered no loss from the improper payment of a check.’ The intended payee defense is based on the fundamental equitable principle that a defendant should obtain relief from liability when no damage has resulted from his wrongdoing.”)