When we receive our daily cash letter from the Fed, we review all checks of $2,500 and above for an endorsement. If the checks are not endorsed by the payee or stamped “All Prior Endorsements Guaranteed” by the depositing bank, we return the check. Is it our responsibility as the payor bank to check the endorsements? Who is held liable when there is no endorsement or a fraudulent endorsement — the depository bank or the payor bank?

A payor bank does not have a duty to review checks received from a depository bank for missing or unauthorized endorsements. The Uniform Commercial Code (UCC) places the ultimate risk of loss for the payment of a check with a missing or unauthorized endorsement on the depository bank.

Under the UCC, a depository bank warrants to the payor bank that a check has been paid to the proper payee, and that the payor bank is entitled to enforce the check. In other words, the depository bank warrants to the payor bank that there are no missing or unauthorized endorsements. Since a check with a missing or unauthorized endorsement is not properly payable under the UCC, if your customer objects to your payment of a check with a missing or unauthorized endorsement, they are entitled to demand repayment for the check from your bank – but in turn, your bank is entitled to demand repayment for the check from the depository bank, since it has breached its warranty to you that the check is properly payable.

Please note that this answer applies only to endorsements on a check. Different bank-to-bank warranty rules apply to a drawer’s signature on a check, depending on whether the signature is altered or forged.

For resources related to our guidance, please see:

Illinois UCC, 810 ILCS 5/4-105 (“In this Article: . . . (2) ‘Depositary bank’ means the first bank to take an item even though it is also the payor bank, unless the item is presented for immediate payment over the counter; (3) ‘Payor bank’ means a bank that is the drawee of a draft; . . .”)

Illinois UCC, 810 ILCS 5/4-205(2) (“If a customer delivers an item to a depositary bank for collection: (2) the depositary bank warrants to collecting banks, the payor bank or other payor, and the drawer that the amount of the item was paid to the customer or deposited to the customer’s account.”)

Illinois UCC, 810 ILCS 5/3-417(a)(1) and 810 ILCS 5/4-208(a)(1), Presentment warranties (“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 making payment or accepting the draft in good faith that: (1) the warrantor is or was, at the time the warrantor transferred the draft, a person entitled to enforce the draft or authorized to obtain payment or acceptance of the draft on behalf of a person entitled to enforce the draft; 2) the draft has not been altered; and (3) the warrantor has no knowledge that the signature of the purported drawer of the draft is unauthorized.”)

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

Illinois UCC § 3-417 cmt. 3 (“Subsection (a)(1) retains the rule that the drawee does not admit the authenticity of indorsements and subsection (a)(3) retains the rule . . . that the drawee takes the risk that the drawer's signature is unauthorized unless the person presenting the draft has knowledge that the drawer's signature is unauthorized. Under subsection (a)(3) the warranty of no knowledge that the drawer's signature is unauthorized is also given by prior transferors of the draft.”)

Illinois UCC, 810 ILCS 5/3-403(a) (“Unless otherwise provided in this Article or Article 4, an unauthorized signature is ineffective except as the signature of the unauthorized signer in favor of a person who in good faith pays the instrument or takes it for value.”)

Illinois UCC, § 3-403, cmt. 1 (“‘Unauthorized’ signature is defined in Section 1-201(43) as one that includes a forgery as well as a signature made by one exceeding actual or apparent authority.”)

Illinois UCC, 810 ILCS 5/4-401(a) (“A bank may charge against the account of a customer an item that is properly payable from that account even though the charge creates an overdraft. An item is properly payable if it is authorized by the customer and is in accordance with any agreement between the customer and bank.”)

Illinois UCC, 810 ILCS 5/4-208(b) (“A drawee making payment may recover from any warrantor damages for breach of warranty equal to the amount paid by the drawee less the amount the drawee received or is entitled to receive from the drawer because of the payment. In addition, the drawee is entitled to compensation for expenses and loss of interest resulting from the breach. The right of the drawee to recover damages under this subsection is not affected by any failure of the drawee to exercise ordinary care in making payment. If the drawee accepts the draft (i) breach of warranty is a defense to the obligation of the acceptor, and (ii) if the acceptor makes payment with respect to the draft, the acceptor is entitled to recover from any warrantor for breach of warranty the amounts stated in this subsection.”)

First Nat. Bank of Chicago v. MidAmerica Federal Sav. Bank, 303 Ill.App.3d 176, 181 (1st Dist. 1999) (“The rule recognizes that, while none of the parties may have had reason to suspect a fraud, the one who took from the forger was the closest to the person causing the loss and is presumed to have had the best opportunity to have prevented the loss.”)