IBA Compliance Connection

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A business recently opened a deposit account and deposited what we later learned was a stolen check for over $150,000. Within two weeks, the customer withdrew most of the deposited money. We now have learned that the individual who opened the account used a forged ID, and the deposited check had been stolen from a lockbox owned by a legitimate business in Missouri. The check was a legitimate check made payable to the legitimate business; the fraudster forged the endorsement when depositing it at our bank. Are we liable to the payor bank for the entire loss?

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admin

Yes, as the depository bank, your bank likely is liable to the payor bank for its entire loss.

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 the check had no missing or unauthorized endorsements, among other warranties. Consequently, your bank likely will be liable to the payor bank for beaching its presentment warranties due to the forged endorsement. While neither your bank nor the payor bank may have had reason to suspect a fraud, your bank is presumed to have had the best opportunity to have prevented the loss since it took the check directly from the fraudster.

The payor bank has three years in which to bring a claim against your bank for a breach of warranty. However, if the payor bank brings such a claim, your bank potentially could limit its losses by bringing a claim against the fraudster — assuming your bank discovers their true identity. By transferring the check to your bank, the fraudster warranted to your bank that all of the indorsements were valid and authorized. In such case, your bank also would have three years in which to bring a claim against the fraudster in court, subject to a requirement to notify them within thirty days after learning of the payor bank’s claim and identifying the fraudster.

For resources related to our guidance, please see:

  • 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. . . .”)
  • UCC § 3-417 cmt. 2 (“Subsection (a)(1) in effect is a warranty that there are no unauthorized or missing indorsements.”)
  • First Nat. Bank of Chicago v. MidAmerica Federal Sav. Bank, 707 N.E.2d 673, 677 (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.”)
  • 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(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 5/3-416(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.”)