Our customer wrote a check from her checking account to her insurance company; however, the insurance company said it did not receive the check. Our customer’s signature is on the front of the check, and we have a copy of the check with an endorsement on the back. The insurance company says it is not their endorsement. Is the bank of first deposit responsible for resolving this matter? The insurance company has requested that we provide an affidavit of forgery, but our bank didn’t cash the check.

Yes, we believe the depository bank that accepted the check with the forged endorsement is responsible for resolving this matter and is in the best position to provide the insurance company with any requested affidavits.

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, we believe the depository bank is liable to you, as the payor bank, for breaching its presentment warranties due to the forged endorsement. While neither your bank nor the depository bank may have had reason to suspect fraud, the depository bank is presumed to have had the best opportunity to have prevented the loss, since it took the check directly from the fraudster who forged the insurance company’s signature.

Your bank has three years to bring a claim against the depository bank for a breach of warranty. The depository bank, in turn, would have three years to bring a claim against the fraudster — provided it notifies them within thirty days of learning of your claim and discovering their true identity.

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 “(ii) for breach of warranty . . . must be commenced within 3 years after the cause of action accrues.”)

UCC, 810 ILCS 5/3-417(f) and 810 ILCS 5/4-208(f), (“A cause of action for breach of warranty under this Section accrues when the claimant has reason to know of the breach.”)

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.”)