We do not believe your bank could be held liable to Mary Doe for reimbursement of the check, since it appears that the three-year statute of limitations on claims for conversion has passed — unless your bank was found to have fraudulently concealed the conversion.

Under the Uniform Commercial Code (UCC), when a check is made payable to two or more persons “not alternatively, it is payable to all of them and may be negotiated, discharged, or enforced only by all of them.”  Since the check was unambiguously made payable to your customer and Mary Doe, not alternatively, it was not properly endorsed when it was deposited into your customer’s individual account without both payees’ signatures.

According to the UCC, an instrument has been converted if “a bank makes or obtains payment with respect to an instrument for a person not entitled to enforce the instrument or receive payment.” The official comments to the UCC provide that when “a check [is] payable to John and Jane Doe . . . neither payee acting without the consent of the other, is a person entitled to enforce the instrument. If John indorses the check and Jane does not, the indorsement is not effective to allow negotiation of the check. If Depositary Bank takes the check for deposit to John’s account, Depositary Bank is liable to Jane for conversion of the check if she did not consent to the transaction.”

However, the UCC also provides that an action for conversion must be commenced within three years after the cause of action accrues. Here, the cause of action accrued more than three years ago — when the check was deposited into Jane Doe’s account in August of 2016 without Mary Doe’s endorsement. Additionally, Illinois courts have found that this statute of limitations will not be tolled due to an individual’s failure to discover a bank’s conversion of an improperly endorsed check within the time limit, unless the bank fraudulently concealed the conversion.

For resources related to our guidance, please see:

• Illinois 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.”)

• Illinois UCC, 810 ILCS 5/3-110(d) (“If an instrument is payable to 2 or more persons alternatively, it is payable to any of them and may be negotiated, discharged, or enforced by any or all of them in possession of the instrument. If an instrument is payable to 2 or more persons not alternatively, it is payable to all of them and may be negotiated, discharged, or enforced only by all of them. If an instrument payable to 2 or more persons is ambiguous as to whether it is payable to the persons alternatively, the instrument is payable to the persons alternatively.”)

• Illinois UCC, 810 ILCS 5/3-420(a) (“The law applicable to conversion of personal property applies to instruments. An instrument is also converted if it is taken by transfer, other than a negotiation, from a person not entitled to enforce the instrument or a bank makes or obtains payment with respect to the instrument for a person not entitled to enforce the instrument or receive payment. An action for conversion of an instrument may not be brought by (i) the issuer or acceptor of the instrument or (ii) a payee or indorsee who did not receive delivery of the instrument either directly or through delivery to an agent or a co-payee.”)

• UCC § 3-420 cmt. 1 (“The second sentence of Section 3-420(a) states that an instrument is converted if it is . . . taken for collection or payment from a person not entitled to enforce the instrument or receive payment. This covers cases . . . in which an instrument is payable to two persons and the two persons are not alternative payees, e.g. a check payable to John and Jane Doe. Under Section 3-110(d) the check can be negotiated or enforced only by both persons acting jointly. Thus, neither payee acting without the consent of the other, is a person entitled to enforce the instrument. If John indorses the check and Jane does not, the indorsement is not effective to allow negotiation of the check. If Depositary Bank takes the check for deposit to John’s account, Depositary Bank is liable to Jane for conversion of the check if she did not consent to the transaction. John, acting alone, is not the person entitled to enforce the check because John is not the holder of the check . . . . Depositary Bank does not get any greater rights under Section 4-205(1). If it acted for John as its customer, it did not become holder of the check under that provision because John, its customer, was not a holder.”)

• Hawkins v. Nalick, 2012 IL App (5th) 110553, ¶ 29 (“Accordingly, in the present case, we believe that we must apply the three-year statute of limitations notwithstanding the plaintiff’s failure to discover the forged endorsement within the time limit. The plaintiff’s claim for conversion accrued when Nalick deposited the check with the forged endorsement, but the plaintiff did not file her claim until over three years after her claim for conversion had accrued. Because the plaintiff’s claim is subject to the three-year statute of limitations provided in section 3-118(g) of the UCC and she has not alleged any fraudulent concealment on the part of the bank, we must hold that her claim is barred by the statute of limitations.”)

• Kaplan v. JPMorgan Chase Bank, N.A., 2015 U.S. Dist. LEXIS 63508 at *29 (N.D. Ill. May 12, 2015)  (“‘The discovery rule is a judicially created rule that tolls the beginning of a statute of limitations until the injured plaintiff knows or reasonably should know that she has been injured and that her injury was wrongfully caused.’ . . . Illinois courts have held, however, that ‘the discovery rule does not toll the running of the three-year statute of limitations set forth in section 3-118(g) of the UCC.’”)