Generally, banks are liable under the UCC for the full amount of an unauthorized check reported by their customers (whether consumer or commercial) with “reasonable promptness” — a reporting period which by default is “within one year after the statement or items are made available to the customer,” but which can be reduced to a shorter period by agreement of the parties, typically in the account agreement. However, we believe it is unlikely that a court would uphold an account agreement limiting this reporting period to a single day.  

The general rule in the UCC requires customers to report an unauthorized check within one year after a statement showing the unauthorized check is made available to them. However, the UCC also allows banks to narrow this timeframe by the terms of their account agreements if the terms are not “manifestly unreasonable.” An Illinois court has found that narrowing the reporting timeframe for unauthorized checks to thirty days is reasonable (and a Wisconsin court has found that a period as short as fourteen days is “not manifestly unreasonable”). We are not aware of any courts that have found that limiting this timeframe to one day is reasonable, and we believe it is likely that a court would find a one-day period to report an unauthorized check would be so short as to be manifestly unreasonable.

The UCC does not require your bank to reimburse a customer for a forged or an altered check if the customer’s own negligence substantially contributed to the forgery or the alteration (provided that your bank exercised ordinary care and acted in good faith in paying the check). However, except in extreme cases (such as a business that keeps blank checks and a rubber signature stamp in an unlocked desk drawer), it can be difficult to prove that a customer’s negligence substantially contributed to a forgery or an alteration.

For resources related to our guidance, please see:

• Illinois 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.”)

• Illinois 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.”)

• Illinois UCC, 810 ILCS 5/4-103(a) (“The effect of the provisions of this Article may be varied by agreement, but the parties to the agreement cannot disclaim a bank’s responsibility for its lack of good faith or failure to exercise ordinary care or limit the measure of damages for the lack or failure. However, the parties may determine by agreement the standards by which the bank's responsibility is to be measured if those standards are not manifestly unreasonable.”)

• Napleton v. Great Lakes Bank, N.A., 945 N.E.2d 111, 118–19 (1st Dist. 2011) (“Here, the parties agreed pursuant to the terms of the Account Agreement that plaintiff was required to timely discover any unauthorized transactions and notify the bank in order to preserve his claim. Our finding that plaintiff's failure to abide by the terms of that agreement precludes his claim is consistent with our holding in Euro Motors and case law in the majority of other jurisdictions, as well as the public policy underlying the UCC ‘in favor of imposing on customers the duty of prompt examination of their bank statements and the notification of banks of forgeries and alterations in favor of reasonable time limitations on the responsibility of banks for payment of forged, altered or unauthorized items.’ . . . Therefore, because plaintiff failed to notify the bank of the forgery within 30 days, the trial court did not err in finding that plaintiff had no claim against defendant.”)

• Borowski v. Firstar Bank Milwaukee, N.A., 579 N.W.2d 247 (Wis. Ct. App. 1998) (“The only reported case that we were able to find that addresses the precise question at issue here . . . approved a reduction from one year to fourteen days without regard to whether or not the bank was negligent. . . . Based on the foregoing, we conclude that the fourteen-day period is not ‘manifestly unreasonable’ . . . .”)

• Illinois UCC, 810 ILCS 5/3-406(a) (“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.”)

• Illinois UCC, 810 ILCS 5/3-406(b) (“Under subsection (a), if the person asserting the preclusion fails to exercise ordinary care in paying or taking the instrument and that failure substantially contributes to loss, the loss is allocated between the person precluded and the person asserting the preclusion according to the extent to which the failure of each to exercise ordinary care contributed to the loss.”)

• UCC § 3-406, Comment 3 (“The following cases illustrate the kind of conduct that can be the basis of a preclusion under Section 3-406(a):

Case #1. Employer signs checks drawn on Employer’s account by use of a rubber stamp of Employer’s signature. Employer keeps the rubber stamp along with Employer’s personalized blank check forms in an unlocked desk drawer. An unauthorized person fraudulently uses the check forms to write checks on Employer’s account. The checks are signed by use of the rubber stamp. If Employer demands that Employer’s account in the drawee bank be recredited because the forged check was not properly payable, the drawee bank may defend by asserting that Employer is precluded from asserting the forgery. The trier of fact could find that Employer failed to exercise ordinary care to safeguard the rubber stamp and the check forms and that the failure substantially contributed to the forgery of Employer’s signature by the unauthorized use of the rubber stamp

*     *     *     *     *

Case #3. A company writes a check for $10. the figure ‘10’ and the word ‘ten’ are typewritten in the appropriate spaces on the check form. A large blank space is left after the figure and the word. The payee of the check, using a typewriter with a typeface similar to that used on the check, writes the word ‘thousand’ after the word ‘ten’ and a comma and three zeros after the figure ‘10.’ The drawee bank in good faith pays $10,000 when the check is presented for payment and debits the account of the drawer in that amount. The trier of fact could find that the drawer failed to exercise ordinary care in writing the check and that the failure substantially contributed to the alteration. In that case the drawer is precluded from asserting the alteration against the drawee if the check was paid in good faith.”)