Our customer reported that a check they issued was stolen and washed, changing the payee and amount of the check. The customer reported the fraud to us two weeks after the check had cleared. Are we liable to our customer for paying the altered check, and do we have a claim against the bank of first deposit?

We believe you must reimburse your customer for the amount paid on the altered check and that you have a claim against the bank of first deposit for breach of its presentment warranties.

Under the Illinois Uniform Commercial Code (UCC), banks may charge their customers only for items that are properly payable — meaning authorized and in accordance with the customer’s account agreement. An “alteration” is “an unauthorized change in an instrument that purports to modify in any respect the obligation of a party.”

A customer cannot be held responsible for an altered check unless their own negligence substantially contributes to the alteration or they fail to notify their bank of the unauthorized payment appearing on their statement with “reasonable promptness.” “Reasonable promptness” means any reasonable timeframe established in the account agreement or one year after the statement containing the unauthorized item is made available to the customer if no timeframe is established.

There is no indication that the customer’s negligence contributed to the alteration according to the facts you have presented. Additionally, it does not seem like your customer failed to notify you of the alteration with reasonable promptness, as the altered check was reported two weeks after it had cleared. Consequently, we believe you must reimburse your customer for their loss on the altered check.

However, as the payor bank, your bank can make a claim for breach of the presentment warranties against the presenting bank for presenting an altered check. Under the Illinois UCC, a bank presenting a draft to a payor bank warrants that the check has not been altered. If the payor bank discovers that the check was altered, the payor bank may hold the presenting bank liable for the losses incurred by paying the check. Such a claim must be commenced within three years after you had notice of the breach of the presentment warranties by the presenting bank.

For resources related to our guidance, please see:

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 5/3-407(a) (“‘Alteration’ means (i) an unauthorized change in an instrument that purports to modify in any respect the obligation of a party, or (ii) an unauthorized addition of words or numbers or other change to an incomplete instrument relating to the obligation of a party.”)

Illinois UCC, 810 ILCS 5/3-407(b) (“Except as provided in subsection (c), an alteration fraudulently made discharges a party whose obligation is affected by the alteration unless that party assents or is precluded from asserting the alteration. No other alteration discharges a party, and the instrument may be enforced according to its original terms.”)

Illinois UCC, 810 ILCS 5/3-407(c) (“A payor bank or drawee paying a fraudulently altered instrument or a person taking it for value, in good faith and without notice of the alteration, may enforce rights with respect to the instrument (i) according to its original terms, or (ii) in the case of an incomplete instrument altered by unauthorized completion, according to its terms as completed.”)

Illinois UCC, 810 ILCS 5/4-401(d) (“A bank that in good faith makes payment to a holder may charge the indicated account of its customer according to:

(1) the original terms of the altered item . . . “)

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 5/4-406(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 5/4-103(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.”)

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 5/3-417(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, 810 ILCS 5/3-118(g) (“An action . . . (ii) for breach of warranty, or (iii) to enforce an obligation, duty, or right arising under this Article and not governed by this Section must be commenced within 3 years after the cause of action accrues.”)

Illinois 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.”)