A customer purchased a money order from our bank, but the money order was intercepted and fraudulently cashed by an unknown third party by mobile deposit at another financial institution. The money order was signed by our bank and drawn from our account. Our customer discovered the fraud when they received notice from the intended payee that their payment was never received. The customer is requesting a refund. What should we do?

We do not believe your bank is obligated to refund your customer. We believe that your bank may assert a claim against the presenting bank for breach of its presentment warranties and refund your customer as a courtesy.

To begin, we note that under Illinois case law, the money order you described would likely be treated as a cashier’s check, as it is structured like a bank obligation and signed by the bank. Under the Illinois Uniform Commercial Code (UCC), the buyer of a cashier’s check that has been stolen cannot assert a claim against the obligated bank for the amount of the check after the check has been paid. As the check in this case has already been paid, we do not believe your bank is obligated to refund your customer — although we believe you may refund your customer as a courtesy.

Additionally, under the Illinois UCC, the bank presenting a draft (including a money order or cashier’s check) to a payor bank warrants that the draft has no missing or unauthorized endorsements. Since it appears that the cashier’s check was presented for payment without the actual payee’s endorsement, your bank could assert a claim against the depository bank for breach of its presentment warranties.

For resources related to our guidance, please see:

Chicago Cicero Currency Exchange, Inc. v. Continental Illinois Nat’l Bank & Trust Co. 189 Ill.App.3d 259, 261 (5th Dist. 1989) (“A cashier’s check is a bill of exchange or draft which is drawn by a bank upon itself. . . . In addition, the bank issuing the cashier’s check fills in the payee’s name and an authorized representative of the bank signs as drawer. In contrast, personal money orders have been described as similar to checks in that the purchaser signs as drawer, a blank space is provided for the name of the payee, and the order must be endorsed. . . . Since a personal money order is not signed by an authorized representative of the issuing bank, it is more in the nature of an ordinary check than a bank obligation.”)

Illinois UCC, 810 ILCS 5/3-312(b) (“A claimant may assert a claim to the amount of a check by a communication to the obligated bank describing the check with reasonable certainty and requesting payment of the amount of the check, if (i) the claimant is the drawer or payee of a certified check or the remitter or payee of a cashier’s check or teller’s check, (ii) the communication contains or is accompanied by a declaration of loss of the claimant with respect to the check, (iii) the communication is received at a time and in a manner affording the bank a reasonable time to act on it before the check is paid, and (iv) the claimant provides reasonable identification if requested by the obligated bank.”)

Illinois UCC, 810 ILCS 5/3-103(a)(11) (“‘Remitter’ means a person that purchases an instrument from its issuer if the instrument is payable to an identified person other than the purchaser.”)

Illinois UCC, 810 ILCS 5/3-312(b)(3) (“‘Declaration of loss’ means a written statement, made under penalty of perjury, to the effect that (i) the declarer lost possession of a check, (ii) the declarer is the drawer or payee of the check, in the case of a certified check, or the remitter or payee of the check, in the case of a cashier’s check or teller’s check, (iii) the loss of possession was not the result of a transfer by the declarer of a lawful seizure, and (iv) the declarer cannot reasonably obtain possession of the check because the check was destroyed, its whereabouts cannot be determined, or it is in the wrongful possession of an unknown person or a person that cannot be found or is not amenable to service of process.”)

Illinois UCC, 810 ILCS 5/3-417(a) and 810 ILCS 5/4-208(a), 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.”)

Illinois UCC, 810 ILCS 5/3-104(f) (“‘Check’ means (i) a draft, other than a documentary draft, payable on demand and drawn on a bank or (ii) a cashier’s check or teller’s check. An instrument may be a check even though it is described on its face by another term, such as ‘money order’.”)

Illinois UCC, 810 ILCS 5/3-104(g) (“‘Cashier’s check’ means a draft with respect to which the drawer and drawee are the same bank or branches of the same bank.”)

Illinois UCC, 810 ILCS 5/3-417(b) and 810 ILCS 5/4-208(b) (“A drawee making payment may recover from any warrantor damages for breach of warranty equal to the amount paid by the drawee less the amount the drawee received or is entitled to receive from the drawer because of the payment. In addition the drawee is entitled to compensation for expenses and loss of interest resulting from the breach. The right of the drawee to recover damages under this subsection is not affected by any failure of the drawee to exercise ordinary care in making payment. If the drawee accepts the draft, breach of warranty is a defense to the obligation of the acceptor. If the acceptor makes payment with respect to the draft, the acceptor is entitled to recover from any warrantor for breach of warranty the amounts stated in this subsection.”)