Are we required to reimburse a customer for an altered check claim on a check that appeared on their statement six months ago? The customer sent the check by mail and says that the payee was altered. Our account agreement requires customers to report their discovery of unauthorized signatures or alterations with “reasonable promptness” — defined as within sixty days of when the statement is first made available, after which time the customer cannot assert a claim against us for the loss, “without regard to whether we used ordinary care.” Shouldn’t the depository bank that breached a warranty bear the loss for the altered check?

We do not believe you are required to reimburse your customer — provided your bank used ordinary care in paying the altered check. Whether the provision of your account agreement disclaiming liability within the first year after an item appears on your customer’s account statement, without regard to whether you used ordinary care in paying the item, is a matter that Illinois courts have not yet decided.

The Illinois Uniform Commercial Code (UCC) requires customers to examine their account statements and notify their bank of any unauthorized or altered item with “reasonable promptness.” If a customer fails to notify its bank with reasonable promptness, the UCC establishes rules for apportioning the loss between the bank and the customer in cases where the customer proves that the bank failed to exercise ordinary care in paying the item.

The UCC permits banks to narrow the definition of “reasonable promptness” in their deposit account agreements, based on the general rule that the UCC’s provisions “may be varied by agreement,” with the limitation that an 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.” The UCC also establishes that if a customer fails to notify their bank regarding an unauthorized or altered item within a year, the customer is entirely precluded from asserting a claim against the bank “[w]ithout regard to care or lack of care of either the customer or the bank.”

An Illinois court has upheld a deposit account agreement’s thirty-day requirement for customers to provide reasonably prompt notification of a fraudulent item. However, that case did not involve an allegation that the bank was negligent in paying the fraudulent item, and we are not aware of any Illinois court decisions that have addressed whether banks may shorten the UCC’s one-year period for disclaiming all liability “without regard to care or lack of care.” We are aware of a decision in which a Wisconsin court found that a reduction of the UCC’s one-year period “to fourteen days without regard to whether or not the bank was negligent” was not “manifestly unreasonable” under the UCC, but that Wisconsin decision could not serve as precedent for an Illinois court.

Additionally, since you have a defense to paying your customer’s claim based on the terms of your account agreement, you likely do not have a warranty claim against the depository bank. Under the UCC, a depository bank warrants to the payor bank that a check has no missing or unauthorized endorsements, but in cases where a customer’s claim is precluded without regard to the payor bank’s lack of care, “the payor bank may not recover for breach of warranty . . . with respect to the alteration to which the preclusion applies.” In this case, it appears that your customer must bear the loss for the altered check.

For resources related to our guidance, please see:

Illinois UCC, 810 ILCS 5/4-406(c) (“If a bank sends or makes available a statement of account or items pursuant to subsection (a), the customer must exercise reasonable promptness in examining the statement or the items to determine whether any payment was not authorized because of an alteration of an item or because a purported signature by or on behalf of the customer was not authorized. 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(d) (“If the bank proves that the customer failed, with respect to an item, to comply with the duties imposed on the customer by subsection (c), the customer is precluded from asserting against the bank:

(1) the customer’s unauthorized signature or any alteration on the item, if the bank also proves that it suffered a loss by reason of the failure;

(2) the customer's unauthorized signature or alteration by the same wrongdoer on any other item paid in good faith by the bank if the payment was made before the bank received notice from the customer of the unauthorized signature or alteration and after the customer had been afforded a reasonable period of time, not exceeding 30 days, in which to examine the item or statement of account and notify the bank.”)

Illinois UCC, 810 ILCS 5/4-406(e) (“If subsection (d) applies and the customer proves that the bank failed to exercise ordinary care in paying the item and that the failure substantially contributed to loss, the loss is allocated between the customer precluded and the bank asserting the preclusion according to the extent to which the failure of the customer to comply with subsection (c) and the failure of the bank to exercise ordinary care contributed to the loss. If the customer proves that the bank did not pay the item in good faith, the preclusion under subsection (d) does not apply.”)

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 (subsection (a)) 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. If there is a preclusion under this subsection, the payor bank may not recover for breach of warranty under Section 4-208 with respect to the unauthorized signature or alteration to which the preclusion applies.”)

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 115, 118–19 (1st Dist. 2011) (“Here, the parties agree that pursuant to the terms of the Account Agreement, the plaintiff’s duty to ‘promptly notify’ the bank of any unauthorized charges was modified to mean 30 days from the date the Monthly Statement was mailed to plaintiff. Although we did not find any Illinois cases directly addressing this issue, decisions from other jurisdictions indicate that such an alteration in the notification period is clearly permissible. . . . 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.”)

Napleton v. Great Lakes Bank, N.A., 945 N.E.2d 117–18 (1st Dist. 2011) (“During oral argument, plaintiffs counsel asserted that the case should be remanded to the trial court for a determination as to whether the bank’s conduct amounted to a lack of good faith or a failure to exercise ordinary care in violation of section 4-103(a) of the UCC, which permits the parties to vary the terms of the UCC by agreement but provides that the parties ‘cannot disclaim a bank’s responsibility for its lack of good faith or failure to exercise ordinary care.’ 810 ILCS 5/4-103(a) (West 2008). We agree with plaintiff that evidence showing that the bank acted in bad faith in trying to disclaim liability for paying unauthorized items or failed to exercise ordinary care might preclude defendant from raising plaintiffs failure to timely notify it of the forgery as a defense. See, e.g., Falk v. Northern Trust Co., 327 Ill. App. 3d 101, 109, 763 N.E.2d 380, 261 Ill. Dec. 410 (2001) (holding that customer’s failure to provide statutory notice to bank of unauthorized withdrawal did not protect bank from suit when it acted in bad faith). However, plaintiff failed to present this issue in his initial complaint or in his briefs to this court and therefore, it is forfeited on appeal.”)

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, Parent Teacher Ass’n v. Manufacturers Hanover Trust Co., 524 N.Y.S.2d 336, 341-342 (N.Y. Civ. Ct. 1988), 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’ as that term is used in [UCC § 4-103] . . . .”)

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. . . .”)

UCC § 3-417 cmt. 2 (“Subsection (a)(1) in effect is a warranty that there are no unauthorized or missing indorsements.”)