A check was presented to us that was drawn on our customer’s account. Approximately three weeks after paying the check, we discovered the payee had been altered. We returned the check with a claim of alteration to the depository bank, which responded with a late return claim since the midnight deadline had passed. Does the depository bank have any liability for presenting us with the altered check? If so, what is the appropriate mechanism for seeking redress, and what language should we use in our correspondence to the depository bank?

Yes, your bank may seek relief from the depository bank for breach of a presentment warranty because the check it presented for payment had been altered. We recommend sending notice of the breach of warranty to the depository bank as soon as possible, with an affidavit of alteration signed by your customer.

When the depository bank presented the check to your bank, it made three presentment warranties, including a warranty that the check had not been altered. Because the check was altered, it appears that the depository bank breached its presentment warranties to your bank, entitling you to collect damages from the depository bank equal to the amount your bank paid (less any amount your bank is entitled to recover from your customer), in addition to compensation for other expenses and loss of interest resulting from the breach.

Under the Illinois Uniform Commercial Code (UCC), your bank has thirty days after the date you had reason to know of this warranty breach and the identity of the warrantor to give notice of your claim for breach of warranty to the depository bank. If the notice is timely made, you may be entitled to recover damages from the depositary bank. After this thirty-day period, the depository bank cannot be held liable for any loss caused by your delay in giving notice of the claim.

Consequently, your bank may wish to send notice of the breach of warranty with an affidavit of alteration signed by your customer to the depository bank as soon as possible, as it appears that the thirty-day notice period has begun to run.

A member of the IBA’s Compliance Division Advisory Committee has provided a sample breach of warranty notice (available in our Forms Library and linked to below) that may provide a starting point for drafting a notice to the depository bank. However, we recommend reviewing any correspondence you plan to send to the depository bank with your bank counsel before sending.

For resources related to our guidance, please see:

Breach of Warranty – Altered Items Indorsement Issues

Illinois UCC, 810 ILCS 5/3-417(a)(2) and 810 ILCS 5/4-208(a)(2) (“Presentment warranties. (a) 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: . . . (2) the draft has not been altered; . . .”)

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.”)

Illinois UCC, 810 ILCS 5/3-417(e) and 810 ILCS 5/4-208(e) (“The warranties stated in subsections (a) and (d) cannot be disclaimed with respect to checks. Unless notice of a claim for breach of warranty is given to the warrantor within 30 days after the claimant has reason to know of the breach and the identity of the warrantor, the liability of the warrantor under subsection (b) or (d) is discharged to the extent of any loss caused by the delay in giving notice of the claim.”)

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.”)

Illinois UCC, 810 ILCS 5/3-417(c) and 810 ILCS 5/4-208(c) (“If a drawee asserts a claim for breach of warranty under subsection (a) based on an unauthorized indorsement of the draft or an alteration of the draft, the warrantor may defend by proving that the indorsement is effective under Section 3-404 or 3-405 or the drawer is precluded under Section 3-406 or 4-406 from asserting against the drawee the unauthorized indorsement or alteration.”)

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.”)