We learned from a webinar on check fraud liability that a customer generally is liable only for checks endorsed with a stamp (also known as a facsimile) signature if the customer authorized their bank to accept such signatures and was negligent in protecting their signature stamp. However, we were advised that large banks are updating their deposit agreements to provide that if a customer creates a signature stamp — even if they don’t intend to use it for checks — they may be liable for any checks endorsed with the stamp. Does Illinois law allow such account terms? What risks should we consider before adding this language to our deposit agreements?

Yes, we believe Illinois law permits account terms limiting a bank’s liability for checks endorsed with a stamp or facsimile signature — provided the customer agrees to the terms. Based on the case law we reviewed, we believe this is a common and accepted practice, in addition to being authorized under the Illinois Uniform Commercial Code (Illinois UCC).

Under the Illinois UCC, a person generally is not liable on an instrument unless they signed it, and a signature may be made “by means of a device or machine.” Further, a check is “properly payable if it is authorized by the customer and is in accordance with any agreement between the customer and bank.” Since forged facsimile signatures are easy to counterfeit, making fraudulent facsimile signatures very difficult to detect, a bank may choose to enter into an agreement with its customer that shifts the loss for payment of a check bearing a forged facsimile signature back to the customer.

In 2000, the U.S. District Court for the Northern District of Illinois found that a bank was not liable to its customer for paying counterfeit facsimile checks, since the parties had entered into a facsimile signature agreement providing that the bank was “authorized and directed to honor checks . . . bearing or purporting to bear the [customer’s] facsimile signature(s) . . . regardless of by whom or what means the facsimile signature(s) may have been affixed to such checks.” The only caveat was that the signatures must resemble the facsimile specimens filed with the bank. In that case, a forensic document examiner found that the signatures on the counterfeit checks were “close duplicates” that could not “reasonably be distinguished . . . by lay examination.”

The court noted that two prior courts had reached similar conclusions. In 1977, the Fifth Circuit Court of Appeals found that “there was no cause of action for recovery of funds paid on forged checks where a resolution was adopted authorizing the drawee’s payment of checks bearing signatures resembling the machine-endorsed facsimile signature,” and in 1996, the Louisiana Appellate Court held that a “bank was protected by the facsimile signature resolution, and not liable . . . as long as the signatures resembled the facsimile specimens submitted” by the customer.

Additionally, the UCC Official Comments for Section 3-404 (addressing imposters and fictitious payees) describes a hypothetical case in which a corporation’s checks are signed by a check writing machine, and a thief obtains access to the machine and issues checks to a fictitious payee. The commentary concludes that the drawee bank would not be liable for paying the checks and charging the corporation’s account if the bank and the corporation had entered into an agreement allowing the bank to debit the corporation’s account “for payment of checks produced by the check-writing machine whether or not authorized.”

Consequently, we believe you may enter into a deposit agreement or separate facsimile signature agreement that shifts liability to your customer for checks endorsed with a facsimile signature, regardless of whether the signature was authorized and whether your customer was negligent in protecting their signature stamp or other facsimile signature device. Included in the resources below are three sample deposit agreements we found online that shift liability to the customer for checks with facsimile endorsements.

Regarding risks, you should be aware that while the UCC allows you and your customers to vary certain UCC provisions by agreement, “the parties to the agreement cannot disclaim a bank’s responsibility for its lack of good faith or failure to exercise ordinary care.” As a result, we recommend consulting with your bank counsel regarding any liability shifting provisions you intend to add to your deposit agreement to ensure they are not so one-sided as to disclaim your bank’s responsibility for a lack of good faith or failure to exercise ordinary care.

For resources related to our guidance, please see:

Illinois UCC, 810 ILCS 5/3-401(a) (“A person is not liable on an instrument unless (i) the person signed the instrument, or (ii) the person is represented by an agent or representative who signed the instrument and the signature is binding on the represented person under Section 3-402.”)

Illinois UCC, 810 ILCS 5/3-401(b) (“A signature may be made (i) manually or by means of a device or machine, and (ii) by the use of any name, including any trade or assumed name, or by a word, mark, or symbol executed or adopted by a person with present intention to authenticate a writing.”)

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.”)

Spear Insurance Co. v. Bank of America, N.A., No. 98 C 1303, 2000 U.S. Dist. LEXIS 961, at *13-14 (N.D. Ill. Jan. 26, 2000) (“An item is properly payable if it is authorized by the customer and is in accordance with any agreement between the customer and bank. In other words, an item is properly paid by the bank if it conforms with the terms of any contract between the bank and its customer regulating when and how an item will be properly payable. In the instant case, there was such an agreement between the Bank and AWL-HC, namely, a facsimile signature agreement. The language of the AWL-HC Resolution is clear and unambiguous: It provides that the Bank is ‘authorized and directed to honor checks . . . bearing or purporting to bear the facsimile signature(s) . . . regardless of by whom or by what means the facsimile signature(s) may have been affixed to such checks, drafts or other orders, if such facsimile signature(s) resemble(s) the facsimile specimens duly filed with the Bank. . . . The only requirement imposed on the Bank by the contract between the parties is that before a check may be honored on a specific account, the signature on the instrument must ‘resemble’ those specimens provided by AWL on the signature card.”)

Spear Insurance Co. v. Bank of America, N.A., No. 98 C 1303, 2000 U.S. Dist. LEXIS 961, at *17 (N.D. Ill. Jan. 26, 2000) (“In the instant case, it is undisputed that the facsimile signature on the counterfeit checks closely resembled the facsimile signature of Woodward on the signature specimen for Account No. 49-21127. . . . In fact, Jack R. Calvert, a forensic document examiner retained by Bank of America as an expert in this matter, compared the signatures on the counterfeit checks to the signatures on the card and concluded that they are ‘close duplicate[s]’ and ‘cannot reasonably be distinguished . . . by lay examination.’”)

Spear Insurance Co. v. Bank of America, N.A., No. 98 C 1303, 2000 U.S. Dist. LEXIS 961, at *14-16 (N.D. Ill. Jan. 26, 2000) (“[F]acsimile signature agreements similar to the one in the instant case have been judged to comport with the provisions of § 4-103. At least one older case appears to be on all fours with this one: In Perini Corp. v. First Nat'l Bank, 553 F.2d 398 (5th Cir. 1977), the court upheld a facsimile signature agreement holding that there was no cause of action for recovery of funds paid on forged checks where a resolution was adopted authorizing the drawee's payment of checks bearing signatures resembling the machine-endorsed facsimile signature. Likewise, in Jefferson Parish School Bd. v. First Commerce Corp., 669 So. 2d 1298 (La. Ct. App. 1996), the court held that the bank was protected by the facsimile signature resolution, and not liable. Pursuant to the resolution in that case, the court held that the bank was not liable for payment of counterfeit checks as long as the signatures resembled the facsimile specimens submitted by Jefferson Parish School Board.”)

Illinois UCC, 810 ILCS 5/4-404 (“Impostors; fictitious payees . . .”)

UCC Official Comments, Section 3-404, Comment 2, Case #4 (“Checks of Corporation are signed by a check-writing machine. Names of payees of checks produced by the machine are determined by information entered into the computer that operates the machine. Thief, a person who is not an employee or other agent of Corporation, obtains access to the computer and causes the check-writing machine to produce a check payable to Supplier Co., a non-existent company. . . . Although the check was issued without authority given by Corporation, the drawee bank is entitled to pay the check and charge Corporation's account if there was an agreement with Corporation allowing the bank to debit Corporation's account for payment of checks produced by the check-writing machine whether or not authorized.”)

Chase, Deposit Account Agreement and Privacy Notice, page 7 (“An endorsement is a signature, stamp or other mark made on a check to transfer the check to another person. If a check you deposited doesn’t have your endorsement, we may endorse it for you or treat the check as if we had endorsed it. Either way, the effect will be as if you had endorsed the check. Also, any deposited check that appears to contain your stamped or facsimile endorsement will be treated as if you had actually endorsed it. We are not bound by any conditional or restrictive endorsements on a check you cash or deposit, or by any endorsement ‘without recourse.’”)

U.S. Bank, Your Deposit Account Agreement, page 13 (“You agree that we will not be responsible for: . . . results from a forgery, counterfeit or alteration so clever that a reasonable person cannot detect it (for example, unauthorized checks made with your facsimile or other mechanical signature device or that look to an average person as if they contain an authorized signature) . . .”)

Wells Fargo, Deposit Account Agreement, page 23 (“Use of a facsimile or mechanical signature — If you use any device or machine to provide a faxed, electronic, computer generated or other mechanical signature (including a stamp on a check) it will be treated as if you had actually signed it.”)

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.”)