Our customer had multiple forged checks drawn on their business checking account after they left their checkbook out at home and their housekeeper stole it. Our customer reported the forgeries to us within our required time frame for reporting fraudulent items. Can we assert under Article 4 of the Illinois Uniform Commercial Code (UCC) that our customer was negligent in safeguarding the checks and therefore responsible for the fraud?

Whether you may hold your customer responsible for the fraud due to their negligence depends on the specific facts and circumstances of the theft and your bank’s check payment and fraud detection procedures. We recommend consulting and reviewing the facts with bank counsel before refusing to reimburse your customer.

The Illinois UCC does not require banks to reimburse a customer for a forged check if the customer’s “failure to exercise ordinary care” substantially contributed to the forgery (provided that your bank exercised ordinary care and acted in good faith in paying the check). The Illinois UCC leaves the decision as to whether a customer’s conduct substantially contributed to a forgery to a court or jury to decide on a case-by-case basis. Additionally, the question of whether a bank exercised ordinary care depends on whether the bank observed “reasonable commercial standards” when paying the check, which is also a question of fact left to a court or jury to decide.

We note that the UCC Official Commentary provides examples of customer negligence, one of which involves a business that keeps blank checks and a rubber signature stamp in an unlocked desk drawer. While this situation is somewhat similar to the one you described, your customer did not leave a rubber signature stamp with the unattended checkbook — a potentially significant difference from the example provided in the UCC Official Commentary.

Accordingly, we cannot predict whether a court would determine that your customer or your bank was negligent in this scenario, and we recommend consulting with bank counsel before refusing to reimburse your customer.

For resources related to our guidance, please see:

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 5/3-406(b) (“Under subsection (a), if the person asserting the preclusion fails to exercise ordinary care in paying or taking the instrument and that failure substantially contributes to loss, the loss is allocated between the person precluded and the person asserting the preclusion according to the extent to which the failure of each to exercise ordinary care contributed to the loss.”)

Chicago Heights Currency Exchange, Inc. v. Par Steel Products & Service Co., 123 Ill.App.3d 1054, 1055 (1st Dist. 1984) (“The Uniform Commercial Code does not define the negligence that will support the section 3 — 406 defense and instructs that this issue is left strictly to the fact finder on a case-by-case basis.”)

Illinois UCC, 810 ILCS 5/3-103(a)(7) (“‘Ordinary care’ in the case of a person engaged in business means observance of reasonable commercial standards, prevailing in the area in which the person is located with respect to the business in which the person is engaged. In the case of a bank that takes an instrument for processing for collection or payment by automated means, reasonable commercial standards do not require the bank to examine the instrument if the failure to examine does not violate the bank’s prescribed procedures and the bank’s procedures do not vary unreasonably from general banking usage not disapproved by this Article or Article 4.”)

Wilder Binding Co. v. Oak Park Trust & Sav. Bank, 135 Ill.2d 121, 129–130 (Ill. 1990) (“[C]ourts have held that the question of whether a bank exercised ordinary care in paying a check presents a genuine issue of material fact which should be answered by the trier of fact . . . We agree with the rationale of these cases.”)

UCC § 3-406, Comment 3 (“The following cases illustrate the kind of conduct that can be the basis of a preclusion under Section 3-406(a):

Case #1. Employer signs checks drawn on Employer’s account by use of a rubber stamp of Employer’s signature. Employer keeps the rubber stamp along with Employer’s personalized blank check forms in an unlocked desk drawer. An unauthorized person fraudulently uses the check forms to write checks on Employer’s account. The checks are signed by use of the rubber stamp. If Employer demands that Employer’s account in the drawee bank be recredited because the forged check was not properly payable, the drawee bank may defend by asserting that Employer is precluded from asserting the forgery. The trier of fact could find that Employer failed to exercise ordinary care to safeguard the rubber stamp and the check forms and that the failure substantially contributed to the forgery of Employer’s signature by the unauthorized use of the rubber stamp.”)