Topic: Article 3 – Uniform Commercial Code
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If a bank customer reports a fraudulent check within the timeframe required in the account agreement (for example, within thirty days), does the Uniform Commercial Code require the bank to reimburse the customer for the loss?
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Yes, the Illinois Uniform Commercial Code (UCC) generally requires a bank to reimburse a customer for a fraudulent check when the customer notifies the bank of the unauthorized payment in the timeframe provided in the account agreement. However, there may be cases where a customer’s negligence precludes reimbursement, as discussed in more detail below. The…
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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?
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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…
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Our customer mailed a check for approximately $7,000 to a payee who never received it. The check appears to have been stolen, altered, and copied onto the fraudster’s check stock. The payee’s name was changed, the amount of the check was increased by an extra digit, and the logo and border that appear on our customer’s check stock are not present. The check was deposited at a Texas branch of a nationwide bank and cleared. Today we returned the check to the depository bank, but the midnight deadline has passed. Do we have a claim for a breach of presentment warranty, and how should notice of such a claim be sent?
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Yes, we believe your bank may seek relief from the depository bank for breach of a presentment warranty since the check it presented was 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…
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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?
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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…
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A customer with a payable on death (POD) checking account has died, and we have not yet closed the account. The POD beneficiary is waiting to receive insurance checks for storm damage to the deceased customer’s home that occurred while she was still alive. The insurance company said that the checks will be made payable to the deceased customer. Can the POD beneficiary deposit these checks into the POD account once she receives them, or will she need to provide us with a small estate affidavit?
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No, we do not believe that the beneficiary — and now owner — of a POD account may deposit checks made payable to the prior owner, and we do not believe a small estate affidavit would protect you from potential liability. Under the Illinois Trust and Payable on Death Accounts Act, unless otherwise agreed, the…
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Our customer paid a vendor, but the vendor claims they never received payment. Although the check cleared our customer’s account, the endorsement on the back of the check does not appear to match the name of the payee (the vendor). We have an affidavit from the vendor and a copy of the front and back of the check. Is sending a “without entry” claim to the depository bank the best course of action? Do you have an example of a “without entry” claim that we can send to the depository bank? Should we reference the depository bank’s warranty of the item’s authorization under Regulation CC and ask that they honor the warranty by remitting a cashier’s check?
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We do not recommend sending a “without entry” claim under Section 229.34(d) of Regulation CC, which concerns returned check warranties. However, we believe your bank may have a claim against the depository bank for breach of its presentment warranties under the Illinois Uniform Commercial Code (UCC). We recommend sending notice of the breach of warranty…
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We have a collection company customer that uses its own endorsement stamp to deposit checks made out to companies on whose behalf it is pursuing collections. The customer claims that getting endorsements from their clients would be too onerous due to the high volume of checks they handle. Instead, they say they have “agency agreements” with all of their clients giving them the necessary authority to deposit these checks. However, they are unwilling to share copies of these agreements with us. Could we face any liability for allowing this practice to continue?
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Yes, we believe that allowing the practice described would put your bank at risk of liability for breach of its presentment warranties and conversion under the Illinois Uniform Commercial Code (UCC). Under the Illinois UCC, your bank could be liable to the payor bank for allowing your customer to deposit checks without a proper endorsement.…
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Our bank sells personal money orders. A teller types in the amount and date, and the purchaser fills in the payee line and signs as the remitter after they leave the bank. Is a personal money order considered valid if the purchaser never signs the face of the money order and it clears the bank unsigned?
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No, we do not believe that a personal money order that has not been signed by the drawer is valid. To begin, we note that under Illinois case law, the money order you described would likely be treated as an ordinary check, not a cashier’s check, as it is not structured as a bank obligation…
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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?
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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…