Bieging Shapiro
& Burrus LLP

4582 S Ulster St Pkwy
Suite 1650
Denver, CO 80237

phone: 720.488.0220
fax: 720.488.7711

Map/Directions

A Primer on  Check Forgeries
BY: John Burrus, Esq.

Provisions for allocating loss resulting from check forgeries are spread throughout the Uniform Commercial Code, and their application to any particular situation can involve a morass of rights and duties among the drawer, the drawee bank, the depositary bank, and the payee. However, the following principles will typically apply to most forgeries.

Unauthorized Signature of Drawer.

• If a drawee bank pays an item bearing the forged signature of the drawer, the ultimate loss will usually fall on the drawee bank. Because the item is not "properly payable" (UCC § 4-401), it may not be charged to the customer's account, and if it has been charged, it must be recredited.

• The drawee bank generally has only three defenses to a claim by a customer that its account should be recredited:

• If the customer was negligent in permitting the forgery to occur, then the loss may ultimately rest with the customer. UCC § 3-406(a). Typical customer negligence would include permitting an unauthorized person access to a facsimile signature device or permitting one person to be both an authorized sole signatory and the only company representative involved in reviewing and reconciling company bank statements. If the bank was also negligent, it will bear a portion of the loss. UCC § 3-406(b)

• A customer must notify its bank of unauthorized payments "promptly" after receipt of its statement and discovery of the facts. UCC § 4-406(c). If it does not do so, it may not recover to the extent of any loss the delay caused the bank. UCC § 4-406(d)(1). Where a series of forgeries is involved, the customer's failure to use due care in examining its statement and notifying the bank of unauthorized items can be a defense if notification would have prevented payment on subsequent forgeries. UCC § 4-406(d)(2). However, in either instance, if the bank pays the item in bad faith or is itself negligent in paying the item, that fact may leave all or some portion of the loss with the bank. UCC § 4-406(e).

• If the customer does not report an unauthorized signature within one year after receipt of its monthly statement, it is precluded from raising the claim, whether or not negligence was involved. UCC § 4-406(f). Some courts have permitted the deposit agreement to shorten this outside limit for reporting unauthorized payments to as little as 14 days and to have the reporting period commence to run on the date of mailing, rather than the date of receipt of the statement by the customer. The only requirement for this type of contractual reduction of the one year reporting period is that the shorter period be reasonable and be clearly disclosed to the customer.

• If the item is paid, the drawee bank generally has no right to charge the item against the depositary bank or other banks in the collection process or to recover against the payee. UCC § 3-418. An exception, which rarely occurs, is that the drawee bank may have a right of recovery against one who did not take the instrument in good faith and for value or who did not in good faith change his position in reliance on payment of the item. UCC § 3-418(c). In addition, in the unlikely event a bank in the collection chain knew of the forgery, the drawee bank would have a claim. UCC § 4-208. The converse of these principles is that a depositary bank or other bank in the collection chain should not ordinarily accept a charge-back from a drawee bank that has paid on a forged drawer's signature.

• If the forgery is caught in time and the item is not paid, neither the payee nor the depositary bank will have any claim against the drawee bank. UCC § 3-408.

• The drawee bank will, of course, have claims against the forger. UCC § 3-407.

Forged Indorsements:

• The immediate recipient of an item bearing a forged indorsement will usually bear the ultimate loss. Often this will be a bank that cashes the item or accepts it for deposit. Although the depositary bank would have a right of charge-back against its customer, if the customer is the one who forged the indorsement, it is unlikely that that right will have much value.

• The loss is placed on the initial recipient by means of the presentment warranties contained in UCC §§ 3-417 and 4-208. These warranties exist whether or not a "Prior

Endorsements Guaranteed" statement appears on the item and may not be disclaimed. UCC § 4-207(d). In a typical situation the intended payee will notify the drawer that payment has not been received. The drawer will then notify its bank that the payee's signature was forged and therefore the item should not have been paid. The drawee will credit its customer's account and then will have a right to charge back the item to any bank in the collection chain and ultimately to the depositary bank.

• The depositary bank usually has only one effective defense. If the drawee bank has not given notice of its claim for breach of warranty within 30 days after it has reason to know of the breach, then its claim "is discharged to the extent of any loss caused by the delay in giving notice of the claim." UCC § 4-207(d).

• The negligence of the drawee in paying the item is not a defense to a breach of warranty claim. UCC § 4-208(b).
   
• These same principles apply with respect to missing indorsements.
  
   
• Again, the depositary bank will have a right of recovery against the forger. UCC § 3-407.

These rules do not exhaust all possibilities for recovery or defense, but will be controlling in most forgery situations a bank is likely to encounter.

Contact John E. Burrus at jeb@bsblaywers.com

Back to Banker's Desk Reference