If any of these warranties is false, the payor bank is legally entitled to recover from the depositary bank, notwithstanding the fact that the “midnight deadline” has passed.7 The first two presentment warranties rarely provide a basis for the payor bank to recover. The first warranty (entitlement to enforce) requires an unauthorized or missing endorsement, which is uncommon on fraudulent checks. The second warranty (no knowledge of unauthorized drawer signature) requires proof that the depositary bank had actual knowledge of the forgery. This standard is difficult to satisfy, as there is rarely evidence that the depositary bank actually knew of the fraud. As a result, the third warranty (no alteration) is the critical one in most cases. Altered, Forged and Counterfeit Checks The third presentment warranty (no alteration) generally provides the best chance of recovery for the payor bank. “Altered” checks have a specific meaning under the UCC, and “altered” checks differ from “forged” and “counterfeit” checks. Thus, when a payor bank seeks to collect from a depositary bank for a fraudulent check, the payor bank normally will succeed only if it convinces the depositary bank (or a court) that the check was “altered” and not “forged” or “counterfeit.” The determination of whether the check was “altered,” “forged” or “counterfeit” likely will determine which bank takes the loss: • “Alteration” means (1) an unauthorized change in a check that purports to modify in any respect the obligation of a party, or (2) an unauthorized addition of words or numbers or other change to an incomplete check relating to the obligation of a party.8 Old-fashioned check-washing may lead to any of the following “alterations” to a check: (i) changing the payee name, (ii) an increase or decrease in the amount payable and/or (iii) completing an incomplete check other than as authorized. If the check is “altered,” the payor bank should recover from the depositary bank.9 • A “forged” check includes an unauthorized signature that was made without actual, implied or apparent authority.10 An example of “forgery” that leads to this result is a stolen checkbook, in which the thief uses the blank checks to forge the customer’s signature. If the check is “forged,” the payor bank likely will not recover from the depositary bank.11 • A “counterfeit” check is a wholly fabricated check rather than a modification to an existing check. For example, a fraudster may use a bank’s routing number and a customer’s account number to create (or order) new checks that resemble the customer’s actual checks. Counterfeit checks are generally treated the same as forged checks. Thus, if the check is “counterfeit,” the payor bank likely will not recover from the depositary bank. At the time the UCC was adopted, these outcomes reflected an allocation of risk that matched the technology of the era. A payor bank was believed to be best positioned to detect forgeries and counterfeits by comparing checks against its customers’ check stock and signature cards. A depositary bank, on the other hand, was believed to be in the best position to detect check-washing, erasures and other alterations. These assumptions, and the resulting outcomes, have not kept pace with modern technology. In the modern era, checks can be imaged, electronically manipulated and remotely deposited into accounts established online. The checks are then processed through a highly automated settlement system involving little to no review of physical checks by actual people. In this environment, the rationale for the outcomes dictated by the UCC can be difficult to discern, and the distinctions between “altered,” “forged” and “counterfeit” become exceedingly difficult to draw in practice.12 The Board of Governors’ Modernization In 2018, the Federal Reserve Board of Governors amended Regulation CC and adopted a rebuttable presumption of 22 NEBRASKA BANKER
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