26 NOVEMBER / DECEMBER 2023 Brett J. Ashton Partner Krieg DeVault LLP BAshton@KDLegal.com Krieg DeVault LLP is a Diamond Associate Member of the Indiana Bankers Association. Counterfeit Checks: Who is Liable? COMPLIANCE CONNECTION Question: My bank has seen a significant increase in check fraud lately, and more often the bank of first deposit is slow, or even refusing to reimburse us for fraudulent checks they accept. If the bank of first deposit doesn’t reimburse us for the loss, do we have to reimburse the customer? Answer: The nature of the fraud will dictate your rights under the Indiana Uniform Commercial Code (IUCC) to receive reimbursement from the bank of first deposit (BOFD) for a fraudulent check. Counterfeit checks are now the most common form of check fraud, in part due to the ease with which fraudsters are able to generate checks based on real account information from checks deposited in the mail. The typical fact pattern in a counterfeit check fraud involves the interception of the customer’s check payable to Payee A, and the subsequent creation of an entirely new counterfeit check that contains the key account information from the original check, payable to the fraudster. Indiana law provides a bank may charge against the account of a customer an item that is properly payable from that account. An item is properly payable if it is authorized by the customer and is in accordance with any agreement between the customer and the bank.1 By negative implication, the IUCC denies the drawee bank the right to charge amounts not properly payable.2 Because a counterfeit check wasn’t created by the customer, it cannot be considered properly payable. That means the loss generally must be borne by the The information herein is provided for general education purposes and is not intended to be legal advice. Please consult legal counsel for specific guidance as to how this information applies to your institution’s circumstances or situation. 1 Ind. Code 26-1-4-401(a) 2 See Ambassador Financial Services, Inc. v. Indiana Nat. Bank, 1992, 605 N.E.2d 746 BOFD for breaching the presentment warranties provided made to the drawee bank. Specifically, Ind. Code § 26-1-4-208 provides, “If an unaccepted draft is presented to the drawee for payment or acceptance and the drawee pays or accepts the draft, (i) the person obtaining payment or acceptance, at the time of presentment, and (ii) a previous transferor of the draft, at the time of transfer, warrant to the drawee that pays or accepts the draft in good faith that: (1) the warrantor is, or was, at the time the warrantor transferred the draft, a person entitled to enforce the draft or authorized to obtain payment or acceptance of the draft on behalf of a person entitled to enforce the draft; (2) the draft has not been altered; (3) the warrantor has no knowledge that the signature of the purported drawer of the draft is unauthorized; and (4) with respect to a remotely created consumer item, the person on whose account the item is drawn authorized the issuance of the item in the amount for which the item is drawn.” The drawee bank making payment may recover from a warrantor (the BOFD), “damages for breach of warranty equal to the amount paid by the drawee less the amount the drawee received or is entitled to receive from the drawer because of the payment. In addition, the drawee bank is entitled to compensation for expenses and loss of interest resulting from the breach.” HB
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