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Q) What are the differences between an altered check and forgery, and which financial institution is liable for a fraudulent item?
A) Let's start by first distinguishing the difference between an altered check and a forged item.
Altered Check: UCC 3-407 defines alteration as:
- An unauthorized change in an instrument that purports to modify in any respect the obligation of a party, or
- An unauthorized addition of words or numbers or other change to an incomplete instrument related to the obligation of a party.
Forged Check: generally means a check where the Signature of the Drawer/Maker of the Check is altered or signed by another person as the drawer with the intent to defraud. Forgery can also include a Forged Indorsement (also spelled endorsement) when the indorsement, the signature on the back of the item to negotiate that item, is altered or signed by another person as the payee of that item.
Liability for a fraudulent item in the check world can usually be determined by reviewing the Presentment Warranties found in the Uniform Commercial Code (UCC).
The Presentment Warranties (UCC 3-417 & 4-208) say, that the warrantor is warranting:
- The draft/item was negotiated by someone entitled to enforce the draft/item
- The draft/item has not been altered; and
- There is no knowledge that the signature of the purported drawer of the item/draft is unauthorized
So which financial institution is liable? While the following identifies general liability principles, it is important to note that liability in any particular scenario may depend on specific facts and circumstances.
Generally speaking, when a check is altered, the payee name or the amount of the check is changed to benefit the fraudster. And the Bank of First Deposit (BOFD) warrants in the Presentment Warranty, to the Paying Bank, that the item is not altered. As a general matter, this makes the BOFD liable for altered items.
What about in the case of a forged item claim?
Forged Indorsement
The BOFD (and any subsequent collecting bank) in the UCC Presentment/TransferWarranty that any item that they present is being negotiated by someone entitled to enforce that item. A forged indorsement is not effective and, as a result, a bank that transfers or present a check with a forged indorsement is generally liable for the item. This incentivizes the BOFD to ensure the person who is negotiating that item is entitled to enforce it, and the indorsement is by that person.
Forged Drawer’s Signature
However, the BOFD would not be in a position to determine if the signature on an item is valid, or if it had been forged. While the BOFD warrants that they have no knowledge of an unauthorized signature, the Paying Bank would be the financial institution that would be in the best position to identify if the signature belongs to the person authorized to issue checks for that account. So the liability for a check with a forged drawer’s signature would generally fall to the Paying Bank.
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