According to most history texts, checks were first used sometime in the early 1500s in the Netherlands, and likely, check fraud was not far behind. In 1762, the Court of the King’s Bench in England decided Price v. Neal, establishing the fundamental principles and rules upon which check fraud loss allocation between banks is based: A payor bank will bear the loss for a forged or counterfeit check because it is in the best position to analyze a drawee’s signature to determine whether it was authorized. More than two and a half centuries later, the Uniform Commercial Code (“UCC”) includes sections representing Price’s principles, as well as the policy that a depository bank will bear the loss for an alteration because it can best determine that a check was altered. Today, banks should be aware of the UCC’s distinctions between altered and counterfeit checks because, depending on the fraudulent item a bank is handling, it might bear the risk of loss.
Much more recently than 1762, the U.S. District Court for the Eastern District of Missouri highlighted the important distinctions between altered checks and counterfeit checks in Provident Savings Bank, F.S.B. v. Focus Bank, 548 F. Supp. 3d 862 (E.D. Mo. 2021). There, the court evaluated whether a depository bank (“Provident Bank”) or the payor bank (“Focus Bank”) was liable for a fraudulent check. A customer deposited into her account a fraudulent check worth $150,520.00. The check had been created by capturing an image of a genuine check and digitally altering the payee, the amount, the check number, and the date and subsequently printing the image on commercially available check stock.
Upon the customer’s deposit, Provident Bank presented the check to Focus Bank for payment, and Focus Bank paid the check. Shortly afterward, Focus Bank’s customer, the drawer of the check, notified Focus Bank that the check was unauthorized. Both banks disputed responsibility for the fraudulent check and the subsequent loss, and litigation resulted.
Focus Bank alleged that the above adjustment was incorrect because the check was an “altered and fictitious” fraudulent item which “contained a forged signature.” Provident Bank contended that Focus Bank paid the check and did not return it or send notice of dishonor until after the expiration of the UCC’s midnight deadline, under which a payor bank will be held strictly liable for failing to return a check by midnight of the banking day following the day the check was presented. In response, Focus Bank defended itself by pleading that Provident Bank breached its presentment warranties, as a breach of a presentment warranty is an exception to a payor bank’s compliance with the UCC’s deadline. Focus Bank argued that Provident Bank breached its presentment warranties in that it did not have knowledge that the signature of the purported drawer on the check was authorized and that the check had not been altered.
Ultimately, the court rejected Focus Bank’s position that the check was an alteration by noting the key differences between altered and counterfeit checks, as determined by prior established caselaw. It explained that an altered check must be an original check which has been physically altered, modified, or effaced in some manner. By contrast, a forged or counterfeit check is one that replaces the authorized check, including where those committing fraud use sophisticated copying technology to create copies of checks which are identical to original checks down to the last detail. The digitally altered check, although based upon and almost identical to a genuine, existing check, was counterfeit because the signature on the check was not authorized. The court concluded that a digitally altered copy of a check which is unauthorized, modified and printed on new check paper is not an alteration under the UCC.
Provident Savings Bank illustrates several important concepts. Firstly, the court distinguishes between a counterfeit check based on the image of an original check— copied, digitally altered and printed on a new check— and a genuine altered check. Secondly, the case emphasizes that, although in all practicality, the two types of fraudulent items might be nearly indistinguishable due to advanced fraud technologies, the check fraud loss allocation principles established by Price v. Neal in 1762 are applied under the UCC to situations arising today.
If a counterfeit fraudulent check becomes more and more difficult to detect, how can a payor bank protect itself from bearing the loss for a fraudulent item? Fortunately, while fraudsters have created technology used for aiding check fraud, payor banks have designed positive pay services which engage bank customers to detect fraud related to their accounts. Positive pay security measures prevent and eliminate check fraud by allowing customers to match or verify check numbers, account numbers, dates, dollar amounts, or to otherwise confirm whether a check was authorized. However, due to time and financial constraints, many bank customers forego the use of positive pay. Further, positive pay is unable to protect depository banks from loss due to alterations. As such, it is worthwhile that a bank familiarize itself with the UCC’s rules and the age-old check fraud loss concepts described above.