## Facts

- Clean World Engineering, Ltd. maintained a business checking account at MidAmerica Bank, FSB, with only Rita Kapur and Victor Bhatia authorized to sign checks.
- Nicholas Fredich obtained employment at Clean World using a false identity (“Robert C. Landrum”) through an identity-theft hiring scheme.
- During his employment, Fredich obtained access to Clean World’s blank checks and could print checks using the company’s accounting software.
- Fredich forged Bhatia’s signature on numerous checks drawn on Clean World’s MidAmerica account and deposited the checks into an account at TCF Bank Illinois.
- MidAmerica paid the forged checks and charged them to Clean World’s account; the total forged amount was about $137,445.02.
- After discovery of the missing checks and forgeries, MidAmerica recovered $85,516.82 but refused to recredit the remaining loss.
- Clean World sued MidAmerica for charging its account for items not properly payable under Illinois UCC § 4-401.
- MidAmerica filed a third-party claim against TCF alleging breach of presentment warranties under UCC §§ 3-417 and 4-208 (Count I at issue on appeal).
- After a bench trial, judgment was entered for Clean World against MidAmerica; the trial court later granted TCF summary judgment on MidAmerica’s presentment-warranty claim.

## Issues

1. Whether a payor bank that paid forged checks may reduce or avoid liability to its customer under UCC § 4-401 by proving the customer’s lack of ordinary care substantially contributed to the unauthorized signatures under UCC §§ 3-406 and 4-406.
2. Whether a depositary/presenting bank breaches presentment warranties under UCC §§ 3-417 and 4-208 by presenting checks bearing forged drawer signatures, allowing the payor bank to shift the loss upstream.

## Decision

- The appellate court affirmed judgment for Clean World against MidAmerica under UCC § 4-401 for charging the account for checks that were not properly payable due to forged drawer signatures.
- The court held MidAmerica did not prove Clean World failed to exercise ordinary care in a manner that substantially contributed to the forgeries under UCC §§ 3-406 and 4-406.
- The appellate court affirmed summary judgment for TCF on MidAmerica’s presentment-warranty claim, holding presentment warranties did not make TCF responsible for forged drawer signatures in these circumstances.

## Legal Principles

- Under UCC § 4-401, a payor bank may charge a customer’s account only for items that are properly payable; checks bearing forged drawer signatures are not properly payable.
- Under UCC §§ 3-406 and 4-406, a customer may be precluded (in whole or part) from asserting a forgery against a payor bank only if the customer’s lack of ordinary care substantially contributed to the unauthorized signature, subject to the bank’s own ordinary-care obligations.
- Comparative-fault determinations under UCC §§ 3-406 and 4-406 are fact-dependent; evidence of imperfect internal controls does not automatically establish substantial contribution to the forgery.
- Presentment warranties under UCC §§ 3-417 and 4-208 generally do not include a warranty of the genuineness of the drawer’s signature in a way that shifts forged drawer-signature losses from the payor bank to the presenting bank.

## Conclusion

The court placed the forged-check loss on the payor bank because the items were not properly payable and the bank failed to prove the customer’s conduct substantially contributed to the forgeries; it also refused to shift the loss to the depositary bank because presentment warranties did not cover forged drawer signatures on these checks.


Clean World Eng’g, Ltd. v. MidAmerica Bank, FSB, 341 Ill. App. 3d 992, 793 N.E.2d 110 (Ill. App. Ct. 2003)