## Facts

- J. Walter Thompson U.S.A., Inc. (JWT) issued a $382,210.15 check drawn on its Bank of America (BoA) account, payable to Outdoor Life Network.
- The check was intercepted, and the payee line was altered to “Diversified Business Enterprises.”
- The altered check was deposited into a Diversified account at First BankAmericano (FBA) and sent through the collection system, including the Federal Reserve Bank of Atlanta (Atlanta Fed), to BoA for payment.
- BoA paid the check, debited JWT’s account, and remitted funds through the Federal Reserve channel to FBA.
- JWT discovered the alteration and requested that BoA recredit its account; BoA refused and instead sought reimbursement from FBA and the Atlanta Fed for breach of presentment warranties.
- Before this incident, JWT had experienced ten prior instances of fraud or attempted fraud on the same account, with aggregate losses under $9,000.
- JWT used BoA’s “Positive Pay” service, which matched check number and amount but did not match payee names, and JWT did not adopt additional measures such as closing the account or requiring payee-name verification.

## Issues

1. Whether JWT failed to exercise ordinary care in a manner that “substantially contributed” to the alteration, barring JWT’s claim under U.C.C. § 3-406(a).
2. Whether BoA lacked “good faith” in paying the altered check, thereby limiting or barring BoA’s presentment-warranty claims under U.C.C. § 4-208.
3. Whether BoA could obtain summary judgment on presentment-warranty claims against FBA and the Atlanta Fed before BoA reimbursed JWT.

## Decision

- The court affirmed summary judgment for JWT against BoA, requiring BoA to bear the loss as between it and its customer.
- The court affirmed summary judgment for BoA against FBA and the Atlanta Fed for breach of presentment warranties that the item had not been altered.
- The court held JWT’s conduct did not “substantially contribute” to the alteration under U.C.C. § 3-406(a).
- The court held BoA acted in good faith under the U.C.C. standard and thus was not barred from warranty recovery under U.C.C. § 4-208.
- The court held summary judgment for BoA on warranty liability was proper even though BoA had not yet reimbursed JWT.

## Legal Principles

- Under U.C.C. § 3-406(a), a drawer is precluded from asserting an alteration only if the drawer’s failure to exercise ordinary care substantially contributed to the alteration; prior low-level fraud and use of non-payee-matching controls, without a causal link to the alteration, are insufficient.
- Under U.C.C. § 4-208, presenting and collecting banks warrant to the payor bank that an item has not been altered; breach shifts the loss to the banks that presented the altered item unless a statutory defense applies.
- “Good faith” in this setting requires honesty in fact and observance of reasonable commercial standards of fair dealing; routine automated processing and reliance on presentment warranties can satisfy this standard absent evidence of dishonesty or item-specific red flags.
- A payor bank’s entitlement to indemnity on presentment-warranty claims may be adjudicated once its obligation to recredit the drawer is established; actual prior reimbursement to the drawer is not a prerequisite to determining warranty liability.

## Conclusion

The court allocated the loss from a payee-altered check by holding the payor bank liable to its customer, while permitting the payor bank—acting in good faith—to recover from the depositary and collecting banks for breach of the U.C.C. presentment warranty that the item was not altered.


J. Walter Thompson U.S.A., Inc. v. First BankAmericano, 518 F.3d 128 (2d Cir. 2008)