## Facts

- Foster Bank’s customer deposited a $133,026 check into her Foster account; the check was drawn on Wachovia and paid from the drawer’s Wachovia customer account.
- The deposited item listed the depositor as payee, but the drawer’s intended payee was a different entity; the depositor substituted her name and withdrew the funds before discovery, then disappeared.
- Wachovia paid the item on presentment by Foster and later destroyed the original paper check under routine truncation practices, retaining only an electronic image.
- From the image alone, it could not be determined whether the item was the original check with a payee alteration or a wholly forged substitute check.
- The drawer sued Wachovia to recover the loss; that action was stayed while Wachovia sought a federal declaratory judgment that Foster must indemnify Wachovia under the UCC presentment warranty.

## Issues

1. Whether a declaratory judgment fixing a depositary bank’s contingent indemnity obligation was final and appealable even though related litigation against the drawee bank remained pending.
2. Whether the depositary bank breached the UCC presentment warranty that the item “has not been altered” when the payee designation was changed, despite uncertainty whether the item was altered or forged.
3. Whether the drawee bank’s routine destruction of the original check barred summary judgment by preventing the depositary bank from contesting alteration or asserting defenses.

## Decision

- The Seventh Circuit held it had appellate jurisdiction because the declaratory judgment fully resolved the indemnity dispute between the banks, even though liability to the drawer was contingent on separate litigation.
- The court affirmed summary judgment for Wachovia, holding Foster liable to indemnify Wachovia under the UCC presentment warranty.
- Wachovia’s routine destruction of the original check did not defeat its warranty claim or create a dispositive evidentiary bar.

## Legal Principles

- Under UCC §§ 3-417(a) and 4-208(a), a bank presenting an item for payment warrants to the drawee that the item has not been altered.
- A declaratory judgment that conclusively determines the parties’ rights and obligations, even if contingent on the outcome of another case, can constitute a final, appealable decision.
- In allocating losses from check fraud within the collection system, the UCC generally places responsibility on the depositary/presenting bank that dealt with the fraudster, absent a specific defense.
- A drawee’s lawful, routine check-truncation and destruction of the original instrument does not, by itself, preclude enforcement of presentment warranties.

## Conclusion

The Seventh Circuit affirmed a declaratory judgment requiring the depositary bank to indemnify the drawee bank under the UCC presentment warranty for a fraudulent payee-substituted check, and held the judgment was final for appeal despite pending related litigation.


Wachovia Bank, N.A. v. Foster Bancshares, Inc., 457 F.3d 619 (7th Cir. 2006)