Presentment Warranties Under the UCC Do Not Apply to Counterfeit Checks

By Edward J. Sholinsky

Recently, a Pennsylvania trial court recognized the distinction between counterfeit checks and altered checks. In doing so, the court followed the lead of other states that have recognized that the depository bank does not violate the Uniform Commercial Code’s presentment warranties when it accepts in good faith a counterfeit check.  The decision reinforces that drawee banks must be aware of their customers’ signatures or risk being stuck with the loss stemming from a counterfeit check.

The presentment warranties in the Pennsylvania Commercial Code provide in pertinent part that, when a depository bank presents a draft for payment, it warrants that “the draft has not been altered.”  The Code defines an alteration as:  1) an unauthorized change in an instrument that purports to modify in any respect the obligation of a party, or 2) an unauthorized addition of words or numbers or other change to an incomplete instrument relating to the obligation of a party.  Indeed, courts throughout the country have held that an “alteration” is a change to, or on, a preexisting document, not the creation of a new check.   So, presentment warranties only apply when a depository bank presents a genuine instrument that has been changed, and not a completely counterfeit instrument.  Put another way, a counterfeit document is not an “alteration” of an instrument for the purposes of the Code.

The Court of Common Pleas of Indiana County adopted this approach in S&T Bank v. Regions Bank (ST Bank v. Regions Bank No 10945 CD 2012).  In S&T, a thief intercepted a check written by an S&T customer.  The thief then created a new check using the same amount, account number, and serial number, along with a scanned signature of S&T’s customer.  The recipient of the counterfeit check deposited it into her account at Regions.  Regions forwarded the check for payment to S&T through the Federal Reserve Bank System.  S&T accepted the check and deducted the check amount from its customer’s account.  About a week later, the customer notified S&T that the check was counterfeit.

The Court held that the presentment warranties did not apply, stating that “the distinction between an altered check and a counterfeit check is significant, since the presentment warranties apply to altered checks but not counterfeit checks.”  The Court reasoned a counterfeit check is not an “altered” check under the Code, and, therefore, presentment warranties do not apply when a thief creates a new, counterfeit check.  As a result, the Court sustained Regions’s preliminary objections and dismissed with prejudice the presentment warranty claims against the bank.

S&T makes clear that, under the Pennsylvania Commercial Code, the presentment warranties under Articles III and IV of the Code do not apply to counterfeit checks.  S&T is consistent with the national body of case law on the distinction between counterfeit checks, on one hand, and altered checks, on the other, and the resulting allocation of liability.  For banks in Pennsylvania it means that drawee banks assume the risk of making a payment on a counterfeit check.  The Code puts the onus on drawee banks to know their customers’ signatures and decisions on presentment warranties reinforce that burden.

Edward J. Sholinsky of Schnader represented Regions Bank in the above action. The trial court also sustained Regions’s preliminary objections to S&T’s transfer warranty claims on the ground that Regions did not transfer the checks to S&T.

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