Check Fraud: Who Pays?

More and more checking account owners are using their debit cards or online bill paying methods. With these rising trends, checkbooks are left unaccounted for, for periods of time. Check fraud can occur in one of many ways, such as (1) the victim writes a check but it is intercepted by a third party who fraudulently alters the check, (2) a third party creates an entirely new fraudulent check from the information on the real check, or (3) checks are stolen from the victim and the third party writes fraudulent checks, forging the victim's signature. For purposes of this article, the victim is a customer of the bank that charges the payor's (the victim's) account. An important defense Safeguarding your checkbook is an important defense if the financial institution insists upon you, as the victim, being responsible for the fraudulent charges. The Michigan Uniform Commercial Code makes the bank strictly liable to make the victim whole but an exception typically applies. If the victim's failure to exercise ordinary care "substantially contributes to an alteration of an instrument or to the making of a forged signature on an instrument," and the bank paid the instrument in good faith, the victim will have difficulty succeeding on a claim against the bank. If the bank also "substantially contributes to the loss," the loss is apportioned between the bank and the victim. Each party has the burden to show that the other party failed in its exercise of ordinary care.
Hazard of keeping your checkbook in plain sight
For example, if you have caregivers, other domestic help, or contract workers that enter your home to perform various duties, and your checkbook is kept in plain sight or in an unlocked drawer or cabinet, the bank will generally assert that you failed to exercise ordinary care in the safeguarding of your checkbook and therefore, the bank will argue that it is not liable to restore your account balance the amount of the fraud. The victim is then left with the options to sue the bank or attempt to arrive at a settlement amount that will allow the victim to recover a portion of the fraudulent charges, including overdraft fees. Exercising ordinary care Significant sums have been stolen from victims in a short period of time because they did not properly safeguard their checkbooks. The law provides that a bank is strictly liable for paying on instruments that are not properly payable, i.e. forged, but the exception of the victim not exercising ordinary care is typically applicable and therefore, the victim can be responsible to restore all or a portion of the fraudulent amount to their checking account or risk collection proceedings and possible litigation. Dan A. Penning