Banking Law Roundup


No. 98           Perspectives on Developments in the Law from The Sharp Law Firm, P.C.          September 2013

Suit Against Insurer Tossed After Joint Payee Forges Check

            A mortgagee who was entitled to a property insurance payment may not sue the insurer on the policy after the insurer’s payment check is fraudulently endorsed by a co-payee, a panel in the Appellate Court’s First District has held.

            In Parkway B & T. Co. v. State Farm Fire & Cas. Co., 2013 IL App (1st) 122387, plaintiff was entitled under the typical mortgage clause to the insurance payment on the damaged mortgaged property.  However, the owners engaged a contractor to repair the property and as a part of that contract authorized the contractor to receive the insurance payment.  Accordingly, the insurer made its checks payable jointly to the plaintiff, the owners and the repairman.  The repairman received and cashed the checks, forging the other signatures.

            The appellate panel ruled that the case was governed by the Uniform Commercial Code, 810 ILCS 5 (“UCC”).  Under the UCC, the court said, issuance of the checks suspended the insurer’s duty (§ 3-310(b)(1)) until they were paid or dishonored, and under §§ 3-602(a) and 3-110(d) a check is not considered “paid” when it is wrongfully endorsed by only one of the joint payees.  A “joint payee acting alone is not entitled to enforce the check,” the court said.  “If a payor bank pays a person not entitled to enforce the check, such as a joint payee who has stolen the check from his co-payee and forged the co-payee’s signature, the suspension of the underlying obligation continues because the check is not considered properly ‘paid’”. 

            Accordingly, the suspension of the insurer’s underlying obligation continued, the court said.  Plaintiff’s remedies were to sue the payor bank under § 3-420 of the UCC, or to sue the drawer for enforcement of a lost, destroyed, or stolen instrument, it said.  However, the mortgagee “cannot merely ignore the instrument and sue the drawer on the underlying contract.” 

Guaranty of July 27, 2007 Note Applies to No Other

            A guaranty of “that certain loan agreement . . . dated July 27, 2007” will be neither reformed nor interpreted to cover a loan agreement actually dated August 24, 2007, a panel in the Appellate Court’s First District has held.

            Citing the uncertainty which departing from the “unambiguous” terms of the writing would bring to the commercial credit world, the court in Ringgold Capital IV, LLC v. Finley, 2013 IL App (1st) 121702, left an assignee of the lender hoisted upon the petard created by the lender when it obtained a guarantor’s limited guaranty of an anticipated transaction but then failed to obtain a modification or new guaranty when the transaction did not close until nearly a month after originally scheduled.

            Noting that the statute of frauds provides that a promise to guaranty the debt of another must be in a signed writing and that a guarantor “is a favorite of the law,” the court said that it “accords the guarantor the benefit of any doubts that may arise from the language of the contract” and the “guarantor is only liable for that which he has guaranteed.”  “Guaranty agreements are strictly construed in favor of the guarantor, especially when the guaranty agreement is prepared by the creditor,” it said.

            Noting the guaranty at issue included a merger clause, the court took notice of the potential impact of disregarding such clauses in commercial cases generally.  “Were we to accept plaintiff’s position, the certainty necessary for the transaction of commercial lending would be thrown into complete chaos and guarantors would be quick to claim the plain reading of their guaranty should be ignored and parol evidence allowed to absolve them of liability,” it said.

            The court also refused to reform the contract because of the alleged mistake.  Because the lender had negotiated the guaranty in terms of a specific date and then had no communications with the guarantor after the transaction failed to close on the expected date, there in fact was no mutual agreement to which the written document could be reformed, it said.

Lawyers Caught in Scam Can’t Use Tort Law To Hold Bank Liable

            A bank customer seeking to use tort law to hold a bank liable for provisionally accepting what turned out to be a counterfeit check has struck out under Illinois’ “economic loss” doctrine. 

            In Dixon, Laukitis & Downing, P.C. v. Busey Bank, 2013 IL App (3d) 120832, the bank customer was a law firm that fell victim to the international check scammers who have been targeting lawyers in recent years.  See Sharp Thinking No. 54 (November 2011), No. 56 (January 2012).  Like the law firms discussed in those issues, plaintiff accepted and deposited what looked like a legitimate check and then paid out the bulk of its proceeds before the check had been finally settled.  When the putative issuing bank returned the document as bogus, the provisional credit was reversed and the firm was left with a substantial debit to its trust account.  It sought to use both Illinois’ enactment of the Uniform Commercial Code (810 ILCS 5) (“UCC”) and common-law negligence principles to hold the bank liable for accepting the check without warning that it might dishonor the deposit later.  The Appellate Court rejected both of the firm’s arguments. 

            Citing 810 ILCS 5/4-103(c), the court held that action or non-action approved by Article 4 of the UCC was the exercise of ordinary care.  “UCC compliance is nonnegligent as a matter of law,” it said.  Because UCC §§ 4-201 and 4-202 create the system for provisional acceptance and place the ultimate risk of eventual charge-back upon the depositor, the court said the firm’s arguments to the contrary were without merit, as UCC provisions “displace common law negligence principles.” 

            Moreover, it said, under the common law a collecting bank does not owe a duty to its customer to inspect a check later determined to be counterfeit, nor any duty to remind customers that they bear the risk of loss until the check is finally settled.

            Furthermore, the court said, the firm’s attempt to use tort theory ran afoul of the “economic loss” rule of Moorman Mfg. Co. v. National Tank Co., 91 Ill.2d 69 (1982).  Distinguishing a federal case that suggested an implied duty of care implicit in a contract “may support” an exception to Moorman, the court said the account agreement and the UCC set forth the bank’s duties and defined ordinary care, and thus there was “no extracontractual relationship” to support an exception to the Moorman doctrine.

                                                                                                       – John T. Hundley,, 618-242-0246