Illinois court says check maker is still liable to holder in due course on check after payee electronically cashes it

A recent decision from the Illinois First District Appellate Court highlights the dangers posed by the technological advances in mobile banking. In West & Lake Check Cashers, LLC v. Propane Pete, LLC, 2023 IL App (2d) 220291 (May 16, 2023) the maker of a check was liable to a currency exchange for the amount of a dishonored check after the payee had cashed the check electronically.

The defendant, or maker, paid the payee by a paper check. The payee electronically deposited the check into his bank account, but kept the paper copy of the check. He later went to the plaintiff, a currency exchange, and cashed the check. When the currency exchange’s bank sought payment from the maker ‘s bank, the maker’s bank returned the check because it had already paid the check to the payee’s bank when the check was electronically deposited. The currency exchanged sued the maker for the amount of the check plus fees and costs and won.

Three issues were raised on appeal. The first was whether the currency exchange was a holder in due course under the Uniform Commercial Code (“UCC”)? If it was, the next question was the maker ‘s obligation to pay the check discharged under the UCC? Third, if the currency exchange was a holder in due course not subject to any discharge, should the court have ordered the maker to pay fees and costs?

As to the first issue—whether the currency exchange was a holder in due course—the Court looked to Section 3-302(a) of the UCC which defines a holder in due course as someone who takes an instrument that appears to be facially valid, for value, in good faith, without notice that it is overdue, dishonored, or subject to an uncured default with respect to payment, contains no unauthorized signature, has not been altered, and is not subject to certain other defenses. The maker contended the currency exchange was not a holder in due course because it did not take for “value” and there was no evidence presented of “good faith”. But the appellate court stated that this argument impermissibly shifted the burden of proof to the holder of the instrument. The UCC provides that when the signatures on a check are admitted or established, production of the check entitles a holder to recover unless the defendant establishes a defense. In other words, the UCC incorporates a burden-shifting principle which makes a “holder” the functional equivalent of a “holder in due course” until a defense has been shown to exist.

The currency exchange was undeniably a holder as it was in possession of the hard copy of the check, it was thus a holder in due course, unless the maker could show it was not. The maker did not meet that burden because it presented no evidence that the check bore some irregularity or anything else to show that the currency exchange was not a holder in due course.

On the second issue—the maker’s claim that it established defenses under the UCC to the currency exchange’s claim that it was a holder in due course — the Court also found against the maker. Contrary to the maker’s contention, the drawer of a check is not discharged once the check is accepted by a bank. Discharge of the obligation of a party is not effective against a person acquiring rights of a holder in due course of the check without notice of the discharge. The court drew a distinction between “real defenses” which a holder in due course is subject to under section 3-305(a)(1) of the UCC, and “personal defenses” which do not apply to a holder in due course. Prior payment is a personal defense that may not be asserted against a holder in due course. As such, it affirmed the trial court’s ruling that the maker must pay the currency exchange the amount of the check.

The Court also determined that the Check 21 Act (“Act”) (12 U.S.C. § 5003(b), did not alter its conclusion. Under the Act a substitute check is deemed the legal equivalent of an original check. But it is also subject to the UCC as if such substitute check were the original check, to the extent such provision of law is not inconsistent with the Act. The Court acknowledged that a substitute check is the equivalent of an original paper check, but the UCC is not inconsistent with the Act. Relying on a federal court decision, Speedy Check Cashers, Inc. v. United States Postal Service, 286 F. Supp. 3d 934 (N.D. Ill. 2017), the Court found although the maker is protected by the substitute check warranties of the Act, the transferee of a non-substitute check, like the currency exchange here, is not. The holder in due course protections under the UCC are not supplanted by the Act.

However, on the third issue, whether the court should have awarded plaintiff fees and court costs, the Court sided with the maker. Fees and costs may be awarded where the defendant has breached one of the warranties under section 3-416 of the Code. The maker argued that it made no warranties to the currency exchange. The currency exchange argued the warranties the maker made to the payee extended to it. the Court held that the maker was not a transferor, the payee was. And under the UCC the person giving the warranties is the transferor.

To conclude that the maker was the warrantor is “absurd and flatly contrary to the text.” Not only was not a transferor of the check, but the maker could not possibly make any of the warranties listed in section 3-416 of the UCC as it had no knowledge with which to make them. Thus, given that the payee was the warrantor, the currency exchanges’ claim for fees and court costs lies against the payee, not the maker. The trial court’s award of attorney’s fees, court costs and the return check fee were vacated.

The Court concluded by noting that “[a] s a final matter, we would be remiss if we did not comment on the inequities that this all too familiar scenario has created. *** Without question, the only person who did anything ‘wrong’ in this case is [the payee], who is not a party to this action and is, most likely, long gone. Be that as it may, however, our hands are tied. Any revision to the [UCC], which is sorely needed considering the technological advancements in banking that the Check 21 Act addresses, must come from the legislature, not the courts.”


  • James Noonan

    Jim is a founding partner of Noonan & Lieberman. Jim has more than 25 years of experience in civil litigation on behalf of creditors, servicers, business and real estate owners.

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