Business Check Fraud


Your company can be held liable for business check fraud losses that third parties incur from honoring counterfeit checks and legitimate checks which have been “stopped” by your business. The law protects any third parties who honor and cash any checks presented to them where such parties are considered to be a ‘Holder in Due Course’. This protection spells big trouble for unwitting businesses here in Illinois and in other states that have adopted the Uniform Commercial Code, or have adopted similar protections.

What is a ‘Holder in Due Course’…in Layman’s Terms?

A Holder in Due Course (HIDC) is a defined person or entity under the Uniform Commercial Code (UCC) that is afforded significant legal protections when presented with a a seemingly legitimate check. Unfortunately for businesses, especially small business, an HIDC significantly impacts the business’s liability for check fraud and the checks it issues!

In simple terms, a Holder in Due Course is anyone who accepts a check for payment. On the face of the check there cannot be any evidence of fraud, nor can the person accepting the check have knowledge of any fraud related to it. In Illinois, (ILCS 810. Commercial Code § 5/3-302), the recipient of the check presented to them is an HIDC and is entitled to be paid for the check. An HIDC can assign, sell, give, or otherwise transfer its rights to another party, who becomes the new HIDC with the same legal rights as the original Holder.

Some Illinois businesses have learned all about the protections afforded to HIDC the hard way. For example, an employee terminated by the company may claim the final check sent was sent to an address no longer occupied by the employee. That contractor/employee would then ask that the check be re-issued. The business, unaware of the HIDC laws, then issues a second check to the employee. The employee will then deposit and cash the second check and may take the first to a local currency exchange, where it would be honored and cashed.

If the business does not properly “extinguish” the first check before issuing the second, the employee in this scenario is paid twice fraudulently. Unfortunately, under this scenario in Illinois, if the former employee presented the original check to the currency exchange and the protections afforded to the exchange were then triggered under the UCC (Kedzie & 103rd Currency Exchange, Inc. v. Hodge 21 UCC Rep. 2d 682 (Ill. Sup. Ct. 1993)).

Of course, any affected business would get a big surprise when it got a letter from the currency exchange’s legal counsel demanding payment as a HIDC! The HIDC laws and the protections afforded under the UCC are disturbing for a hard working business owner who is now forced to seek recourse directly through the former employee. That entails spending legal fees that may exceed the amount of the double payment!

Under the Illinois UCC, there are some defenses, such as: (1) a defense of the obligor based on (i) infancy of the obligor to the extent it is a defense to a simple contract, (ii) duress, lack of legal capacity, or illegality of the transaction which, under the law, nullifies the obligation of the obligor, (iii) fraud that induced the obligor to sign the instrument with neither knowledge nor reasonable opportunity to learn of its character or its essential terms, or (iv) discharge of the obligor in insolvency proceedings. But, those defenses don’t normally apply in the run of the mill check scams that affect many small businesses.


After learning about what an HIDC is and how it can impact your business, what steps can your business take to avoid these business check fraud liability?

Here are some recommendations based upon some recent decisions under the UCC generally:

Protection #1: Understand what a HIDC is, who is an HIDC (yes, even the local currency exchange here in Illinois) and the protections they are afforded.

Protection #2: Use security features on Company checks that would make it difficult for any third party to attempt to create and present a fraudulent check for payment. Using overt and covert security features will help prevent check fraud losses, including some HIDC claims. Overt and covert security features including heat sensitive ink, a watermark and explicit warning bands have proven to help combat the use of counterfeit checks and defeat claims by HIDC plaintiffs. (For example, SAFEChecks has 12 security features.)

Protection #3: Any previously issued check should expire before replacing it. Your business may believe issuing a stop payment order will extinguish the check. But, placing a stop payment on a check does not necessarily terminate the obligation of a business to pay the check. The business/issuer can be held liable for both checks under Illinois law. That is why businesses should use an expiration statement on the face of checks (i.e. “THIS CHECK EXPIRES AND IS VOID 20 DAYS FROM THE DATE OF ISSUANCE).” If the first check is lost, y0ur business should wait more than 20 days from the date of issuance and then reissue it as necessary. A party that accepts an expired check has no basis to assert protections as an HIDC if the check is returned unpaid. 

Protection #4: Use company checks that are customized or contain unique features and are not generic or otherwise available as blanks to other businesses.