The Bank Always Loses

Lawyers commonly assume that the bank always wins disputes over unauthorized check transactions. That assumption is backwards. The baseline rule is that banks, as the providers of the check payment system, bear the risk of loss from forgeries. The origins of the “bank always wins” notion are found in an early-twentieth century dispute about the effect of bank failure on collection of checks. Modern deposit insurance and bank regulation have rendered that dispute moot. The rhetoric produced by that dispute, however, still distorts the profession’s sense of the law on matters that remain...

Lawyers commonly assume that the bank always wins disputes over unauthorized check transactions. That assumption is backwards. The baseline rule is that banks, as the providers of the check payment system, bear the risk of loss from forgeries. The origins of the “bank always wins” notion are found in an early-twentieth century dispute about the effect of bank failure on collection of checks. Modern deposit insurance and bank regulation have rendered that dispute moot. The rhetoric produced by that dispute, however, still distorts the profession’s sense of the law on matters that remain significant. Indeed, courts have decided cases that are inexplicable but for the implicit assumption that the baseline rule is that the bank always wins.