Final answer:
When a bank pays a forged check, it is liable for converting the payee's funds, meaning it must return the funds to their rightful owner and could face legal consequences.
Step-by-step explanation:
If a bank pays a forged check, it is liable for converting the payee's funds. This means that the bank has wrongly transferred the ownership of funds from the rightful owner (the payee) to another party (the forger). In legal terms, conversion is the wrongful act of disposing of someone else’s property as if it were one's own. In such cases, the bank has to return the funds to the rightful owner and possibly face additional legal consequences.