Counterfeit Cashier's Check Defense

Question: We had a depositor who sold something over ebay, and came in with one of "those" checks that was for more than she was due. She was supposed to cash the check, keep what was owed to her, and send the excess funds to the buyer. She brought in a cashier's check and split it. She took the cash to the Western Union Office and wired it, as she had been instructed to do, and mailed the merchandise to the buyer too. We got the check back, stamped "Counterfeit Item" and we charged it back to her account, which overdrew her account by some $6,000. Her lawyer has now called and said we can't do that - that the loss is ours. Can you tell me what our defense is?

Answer: First, please understand that neither BANKERS' HOTLINE nor I give legal advice. I can give you my opinion, but you need to go to an attorney for legal advice.

My opinion? First, as it was a cashier's check, it should never have come back to you "stop payment." A financial institution cannot stop payment on a bank obligation. This is one of the most complicated parts of the counterfeit check problem. But the facts are that they sent the check back that way, and you accepted the return. But that was only two of the errors. Just as your depositor should never have accepted that check (where has she been for the past two years???), so your teller should have never cashed the item. If your customer had deposited the whole item, and then wrote a check on her account and cashed it, your depositary agreement would have kicked in, and you could have charged it back to her account when it came back to you. But you split the check. The first thing you have to do to "split" a check is "cash" it. So you cashed the check, and in doing so you made final payment on the check. You cannot now charge the check back against her account unless you have that right written into your customer agreement. The UCC allows you to vary your agreement with your depositor.

The Uniform Commercial Code is very clear about cashing out items. It says in Section 4-215. Final Payment Of Item By Payor Bank; When Provisional Debits And Credits Become Final.

(a) An item is finally paid by a payor bank when the bank has first done any of the following:
(1) paid the item in cash; (End of your story.)
   ( b) If provisional settlement for an item does not become final, the item is not finally paid
(Emphasis is the Editor's)

If you had made provisional settlement for the item (i.e. accepted the whole check for deposit) you had the right to charge it back to her account - as it most likely states in your customer agreement. But, as you cashed it outright, unless you have that covered in your agreement (and most banks don't) you have no right to charge it back. I had a boss once that cautioned me, "You can ASK the customer if you can charge back a cashed out item, but you can't without permission." I never forgot that, and when it was my turn to be boss, the agreement was changed!

An attorney might be able to help you in this case by pursuing dual negligence, and you could wind up only paying for half the loss. It isn't as if that scam hasn't gotten a lot of press. Your customer should have been aware that transaction was fraudulent. But check your depositor agreement first. You may get lucky.

Copyright © 2004 Bankers' Hotline. Originally appeared in Bankers' Hotline, Vol. 14, No. 9, 11/04