We have a customer who issued a check for R/E Taxes. The check posted to their account in October 2023, shortly after they sent it. The back of the check is endorsed by the BOFD with "absence of endorsement guaranteed". No endorsement by the payee. Nothing on the front of the check was altered/changed. The Payee (tax collector) contacted our customer now, 7 months later, claiming our customer is delinquent on their taxes because of never receiving their payment. Our customer gave the tax collector a copy of the cleared check. The tax collector informed our customer that the bank that endorsed the check is not the bank they utilize. So it seems we have a situation in which case our customers check was intercepted and deposited into some other account - likely in some sort of fraud scenario.

Are we liable to our customer for originally paying the item last year?

I believe we clearly have a solid case to demand the funds back from the BOFD due to them endorsing the item as they did.

The bank of first deposit made a "presentment warranty" to you under your state's Uniform Commercial Code. The payee is claiming they did not receive the proceeds of the check so the claim against the BOFD is that they breeched their presentment warranty.

The payee should complete an affidavit of forged/missing endorsement which states that they neither endorsed nor received benefit from the check. Make sure whoever signs the affidavit also provides evidence that they are authorized to sign on behalf of the payee. That affidavit along with a photo in lieu copy of the check should be sent without entry to the bank of first deposit demanding payment in the form of a cashier's check or wire transfer for breach of the presentment warranty under the terms of your state's uniform commercial code.

Since this is a legal matter between, the payee, your customer, your bank, and the BOFD, if you are not sure how to proceed, you should be contacting your legal counsel familiar with state law.

For most states, the statute of limitations is three years for endorsement claims.

As far as liability. Your customer is liable to the payee to pay their taxes. You are liable to your customer for honoring a check with an invalid endorsement. The BOFD is liable to you for breach of presentment warranty, and the crook is liable to the BOFD. Of course, the UCC only assigns liability, it doesn't force anyone to pay anyone else. If someone in the chain refuses to satisfy their liability, any of the parties can sue the other seeking restitution from the party who is liable to them.

Thanks for the response. You state "You are liable to your customer for honoring a check with an invalid endorsement." however the BOFD used an absence of endorsement on the check. Is that not a valid endorsement?

Thanks again!

There is nothing wrong with the stamp, but your customer is asserting that you honored a check against their account and the wrong party got the money. The make their claim to you. The "chain of liability" is as follows:

Payee to the Customer
Customer to Drawee Bank
Drawee Bank to Bank of First Deposit
Bank of First Deposit to its Customer

The law doesn't make the issuer of the check deal with the bank of first deposit. They deal with their bank (that's you) and then you deal with the bank of first deposit.