Counterfeit check on non-profit's account

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Question:

A counterfeit check clears a large, corporate, non-profit client's account and the client reports it to us within 30 days. In the course of an investigation the client mentions that the serial number of the counterfeit check matches the serial number of a check that was issued 6 months prior and never cashed. The client stated that they knew the payee never received the check and said "I guess I never put a stop payment on that one...." Does the drawee bank have a defense under UCC regarding customer negligence? The client knew the check was lost and outstanding and if a stop payment was placed the counterfeit would never had cleared. A client of this size and sophistication should reconcile daily and use positive pay services as well, but they don't. Basically, is there any strong defense for me if I deny this claim?

Answer:

I would not get sanguine about your chances here. If this were the 10th in a series of fraudulent checks over a period of months, I'd start lining up on your side of the tug-of-war. But in this case, I simply don't think the non-profit's failure to stop payment on one item will buy you much credibility.

You've said this is a large account. Losing the account might be worse than charging off the check. We don't know how large the check is, but if you're worked up about it, it's probably more than lunch money. But don't forget that the first line of defense here is supposed to be the bank's ability to discern counterfeits. Unless you have an iron-clad deposit agreement mandating positive pay for accounts of this size, I would not suggest pursuing this. Even if you have such wording, I'm not so sure your directors and senior management would want to see their bank's name tried in the court of public opinion on this issue.

First published on BankersOnline.com 10/03/05