Responsibility for Forged, Cashed Check

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Question:

We had a check which cleared an account here at our bank the 17th of July. The customer contacted us on the 21st and said it was a forgery, so we returned it on the 22nd. The bank that cashed it refused it and sent it back to us on August 3rd. We returned it through help from Fed, with the proper documents on August 4th. Now the bank that cashed it called us and said we need to send them a cashier's check or a letter authorizing them to process the check again. Who is responsible for this check, our bank or the one that cashed it?

Answer:

Without worrying about the fact that the 17th of July was a Saturday this year, your return of the check on the 22nd was not timely because it was done after your midnight deadline. The other bank's late return claim was timely, and that's where it should have ended. It's become apparent that the Fed doesn't really check the dates on late return claims or on disclaimers of those claims (you apparently filed a disclaimer and got your money back from the other bank).

Back in the day, when more banks played by the UCC rules, you'd be left responsible for the forged item, in accordance with UCC and Negotiable Instruments Law cases dating back to the Price vs. Neal decision in England. Boiled down to its essence, Price vs. Neal states that a bank is responsible for recognizing its own depositor's signature. Once the midnight deadline passes, the bank becomes accountable for the amount of the forged check.

Under some clearing house agreements (not the Fed) a warranty provision in the clearing house rules may shift the burden of loss on a fraudulent check to the bank cashing or taking the check for deposit (if conditions are met). Without such an agreement, the loss remains with the paying bank.Your bank has thus far successfully used the Fed's procedures to recover funds to which the UCC would not consider it to be entitled. If the other bank takes the matter to court, I believe the other bank would prevail. Talk to your bank counsel to obtain his or her legal advice on your liability in this situation.

First published on BankersOnline.com 9/13/10