ICL – Check Warranty Breaches and Dealing Direct
May 28, 2023
ICL – Check Warranty Breaches and Dealing Direct
Lovely and warm where you are here in Michigan, where I am, it’s still winter and even though it’s February, the longest month of the year, right? So, last time we got together, we went through the warranties and indemnities that live in Uniform Commercial Code and reg CC that govern check. And we went through those in some detail. I’m going to go through those again. Because with, you know them and you know where they live, you can pretty much work yourself out of any challenge that you run into with check.
So we’re going to talk about what happens when those warranties are breached and how to deal with it. So as Nikki said as we go along, if you have questions type in the chat box, I’ll stop periodically and will address your questions.
First off, let’s make sure I can get this going. Here we go. I’m not an attorney. I’m not giving you legal advice. So as always, first, this particular circumstances, you’re going to want to contact your legal counsel to make sure that you take the appropriate action.
So let’s start out by looking at the agenda. We’re going to go through the legal framework again. We’re going to talk about the warranties that you make as a presenting bank and you use when you are depositary bank. You accept a check, you send it on to the paying bank you make warranties when you’re paying bank and check are presented to you are warranted you.
And then we’re going to talk about how images are actually exchanged and how to fix warranty breaches. So, to start out, I’m going to remind you again that there are two bodies of law that govern check the first being state law, just Uniform Commercial Code. It’s adopted by each state, and it can vary from state to state. So it’s important that you know your state’s version of UCC. There are 1400 articles that live in UCC. Articles three and four are all about check. Article three defines negotiable instruments and I would strongly recommend that you save that to your favorites because there’s a wealth of information there. And Article four talks about banks’ obligations to each other and to their customers. So, there’s a, like I said, there’s a wealth of information there. And I’m going to stop here because I want to let you know, I’m using what’s called the model UCC. So, this is the version of UCC that is presented to every state to adopt or to amend as they see fit. There are some states that very certain timing requirements. So why I say it’s really good to know and save your state’s version of UCC. The other body of law that governs check is a Federal regulation regs CC, that’s where you’re going to find the definition of an electronic check, as reg CC acknowledges that we are exchanging images of check. UCC really was written for paper and doesn’t go to the image exchange.
in reg CC, you’re also going to find the availability requirements and you’re going to find the warranties and indemnities, which we are going to talk about today.
To start out with the question that every bank wants to ask, and I get this all the time in various ways, but when can you charge your customers’ account? And UCC 4-401 is very, very explicit. A bank may charge against the account of a customer an item that is properly payable even though it might create an overdraft.
And what properly payable means is it’s authorized by the customer and is in accordance with any agreement between the customer and the bank. So if I’m a customer of your bank and a counterfeit check pays against my account, that check is not properly payable because I didn’t authorize it, just like a forged check or an altered check. Whatever I didn’t authorize is excluded from these terms of when a bank may charge its customers’ account. So, you want to keep that in front of you, whenever you’re dealing with issues when your customer calls you about a check that is a problem.
Now the warranties they live in both articles 3 and 4, and they are the same in both articles and there are four warranties and really three that you want to be very familiar with. The first one is that the warrantor, which means the bank that accepts this unaccepted draft and obtains payment, or gives payment for it, warrants to the paying bank that they are entitled to enforce. And what that means is they gave the value of that check to the payee.
The second warranty is that the depositor bank says to the paying bank, this check has not been altered.
Third one in this applies specifically to Fed exchanges because an ECCHO-governed exchange does a 180 on this particular warranty. So, if you receive your checks from the Fed as a paying bank, the depositary bank says to you, we have no knowledge that the signature of the drawer of the draft is unauthorized.
And I see, I don’t forget the slide with the terms. The drawer is the party who writes the check. We sometimes, it’s called the maker, but that term in UCC and regs CC is the drawer. So when you write a check, you are the drawer. The paying bank is referred to as the drawee.
So the depositary bank says the paying bank, we don’t know that the maker signature is not authorized because how would they know? When you accept a check for deposit that is not drawn on you, you have no way of knowing if that drawer signature authorized or not.
And then the fourth warranty is superseded by a warranty that lives in reg CC. This one addresses, specifically, remotely created consumer items that when a bank presents it to a paying bank, they’re making a warranty that it is authorized but it is specific to consumers. Now again, reg UCC is a lot older than reg CC. So it was attempting to protect consumers but reg CC picked that up and applied that to everybody, and we’ll look at that.
So, in reg CC to 229.34 – commit that to memory, save that page in your favorites. You’re going to find the electronic check warranty, which means that the bank that takes that paper check and images. It makes a warranty to the paying bank that accurately represents the original check.
And when we first began exchanging images, that was sometimes a problem, but that really hasn’t been any kind of problem for a number of years because pretty much procedures and technology has developed to the point where we don’t have mismatches like we did it first. And then also you’re, this is where you’re going to find the, what we call the no double debit warranty. And basically, it says, depositary bank says to the paying bank, no one’s going to be asked to pay the same check twice. So, when a bank presents a check to a paying bank, it says no one’s going to be asked to pay this twice and every single bank that presents that same check makes that same warranty.
And here is where reg CC picks it up with the RCCs, a remotely created check and does not differentiate between consumer or non-consumer. It simply says that the presenting bank says to the paying bank, this remotely created check is authorized in the amount and to the payee and against the account to which is charged. There’s also a warranty for encoding; depositary bank warrants to the paying bank that it encoded the check for the right amout and settled for the right amount.
And then also the return check warranties and I’ll emphasize this again, and again, paying bank. When it returns a check, it warrants that it returns it timely. And we’ll look at those timings again, and then the RDC in the remote deposit capture and the ECI, electronic check image indemnity, also live in reg CC.
So let’s talk about the exchange. Neither UCC are reg CC prescribe how images are exchanged. You always exchange by agreement. So if you go through the Fed, you are agreeing, when you sign up with the Fed, to abide by the terms of Federal regulation J and accompanying operating circular OC 3. So as such you agree to exchange your images, through the Fed, send them and receive them. You agree to use their adjustment platform and to do your returns through them. Reg J has particular warranties in there that we’re not going to talk too much about. They don’t vary the terms of reg CC or UCC those will always be part of that exchange reg C and UCC
They go through a private exchange where you’re not going through the Fed, but for example, at ACBB, if you agree to send your images to them, they’re going to peel out all the end points that are bound for their other members and then for other ECCHO members and those are all going to be governed under the ECCHO rules, which is really the purpose of ECCHO rules. They were designed to provide a rule set for the exchange of images back in the day when we were exchanging paper.
Now, it’s pretty much the way we exchange is by images and when you exchange privately, you need to have a rule set so everybody’s abiding by the same rules. That’s where the ECCHO rules come in. So you agree to exchange under the ECCHO rules. You agree to abide by the rules. You agree to adjust and return in accordance with those rules. And again, there are the reg CC and UCC warranties are not varied except for one warranty, which we’ll look at and that’s called Rule 9.
So let’s first look at the return check warranties. When a paying bank or returning bank returns a check, it warrants, makes a warranty that are returned it within the midnight deadline found in UCC, which says the bank may revoke the settlement and recover the settlement if before it has made final payment and before its midnight deadline, it returns the check. The midnight deadline is the day after the check is presented.
Then reg CC picks it up and says so that it gets back to the depositary bank, the second business day following the day it was presented by 2 p.m., that bank’s time. So, in other words, a check that is presented to you yesterday, this morning you were working your NSF, stop payments, account not found. And if you’re going to return it, you return it by midnight tonight do that it gets back to the depositary bank by 2 p.m., their time tomorrow, and each of those days are business days.
It’s important to remember and to note that there are certain types of checks that are exempt from those return requirements, surprise, surprise! checks drawn on the Treasury of the U.S., U.S. Postal Service money orders, or any check that is drawn on a unit of government and not payable at or through a bank. So for example, a check that is issued in the paper days, we used to see income tax refund, check state income tax refund checks and they were not drawn on any bank. They were drawn on the state. Just like when you look at a Treasury check, it’s not drawn on the bank, any bank. It’s drawn on the Treasury. So those entities and U.S. Postal Service, they are not drawn on a bank. So when you see those just remember that they can be returned or adjusted and generally, the Treasury will do reclamations but those returns can come back to you, months and months and months after you presented them. So just be aware of that.
So, before we go any farther, are there any questions?
One just popped in. It says, what is the liability, responsibility of issuing large item return notification in a timely manner?
That’s a very good question. And that is something that is outlined in the reg CC requirements, which I don’t have up here, but when you return, an item for greater than $5,515, there is a requirement that you provide a return notice back to the depositary bank, but here’s the kicker and here’s a very interesting part of that, that notice can be provided in paper form. It can be provided by giving him a telephone. It can be provided by the timely return of the check. So, when you look at 229.31, it will tell you that, that late return, or the large dollar return notice, can be in the form of the timely return of the check itself. Excellent question.
So what that means is, if you are returning your checks timely, you do not have to do what is sometimes referred to as an EARNS notice or an LDRIN, the Fed used to call it return the check timely, and you’ve provided notice.
So what is a warranty breach? So, we looked at the warranties and just think of like when you buy a car and you have a warranty that, you know, the drivetrain is going to last X number of days or years or whatever, that company that manufactured or sold you that car made a warranty. When you make that claim to them because your drivetrain fell off your car, they are obligated to fulfill their warranty. And if they don’t, they have not met their legal obligation to you. And that warranty is not a conditional warranty. You’ll notice those warranties didn’t say the check is not altered unless I can’t recover from the depositor. Then I’m not making any warranty at all. That’s not the truth. The warranty is not conditional on the warrantor’s ability to recover its loss.
Some warranty breach claims can be handled through the adjustment process, like an encoding error or a remote deposit capture indemnity claim, or few others, but most warranty breaches have to be handled by dealing direct. That means the party that received the warranty, the paying bank, has to deal with the depositary bank, the party that made the warranty and said, here, you breach your warranty, pay us back. So, as I said, some can be made through an adjustment process, not very many. So you want to know what your adjustment process will allow you to do and when you have to deal direct.
And that’s what we’re going to be talking about today, about dealing direct. So, do know your adjustment platform specific rules and timing. Whether it’s, the Fed, you will find on their site, different kinds of, I types, adjustment types and the timing for which you have to do those with entry and without entry; with entry means you get the credit or debit right away; without entry means that they send a message to the other party.
Do you want to know what that is? So let’s talk about the paper check. Because again, these regulations all started out with paper and a check has to begin its life as paper. That’s why we have that ECI indemnity. If I email you a check that I created and signed electronically, that is not a check. It must begin its life as paper.
So the drawer writes a check to a payee. So I write a check to Nikki. She takes that check and deposits that in her bank, either in paper form, or if her bank gives her a remote deposit capture. You’ll deposit that as an image. If she goes into the bank and lays that paper down on the teller counter, that teller is going to be looking at, they’re going to be looking and identifying Nikki. Making sure that check doesn’t appear to be altered, all kinds of things. There’s teller review when that paper check is deposited.
And that’s an important thing to remember because when you accept checks for deposit through RDC, you don’t have that kind of review.
So, the depositary bank would take that paper check and send it to a collecting bank, which could be the Fed or a correspondent bank, a bankers bank, that kind of thing. And then that collecting bank would then send that physical piece of paper to the paying bank, and you can imagine there were Planes Trains Automobiles, the whole nine yards there and all kinds of things could happen. Planes could crash per year, trucks could crash break down. There could be weather etc. etc, so it was always a dicey thing to get the paper from the depositary bank to the paying bank, who then would charge the drawer or the maker’s account.
Now if that account had no funds in it or if that check had a stop payment on it, then the paying bank would send that paper back the way it got it timely and get it back to the payee who would receive that original check with a big old stamp on it that said, payments stopped or NSF. And like I said, that all involved physical transportation of that check.
So when that teller review takes place, what are they looking at? Well, first of all, they’re looking at the endorsement because, remember, that depositor depositary bank warns that it is entitled to enforce that check, which means they gave value to the owner, to the holder, to the payee. So, are there multiple payees? If there are multiple payees then that check needs to go into an account that all those payees have access to. Is the payee present, have I identified that payee, have I given credit to the payees account? That’s that critical step that needs to take place when that check is being presented to be deposited.
What kind of a check is it? You know, if it’s a cashier’s check you know that you have to give availability the next business day.
And if it’s a government check, you know, that that check would come back any time. So, it’s going into an account that you know how much funds is in that account, in case that is charged back, etc. etc. Personal or payroll. There’s no difference in terms of the availability requirements, but it makes a difference as to how well you need to know your customer. If they are regular customer and every week they come in and bring in their payroll check, you have reason to believe that that check is going to pay pretty regularly, based on your experience with that customer. This is where it all comes down to know your customer. Another thing that takes place at that review is, was that check altered? Are there different different inks, different fonts, different handwriting, different typing on it, do the character amount and the legal amounts match? All that stuff. What’s going on there is that depositary bank is ensuring that it honors its warranty that the check is not altered.
And when you’re a counter agreement is going to talk about your relationship with your customer, and you basically tell them and this is where you guys want to know what your account agreements say that, you’re basically saying that everything you deposit us with us is provisional. It comes back, we’re going to charge a back to you.
Also, your account agreement should address future dated and stale dated checks. Future dated: if I write a check to Nikki, but I dated March 23 because I’m not getting paid until March 20 my bank can pay it and UCC 4401, we talked about when a bank may charge its customers’ account. Also says, you may charge your customers account, even though it’s before the date of the check.
Stale data checks, a check that is greater than six months old. A bank may pay, but is not obligated to pay, and you’ll find that in UCC 404.
So, your account agreement wants to tell your customer that we may pay a check that is future dated or stale dated unless you tell us not to because nobody, no bank looks the at the dates of every check being presented anymore, which is why UCC says you may pay those. So there’s no rule that says a stale dated check must be returned or a stale dated check can be returned up to one year after it’s paid. I’ve been asked that a number of times, The stale dated may be paid by the paying bank, unless their customer tells them not to and that would be in the form of a stop payment order.
Now, there’s also another term that is defined by the UCC 3304, which calls a check greater than 90 days from the issue date overdue. It does not mean it’s non-negotiable. It’s still completely negotiable, but it has a different legal status and that particularly comes into play if that’s a cashier’s, check and holder in due course issues, which we’re going to talk about in a future session.
So now, let’s look at how we are actually paying checks today with image, the payee. I write Nikki a check and she remotely deposits that check with her bank. There’s no physical review, generally, unless you are looking at all images of deposited items with the understanding that if you are requiring your customers to put a restrictcive endorsement for mobile deposit only on the back of the paper item, when you look at the image of that, deposited item seeing that on the image is not a guarantee it’s actually on the paper. So, you need to be aware of that risk. So the depositary bank takes it without generally the kind of physical review that it would if it took that over the counter as a piece of paper, going to send the image to the collecting bank is going to send the image to the paying bank going to do the same thing is when it got a paper check. And if there are funds or there’s NSF, the image goes back and instead of getting the original item, Nikki will get a substitute check.
So the whole process is electronic and, boy, it made a huge difference. When everybody started exchanging images, we no longer had to worry about weather and planes and trains and automobiles. We were able to send these through, essentially, at the blink of an eye compared to all that physical transportation.
So, before I go any further, are there any questions? Take that as a no.
All right. So what are the timings of these warranties?Well, first of all, UCC has a three-year statute of limitations and that’s defined in UCC 3-118. So if something comes up, that claim has to be made within three years of the occurrence. So, for example, if the payee of a check says to the drawer, hey, where’s my money? You owe me money. You said you were going to send me a check. And the drawer says, I wrote you that check two and a half years ago. And here’s a copy of it as it showed up in my statement. And the payee looks at that and says that’s not my endorsement. It’s either missing or it’s forged, and I never got it.
That is a potential breach of warranty on the depositary bank, that it was entitled to enforce and it could get that claim for up to three years from the date that check was presented to the paying bank. That’s particularly important when we talk about multiple payees, and I’ll talk about that in a second. Now, the altered check warranty, which also lives in UCC, has what’s called a one-year preclusion rule. UCC 4-406 puts an obligation on the customer to examine its statement and report within one year of getting that statement any alterations or any unauthorized signatures. And what that does is that reduces the liability of the paying bank and the depositary bank, but that may be varied by agreement. It almost always is. So here again is where you want to know what your account agreement says.
Typically, what I see most banks say let us know within 60 days of getting the statement. If you don’t and you tell us about an altered check or an unauthorized signature outside of that time frame, you are precluded from asserting a claim against us. So do know what your account agreement says. Now, the warranties that live in reg CC, like the remotely created check warranty, the encoding warranty, the no double debit warranty, those all have a one-year statute of limitations. And again, that statute of limitations clock starts from the date that that check was presented to the paying bank.
All right. So let’s talk about that first warranty. Entitled to enforce.
Now endorsement is variously misunderstood. And what’s really the most important is that the endorsement is critical to the depositary bank because what they’re doing when they accept that check and the payee endorses it, that payee is endorsing it for the purpose of negotiating that instrument, restricting the payment of it, for example, for deposit only. And it incurs the endorsers liability on the instrument. Meaning, it’s that check has returned unpaid for any reason NSF, payments stopped etc., that endorser is going to assume the liability and they’re going to be charged back for that by the depositary bank. So the value of the endorsement is primarily to the depositary bank. The paying bank is not in a position to know that payee’s endorsement and the drawer, the person who writes the check is not in a position to know the payee’s endorsement, which is why that warranty lives for three years and is not altered by that one-year preclusion rule Because your account owner when they write a check, they aren’t going to see on their statement that an endorsement is a forged endorsement or that it’s missing; even if it’s missing, that doesn’t mean the payee didn’t give value for that check from the depositary bank.
Now this happens a lot and I have a name that people like to misspelled. So, if I get a check made payable to me, and it’s spelled wrong, I still want that funds. And the UCC 3-204 anticipates that that if an instrument is payable to holder under a name, that is not the name of the holder, for example, for me Dale Bolt. Instead of Dal Bolt or Yoko Ohno instead of Yoko Ono, the endorsement may be made by the holder and the holder is a person to whom that check’s payable, in the name stated in the instrument or in the holder’s name or both. And that’s typically what most banks will do. But the signature in both names may be required by the depositary bank. So Yoko comes to you. She has an account with you. The check is payable to her spelled wrong. You asked her to endorse it as it was spelled, and then you asked me to endorse it as her name appears on your account and her identification.
Now if you’re wondering why I’m spelling indorsement with an I because you are more familiar probably and seeing it spelled with an e. I is how it’s spelled in all of the regulations and there are reasons for that, but we won’t get into that here.
All right. Now, UCC 3-205 talks about other kinds of endorsements. The first being a special endorsement, and that means, if the endorsement is made by the holder, the payee, and then is further made payable to someone else, that’s called a special endorsement. For example, I owe Nikki some money and I get a check payable to me from someone else that happens to be for that same amount. So I endorse it as it is made payable to me, and then I write “pay to the order of Nikki Clarke,” and then I give her that check. That’s called a special endorsement, nothing wrong with that. But as, you know, depositary banks have some heartburn with it. Because when Nikki comes in to deposit, that do they know unless I’m standing there with her that I really did endorse it. And that’s where you have to know your customer.
A blank endorsement does not mean that there’s no endorsement. It simply means, it’s endorsed by the payee and that’s it. There’s no further instructions. No restrictions, no paid further, pay to the order of whatever, whatever. It’s just blank, a check payable to me is endorsed by me and that’s it. That’s called a blank endorsement.
And then anomalous endorsement is an endorsement that gives paying banks heartburn. And this is not uncommon and it simply means an endorsement made by a person who’s not the holder of the instrument, not the payee of the instrument, the most common kind of anomalous endorsement is a check that’s payable to ABC company, but it’s signed by Bob Smith CFO.
Well, he may have the authority to act on behalf of the ABC company, and when Bob goes into the bank, ABC or rather the bank, make sure that that check goes into ABC company and Bob Smith endorsed that on behalf of ABC company and the depositary bank honors its warranty that it’s entitled to enforce. However, if the paying bank is looking at that check, because it happens to be a large dollar item, and they see not ABC’s endorsement, but Bob Smith, they may think something’s funny.
But remember that, and this is an important thing, the paying bank is not in a position to know if the depositary bank breached its warranty. It has to start with the payee.
So if the paying bank – and some of us have done that, used to do this too, and it creates more trouble – would return that check for guarantee of endorsement, when in fact, the guarantee is already there in the form of the warranty, what that can sometimes do is cause more problems. A check gets instead of redeposited with a nice stamp saying endorsement, guaranteed instead gets charged back to the payee’s account, who calls the drawer and says, why did your check come back to me? So it can create a lot of problems.
So I’m going to stop right there. Do we have any questions so far?
Did receive one question. So the question is, whose responsibily are washed/altered checks, meaning everything looks good, signature, but the customer contacts the bank and reports a fraudulent check, clearing their account and it is past a return timeline.
So if I’m understanding that question, we’ve already discussed that, remember that the depositary bank makes a warranty to the paying bank that the check is not altered. So if the drawer of the paying the paying banks customer says, I wrote a check to John Smith for 100 bucks and it paid for a thousand dollars and it’s payable to Mary Jones, that would be an altered check and that is a breach of warranty on the paying that part of the depositary bank.
Anything else? That was the only one. Hey, all right.
So now let’s talk about the restrictive endorsement. That’s become much more of a hot topic these days in the days of the remote deposit capture indemnity and restrictive, endorsements have lived forever, and you’ll find the definition and UCC 3-206, and it simply says that it limits the negotiation or the payment to a particular person or a particular method of negotiation, for example, for deposit only. That was the more common type of restrictive endorsement we used to see, which meant that that check is not to be cashed. It’s to be deposited in the payee’s account. So, a restrictive endorsement restricts the method of the negotiation of that check to the terms of that endorsement.
Now, let’s talk about multiple payees because this comes up from time to time. And remember that I said that UCC has a three-year statute of limitations.
So if a check comes in and wants to be negotiated at your bank, and it’s payable to two or more persons, alternatively, then it’s payable to any one of those. So, if it’s payable to George comma Paul or Ringo, George can cash it, Paul can cash it, Ringo can cash it. It can go into George’s account or Paul’s account or Ringo’s account. But if it’s payable to two or more persons not alternatively, it’s payable to all of them and may be negotiated, discharged, or enforced only by all of them. So, the check is payable to John and Paul and George, John can’t come in and cash it. Paul can’t deposit that in his account. They have, the check has to go into the Beatles’ account or into an account where John and Paul and George are all signers. That’s important to remember. Because that check, one of those one of those payees could come back to the paying bank or up to three years and say this check did not, I did not get credit for it. And that would be a potential breach on the part of the depositary bank. And I always say potential. Because in the event that a breach has asserted, the depositary bank has to prove that it either honored is warranty or did not.
Now, if it’s ambiguous as to whether it’s payable to two or more, alternatively, it’s going to be payable to the persons. Alternatively, for example, George comma, Paul comma, John. The word “and” is not there. So it’s not clear or rather, it’s ambiguous. So it’s payable to any one of those people able to them, alternatively. So within this case, George or Paul or John in there are check were deposited into their account. So really your rule of thumb wants to be if it doesn’t say “and” or if the symbol & isn’t on there between the payees, then it’s going to be “or.”
All right, so now let’s talk about what happens when the payee says, I never got the funds of a check that was paid, and who starts that claim. Nikki wrote me a check. She owed me some money, and I’m not very good with my finances. And maybe two years later, I say, Nikki, by the way, I sold you, my bike back in 2020. Where’s my money? And Nikki says, well, I wrote you a check for that way back in 2020, and it paid against my account, and I say, well, I’m pretty sure I never got it. So Nikki pulls up her statement. Prints a copy of that image, that check, shows to me, shows me that it paid and what’s wrong with that? Well, my endorsement is either not on there or it’s forged, and I say I never got it. So now you’re the paying bank, Nikki comes to you, the paying bank and says all right. Hey, he says he never received the funds. What do you do?
So what you don’t do is just pluck that check from the past and return, it unless that check paid yesterday, you cannot return. It. Remember our return warranties that are paying bank makes when a return to check that it does so timely, if you return a check late, it’s a warranty breach. So in this particular case, you don’t have an adjustment avenue and you can’t return it. What do you do?
So, here’s the return time frame, so I want you to memorize these. So what do you do? What need first is a statement from the payee that says, I’ve looked at that check, that paid check and I’ve seen it front and back, and my endorsement on that is either a forgery or it’s not there and I need to state, I never received value. So you, paying bank, want to get a written statement from the payee, and it’s always a good idea to have that notarized, not because any regulation requires it, but it’s when you’re going to present that endorsement, that endorsement claim to the depositary bank. You want to let them know that you in fact got a sworn statement from the payee that they never received it. You got a deal direct with that depositary bank. You have to send them a warranty, breach claim letter, saying, you breached the UCC presentment warranty that you’re entitled to enforce, here’s the statement from the payee, proved to us or to the payee that you gave them value or return the funds back to us.
So I’m going to stop there. Any questions about that process. All right, I’ll take that as a no.
All right, let’s talk about altered checks.
First of all, what’s an altered check? The alteration is defined in UCC 3-407 an unauthorized change in the check that purports to modify in any respect the obligations of a party. It could be the unauthorized addition of words or numbers or other changes to an incomplete check. For example, I recently heard this one, which always surprises me that people do this, but they do, a guy wrote a check or rather signed a check and gave a blank check to somebody and then there were changes made to that. And I think actually that check was incomplete and there was additions of words and so forth. So that’s an alteration. Or I write a check to Nikki for 10 bucks, and she adds a couple zeros behind it and then gets a thousand bucks for it. That’s an alteration.
All right. So when you are the paying bank and your customer tells you that they wrote a check for something to a certain payee for a specific amount but it paid for a different amount and/or to a different payee, you have a breach of warranty on the part of the depositary bank. And again, there’s no adjustment process. And remember we talked about that while that warranty lives in UCC which has a three-year statute of limitations that is further limited by UCC 4-406, by what’s called, referred to sometimes, as the statute of repose, which I was kind of like that one, which says the customer has a duty to examine its statement. And if it does not report within one year after getting that statement to discover that alteration, they are precluded from asserting against the bank that alteration. Now remember that timing may be varied by agreement and frequently is, so if your account agreement says, you must notify us within 60 days of getting the statement and they tell you on day 90, your terms of your account agreement prevail and they are precluded from making an assertion against you, the paying bank.
Again, unless that check paid yesterday, you don’t return it. And because this is a warranty breach, an altered check warranty breach, you don’t have an adjustment avenue. What do you do? So remember, first that you’re going to need to reimburse the drawer’s account because UCC says a bank may pay, charge against its customer’s account, a check that it’s properly payable, which means authorized by the drawer. An altered check is not a properly payable check. So you reimburse your drawer, your customer. And now you, the paying bank, has deal directly with a depositary bank. Again, get a written statement of alteration from the drawer, a copy of the check, the image as it was presented front and back, and you do the same thing. You send a letter to the depositary bank, saying the breach of UCC presentment warranty. Here’s a sworn statement from the account holder. Here’s a copy of a front and back, which clearly shows the alteration. So, honor your warranty. Now, the timing for a bank to honor its warranty is not defined in UCC or reg CC. It’s simply imposes on that bank the obligation to honor the warranty, and the bank that draw drags its feet in honoring its warranty or responding to a warranty breach claim is not meeting the terms of the law or the Federal regulation. So sometimes you have to lawyer up and send them a threatening letter. If you don’t honor your warranty, we’re going to take you to court and force you to do so.
Any questions about alterations before we get on to forgeries and counterfeits?
All right. I’m going to take that as a no.
Oh, here’s a question. If that just disappeared, Nikki, can you read that for me? Sorry. It just popped up. So if the BOFD receives a claim for an altered check, are they obligated to give the paying bank the full amount of the claim if the funds are not available or is a rule 9 claim, if exchange through ECCHO, the only way for BOFD to disclaim. That’s a very good question.
Remember I said earlier, that the warranties that we looked at are not conditional? So the depositary bank cannot say to the paying bank to whom it made that warranty that that check is not altered. I’m going to take a loss because my depositor’s account is empty. They can’t do it. It’s not a conditional warranty.
So with altered checks, the answer is no, the depositary bank can’t do that. And if they stonewall and say they will or because they’re they can’t recover. They’re not going to take that loss. That’s when you have to lawyer up. Now rule 9. We’re just going to get into that right now. So good timing you set me up. Perfect.
All right. So when a check is presented through the Fed, this warranty prevails. The warrantor has no knowledge that the signature of the drawer of the draft is unauthorized because how would the depositary bank know the drawer signature if it’s not drawn on them? They won’t know. They can’t know that. So they make no warranty to the paying bank. So when you’re paying bank and you get a check presented to you through the Fed and your customer calls you a month after thatf check paid and says, it’s a forgery. You have no recourse, no legal recourse. That’s important to understand.
Now if you got it through an ECCHO exchange, we’re going to talk about that. So you learn that you charged the forged or counterfeit check against your a customer’s account. Remember that UCC 4-401 says you can only charge a customer’s account if that check is authorized. So, a forgery or a counterfeit] is not authorized. You can’t charge your customers account that, for that. That means that without any recourse, the paying bank takes the loss. And, if that check did not pay yesterday, you can’t return it for any reason. There is no provision for a late return because the check is quote fictitious.
A check has to be returned within the UCC midnight deadline and the reg CC expeditious return requirements. Again, I’m going to emphasize that. Came in yesterday. Has to come up and go out of the shop by midnight tonight. So, it’s back to the depositary bank tomorrow 2 o’clock their time, each of those days being business days. However, there is one possible avenue of recourse. First off, if you get that forgery or counterfeit notice from your customer, the first thing you want to find out is, did I get it through the Fed? If I did, we just talked about that. There was no warranty made. So, paying bank, you got to reimburse your customer and you don’t have any recourse. If you got it through an ECCHO-governed exchange, there’s something called rule 9, which does a 180 on that warranty that we looked at that the depositary banks says, I have no knowledge that the drawer signature is not authorized. Rule 9 is for ECCHO-governed exchange that the check has to go through a private exchange, not touch the Fed. And rule 9 basically says the depositary bank warrants that it’s not a forgery, not a counterfeit.
So this is for ECCHO members-only; the depositary bank has to be an ECCHO member. The paying bank has to be an ECCHO member and that check needed to presented through an ECCHO-governed exchange. Not through the Fed. The depositary bank didn’t send it through the Fed, the paying bank didn’t get it from the Fed.
So again, rule 9 was developed by the members of ECCHO to try to find a way to deal with forgeries and counterfeits that were reported too late to return. It provides an avenue of recourse. It’s not guaranteed, but it provides a way to attempt to recover. So again, rule 9 is only available for in ECCHO exchanges and the rule, the ECCHO rules do permit members to opt out of rule 9. Meaning, they don’t have to receive a rule 9 claim or honor it, but they can also not make rule 9 claims and there’s about 14 banks that have actually opted out. You can find that list on our website.
What this does is it says, yes opting in. We have about seven minutes left, eight minutes, Perfect. All right, what this does is shift liability to the depositary bank, if they still have the funds. So, here’s what rule 9 says, the depositary bank warrants that it is not a forgery, not a counterfeit, and they are liable to the paying bank, if the paying bank makes the claim timely, and if they still have the funds, which relates back to that earlier question. In a rule 9 claim, the depositary bank may disclaim that rule 9 claim if the depositor’s account is empty.
So it is an potential avenue of recourse, but it’s kind of a Hail Mary pass, is how I look at it.
All right. So, there are time frames. Your customer has to notify you within 60 days of getting the statement. When they notify you, you have 15 days to make the claim. If you don’t send a written statement with that claim and the depositary bank wants it, they have 15 days to ask for it and you have 15 days to respond to it, etc. So, if you’re making a rule 9 claim, do an end run around that and always include the written statement.
So, as I said, it provides an avenue of recourse and the depositary bank has to reimburse the paying bank if they still have the funds and that claim was made timely. So, always, first determine did you get it from the Fed? Or did you get it through an ECCHO exchange?
All right, let’s look at that last warranty. Remember I said it lives in UCC about RCCs remotely created consumer items and then reg CC up that one and says any remotely created check is warranted by the depositary bank to be authorized in the amount and to the payee.
Now, what’s a remotely created check? That’s defined in reg CC says, it’s not created by the paying bank and doesn’t bear the signature of the drawer. So it looks something like this. You’ll see in the drawer signature area that it was verbally authorized or something like that. When I sat in your chairs and got all those calls about fraud, when I bring up the image and I saw one of these. Yay, I have recourse. I want to point out to you that. There’s a field to the immediate left of the routing and transit symbol. That’s called the external processing code. This field is an optional field, but the number six has been designated for RCCs. So if you have a customer that’s creating RCCs and depositing them with you, first of all, you need to know that you do not want to be an avenue for fraud. You could require them to populate that EPC field with 6 so you can programmatically track that. Now, you find out about an unauthorized remotely created check. Again if it paid yesterday, you can return it. But if it didn’t, this is one of these warranty breaches that actually has an adjustment available to it. If you got it through the Fed, it’s called an URCC WIC, stands for unauthorized remotely created check warranty indemnity claim, and you can do that with entry for up to 150 days from the presentment date. Yes, later date of that check, you do need an affidavit from your account holder that that RCC is not authorized.
The FED changed that timing from 90 days to 150 days because of the pandemic. You have to get that statement and remember that, that warranty was made in reg CC, so it has it lists for one year, ECCHO exchange is still 90 days.
I turned on the speed there. Any questions about remotely created checks? Any questions about anything?
Clear as spring water, right? That’s it, we have clearly have a knowledgeable audience today, so accent, excellent.
So I’m going to show you a couple of links reg CC is of course, a Federal regulation. So it’s not going to be a simple link, right? You can go directly to the electronic code of Federal Regulation, ecfr.govand search it out, or you can go to law dot Cornell. edu.
For UCC for Uniform Commercial Code, the model. You can also find reg CC a version of that. They host that as well as more generic, but it’s good to have those access. And if you’re an ECCHO member, you have access to the ECCHO rules. So do take full advantage of those. Save these regulatory references to your favorites so that you have access to them whenever you need them.
And you can always go to our website. When you’re an ECCHO member, you have access to our education site. There’s no additional fee to access our various educational library components, and you can always give me a call. If you’re not an ECCHO member, I’m happy to talk to you about this particular session. If you are an ECCHO member, I’m on call for you. And this is how to get hold of me. Thanks for your time, everybody. If you have no more questions, we’ll call it a day.
Fantastic. And thank you Dal for your time as well. And we will resume again next week with a different session, different topic. I did update the dates in your email that I provided out today. So if you have any questions reach out to myself or to down and have a wonderful afternoon.
Take care, everybody.