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Question & Answer
Question: We had a customer who wrote a check for $8,000 that was deposited by the payee into his bank. The payee's bank encoded the check for $2,000, and when it came in to us through the work, it was, of course, paid against our customer's account for $2,000.
All this happened three months ago.
Now the depositary bank wants $6,000 from us.
Last month our customer declared bankruptcy and his accounts with us are closed. Are we liable for the $6,000?
Answer: Both of the banks involved in this problem are in the same state, and that state has long since been operating under the new, revised Uniform Commercial Code. Keep in mind that one of the major principles of the new UCC is that it attempts to shift the risk of loss to the party in the best position to prevent the loss. In this case, the depositary bank is in that position.
In addition, Section 4-209 of the UCC says that the entity which encodes the check warrants that the encoded information is correct. Therefore, the liability for the incorrect coding is on the depositary bank. Their customer, the payee on the check, needs to look to that bank-or the original maker of the check-for the $6,000. You should send your regrets for the claim-but no money.
Copyright © 1996 Bankers' Hotline. Originally appeared in Bankers' Hotline, Vol. 6, No. 6, 4/96
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