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Question & Answer
Question: Our customer wrote a check over a year ago in the amount of $3,200, payable to an individual. The payee deposited the check into his account in a bank in our state, evidently was credited $3,200, and the depositary bank sent us the check through the work. We charged it to our customer's account and sent it to him in his statement. Over a year ago.
This week, we were contacted by the depositary bank, who sent us a copy of the check which they had encoded last year for $1,200 instead of $3,200. They want the $2,000 difference. Our customer no longer has the money in his account to cover the $2,000 difference, and he says it wasn't his fault anyway! He refuses to pay up. What is the statute of limitations on encoding - and is there anything we can do about this except pay the other bank the $2,000 and take the loss?
Answer: Oh, there's lots you can do about it. You happen to be in a state that has adopted the revisions to UCC 3 & 4. Before the revisions there was no such thing as an encoding warranty. Now there is.
If the banks are located in states where the revisions have been adopted, the statute of limitations on encoding warranties is 3 years from the time the claim arises. Whoever encoded the check warrants the amount is correct. Whoever made the encoding error has to pay. In this case, that is the depositary bank.
The depositary bank probably credited their customer (the payee on the check) with the $2,000 long ago, and have been sitting with the difference in their adjustment area, and are now trying to rectify the difference. In order to do so, they turn to the drawee bank (that's you). If the drawee bank's customer still has the dough, the drawee bank should debit his account and give the funds to the depositary bank.
If the drawer of the check does NOT have the funds, however, the drawee bank can refuse to remit the difference to the depositary bank. The depositary bank would have to either take the loss, under its encoding warranty, or would have to go against the drawer directly in an action for unjust enrichment.
One last note. In the case of a slip-up along the way - for instance, if the drawee bank sent the $2,000 at the request of the depositary bank, even though it was not obliged to do so, and then attempted to charge the customer's account to recover its $2,000 and found there was not enough money there, charge it back anyway. Be aware it is entirely lawful for the account of the drawer of the check to be debited for the difference in what was originally deducted, versus what should have been, since his check orders the bank to pay the full $3,200. The theory of unjust enrichment would be one of the legal bases for the authority to debit. The bank can charge back the amount of the item against his account even if it creates an overdraft.
Our thanks to Bankers' Hotline advisor, attorney Mary Beth Guard for her assistance in responding.
Copyright © 1999 Bankers' Hotline. Originally appeared in Bankers' Hotline, Vol. 9, No. 10, 11/99
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