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Question & Answer
Question: We have a customer who wrote a check for $2500.00. When we got it through the work six months ago it was encoded $25.00. We have today - six months later - received an adjustment charge from the Federal Home Loan Bank for the difference. When we told them we wanted to refuse the charge, they told us they had already credited the depository bank, and there was nothing they could do. Our customer's account has nowhere near that amount in it. Do we have any recourse?
Answer: Sure do. Somebody at Federal Home Loan goofed. The new UCC is very specific about liability on incorrect encoding. This warranty is new under the revised UCC. It is found in §4-209 and is set forth quite simply, as follows: A person who encodes information on or with respect to an item after issue warrants to any subsequent collecting bank and to the payor bank or other payor that the information is correctly encoded.
The statute also says that if the customer (e.g. check casher, super market) of a depository bank encodes, that customer's bank also makes the warranty.
A person to whom the encoding warranty is made and who took the item in good faith (that would be you) may recover from the warrantor (that would be the depository/encoding bank) as damages for breach of warranty an amount equal to the loss suffered as a result of the breach, plus expenses and loss of interest incurred as a result of the breach.
Having said all this, you know the liability was not yours. The dispute should be between your customer and the encoding bank. However, with the charge already paid, the fat is in the fire. Your customer obviously knew the check was paid for the wrong amount, and took advantage of that fact by cleaning out his account. You're going to have to go after him at this point. You might just charge the check, and overdraw his account. I'd also write a very strong letter to the encoding bank, quoting them the UCC, and demanding reimbursement. If they are honorable, they'll make the correction.
One last thing you may want to do - once this is all settled, don't reopen that customer's account.
Copyright © 2000 Bankers' Hotline. Originally appeared in Bankers' Hotline, Vol. 10, No. 2, 2/00
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