Recently a bank in our market has begun to return a certain customers items for missing endorsement inspite of our warranty and no specific endorsement instructions on their checks. When asked the paying bank said it was at the behest of their customer. 1. Are we within our rights to suggest they explain UCC section 4-205 to their customer? 2. What would be the suggestion if this activity continues?

You can explain 4-205 to the paying bank, but you can't force it to change what it is doing. As inefficient as this bouncing of checks back and forth is, the paying bank is entitled to insist on the endorsement if its customer wants it.

My suggestion is to determine which of your customers is/are depositing these checks without endorsement and take care of the problem at the "front end." As depositary bank, you can insist on the endorsements even if the UCC protects you when they are missing. And, if some slip by, be prepared to whack the returned checks with a "Credited account of within named payee" stamp, rather than charge them back (but give them notice).

This topic will be included in my Wednesday April 18, 2007, webinar on "Return Items - The Depositary Bank Perspective."