QUESTION: We frequently have customers who wait 6 months to report forgeries. Our procedure has been to return the item at that time to the depositary bank. (We normally give the customer a refund) It is my understanding that we must return items according to Reg. CC, and this is much too late. Please tell me what we should be doing when this happens? I am new to compliance, but this does not seem like the correct way to handle forgeries. Our deposit agreement states that the customer should examine their statement within 30 days. I know that the customer has one year to report a forgery and three years to report a forged endorsement.
ANSWER FROM SAM OTT: There are two parts to this inquiry. One is the issue of whether you must make a refund to your customer. The other is the issue of whether you may return the item to the depositary bank.
If the forgery is of the drawer's signature, both Reg. CC and the UCC apply, and the item must be returned prior to your midnight deadline. If the forgery is of the depositor's endorsement, you can return the check outside the midnight deadline to the bank of first deposit and receive reimbursement due to the fact under the provisions of the Uniform Commercial Code (UCC) the depository bank has guaranteed all prior endorsements including the forged endorsement. (Note, however, that this area is very complex and there may be circumstances that would defeat the success of the return.)
Whether you are liable to your customer, however, is a different issue. Under the UCC 4-406, the customer has a duty to promptly examine his bank statement and report a forgery. If the customer fails to act quickly, he can lose important rights and may not be able to pass the loss on to your bank unless he can show you failed to exercise ordinary care. The UCC does allow you and your customer to modify the provisions of the UCC by agreement. If your depository agreement contains language that relieves the bank of any liability if the customer does not notify the bank of any forgeries within 30 days after receipt of a bank statement, you would not have to recredit your customer's account. Even if your agreement does not have such a provision, check the language of the UCC that was adopted in your state, as it can vary from one jurisdiction to another. Always try to determine whether the forgery was an isolated instance or whether there were multiple forgeries by the same wrongdoer. The model UCC text contains a provision that a bank is not liable for multiple forgeries on a account if the items were forged by the same party and the customer id not notify the bank within 30 days of receipt of the statement containing the initial forgery. The bank is however, liable for the first check or checks contained in the first statement unless the negligence of the customer allowed the forgery to occur. This provision may have been adopted by your state legislature or could have been amended or deleted. Check your state version of the UCC or contact your legal counsel.
As with any question involving UCC Articles 3 and 4, the answer is heavily dependent upon the exact facts and circumstances and the language of the law as adopted in the state.
ANSWER FROM BARBARA HURST: Your customer who is reporting forged signatures on his or her account
has a whole year to report a forged signature. However, there is a limit to how many days they can claim. Your deposit agreement states they have 30 days. You are more generous than most of the industry, where the standard is usually ten days. Your 30 days means that you will accept liability for the 30 days already in the statement they have received, plus 30 days, 60 days in all. As you can see, if your agreement read 10 days, you'd reduce your liability.
You never refund a customer without investigation! Ask all manner of questions on how this forgery took place. Where were the checks kept, who had access to them, do you know the name of the payee, etc. Was there customer negligence involved? The new Uniform Commercial Code cuts you some slack here. Take advantage of it.
Reg CC is not the regulation you are addressing with the timely return of checks. Reg J says you have to start a check you are not going to pay, drawn on your customer's accounts, by midnight of the day
following receipt of that check in your shop. After that time, the payment of the check drawn on you to the presenting bank is final. They only way you can return a check that has a claim of forged signature
is without entry that is, with a request for reimbursement, sent to the negotiating bank, through the United States mail. We suggest you send a good copy of the front and back of the check instead of sending the original, because your chances of getting paid for a forged signature on one of your accounts is slim to none! So you'll want to hold on to the original check.
Forged endorsements are another matter entirely. You are correct in saying your customer has three years to report a forged endorsement. In that case you will want an affidavit of forgery signed by the payee. That original check, along with the signed, original affidavit, will go back to the negotiating bank with a polite demand for payment, under the terms of UCC 4-406. But, again, it will go back without entry, through the United States mail.
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