Okay, here's the scenario...the payee of a check has no other accounts with our bank, but has a charged off account here…when they presented the "on us" check for cashing, could we require them to pay on the bad account with some of the proceeds of the check they are attempting to cash, and if they do not agree, we would refule to cash it? Would that be enough of a reason to refuse cashing the check? And, if so, how would you suggest we handle with our customer if they inquire as to why we did not cash the check?

You might look at your state law. In our state if there is good funds in the account and we have not been notified that our customer has put a stop payment on the check and the non-customer has proper ID you must cash the check. You can ask them to pay on their charge off but if they say no you can't refuse if there is good funds. Now you can refuse if the check is not drawn on your bank and we do that.

We had a similar situation recently and our counsel said this -

Once the customer "charged off", they were no longer considered a "customer". Thus using our policy of cashing an "on-us" check for a non-customer. (We do have the visit with the ex-customer about the outstanidng balance though.)

In our state - we are required to cash the on-us check in this case.

It was always my understanding that banks don't have to cash a check at all. If the item is presented through clearings and there no reason to deny payment, then it must be paid, but I don't know where it says we have to cash it.