We have a business customer that deposited a check from a merchant that was missing a signature. He contacted the merchant who told him to endorse the check as "refer to maker" and they were to call their bank to honor this check.

Three weeks later, the bank returned the check for missing signature. Since then, our business customer who originally deposited the check, walked away from his business and is not communicating with us at this point.

Can we claim untimely return on this item? What reg specifically can I look to that governs missing signatures?

Any help would be greatly appreciated!!

It sounds like the drawee bank returned it on their own due to the missing signature. When I managed back-office ops and check proof, we pulled checks over a certain $ amount and if the signature was missing, we returned it. Now, I think because the maker of the check meant for it to clear their account, you can send the item to the drawee bank for collection. I also managed check returns and collections back in the day, and what I would do in this situation is just that - send the item for collection and see what happens. It would be on them to contact the maker and verify intent.

And no, you cannot claim untimely return on the check. For maker signature issues (missing signature, visibly altered signature) they have a much longer timeframe for returns. I can't think of the exact law (it's been a while) but maybe someone else can chime in. I believe it's in the UCC.

That's because the fault of accepting the item lies with the depository bank. If it was a forged maker signature it's a different story - your bank had no way of knowing it wasn't the correct signature upon acceptance. However, for a missing signature it is seen as the payee's bank's fault for accepting it, since it should have been caught and rejected at the time of the deposit.

Mauraga -- So sorry, but there is no extension of the midnight deadline for returning checks for missing signature or forged signature. That's what the UCC says (see section 4-301 and -302).

If I were the depositary bank, I would challenge that return in a New York minute.

John, thanks for clarifying that. I guess I am still confused (but in no way do I want to tell people the wrong information).

I was focusing on another section, mainly "defenses under the UCC on an item that was paid not properly payable" and section 3-404. I took it to clearly mean that if the depository bank takes in a deposit that it shouldn't have, it may be liable for the loss.

"The person bearing the loss (usually the drawer) may recover from the person failing to exercise ordinary care (usually the depositary bank) to the extent the failure to exercise ordinary care contributed to the loss."

I've ran into this before and always thought that it worked like this:

1) missing maker signature; visibly altered item = responsibility on depository bank
2) forged maker signature = responsibility on drawer bank (since depository bank has no way of knowing the maker signature is a forgery)

Is that correct? I know the midnight deadline applies to virtually all transactions, but I was always told that in instances of negligence on our end (as a depositary bank) we may be hit with a claim on an item we shouldn't have accepted and it can go beyond the midnight deadline.

Any clarification would be great, thanks!

Thanks to you both for the responses. I have searched both areas of the UCC....the section that addresses the time frame for returns and the section on items that are properly payable. I just can't find a clear answer...

I would like to know where those two quotations come from. I am always glad to learn something new, but only when I know it's got a citation behind it.

The last I knew, the drawer of a check has neither a contractual relationship nor a right to recovery from a depositary bank.

3-404 deals with impostors and fictitious payees. It has no bearing on the question of erroneous payment of an unsigned check. You cannot borrow language from one section of the law and apply it elsewhere. It has to be used in context.

Hi John, thanks for the discussion

This is all coming from a manual I received earlier this year when I went to an Operations Compliance seminar through the Indiana Bankers Association. We went through a lot of these examples at length and each section I have in my manual has specific examples and a reference to the UCC. I hope this thing hasn't been leading me down the wrong path since April!

There is a section in here called "Customer's Requirements to Report Forgeries, Alterations, Forged Indorsements and Other Issues" and the manual states the following:

There are special time limits on asserting claims by the customer:

* A forged drawer's signature or alteration must be discovered and reported within one year of the statement or checks being made available. Some states, such as Georgia, provide for a shorter period of time in the UCC statute. Georgia provides a 60 day period. (4-406) Many banks attempt to reduce this period of time in the account agreement.
* A customer must seek recredit to the account for a check paid over a forged indorsement within three years (4-111). Georgia provides for one year instead of three years in the statute.

I'm not John, but that deals with claims by the customer. That has nothing to do with the ability of the bank to return the check to the depository bank. It would be the bank's loss at that point.

Ok, I found the section here that states that after the midnight deadline passes, the payor bank becomes primarily responsible for the instrument. However, they can seek reimbursement under "breach of warranty under the UCC". In this instance, they could seek reimbursement under the "presentment warranty".

They have 30 days from the time they learn of the breach of warranty to seek reimbursment. (4-207; 4-208)

3-406 also has a section stating that the loss can be allocated between the two parties (banks) if it can be proven that the payor bank failed to exercise ordinary care in paying the item and the depositary bank failed to exercise ordinary care in taking the item. So it sounds like both are at fault.

Anyway, I don't want to confuse anyone (and myself) anymore. I could read this manual all day long and come up with various different interpretations.

Thanks, Randy. I could not have put it better myself, except to reiterate the caution I gave earlier: You must understand the wording of the law (or regulation) in the context of the matter it is addressing. As Randy ably points out, 4-406 and 4-111 address the relationship between the customer and the paying bank.

What warranty has been breached? The depository bank guaranteed the check's endorsement or lack thereof. Unless the business customer didn't originally get his money, there is no breach of warranty.

OK. Let's jump back to the original question. Was this a late return and does the depositary bank have the right to enter a claim of late return? I offer a resounding YES to both parts of that question, qualified only to the extent that the paying bank of course has the right to disclaim the late return by demonstrating that it acted timely.

Now, for the post-action claims --

1. The purported drawer of the check certainly has a claim on the paying bank for improper payment, but the bank could defend with an argument that its customer received value for the payment or an argument that the customer intended that the payment be made at the time the check was tendered, in which case payment of the check was authorized notwithstanding the missing signature.

2. If that defense won't fly, and the paying bank is liable to its customer for the erroneous payment of the check, there might be a claim under the presentment warranty at 4-208(a)(3) - "the warrantor has no knowledge that the signature of the purported drawer of the draft is unauthorized" -- but that claim can't be made by simply returning the check late. It has to be made without entry, and might have to be made through legal process if the depositary bank demurs.