So we have a customer who received a Large Refund Check for $5,000 made payable to him AND his wife.
He forged his wife's signature and deposited into HIS account here at the bank.
The wife found out and came to us with a police report and apparently knew he deposited here.
We are holding the funds and he's threatening to sue us for doing this. Don't we have the right to hold the funds since we have the police report from his wife?

We didn't release specific account information to his wife (since she doesn't sign on the account) But we took her information and agreed to hold the funds.

Again, he's threatening to sue us etc...but we shouldn't be in trouble right?!

I suggest you talk with bank counsel. You've just taken action to deny your depositor access to his account funds without any legal compulsion to do so. A police report is an allegation, not a conviction. Your customer may have forged his wife's signature, but you don't know all the facts yet.

Contact your bank's attorney, and specifically ask whether the bank's action risks the potential for a depositor's suit for wrongful dishonor if any of your depositor's checks bounces. Tell the wife she needs to contact the issuer of the refund check (I assume it's the IRS) to press her case that the endorsement was forged.

At our bank we never let a spouse deposit a refund check made payable to both into a single name account, for this reason exactly, you never know the martial status and it's not your job to police.

We would allow a refund check made payable to both to be deposited into a single name account, only if the person who is not on the account is present with ID.

He did happen to have her ID... but he forged her signature.. it's a big ol mess. I think we spoke to our bank attorney and the money from the refund was sent to the courts and will behandled by the courts.

"the refund was sent to the courts and will behandled by the courts."

That was probably the wisest move available to the bank. It gets you squarely out of the middle. If you review your depositor's agreement, it should have those exact provisions mentioned regarding any dispute regarding funds in a joint account between the owners.

You've dodged the bullet; paying the funds into court and seeking a declaratory judgment was a wise move.

Had the wife moved a bit more slowly and taken the "correct" route, filing a formal claim, your bank would not have had a defense to the reclamation notice. Your bank needs to dramatically revise its proceedures for accepting government checks for deposit...