Hello All,

We have a commercial customer with accounts at several banks. We have agreed to cash checks issued by this business to its customers that are not drawn on their accounts at our institution. We have an indemnity agreement with them that says they will not hold us responsible for any losses as a result of this. Recently, we cashed a check that was stale dated. In addition, the check also had a restrictive legend saying that it was expired as of nearly a year ago. They have returned it to us with the stale dated reason and are claiming that the loss falls to us because we should have noted the date of the check when it was presented. The indemnity agreement says plainly that they will not hold us responsible if a check we cash for their customers is not paid for any reason.

So, my question is who does the liability fall to? Normally, I would say the answer is in the UCC or the account agreement, but this seems like a slightly different situation since the check was not drawn off of an account here and because we have the indemnity agreement. Any help is greatly appreciated.

The paying bank has the option of returning a stale check unpaid, and as the depositary bank you will be charged. The question is whether your indemnity agreement will be enforceable against the issuer.

That's a question for an attorney who can review the entire agreement, and no one here is in that position. Will the "for any reason" language prevail, or will a judge or jury decide that it's overly vague? Is there any mention in the agreement of stale checks, including those that are "stale" based on a check legend, or those that are more than 6 months old?

And is the bank willing to try to enforce the agreement given the circumstances and the balances maintained with the bank?

Thanks, John. That makes sense. For clarification, the exact wording of the paragraph in question is "Provided the Bank utilizes reasonable care inspecting the identification as described in 2(b), the Company hereby agrees to indemnify, hold harmless, and defend the Bank from and against any and all losses, claims, liabilities, and expenses, including reasonable attorney's fees, that the Bank may sustain by reason of cashing the checks, including any loss or expense incurred as a result of any of the checks being returned to the Bank for any reason or a claim being made on any of the checks for any reason."

So, their only out based on the agreement would be to claim that the bank did not properly identify and inspect the identification of the payee.

Still, I agree that it would come down to whether or not the bank decided to pursue this. As it turns out (and much to my surprise), we decided to terminate our relationships with the business.