We received a cashiers check back as "refer to maker". When the institution that the check was issued on was contacted, they said it was purchased with a fraudulent check. I was under the impression that cashier's checks are guaranteed funds (unless of course it is a fraudulent item). Wouldn't the issuing financial be liable?

They would be, and you have the right to make a claim against them for wrongful dishonor of their cashier's check. They will either accept liability or make you sue them. Before it gets to that point, you may want to ask bank counsel to draft a demand letter to help remind them of their obligation under the Uniform Commercial Code.

Thank you, that's what I thought as well, but it never hurts to get a second opinion.

I've seen banks bluff many times, especially a bigger bank to a smaller one in an attempt to, dare I say it, bully them. It isn't your bank's fault that the other bank blew it. The only thing I'd insert to Brian's comment is an attempted call before I'd spend money on a letter from counsel, to ask the person who would get your letter if they're familiar with UCC, and quote chapter and verse. If they try and stick to their opinion, get counsel involved.