I'm no UCC expert. Can anyone tell me how long a draft can be returned?In other words, if we accepted a draft into one of our business customers accounts, and it was unauthorized, how long does that drawer and their bank have to return it to us unauthorized, 60 days? 90 days? Thanks in advance.

You are going to have to describe this draft in a little more detail? Did it look like a check and was it processed through a normal automated cash letter? If so, they have until midnight of the business day after the business day of presentment.

These drafts do look like checks and are processed like a check. What I'm concerned about is if the person whose account on which the draft was made realizes 30-45 days after they get their statement that they didn't authorize such a draft and go to their bank, their bank will return it to us as unauthorized. How long does the returning bank have to notify us that the draft will be returned. I hope I'm making sense, as I stated UCC is not my strength.

It depends on what State you are in. In many States, there are no provisions to return these items after the midnight deadline. If you are banking a company that is initiating these, you need to be very sure of thier procedures for obtaining proper authority and make sure they are credit worthy to support any unauthorized claims.

The states that acknowlege their existence refer to these as "demand drafts." If you search using that term, you will find several prior threads. As noted, the general rule that a check has to be returned by midnight of the following day applies unless your state has tweaked the model version of the UCC.

The Feds are going to "fix" this.

Here's my questions on this:

A) How would the customer know by midnight that day that the check even came through?

B) Where can I find UCC information for Colorado?

I ask because we have a late claim dispute on an unauthorized draft that was created by a company that we see a large number of these come through. This company doesn't seem to be using the best business ethics on their end and I don't want my customer to have to pay the 119.90 for a check he didn't authorize.

Thanks in advance!-

A) They can't. And by the why - they don't eat the loss - you would for paying an unauthorized debit.

B) Go Here

In Texas it is found in the UCC at 3-104(k), which defines a demand draft and 3-417(a)(4) which include proper authorization in the presentment warranties. You should look in the similiar sections in Colorado:

§ 3.104. (k) "Demand draft" means a writing that is not signed by a customer, as defined in Section 4.104(a)(5), and that is created by a third party under the purported authority of the customer for the purpose of charging the customer's account with a bank. A demand draft does not include a check drawn by a fiduciary, as defined in Section 3.307. A demand draft may contain any or all of the following:

(1) the customer's printed or typewritten name or account number;

(2) a notation that the customer authorized the draft; and

(3) the statement "No signature required," "Authorization on file," "Signature on file," or words to that effect.


§ 3.417. PRESENTMENT WARRANTIES. (a) If an unaccepted
draft is presented to the drawee for payment or acceptance and the drawee pays or accepts the draft, (i) the person obtaining payment or acceptance, at the time of presentment, and (ii) a previous transferor of the draft, at the time of transfer, warrant to the drawee making payment or accepting the draft in good faith that:
(1) the warrantor is, or was, at the time the warrantor transferred the draft, a person entitled to enforce the draft or authorized to obtain payment or acceptance of the draft on behalf of a person entitled to enforce the draft;
(2) the draft has not been altered;
(3) the warrantor has no knowledge that the signature of the drawer of the draft is unauthorized; and
(4) if the instrument is a demand draft, the creation of the draft according to the terms on its face was authorized by the person identified as drawer.

So, if the bank pays for this "unauthorized draft" then it would make sense that all these companies are out there creating them to get rich off of banks..... doesn't make much sense in the world of "logic" to me.

Well, that is why the States have been working on fixing the problem through modification of the UCC. The Fed is working on it also.

What state was the bank in that the check drawn on? If it's Colorado - return it for breach of warranty.

My friend Pizzaz is in Massachusetts, which has not updated its version of the UCC to address these despicable items. So Pizzaz's bank has until its midnight deadline to return them.

In general, if a customer has not authorized one of these items, the drawee bank is responsible to refund the customer under the same rules applicable when dealing with forged drawer signatures on checks. That's separate from whether the bank is able to recover anything under the UCC.

As to smcfarland's questions the customer isn't responsible under the UCC to know the item came through, any more than the customer would be aware that a check the customer had written came through. The customer gets the reasonable time after statement rendering to verify payments from the customer's account, unless it's a business account and you have special arrangements. Again, it's the same as a forged drawer signature on a check.

The Fed indicates that Colorado is one of the fourteen states that has added the language to its versions of articles 3 and 4 of the UCC to add transfer and presentment warranties of customer authorization to these drafts. You can find the Colorado UCC here: LINK

Since only 14 states have adopted transfer warranties unique to these demand drafts (or remotely created checks) and the provisions of the law vary from state to state, it's a toss-up whether you'll be able to send the item back to the depository bank without entry and have your claim honored. But it will be worth an attempt. Get your customer to sign an affidavit stating that the customer didn't authorize the draft/check to be drawn against the customer's account first.

It was California

The fourteen states that have adopted some form of language in their versions of the UCC are California, Colorado, Hawaii, Idaho, Minnesota, Nebraska, New Hampshire, North Dakota, Oregon, Tennessee, Utah, Vermont, West Virginia, and Wisconsin.

Click Here for a report on the Fed's proposal to amend Regs. CC and J to address the problem uniformly.

There you go - return it!

Is there a specific amount of time that we have to return these items? We just had a customer call in and indicate they didn't authorize one. We're in Nebraska.

In most cases, the "tweak" of the UCC is to add transfer and presentment warranties. Look in article 3 of your state's version and the version in force in the state where the check was deposited. Find the section on "statute of limitations," which is normally section 3-118. The "standard" version of the UCC says three years.

If its three years, does that mean we could send the check back for 3 years after we paid it?

The three years is counted from when the cause of action accrues. The cause of action accrues as to your customer when then customer knows or has reason to know that the draft is/was unauthorized.

But be aware that once you or anyone else learns of the facts, if you fail to notify the person against you will make a claim within 30 days, and your delay causes that person to incur a loss that would not have been incurred if you notified them within 30 days, the claimant could be liable for the increased loss.

Thanks John, as for notification, is sending the check back "notification?" Here's the scenario that happened. Customer gets called by someone indicating they can get a credit card to repair their credit. The charge is $369. Customer gives account number, routing, etc to the caller. Customer later changes mind, calls this company and says cancel. The company sends though the check anyway which doesn't get noticed until the statement comes. Then they call us. We are going to try to send it back. Are we doing things correct?

Well, maybe. Your customer would have been better off calling the bank to stop payment on the "check." If the company had already created it, the customer authorized it, and your customer might be on the horns of a dilemma.

Frankly, I know that a lot of these "unauthorized" drafts are actually cases of buyer's remorse, or at best, cases in which the customer was lured into giving out account information. I simply don't know when people are going to wake up and smell the coffee on this stuff, and stop being sweet-talked into these deals.

You know what...call the bluff and return the item. It won't be disputed. Maybe that's not the letter of the law, but neither is drafting someone's account without authorization.

So just to clarify, I'm going to quote UCC S4-302 when telling the paying bank that it's a late return, therefore we will not be sending them $$ and it's up to them to pay back their customer. I just need a specific UCC code section.

That's what I would do, Pizzaz.

Thanks John, you rock!

OK, in repsonse to my original question, we returned these items as late returns. Now, the bank they're drawn on is returning them back to us stating late claim is invalid because in the case of an unauthorized draft, they have 60 days to return it, is this true?? Please help, I'm clueless on UCC rules and this has been going on for months!