If a customer presented a forged check to Bank A for partial deposit and partial cash back. Bank A sends it to Bank B for payment. Bank B waits too long to discover it was a forged item. Bank B does send it back after the deadline. Is Bank B only liable to Bank A for the amount which was withdrawn (its actual loss presuming that the deposited funds are still in the account) or for the entire amount? And can Bank B send the check back to Bank A through the regular banking channels?

[This message has been edited by Kathryn (edited 08-02-2001).]

I'm not sure about the amount of liability. However, who is liable depends on what was forged. The depositing bank (Bank A) is liable for a forged endorsement. The drawee bank (Bank B) is liable for a forged signature. In the case of a forged payee endorsement, Bank B can return the check within the midnight deadline to Bank A as a forgery. Usually, however, Bank B doesn't know that it's a forgery until their customer tells them. In that case, Bank B has to send a non-entry request via the US Mail (a letter), along with an affadavit of forgery, to Bank A requesting an official check as payment. Bank A must comply with this request. If the maker's signature is forged, then Bank B can return the check to Bank A within the midnight deadline. If Bank B discovers the forged signature after the midnight deadline they are out of luck. NO ITEM, regardless of reason for return, can be sent back through regular channels, ie., return cashletter, after the midnight deadline. Refer to section 18.3 of Federal Reserve Operating circular number 3. It can be found at www.frbservices.org.