Who is responsible when endorsements become illegible? We sent a check thru Fed with a perfectly readable endorsement. The payee bank has returned it to us (very late) citing that the delay was caused by the fact they could not read the back of the check. As far as we can tell they are the ones who endorsed on top of our endorsement thus making the whole thing illegible. They cited Reg CC and demanded they money back. Reg CC is somewhat contradictory on this topic.
Any help will be greatly appreciated.

If your endorsement was placed in the appropriate section of the check and was legible when the check left your bank, you can simply refuse the late return if it came back as a return item, or refuse the claim if it came to you "without entry."