We have recieved notice from a paying bank that a check will be returned as forgery. The paying bank wants us to give then back the full amount of the forged item amount. Can we apply a hold to the depositing customers accout for that amount. What if there are no funds in the acocunt, then what are our obligations to the paying bank?

It sounds like they are kindly asking you to honor a late return past the midnight deadline if there are funds in your customers account. If you choose not to cooperate, the paying bank is on the hook to recover the funds on their own. I would freeze the account immediately to investigate the activity in the account for other problems.

The bank I work for tries to accommodate these requests as a courtesy to other financial institutions and as long as there are collected funds in the account. We also require a "hold harmless" letter before any funds will be returned. In addition, a conversation with your customer is warranted as to why they deposited a item that was returned as a forgery.

You may want to terminate that relationship.

What if there are only partial funds in the account. Are we required to send the full amount, and absorb the remaining as a loss to our bank?

Again, if this is a late return, you are not required to do anything. The typical hold harmless letters I have seen state something to the effect of ...

"In consideration of the payment by ?????? (Bank Name) (“Depository”) in the amount of up to $????????? to the undersigned ..."

If you wanted to cooperate you could send the amount that is left in the account. You do not need to, nor should you, send the entire amount; that would create a loss to your
bank. Please check with your legal counsel / operations management to get their take on the situation.

If this is not a late return and they have notified you of the forgery within the midnight deadline, your bank will be on the hook to collect from your customer.

I am by no means a legal expert on the matter...just someone who has dealt with it on occasion. Hopefully one of the experts in this forum will chime in soon.

Packerman seems to have a good handle on the situation.

Thank you. I was having a hard time with this one as it has been along time since I needed to be concerned with such a thing. So II made my self some pretty good notes!

Another scenario could be that the item they are returning as a forgery was accepted at by your bank for deposit as a third party check. Your bank could be on the hook if you did not properly identify and document ID for the original payee of the item before acceptance. I believe there is typically a three year return time frame for checks with a forged payee endorsements. In this case they should be including in their request an affidavit of forgery completed by the payee of the item.