We received an $18,000 large return item from FED on Oct. 12, 2002, however, the item was deposited on August 09, 2002. We received only a copy and not the original item. We returned the item as a "Late Return". Today, we received the tiem back from the Fed along with a protest from the "paying bank" claiming the bank of first deposit was illigible and that the item was sent "Raw to the Fed". We have researched the original to examine the back of the check and find that the endorsement is legible and that our routing no. is visible. My question concerns, the fact that the original must be lost and that the paying bank was not able to get a clear picture of back of the item for whatever reason, (poor reproduction quality or malfunction of equipment), can the "paying bank" deny liability for such a late return (2 months)? This can't be reasonable under the UCC or Reg. CC. Natually, the funds have been released since the check was not returned within the deadlines. Any suggestions on this one? I have not experienced such a late return as this.

First: Federal Reserve regulations require payor institutions to provide notification to the institution of first deposit when returning items for $2,500 or more. The payor must notify the institution of first deposit by 4:00 p.m. (local time) of the second business day following the day the check was presented to the payor bank.

Check to see if you got notice, if yes, you are dead in the water, if no, you have a case.

Second, you need to file "Bank's Claim of Late Return" with the FRB and they will sort through the mess. That form is HERE. On the other hand, if you got the large item return call, you may not have a case - especially if the FRB delayed returning the item - you really need to have the drawee bank record the sequence of events to see if they delayed returning the item and to see who they contacted at your bank.

My understanding is that you have already protested the late return and are looking at the "Paying Bank's Response to a Claim of Late Return." Review it carefully. Frequently, the way the paying bank fills out the form clearly indicates the return is late. Note the date of receipt and the date and method of return. If you are fortunate, their own dates will make your case.

If you are not so fortunate, you need a copy of the check showing the condition it was in when it left your institution. (In fantasyland, I would also like to get a copy of the check from the Fed so I could compare its condition at different points in transit.) If the return turns out to be timely, but your endorsement was legible and in the proper position when it left your bank, your claim against them is limited to the missing notice of large dollar return. Make a precalculation as to when the notice should have been received and how much money was in the account at that time. Given the amount, the prompt involvement of your attorney is probably a good idea.

P.S. Don't make the mistake I just made, focusing on the returning bank. Your customer and the drawer of the check are also potential sources of repayment and should not be neglected in your evaluations. Your customer was entitled to a notice of large dollar return by midnight of the banking day following October 12. (12 CFR 229.33(d)) Make certain they got it and, if not, give it to them now.

I was under the mistaken impression that the Fed REQUIRES banks to notify other institutions on large returned items. But my Item Processing area tells me that there is no federal requirement to do that..it is just strongly encouraged. Does everyone have that same idea ???

Nope - Reg CC says:

SECTION 229.33—Notice of Nonpayment
(a) Requirement. If a paying bank determines not to pay a check in the amount of $2,500 or more, it shall provide notice of nonpayment such that the notice is received by the depositary bank by 4:00 p.m. (local time) on the second business day following the banking day on which the check was presented to the paying bank. If the day the paying bank is required to provide notice is not a banking day for the depositary bank, receipt of notice on the depositary bank's next banking day constitutes timely notice. Notice may be provided by any reasonable means, including the returned check, a writing (including a copy of the check), telephone, Fedwire, telex, or other form of telegraph.