Countering Breach of Transfer Warranty

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Question:

We are in a spitting match with another bank over some forged checks. We accepted them and sent them for payment to the other bank back in January. Over a month later, the bank returned them - one was stamped NSF, the other two had no reason, so we called and the bank faxed us forgery affidavits. From day 1 of my banking career, I have been taught that the paying bank eats forgeries, so we returned them as late returns. Then we got a letter from the bank demanding payment saying we had breached the transfer warranties (since there were forged signatures). We replied you are outside of your timeframe for breach of warranty and besides, we are holder in due course and you can't demand payment for forgeries from a holder. They replied since you knew they were forgeries, you were on notice of the breach of transfer warranty therefore we are within the timeframe. Neither one of us is giving in, but I can see where they are getting the breach of transfer warranty, which seems to be a contradiction to the holder in due course defense against forgery. So can we/how do we counter their argument of the breach of transfer warranty?

Answer:

Answer by Randy Carey: I would wait to provide any additional counter when you reply to the lawsuit that they may or may not file. That is the only way that they are going to get any money from you and the continued bantering back and forth serves no useful purpose. If the maker's signature is the forgery in question, they have until the midnight deadline to return the items - end of story. The only response that I would provide is that if they feel strongly that they are in the right - sue us.

Answer:

Answer by John Burnett: On the other hand, if the checks in question have been returned (albeit late) and you were charged for them (and haven't recovered the funds), you may want to push back some more before deciding whether to institute legal action from your end to recover the funds. You say that the paying bank claims you knew the checks were forgeries. I am not sure where that came from or on what basis they are making that claim. If you did know of the forgeries before presenting the checks for payment, you could end up losing these funds.

But if you knew nothing of the forgeries until the paying bank supplied the copies of the affidavits, I think you have a strong case for recovery. As Randy noted, the paying bank had until its midnight deadline to return those checks, and when it missed the deadline, it became accountable for them.

First published on BankersOnline.com 6/10/13