Notification Requirements For NSF Checks

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Question:

A customer deposits a check for rent from a tenant on the 3rd of the month. That check is returned for NSF. How much time does the bank have to notify the customer? If they bank waits till the 28th of the month to notify the customer, and mails the returned check back with the endofmonth bank statement, would they be liable for any damages?

Answer:

Your time to notify the customer begins to run when you get notice of dishonor you have until the following business day. The following is from the model version of the UCC. Look at the parallel provision enacted in your state, there may be differences.

Section 3503. NOTICE OF DISHONOR.

(a) The obligation of an indorser stated in Section 3415(a) and the obligation of a drawer stated in Section 3414(d) may not be enforced unless (i) the indorser or drawer is given notice of dishonor of the instrument complying with this section or (ii) notice of dishonor is excused under Section 3504(b).

(b) Notice of dishonor may be given by any person; may be given by any commercially reasonable means, including an oral, written, or electronic communication; and is sufficient if it reasonably identifies the instrument and indicates that the instrument has been dishonored or has not been paid or accepted. Return of an instrument given to a bank for collection is sufficient notice of dishonor.

(c) Subject to Section 3504(c), with respect to an instrument taken for collection by a collecting bank, notice of dishonor must be given (i) by the bank before midnight of the next banking day following the banking day on which the bank receives notice of dishonor of the instrument, or (ii) by any other person within 30 days following the day on which the person receives notice of dishonor. With respect to any other instrument, notice of dishonor must be given within 30 days following the day on which dishonor occurs.

From Ken: In short, if a collecting bank wants to rely on the indorser's obligation to pick up a check returned NSF (believe me, you do) you must send notice of dishonor by the banking day after you get notice of dishonor. (Reg CC has a parallel, makeweight requirement at 12 CFR 229.33 that applies to checks of $2,500 or more.)

The law is willing to assume that your customer was hurt by your delay...your customer may legitimately refuse to accept the returned check if you do not give timely notice of dishonor.

First published on BankersOnline.com 9/16/02