Time limit to claim on missing endorsement?

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Question:

There was a $134,611 check made payable to two companies from one of our customers. One company does not bank with us. They took the check to their bank without the other company endorsing it, and that bank paid the check. How long do we have to return the item that was improperly endorsed and paid?

Answer:

Forged endorsement claims are pursued under the transfer and presentment warranties of the Uniform Commercial Code (UCC). In most states' versions of the code, these warranties are found in sections 3-416, 3-417, 4-207, and 4-208. The time limits for bringing a claim are generally three years from the date the claimant "has reason to know of the breach [of warranty]" (Sections 3-118 and 4-111).

Don't let the three year period (one year in some states) lull you into a false sense of security, however. Once you learn of the forgery and have an opportunity to identify the warrantor (the depository bank against which you'll make a claim), you have only 30 days to notify the warrantor of your claim. If you delay that notice beyond 30 days, the warrantor's liability to you is decreased to the extent that the warrantor's loss is increased by the delay.

You can use part of that 30-day period to figure out what your position is. You should not assume anything about who is obliged to whom or for how much, until you've done some detective work.

Determine from your customer whether the second company ever saw its share of the money. Sometimes, one payee will pay the other to resolve issues like this.

Also, review how the check was actually made out. Even though both companies are named as payees, unless it was plain that the check was payable not in the alternative, either payee might have legitimately negotiated it. What you're looking for is the word "and" or an ampersand ("&") between the two payee names. If it's not there, the only proper way for this matter to be resolved is between the two payees.

If the "and" is there, and if the two payees haven't settled this already, have your customer obtain an affidavit from the aggrieved company to the effect that they never endorsed the check and have never obtained any part of the proceeds of the check.

Then, contact the bank that accepted the check for deposit, advising them of the affidavit, and notify them you're sending a claim "without entry." (For this kind of money, I would not delay notifying them of the claim, but I would not let go of the original check until I knew they planned to honor the claim.) If the depository bank is unwilling or unable to honor the claim, call your attorney.

First published on BankersOnline.com 8/29/05