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Washed Checks: Who takes the loss?

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Question: 
I recently took a loss on a washed check. I was the depository bank. I am trying to find out if I had to take that loss. As the depository bank, I know we warrant the check but there was no way to tell that this check had been washed. Are we still responsible? The maker's bank did not discover the alteration until the customer received their statement. We took the loss but I am just trying to understand it better. Also where do I find the rules for this?
Answer: 

Normally it is the drawee bank's loss in the case of an altered check UNLESS it is an obvious material alteration - for instance, if the payee's name was crossed out and another name written in - in which case it could be argued your bank was negligent in examining the item before negotiating it. In the case of a washed and altered check, you might be liable if the fact that the check was washed and altered was visible and apparent to the naked eye - particularly if it was a single check transaction, and not one of a number of checks being deposited at the same time. If, however, you took the check in good faith, and there was nothing apparently wrong with the item, it is usually the paying bank's problem, not yours. You'll find the section for altered checks in the Uniform Commercial Code section 3 - 407.

First published on BankersOnline.com 8/05/02

First published on 08/05/2002

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