Question:

Hi Heather,

We have another financial institution requesting funds back for a check that is fraudulent. Can you clarify for me when we as a credit union are responsible to take the loss and when we can deny the request?

In this situation the check was altered. The payee was changed to someone else. The dollar amount and the drawer’s signature on the front did not change.

Answer: 

In general, a paying bank has only until its midnight deadline to return a check.

However, if the claim involves the depository bank breaching transfer and presentment warranties under the UCC, the paying bank has a longer time to make a claim against the depository bank outside of the check collection process. By accepting a check for deposit and sending it to be collected, a depository bank warrants to others in the collection process that (among other things) the item has not been altered. The time frame for making presentment and warranty claims against a depository bank is three years.

So unless it has been a very long time since your credit union accepted this check for deposit, it sounds like your credit union is responsible to make the paying bank whole.

Any “easy” (UCC issues aren’t easy!) way to remember things:

• If the drawer’s signature has been forged or the entire item is counterfeit = Paying bank is responsible and has only until its midnight deadline to return a dishonored check to the depository bank.
• If the payee’s signature has been forged, or someone not entitled to payment has endorsed the item, OR there has been materials alterations made to the item = Depository bank is responsible. Paying bank still has until its midnight deadline to return the check, but can also make breach of transfer and presentment and warranty claims directly against the depository bank for up to three years after the item was presented for payment.

Sorry I don’t have better news.