A customer submitted a check for deposit that was returned for insufficient funds. Per our policy, we automatically submitted the check a second time and it was again returned for insufficient funds. The customer went to the police to make a claim against the payor and was told they have no recourse under the criminal code since the check was resubmitted for payment within seven days of the first return. According to the police we would need to submit the check for payment again for the customer to have a case, but we believe Regulation CC prohibits a third submission. Are they correct?

We believe that you may be able to submit the check for payment a third time as discussed in more detail below, either by submitting it for payment through the ACH system or by sending it as a collection item directly to the paying bank.

The police are partially correct, since one method of proving that a person has intentionally passed a bad check is to show that the check was dishonored on two occasions, at least seven days apart. However, this is not the only method of proving the payor’s intent.

Under the Illinois Criminal Code, a person commits a deceptive practice when they deliver a check for the payment of money, knowing it will not be paid by the bank on which it was drawn. The Criminal Code provides that a trier of fact may infer that a person knows their check will not be paid and that they have acted with intent to defraud in either of two situations: (1) the person fails to have sufficient funds or credit with the depository when the check is issued or delivered, or (2) the check or other order is presented for payment and dishonored on each of two occasions at least seven days apart.

Consequently, if the payor did not have sufficient funds in their account to cover the check at the time it was issued or delivered to your customer, an alternative basis exists for a trier of fact to infer the payor’s intent to defraud your customer.

Regarding resubmission of the check, Federal Reserve Operating Circular No. 3 states that it will not handle an item as a cash item if the “the bank on which the item is drawn has declined to pay the item two or more times.” As a result, you cannot send the check through the Federal Reserve system for payment a third time. However, you have the option of re-presenting the check as an ACH entry, provided certain conditions are met.

Under the Nacha Operating Rules, a re-presented check (coded as an “RCK”) may be submitted for payment if the check:

1. is an “item” as defined in Article 4 of the Uniform Commercial Code,

2. is a negotiable demand draft drawn on or payable through a participating depository financial institution, other than a Federal Reserve Bank or Federal Home Loan Bank,

3. contains a pre-printed serial number,

4. is an amount less than $2,500,

5. indicates on its face that it was returned due to insufficient funds,

6. is dated 180 days or less from the date the RCK Entry is transmitted to the receiving depository financial institution,

7. is drawn on a consumer account, and

8. has been previously presented: (i) no more than two times through the check collection system if the entry is an initial RCK Entry, or (ii) no more than one time through the check collection system and no more than one time as an RCK Entry, if the entry is a reinitiated RCK Entry.

As such, we believe a check may be sent for collection twice through the Federal Reserve system and once through the ACH system, or twice through the ACH system and once through the Federal Reserve system.

In addition, you have the option of going directly to the paying bank for collection. Since check collection between two financial institutions is governed by agreement, we recommend reviewing any agreements you have with the paying bank to determine how many times an item may be presented when not being sent through the Federal Reserve or ACH systems for collection.

For resources related to our guidance, please see:

Illinois Criminal Code, 720 ILCS 5/17-1(B) (“Bad checks. A person commits a deceptive practice when:

(1) With intent to obtain control over property or to pay for property, labor or services of another, or in satisfaction of an obligation for payment of tax under the Retailers’ Occupation Tax Act or any other tax due to the State of Illinois, he or she issues or delivers a check or other order upon a real or fictitious depository for the payment of money, knowing that it will not be paid by the depository. The trier of fact may infer that the defendant knows that the check or other order will not be paid by the depository and that the defendant has acted with intent to defraud when the defendant fails to have sufficient funds or credit with the depository when the check or other order is issued or delivered, or when such check or other order is presented for payment and dishonored on each of 2 occasions at least 7 days apart. In this paragraph (B)(1), ‘property’ includes rental property (real or personal).

(2) He or she issues or delivers a check or other order upon a real or fictitious depository in an amount exceeding $150 in payment of an amount owed on any credit transaction for property, labor or services, or in payment of the entire amount owed on any credit transaction for property, labor or services, knowing that it will not be paid by the depository, and thereafter fails to provide funds or credit with the depository in the face amount of the check or order within 7 days of receiving actual notice from the depository or payee of the dishonor of the check or order.”)

FRB Operating Circular No. 3, Collection of Cash Items and Returned Checks, Section 3.1(a), printed page 3 (November 15, 2021) (“A sender should not send to us any item, and we do not undertake to handle an item as a cash item, if: (a) The bank on which the item is drawn has declined to pay the item two or more times. For purposes of this subparagraph 3.1(a) only, the term ‘the item’ means a check; any substitute check, electronic check, or ACH entry derived from that check; and any photocopy in lieu of that check . . .”)

NACHA Operating Rules (202s) Section 2.5.13.1 General Rule for RCK Entries (“An RCK Entry is a debit Entry used to collect the amount of a Check returned for insufficient or uncollected funds. If an eligible item as described in Subsection 2.5.13.3 (RCK Eligible Items) is returned by a Participating DFI, an ODFI may initiate an RCK Entry. As provided in Section 8.81 (‘RCK Entry’), an RCK Entry is deemed to be a presentment notice for purposes of Revised Article 4 of the Uniform Commercial Code (1990 Official Text), receipt of the RCK Entry constitutes presentment of the item pursuant to Article 4-110, and return of the RCK Entry constitutes notice of dishonor or non-payment pursuant to Article 4-301. The provisions of these Rules that are applicable to RCK Entries are intended to constitute a modification of Regulation CC by agreement as provided at 12 C.F.R. Part 229.37 of Federal Reserve Regulation CC.”)

NACHA Operating Rules (2022) Section 2.5.13.3 RCK Eligible Items (“An Originator may initiate an RCK Entry only in relation to an item that:

(a) is an item within the meaning of Revised Article 4 of the Uniform Commercial Code (1990 Official Text);

(b) is a negotiable demand draft drawn on or payable through or at a Participating DFI, other than a Federal Reserve Bank or Federal Home Loan Bank;

(c) contains a pre-printed serial number;

(d) is in an amount less than $2,500;

(e) indicates on the face of the document that the item was returned due to “Not Sufficient Funds,” “NSF,” “Uncollected Funds,” or comparable language;

(f) is dated 180 days or less from the date the RCK Entry is Transmitted to the RDFI (i.e., the item to which the RCK Entry relates is not stale-dated);

(g) is drawn on a Consumer Account; and

(h) has been previously presented:

(i) no more than two times through the check collection system (as a Check, substitute check, or image), if the Entry is an initial RCK Entry; or

(ii) no more than one time through the check collection system (as a Check, substitute check, or image), and no more than one time as an RCK Entry, if the Entry is a reinitiated RCK Entry in accordance with Subsection 2.12.4.1 (General Rule for Reinitiated Entries).”)

Illinois UCC, 810 ILCs 5/4-104(9) (“‘Item’ means an instrument or a promise or order to pay money handled by a bank for collection or payment. The term does not include a payment order governed by Article 4A or a credit or debit card slip . . .”)

Illinois UCC, 810 ILCs 5/4-103 (“Variation by agreement . . .

(a) The effect of the provisions of this Article may be varied by agreement, but the parties to the agreement cannot disclaim a bank's responsibility for its lack of good faith or failure to exercise ordinary care or limit the measure of damages for the lack or failure. However, the parties may determine by agreement the standards by which the bank's responsibility is to be measured if those standards are not manifestly unreasonable.

(b) Federal Reserve regulations and operating circulars, clearing-house rules, and the like have the effect of agreements under subsection (a), whether or not specifically assented to by all parties interested in items handled.”)

Illinois UCC, 810 ILCs 5/4-206 (“Transfer between banks. Any agreed method that identifies the transferor bank is sufficient for the item's further transfer to another bank.”)