IBA Compliance Connection

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Our customer paid a vendor, but the vendor claims they never received payment. Although the check cleared our customer’s account, the endorsement on the back of the check does not appear to match the name of the payee (the vendor). We have an affidavit from the vendor and a copy of the front and back of the check. Is sending a “without entry” claim to the depository bank the best course of action? Do you have an example of a “without entry” claim that we can send to the depository bank? Should we reference the depository bank’s warranty of the item’s authorization under Regulation CC and ask that they honor the warranty by remitting a cashier’s check?

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We do not recommend sending a “without entry” claim under Section 229.34(d) of Regulation CC, which concerns returned check warranties. However, we believe your bank may have a claim against the depository bank for breach of its presentment warranties under the Illinois Uniform Commercial Code (UCC). We recommend sending notice of the breach of warranty to the depository bank. For that purpose, we have attached two sample breach of warranty notices (available in our Forms Library and linked in the resources below) that may provide a starting point for drafting a notice to the depository bank. We recommend carefully reviewing any correspondence you plan to send to the depository bank before sending, and you may wish to involve your bank counsel.

When the depository bank presented the check to your bank, it made three presentment warranties under the Illinois UCC, including a warranty that there are no unauthorized or missing endorsements. It appears that the depository bank breached this warranty, since the endorsement on the back of your customer’s check does not match the name of the payee, and your customer’s vendor claims it did not receive the payment.

When you notify the depository bank, we recommend referencing the depository bank’s breach of its presentment warranties under the Illinois UCC. Additionally, we believe you should include instructions for settling the claim, such as requesting that the depository bank mail a cashier’s check to your bank or wire the funds.

For resources related to our guidance, please see:

  • Regulation CC, 12 CFR 229.34(d) (“Returned Check Warranties. Each paying bank or returning bank that transfers a returned check and receives a settlement or other consideration for it warrants to the transferee returning bank, to any subsequent returning bank, to the depositary bank, and to the owner of the check, that—

(i) The paying bank, or in the case of a check payable by a bank and payable through another bank, the bank by which the check is payable, returned the check within its deadline under the UCC or § 229.31(g) of this part;

(ii) It is authorized to return the check;

(iii) The check has not been materially altered; and

(iv) In the case of a notice in lieu of return, the check has not and will not be returned.”)

  • Illinois UCC, 810 ILCS 5/3-417(a) and 810 ILCS 5/4-208(a) (“Presentment warranties. (a) If an unaccepted draft is presented to the drawee for payment or acceptance and the drawee pays or accepts the draft, (i) the person obtaining payment or acceptance, at the time of presentment, and (ii) a previous transferor of the draft, at the time of transfer, warrant to the drawee making payment or accepting the draft in good faith that: (1) the warrantor is or was, at the time the warrantor transferred the draft, a person entitled to enforce the draft or authorized to obtain payment or acceptance of the draft on behalf of a person entitled to enforce the draft; (2) the draft has not been altered; and (3) the warrantor has no knowledge that the signature of the purported drawer of the draft is unauthorized.”)
  • UCC § 3-417 cmt. 2 (“Subsection (a)(1) in effect is a warranty that there are no unauthorized or missing indorsements.”)