One of our commercial customers had several forged checks drawn on their account. One check was written on June 8. The check cleared our bank on June 13. The customer received a statement showing the check on June 30, and they notified us that the check was fraudulent on July 10. We returned the check to the depository bank (a credit union) on that day. The credit union submitted a late return claim to the Fed, which initially credited the credit union but reversed the credit after we submitted documentation. The credit union claims that we made a late return under Section 4-302 of the Uniform Commercial Code (UCC).

We believe that the credit union is correct that the check was a late return under the Uniform Commercial Code (UCC), because your bank returned the check after the midnight deadline.

As we understand the Fed’s process for late returns, it would have revoked its credit to the credit union if it could not obtain the credit from your bank, or if your bank submitted documentation stating that you returned the check within the midnight deadline. The midnight deadline provided in the Uniform Commercial Code (UCC) requires banks to return checks, including forged checks, by midnight of the next banking day after receiving the check (with certain limited extensions permitted under Regulation CC).

Apart from the UCC’s midnight deadline requirement for returned checks, your bank still may have a claim against the depository bank (the credit union, in this scenario) under the UCC’s presentment warranties. When the depository bank presented the check to your bank, it made three presentment warranties under the UCC: (1) there are no unauthorized or missing endorsements on the check, (2) the check has not been altered, and (3) the depository bank did not know that the drawer’s signature was forged. However, it is unlikely that the credit union breached any of these warranties, unless you can prove that it knew that the check was forged when it transferred the check to your bank.

For resources related to our guidance, please see:

FRB Operating Circular No. 3, 20.5 (“The sender’s Administrative Reserve Bank will revoke the credit provided under paragraph 20.4 given to the sender (and a Reserve Bank will recredit the paying bank) if: (a) for any reason a Reserve Bank cannot obtain the amount of the credit from the paying bank; or, (b) a Reserve Bank receives the returned check or the copy the paying bank received with the Claim of Late Return and a statement as provided below . . . : (i) state that the paying bank returned the check within its deadline under the Uniform Commercial Code and Regulation J or Section 229.30(c) of Regulation C, and (ii) show the banking day of receipt and the date of return by the paying bank.”)

FRB Operating Circular No. 3, 20.3 (“A bank that believes it has a claim for breach of warranty based on an altered check, a forged indorsement, a missing indorsement or an unauthorized indorsement against another bank should deal directly with that other bank. . . .”)

Illinois UCC, 810 ILCS 5/4-302(a) (“If an item is presented to and received by a payor bank, the bank is accountable for the amount of: (1) a demand item, other than a documentary draft, whether properly payable or not, if the bank, in any case in which it is not also the depositary bank, retains the item beyond midnight of the banking day of receipt without settling for it or, whether or not it is also the depositary bank, does not pay or return the item or send notice of dishonor until after its midnight deadline; . . .”)

Illinois UCC, 810 ILCS 5/4-104(a)(10) (“‘Midnight deadline’ with respect to a bank is midnight on its next banking day following the banking day on which hit receives the relevant item . . . .”)

Regulation CC, 12 CFR 229.30(c) (“The deadline for return or notice of nonpayment under the U.C.C. or Regulation J (12 CFR part 210), or § 229.36(f)(2) is extended to the time of dispatch of such return or notice of nonpayment where a paying bank uses a means of delivery that would ordinarily result in receipt by the bank to which it is sent (1) On or before the receiving bank’s next banking day following the otherwise applicable deadline by the earlier of the close of that banking day or a cutoff hour of 2 p.m. or later set by the receiving bank under U.C.C. 4-108, for all deadlines other than those described in paragraph (c)(2) of this section; this deadline is extended further if a paying bank uses a highly expeditious means of transportation, even if this means of transportation would ordinarily result in delivery after the receiving bank’s next cutoff hour or banking day referred to above; . . . .”)

Illinois UCC, 810 ILCS 5/4-302(b) (“The liability of a payor bank to pay an item pursuant to subsection (a) is subject to defenses based on breach of a presentment warranty (Section 4-208) or proof that the person seeking enforcement of the liability presented or transferred the item for the purpose of defrauding the payor bank.”)

Illinois UCC, 810 ILCS 5/3-417(a)(1) and 810 ILCS 5/4-208(a)(1) (“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 that pays or accepts 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; (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.”)

Illinois UCC, 810 ILCS 5/3-417, cmt. 2 (“Subsection (a) states three warranties. Subsection (a)(1) in effect is a warranty that there are no unauthorized or missing indorsements. ‘Person entitled to enforce’ is defined in Section 3-301. Subsection (a)(2) is a warranty that there is no alteration. Subsection (a)(3) is a warranty of no knowledge that there is a forged drawer’s signature.”)