We have a business customer that deposited a fraudulent $100K cashier’s check at our bank. The customer waited two days for the funds to become available, then wired out $70K. After sending the wire, we received the $100K check as a chargeback with the notation that the check was an “altered fictitious check,” but we rejected the return as late (past the midnight deadline). Our customer later notified us that the $100K check they deposited appeared to involve a fraud scheme. We placed a hold on the remaining $30K in our customer’s account. After waiting thirty days, we have not heard from the paying bank, which apparently has a $100K loss. Is our customer entitled to keep the $30K from the fraud, or does the paying bank have a right to claim the remaining funds?

Whether the paying bank has a right to claim the remaining funds from your customer depends on the facts and circumstances of the fraud. If your customer was an innocent victim of the fraud and took the cashier’s check in good faith as payment for goods or services (or took certain actions in reliance on the payment), we do not believe the paying bank has the right to claim the remaining funds from your customer. Conversely, if your customer was a party to the fraud or did not take the check for value or change their position in reliance on the payment, we believe the paying bank may be entitled to reclaim the full amount of the cashier’s check from your customer. The paying bank also may be entitled to seek relief from your bank if your bank breached any presentment warranties when presenting the cashier’s check for payment.

Under the Uniform Commercial Code (UCC), when taking a cashier’s check for deposit and making the funds available before final settlement of the check, your bank has the right to charge back the check and obtain a refund from your customer if your bank does not receive settlement for the item — such as when the item is timely returned by the paying bank. However, if the paying bank erroneously makes payment on a cashier’s check that it failed to identify is fraudulent and does not make a timely return (i.e., before the midnight deadline), the paying bank may be liable for the amount of the check. Here, the paying bank missed the midnight deadline and did not make a timely return, but it still may be able to claim the funds from your bank or your customer, depending on the rules discussed below.

Generally, a paying bank may recover a mistaken payment from the person to whom or for whose benefit the payment was made — regardless of whether the paying bank exercised ordinary care in making the payment — unless the person receiving the payment took the check in good faith and for value or changed their position in reliance on the payment. The Seventh Circuit has confirmed that “Illinois law provides no remedy for [a bank] against a person who took [an] instrument in good faith and for value.” However, the commentary to the UCC provides that “[[i][/i]i]f a check has been paid by mistake and the payee receiving payment did not give value for the check or did not change position in reliance on the payment, the drawee bank [i.e., the paying bank] is entitled to recover the amount of the check.”

Assuming the paying bank in this case suffered a loss — either because the fraudulent cashier’s check was a fictitious check the paying bank didn’t issue or was a genuine check that was forged or altered (for which the paying bank reimbursed a victimized customer) — it has three years from the date of the mistaken payment to seek recovery from the payee.

Additionally, the paying bank may be entitled to seek recovery from your bank for breach of one of the three presentment warranties when presenting the cashier’s check for payment: (1) that there were no unauthorized or missing endorsements, (2) that the check had not been altered, and (3) that you did not know that the drawer’s signature was forged. If the check truly was altered, your bank may be liable to the paying bank for breach of your presentment warranties, and the paying bank has three years from the date the breach occurred to bring an action against your bank.

Consequently, we recommend obtaining more information from your customer regarding the circumstances of their receipt of the cashier’s check, including whether they took the check for value or changed their position in reliance on it and obtaining more information from the paying bank as to why it believes the check was “altered” — for which your bank may be held liable. We also recommend filing a suspicious activity report (SAR) in relation to the fraudulent cashier’s check since the loss exceeds $25,000.

For resources related to our guidance, please see:

OCC Bulletin 2007-2, Fraudulent Cashier’s Checks: Guidance to National Banks Concerning Schemes Involving Fraudulent Cashier’s Checks (January 8, 2007) (“Paying banks also experience risks related to fraudulent cashier’s checks. Paying banks that fail to identify fraudulent cashier's checks may pay the checks erroneously. Even if they identify the checks as fraudulent, they may find themselves liable for the amount of those checks if they do not return the checks in a timely manner.”)

Illinois UCC, 810 ILCS 5/4-214(a) (“If a collecting bank has made provisional settlement with its customer for an item and fails by reason of dishonor, suspension of payments by a bank, or otherwise to receive settlement for the item which is or becomes final, the bank may revoke the settlement given by it, charge back the amount of any credit given for the item to its customer's account, or obtain refund from its customer, whether or not it is able to return the item, if by its midnight deadline or within a longer reasonable time after it learns the facts it returns the item or sends notification of the facts. If the return or notice is delayed beyond the bank’s midnight deadline or a longer reasonable time after it learns the facts, the bank may revoke the settlement, charge back the credit, or obtain refund from its customer, but is liable for any loss resulting from the delay. These rights to revoke, charge back, and obtain refund terminate if and when a settlement for the item received by the bank is or becomes final.”)

OCC Bulletin 2007-2, Fraudulent Cashier’s Checks: Guidance to National Banks Concerning Schemes Involving Fraudulent Cashier’s Checks (January 8, 2007) (“The bank’s right to charge back under the UCC may not apply if the paying bank fails to return an item to the bank by midnight of the banking day following the date the paying bank received the item.”)

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, . . . retains the item beyond midnight of the banking day of receipt without settling for it or. . . does not pay or return the time or send notice of dishonor until after its midnight deadline.”)

Illinois UCC, 810 ILCS 5/4-104(10) (“‘Midnight deadline’ with respect to a bank is midnight on its next banking day following the banking day on which it receives the relevant item or notice or from which the time for taking action commences to run, whichever is later.”)

Illinois UCC, 810 ILCS 5/3-418(a) (“Except as provided in subsection (c), if the drawee of a draft pays or accepts the draft and the drawee acted on the mistaken belief that (i) payment of the draft had not been stopped under Section 4-403 or (ii) the signature of the drawer of the draft was authorized, the drawee may recover the amount of the draft from the person to whom or for whose benefit payment was made or, in the case of acceptance, may revoke the acceptance. Rights of the drawee under this subsection are not affected by failure of the drawee to exercise ordinary care in paying or accepting the draft.”)

Illinois UCC, 810 ILCS 5/3-418(b) (“Except as provided in subsection (c), if an instrument has been paid or accepted by mistake and the case is not covered by subsection (a), the person paying or accepting may, to the extent permitted by the law governing mistake and restitution, (i) recover the payment from the person to whom or for whose benefit payment was made or (ii) in the case of acceptance, may revoke the acceptance.”)

Illinois UCC, 810 ILCS 5/3-418(c) (“The remedies provided by subsection (a) or (b) may not be asserted against a person who took the instrument in good faith and for value or who in good faith changed position in reliance on the payment or acceptance. This subsection does not limit remedies provided by Section 3-417 or 4-407.”)

UCC § 3-418 cmt. 1 (“If the drawee acted under a mistaken belief that the check was not forged or had not been stopped, the drawee is entitled to recover the funds paid or to revoke the acceptance whether or not the drawee acted negligently. But in each case, by virtue of subsection (c), the drawee loses the remedy if the person receiving payment or acceptance was a person who took the check in good faith and for value or who in good faith changed position in reliance on the payment or acceptance.”)

First American Bank v. FRB of Atlanta, 842 F.3d 487, 489 (7th Cir. 2016) (“First American was the victim of a mistake, all right, but Illinois law provides no remedy for such a victim against ‘a person who took the instrument in good faith and for value.’ 810 ILCS 5/3-418(c). The lawyer and the two banks reasonably believed that they were engaged in the innocent, commonplace banking activity of forwarding a check to its intended final recipient on behalf of their clients. There is no claim or evidence that they knew they were siphoning money to criminals.”)

UCC § 3-418 cmt. 2 (“If a check has been paid by mistake and the payee receiving payment did not give value for the check or did not change position in reliance on the payment, the drawee bank is entitled to recover the amount of the check under subsection (a) regardless of how the check was paid.”)

Illinois UCC, 810 ILCS 5/3-118(g) (An action “(ii) for breach of warranty, or (iii) to enforce an obligation, duty, or right arising under this Article and not governed by this Section must be commenced within 3 years after the cause of action accrues.”)

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

Uniform Commercial Code, 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.”)

FDIC Suspicious Activity Report Rules, 12 CFR 353.3(a) (“A bank shall file a suspicious activity report . . . in the following circumstances: (2) Transactions aggregating $5,000 or more where a suspect can be identified. . . . (3) Transactions aggregating $25,000 or more regardless of potential suspects.”)