IBA Compliance Connection

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One of our customers signed an affidavit of forgery relating to four checks that were drawn on her account (we believe this is related to elder abuse by her son). We paid two of the checks and returned two NSF. We are going to refund the two checks that were paid. Can we return these checks? The midnight deadline already has passed. Does Rule 9 apply?

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No, we do not believe that you may return the checks after the midnight deadline. Generally, your bank must return a check, including a forged check, by midnight on the next banking day after receiving the check, as required by the Uniform Commercial Code (UCC) (with certain limited extensions permitted under Regulation CC). In this case, these return deadlines almost certainly are unavailable.

Outside of the check return process, your bank still may make a claim against the depository bank under the UCC presentment warranties (or possibly Rule 8 warranties, if those apply, as discussed below). 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. Here, it is unlikely that the depository bank 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.

As we understand the term “Rule 9,” this generally refers to claims made through a clearinghouse for warranty breaches. If your bank is a member of a clearinghouse such as ECCHO, it is possible that a Rule 9 or similar rule may have required the depository bank to warrant that the drawer’s signature on the check was not forged. We recommend checking its operating rules for more information on breach of warranty claims and requirements.

We also note that your bank should assess whether a Suspicious Activity Report should be filed regarding the forged checks (particularly if they total more than $5,000).

For resources related to our guidance, please see:

  • 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 . . . whether properly payable or not, if the bank, . . . does not pay or return the item or send notice of dishonor until after its midnight deadline.”)

  • 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; . . . .”)

  • Uniform Commercial Code, 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.”)

  • 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.”)

  • OCC Suspicious Activity Report Rules, 12 CFR 21.11 (“A national bank shall file a SAR with the appropriate federal law enforcement agencies and the Department of the Treasury on the form prescribed by the OCC and in accordance with the form’s instructions. The bank shall send the completed SAR to FinCEN in the following circumstances: . . . (2) Violations aggregating $5,000 or more where a suspect can be identified. . . .”)

  • ECCHO Whitepaper, Understanding “Rule 8” and “Rule 9” Warranty and Claims Processes (May 2016), page 2 (“Rule 9 . . . A Depositary Bank warrants to the Paying Bank that (i) the signature of the drawer customer is not forged or unauthorized, and/or (ii) the check is not counterfeit.”)