Yes, banks generally must return checks by midnight on the next banking day after receiving the check, as required by the Illinois Uniform Commercial Code (UCC).

However, federal Regulation CC permits an extension of the UCC midnight deadline under certain circumstances. A paying bank may send the returned check directly to the depository bank by sending an electronic returned check, if the banks have an agreement to do so, or by a courier that leaves after midnight to deliver a paying bank’s forward collection checks. In both cases, the midnight deadline is extended if the depository bank receives the returned check by 2:00 p.m. or before closing, whichever is earlier, on the next banking day following the otherwise applicable deadline.

Outside of the check return process, your bank still may make a claim against a depository bank under the UCC presentment warranties. When the depository bank presents a check to your bank, it makes three presentment warranties: (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. If a presenting bank has violated any of these warranties, it may be liable to your bank.

We do not believe an account agreement requiring a business customer to report a fraudulent check immediately upon receipt of a statement would be enforceable. Under the UCC, a customer must “promptly notify” its bank of any fraudulent checks after receiving an account statement. The general rule is that a customer has one year to report fraudulent checks, but the UCC allows that window to be altered by agreement — provided that the timeframe is not manifestly unreasonable.

We are aware of one Illinois court that upheld an account agreement requiring a customer to report fraudulent checks within thirty days of receiving a statement. However, it is unlikely that an agreement requiring a customer to immediately report fraudulent checks would be deemed reasonable.

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 it receives the relevant item . . . .”)

• Regulation CC, 12 CFR 229.31(g) (“The deadline for return or notice of dishonor or nonpayment under the UCC or Regulation J (12 CFR part 210), or § 229.36(d)(3) and (4) is extended to the time of dispatch of such return or notice if the depositary bank (or the receiving bank, if the depositary bank is unidentifiable) receives the returned check or notice (1) On or before the depositary bank’s (or 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. (local time of the depositary bank or receiving bank) or later set by the depositary bank (or receiving bank) under UCC 4-108. . . .”)

• Regulation CC, Commentary, 229.31(g), Comment 1(a) (“A paying bank may, by agreement, send an electronic returned check instead of a paper returned check or may have a courier that leaves after midnight (or after any other applicable deadline) to deliver its forward-collection checks. This paragraph removes the constraint of the midnight deadline for returned checks if the returned check reaches the depositary bank (or receiving bank, if the depositary bank is unidentifiable) on or before the depositary bank's (or 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. (local time of the depositary bank or receiving bank) or later set by the depositary bank (or receiving bank) under UCC 4-108.”)

• 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. . . .”)

• UCC § 3-417 cmt. 2 (“Subsection (a)(1) in effect is a warranty that there are no unauthorized or missing indorsements.”)

• UCC, 810 ILCS 5/4-406(c) (“[T]he customer must exercise reasonable promptness in examining the statement. . . If, based on the statement or items provided, the customer should reasonably have discovered the unauthorized payment, the customer must promptly notify the bank of the relevant facts.”)

• UCC, 810 ILCS 5/4-406(f) (“Without regard to care or lack of care of either the customer or the bank, a customer who does not within one year after the statement or items are made available to the customer. . . . discover and report the customer’s unauthorized signature on or any alteration on the item is precluded from asserting against the bank the unauthorized signature or alteration.”)

• UCC, 810 ILCS 5/4-103(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.”)

• Napleton v. Great Lakes Bank, N.A., 408 Ill.App.3d 448, 452 (1st Dist. 2011) (“Here, the parties agree that pursuant to the terms of the Account Agreement, the plaintiff's duty to ‘promptly notify’ the bank of any unauthorized charges was modified to mean 30 days from the date the Monthly Statement was mailed to plaintiff. Although we did not find any Illinois cases directly addressing this issue, decisions from other jurisdictions indicate that such an alteration in the notification period is clearly permissible.”)