Yes, the depository bank can file a claim of late return in relation to a fraudulent or altered check that was not returned before the midnight deadline. However, your bank may be able to seek relief from the depository bank for breach of a presentment warranty due to the altered check.

Under the Federal Reserve Banks’ (Fed) rules, a paying bank “may send to us a returned check that a Reserve Bank did not handle for forward collection only if it sends the returned check within the deadline of Regulation CC and the Uniform Commercial Code” — i.e., the midnight deadline. The midnight deadline provided in the Uniform Commercial Code (UCC) requires banks to return checks, including altered checks, by midnight of the next banking day after receiving the check (with certain limited extensions permitted under Regulation CC). According to its Operating Circular 3, the Fed does not provide an adjustment process for checks returned after the midnight deadline, even if the checks have been altered. Rather, the Fed directs banks that believe they have a claim for breach of warranty based on an altered check to “deal directly with that other bank.”

When the depository bank presents a check to your bank, it makes three presentment warranties, including a warranty that the check has not been altered. Because this check was altered, it appears that the depository bank breached it presentment warranties to your bank. Under the UCC, your bank has thirty days after the date you had reason to know of this warranty breach and the identity of the warrantor to give notice of your claim for breach of warranty to the depository bank. If the notice is timely made, you may be entitled to recover damages from the depositary bank equal to the amount your bank paid (less any amount your bank is entitled to recover from your customer), in addition to compensation for other expenses and loss of interest resulting from the breach. After this thirty-day period, the depository bank cannot be held liable for any loss caused by your delay in giving notice of the claim.

Consequently, we recommend sending notice of the breach of warranty along with an affidavit of alteration signed by your customer to the depository bank as soon as possible, as we believe that the thirty-day notice period has begun to run.  

Additionally, we note that the depository bank may be able to defend against a claim for a breach of warranty due to an alteration if your customer substantially contributed to the alternation by failing to exercise ordinary care or failed to timely discover and report the alteration — neither of which appears to be the case here.

For resources related to our guidance, please see:

• FRB Operating Circular No. 3, 20.14 (If a sender believes that the paying bank returned late (after the paying bank's deadline under the Uniform Commercial Code, Regulation J, and Section 229.31(g) of Regulation CC) a check or electronic item in the amount of $100.00 or more, the sender may dispute the return by furnishing us with the returned check (or a legible copy of the front and back of the returned check) and a signed statement that the bank believes that the paying bank returned the check late.”)

• FRB Operating Circular No. 3, 15.1 (“A paying bank may return a cash item to us for which it has previously made settlement to a Reserve Bank only if it returns the item within the deadline of Section 210.12(a) of Regulation J, Section 229.31(g) of Regulation CC and the Uniform Commercial Code. A paying or returning bank may send to us a returned check that a Reserve Bank did not handle for forward collection only if it sends the returned check within the deadline of Regulation CC and the Uniform Commercial Code.”)

• 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 item 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.”)

• 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. . . .”)

• FRB Operating Circular No. 3, 20.13 (“A Warranty or Indemnity Claim Does Not Justify Returning an Item After the Return Deadline. A bank must not attempt to recover on a warranty or indemnity claim by including the item in a paper or electronic cash letter or return letter after the return deadline.”)

• FRB Operating Circular No. 3, 20.11(b) (“Types of Claims for Which We Do Not Provide an Adjustment Process. . . . 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. A bank that believes it has such a claim against a Reserve Bank should provide prompt notice of such a claim and also submit the claim to the Reserve Bank together with appropriate documentation, including an affidavit of forged or unauthorized indorsement or alteration.”

• Illinois UCC, 810 ILCS 5/3-417(a)(2) and 810 ILCS 5/4-208(a)(2) (“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: . . . (2) the draft has not been altered; . . .”)

• Illinois UCC, 810 ILCS 5/3-417(b) and 810 ILCS 5/4-208(b) (“A drawee making payment may recover from any warrantor damages for breach of warranty equal to the amount paid by the drawee less the amount the drawee received or is entitled to receive from the drawer because of the payment. In addition the drawee is entitled to compensation for expenses and loss of interest resulting from the breach. The right of the drawee to recover damages under this subsection is not affected by any failure of the drawee to exercise ordinary care in making payment. If the drawee accepts the draft, breach of warranty is a defense to the obligation of the acceptor. If the acceptor makes payment with respect to the draft, the acceptor is entitled to recover from any warrantor for breach of warranty the amounts stated in this subsection.”)

• Illinois UCC, 810 ILCS 5/3-417(e) and 810 ILCS 5/4-208(e) (“The warranties stated in subsections (a) and (d) cannot be disclaimed with respect to checks. Unless notice of a claim for breach of warranty is given to the warrantor within 30 days after the claimant has reason to know of the breach and the identity of the warrantor, the liability of the warrantor under subsection (b) or (d) is discharged to the extent of any loss caused by the delay in giving notice of the claim.”)

• UCC § 3-417 cmt. 7 (“The first sentence of subsection (e) recognizes that checks are normally paid by automated means and that payor banks rely on warranties in making payment. Thus, it is not appropriate to allow disclaimer of warranties appearing on checks that normally will not be examined by the payor bank. The second sentence requires a breach of warranty claim to be asserted within 30 days after the drawee learns of the breach and identity of the warrantor.”)

• Illinois UCC, 810 ILCS 5/3-417(f) and 810 ILCS 5/4-208(f) (“A cause of action for breach of warranty under this Section accrues when the claimant has reason to know of the breach.”)

• Illinois UCC, 810 ILCS 5/3-417(c) and 810 ILCS 5/4-208(c) (“If a drawee asserts a claim for breach of warranty under subsection (a) based on an unauthorized indorsement of the draft or an alteration of the draft, the warrantor may defend by proving that the indorsement is effective under Section 3-404 or 3-405 or the drawer is precluded under Section 3-406 or 4-406 from asserting against the drawee the unauthorized indorsement or alteration.”)

• Illinois UCC, 810 ILCS 5/3-406(a) (“A person whose failure to exercise ordinary care substantially contributes to an alteration of an instrument or to the making of a forged signature on an instrument is precluded from asserting the alteration or the forgery against a person who, in good faith, pays the instrument or takes it for value or for collection.”)

• Illinois 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 (subsection (a)) 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. If there is a preclusion under this subsection, the payor bank may not recover for breach of warranty under Section 4-208 with respect to the unauthorized signature or alteration to which the preclusion applies.”)