Saturday, June 25, 2022

April 2007 Legal Briefs

  1. Stale-Dated Checks: Should the Bank Pay Them or Not?
    1. What the Statute Says
    2. Bulk Filing
    3. Regulation CC Exception Hold
    4. Whether to Pay or Not?
    5. Some Possible Approaches
    6. When is an Old Check No Longer Good?
  2. Reasons for Returning Checks within the Midnight Deadline
    1. The Bulk Filing Issue
    2. Having a Valid Reason for Return
    3. Reasons Limited to the Midnight Deadline
    4. “Refer to Maker”; Kiting
    5. “Account Closed”
    6. Forged Checks
    7. Dummy or Counterfeit Checks

1. Stale-Dated Checks: Should the Bank Pay Them or Not?

Bankers often ask whether they are liable to the customer for paying a check that is more than six months old.  Usually it’s because some customer is mad and demands reimbursement for a stale-dated check paid on his account. 

Maybe the customer has added the uncleared check back to his account. When the check finally clears, the account becomes overdrawn, and overdraft fees are imposed.  Maybe some of the customer’s other checks are also returned unpaid because of the overdraft created by the stale-dated check.

The stale-dated check that the bank has paid may even be one on which the customer placed a stop payment order that has now expired.

If the bank’s actions are “in good faith” (almost always the case), the bank has no liability in any of these situations. I will explain these issues in more detail below.  In spite being legally in the right, however, there still may be some very real “customer relations” issues for the bank to resolve with its customer.  

1. What the Statute Says

Stale-dated checks are governed by Section 4-404 of the UCC.  This section states, “A bank is under no obligation to a customer having a checking account to pay a check . . . which is presented more than six (6) months after its date, but it may charge its customer’s account for a payment made thereafter in good faith.”

Both parts of this statement need to be emphasized:  (1) A bank returning its customer’s check as “stale-dated” (more than six months old) does not wrongfully dishonor its customer’s item, and has no liability.  (2) But a bank that honors a stale-dated check, charging it to the customer’s account, is also not wrong—if it acts “in good faith.”  Choosing either approach is permissible. 

2. Bulk Filing

All but a handful of banks in Oklahoma use “bulk filing.”  In other words, they do not manually examine checks (except larger items) before they are paid.  Under this system a stale-dated check received in the paying bank’s cash letter will be processed electronically and posted automatically to the customer’s account, with no one actually examining the check—unless it is a large item, or it overdraws the account. 

A customer’s printed checks are already magnetically encoded with the paying bank’s routing number and the customer’s account number.  The depository bank (or other processor) magnetically encodes the amount of the check.  With these three numbers (routing number, account number, and check amount), a check is automatically paid on the customer’s statement. 

However, there is no magnetic encoding of a check’s date.  Therefore, it is impossible for check-processing equipment to recognize that a check is stale-dated.  A check presented in the bank’s cash letter normally goes directly into the customer’s monthly statement, with no one examining the date.  The bank obviously pays the check “in good faith” in this situation:  Because standard processing does not call attention to the check’s date, no one can argue that a bank pays a stale-dated check other than “in good faith” if bulk filing is used.

3. Regulation CC Exception Hold

A Regulation CC exception hold based on “reasonable cause to doubt collectibility” provides a good method for a depository bank to deal with a stale-dated check that a customer wants to deposit.  The Federal Reserve’s Reg CC Commentary at Section 229.13F)(2)(c) states, “The fact that a check is deposited more than six months after the date on the check . . . is a reasonable indication that the check may be uncollectible.”  Therefore, stale-dating justifies imposing an exception hold on the deposited item.

Many depository banks refuse to take a stale-dated check on any basis, telling the customer that the check “isn’t good” after six months.  Actually, nothing prevents a paying bank from honoring the check, if it wants to. 

The Oklahoma Comments to UCC Section 4-404 state, “A stale check remains properly payable.”  Thus, if the paying bank does not notice that a check presented in its cash letter is stale-dated, and pays it anyway, “final settlement” for that check occurs when the midnight deadline passes. 

The hold based on “reasonable cause to doubt collectibility” provides adequate time for a depository bank to learn whether the paying bank is going to return the stale-dated item within its midnight deadline.  (Particularly when a depository bank’s standard policy makes funds available more quickly than Reg CC requires, imposing an exception hold on a stale-dated item is prudent.) 

A stale-dated item has built-in grounds for return—but return is neither required nor certain. With bulk filing, a stale-dated item sent to another bank in its cash letter will usually pay–(1) if the account on which the item is drawn remains open, (2) there is an adequate collected balance available (including overdraft protection) to pay the item, and (3) the item is below the paying bank’s cut-off amount for manual examination of items. 

There’s nothing legally wrong with presenting stale-dated items through a paying bank’s cash letter.  Such items remain properly payable, even though the paying bank (if it catches them) has the right to return them.  If timely return is not made, final settlement occurs, and the depository bank’s customer has good funds.  

4. Whether to Pay or Not?

In situations apart from bulk filing, a paying bank may have an opportunity to manually examine checks, and to observe that they are stale-dated.  This is certainly true when items are presented directly to a teller for cashing.  (By contrast, in a stack of checks deposited by a merchant, the teller usually verifies the deposit total, but doesn’t focus much on each separate check.)

But even when a bank employee has an opportunity to examine a check before it is paid, there’s no duty to look for a stale date, and no liability for failing to notice the date.  It’s hard to argue that a bank acts wrongfully by paying any check that a customer has actually written—if no stop payment order is currently in effect.  (After the customer writes a check, a bank is not required to consider whether a customer may now have changed his mind.)

But maybe a bank does notice a check’s stale-dating.  What action should it take?  Some banks feel more comfortable in adopting some general guidelines for dealing with stale-dated checks, and training employees to follow them.  Other banks prefer to handle stale-dated checks on a case-by-case basis.  The approach that works best for a particular bank may depend on the bank’s size and how well its employees know its individual customers.

5. Some Possible Approaches

As one example of a general policy, a bank could decline to pay any stale-dated check that it actually notices. 

This won’t make the payee happy, but might be what the average customer wants.  Often a customer “gives up” on uncleared items that are more than six months old.  At some point, the customer adds such items back to his checkbook balance.  By the time a stale-dated check (at least six months old) is actually presented, there may no longer be sufficient funds in the account to pay both that item and the customer’s more recent outstanding checks.  Payment of a post-dated check usually surprises the customer, even if there are adequate funds to pay it. Thus, to comply with a customer’s probable expectations, a bank might simply return all stale-dated checks that it is able to discover quickly enough.

A bank could take the opposite position instead:  “The customer wrote the check, so generally we’re going to ignore the stale-dating and pay the item, like any other item, if the account has available funds.”  This is a hands-off approach, and may fit better with the practical realities of a larger bank’s operations—especially if the person handling an individual item (a teller at any of the bank’s many locations) is not familiar with the customer and cannot guess the customer’s wishes.  (The “hands-off” approach is also consistent with what happens under bulk filing, wherein stale-dated checks simply get paid, if funds are available.)

A third approach (if the bank notices a stale-dated check) is to try to find out what the customer wants in the particular case. Telephoning the customer is the only good method of doing this, if the customer can be reached, and if the bank is willing to make the effort. In many cases this will not work, because the customer will not be home.  But it’s certainly courteous to attempt to contact the customer.  (There is no legal requirement to do so.)  

If the payee presents a stale-dated check at the teller’s window and there is a line of customers, taking time to phone the drawer may result in bad service for other customers.  Ideally, the teller can hand the stale-dated item to a supervisor, who will attempt to call the customer.  But when a payee comes to the drive-through window after regular lobby hours, tellers may be too busy to attempt to call the customer about a stale-dated item.) 

There will always be situations where a paying bank must take action on a stale-dated check without determining the customer’s wishes.  What to do?  If it’s handled case-by-case as a matter of individual judgment, it may be useful to think through some guidelines for decision-making.

If I were making decisions, I would tend to pay all stale-dated checks that are reasonably small (for example, anything under $50 or maybe under $100)—assuming that the customer has a reasonable balance in the account and paying the item will not overdraw it or cause other checks to bounce.  (A customer with a good balance is usually not going to be upset when small, older checks are paid on the account.)

I would probably not pay a stale-dated check if, after examining the account balance, the check cannot be paid from collected funds in the account, but only by accessing overdraft protection.  I would probably decline payment on a stale-dated check in almost any case where doing so would result in an overdraft fee.  I would also tend to decline payment on a stale-dated check if paying it leaves such a low balance that resulting overdraft fees on other outstanding checks, as they are presented, will be almost a certainty.

(Customers are almost always upset when payment of a stale-dated check causes overdraft charges.  When the customer complains, the bank often will have to reverse all or part of the overdraft fees.  Although the bank is technically right, the customer still won’t stand for it.  It’s easier to think ahead by returning a stale-dated check, if doing so is necessary to avoid overdraft fees that will anger the customer.) 

I would tend to return large items that are stale-dated, when I have a clear opportunity to make a choice—in other words, in cases not handled automatically through bulk filing.  The impact from larger checks is more important to the customer.  In the interest of “getting it right,” I would be hesitant to pay any larger check that is stale-dated, if I am unable to determine the customer’s wishes.  

Also, I would be less likely to pay a stale-dated item as it gets older and older.  If a stale-dated item is seven months old, I would at least consider paying it.  If an item is two or three years old, I probably would not pay it. 

6. When is an Old Check No Longer Good?

Even most bank employees are unaware that a customer check remains payable for ten years after its date (UCC Section 3-118(c))–if it has not yet been presented for payment even once.  However, if it was previously presented for payment once, and was dishonored (for example, if it was returned “NSF”), it remains payable for up to three years after the date when it was first presented.  Although this is the law, most customers would totally flip out if their bank paid a really old check and tried to explain to them that legally it is still good. 

As just explained, there may be a “practical” limit on how old a stale-dated check the bank should knowingly pay; but a check not presented at all for several years after it is written is extremely unlikely to turn up later.  

2. Reasons for Returning Checks within the Midnight Deadline

A paying bank must understand what reasons are available for returning a check after the bank’s midnight deadline (which I will outline in a future article), and also the longer list of check-return reasons that can only be used before the midnight deadline (some of which I will discuss here).  The timing for returning a check based on a particular reason is determined by statutes and regulations and cannot be varied.

The rules outlined in the UCC and Regulation CC allocate check losses very clearly, either to the depository bank (and its depositor) or to the paying bank.  These rules emphasize certainty and finality, not “fairness” to either bank, as such.  The system creates a predictable event, “final settlement.”  After that point in time, the paying bank is stuck with a loss if it has not returned a bad item, and the depository bank can safely give its customer available funds without risk that the item will later be returned unpaid—except for claims involving “breach of warranty.”

I will discuss several topics related to reasons for returning checks within the midnight deadline

1.  The Bulk Filing Issue

Almost all banks in Oklahoma use “bulk filing.”  As a result, a bank examines only those items in the cash letter that either (1) are large, or (2) will not pay from a combination of the customer’s available funds on deposit plus the account’s overdraft limit.  

Checks presented to a teller to be cashed are also manually examined; however, “on us” checks presented in another customer’s deposit may not be examined by anyone, except in verifying the deposit total and encoding the item.

If a customer has a good balance in his account and a bogus check is received in the bank’s cash letter, or in a deposit by another customer of the same bank, and that check is below the dollar amount that triggers manual examination, the bad check will pay automatically.  Generally no one will notice the bad item until the customer receives his statement in the mail, or when some items presented later overdraw the account.  By then, the midnight deadline for returning the item will have passed.  The paying bank must re-credit the unauthorized item to its customer’s account (unless the customer is extremely slow in examining his statements, or has otherwise contributed to the loss).  The midnight deadline will prevent the paying bank from returning the item (except for “breach of warranty” claims), and the paying bank loses.  

Bankers often say it is “unfair” to have no chance to avoid the loss on a fraudulent check. The only way to reach a different outcome would be to manually examine all items. This is prohibitively expensive and time-consuming.  A bank doing bulk filing makes an economic decision that it is cheaper to take losses on bad checks below the dollar amount that requires manual examination, in order to avoid the expense of manually examining those smaller items.  When a bank is taking too many losses on bad checks, it can consider lowering the dollar amount that triggers manually examination—but this will increase the bank’s time spent in examining checks.  Furthermore, lowering the dollar level at which checks are manually examined would only help if a substantial number of the checks that are causing the problem are above the lowered dollar amount.
 
2.  Having a Valid Reason for Return

Section 229.30(d) of Regulation CC states, “A paying bank returning a check shall clearly indicate on the face of the check that it is a returned check and the reason for return.”  A notice of nonpayment of large items, as required by Section 229.33 of Regulation CC, also must include the “reason for return.”  If a particular reason for return is one that cannot be used after the midnight deadline, the bank must return the item before that time, or else the bank no longer has a valid reason for return.

When a paying bank returns a check outside of its midnight deadline, and uses a return reason that doesn’t apply after the midnight deadline, the depository bank should bounce the check back to the paying bank as a “late return.”  Understandably, the paying bank does not want to take the loss; but if the paying bank is already in a position where it must stand the loss (because it is already outside of the time period for using a particular reason to return the check), nothing is accomplished by the paying bank’s attempt to return the check to the depository bank anyway. 

 More importantly, when a paying bank returns a check outside of its deadline, it breaches a warranty under Section 229.34(a) of Regulation CC.  (Any paying bank making a return automatically warrants that it is returning the check within its deadline.)  The bank also violates the Federal Reserve’s Operating Circular No. 3, Section 17.1, which allows a paying bank to return a cash item “only if it returns the item within the deadline of Section 210.12(a) of Regulation J, Section 229.30 of Regulation CC and the Uniform Commercial Code.” 

3.  Reasons Limited to the Midnight Deadline

A paying bank has many available reasons for returning a check to the depository bank within the midnight deadline.  Most of these are based on some  provision in the UCC or contract law that also specifically gives the paying bank the right not to pay the item (under the circumstances) and that does not result in liability to anyone for “wrongful dishonor” of the item.

Following are some examples:  “Deceased”; “stop payment”; “account closed”; “signature irregular” (or “forgery”); “counterfeit”; “no account” “not on us”; “unauthorized signature”; “signature missing”; “stale dated”; “postdated”; “insufficient funds” (or “NSF”); “uncollected funds” (or “funds not available”); or “two signatures required.”  These reasons can’t be asserted outside of the midnight deadline.

4. “Refer to Maker”; Kiting

“Refer to maker,” as a reason for return, is almost no reason at all.  It indicates the paying bank’s intention to dishonor the check, but doesn’t convey any information.  It says, “Don’t ask us why.  Go ask our customer.”  This reason for return should be used sparingly, when no other reason for return will fit.  Generally, a bank should figure out and state a more specific reason for return. 

The best use of “refer to maker” is in connection with kiting.  The problem with using “kiting” as a reason for return (the bank’s real reason) is that “kiting” accuses a customer of a criminal offense—at a point in time when the customer has not been convicted, or even charged with that offense. If the paying bank has misinterpreted what’s happening on the account, or if the facts are not strong enough for the district attorney to file charges for kiting, the paying bank could potentially be sued by its customer for libel.

Using “funds not available” for a return reason (another possible choice)—after the paying bank places an extended hold to collapse the kite—is at least minimally adequate from the paying bank’s standpoint.  It’s not false (as far as it goes), but neither is it a full warning to the depository bank of the seriousness of the problem.  Normally, “funds not available” signals that by waiting a few days before trying again, the check might pay.  However, with a kite the paying bank places an extended hold to try to get itself back to a positive “collected funds” balance, and may intend to close the account as soon as it can.  The check is probably never going to pay. 

Everyone asks, “What does ‘refer to maker’ really mean?”  (The paying bank is deliberately not saying, but somehow expects the depository bank to interpret its meaning.)  To me (1) “refer to maker” suggests a problem surrounding the particular check that the paying bank does not want to put a name on (at least, not in writing); (2) it implies that the customer (the maker) is somehow well aware of the circumstances, not just a innocent victim; and (3) it tells the depository bank to see the maker for a better explanation.  (Translation: “Check your hole card with this customer.”)

Telling the depository bank to “refer to maker” is usually not to be taken literally. If a maker is actually involved in questionable transactions on his bank account, it’s unlikely that the depository bank will receive a truthful or accurate explanation from the maker.  Saying “ask the maker” is almost like suggesting that someone should talk to a brick wall.

 Although the paying bank uses “refer to maker” as a return reason, the paying bank is free to call the other bank at any point to warn that apparent kiting is going on.  Equally, a depository bank that holds a check that has been returned for this reason is free to call the paying bank, to attempt to learn more.  One of the exceptions under the privacy regulation allows information to be provided between financial institutions, in the case of fraud or to prevent fraud. 

Every kite involves writing checks on funds that don’t exist–and eventually will cause loss to one financial institution or the other.  A customer who is kiting is definitely attempting to defraud a financial institution–although he is probably rationalizing his behavior, not thinking of it exactly that way.  He’s trying to get banks to give funds availability for checks written “on air”; he knows the money isn’t there currently; and one of the banks will definitely take a loss, unless he can find a way (perhaps very unlikely) to deposit good funds to the accounts.

In a suspected kiting situation, a paying bank can and should file a suspicious activity report (SAR), and can attach to the SAR a list of the items that are involved, or copies.  Once the SAR with this information is mailed, the bank is protected from liability under federal law if it provides a copy of the SAR to law enforcement.  If a district attorney then determines to file charges for kiting, the fact that checks were returned as “refer to maker” (or even “funds not available”), instead of “kiting,” is irrelevant.  It is the evidence of the kite (in the form of checks from both banks) that establishes legally whether kiting exists.

5.  “Account Closed”

A paying bank can return a check as “account closed” in any situation where that reason is truthful.  But a bank might also try to anticipate and soften the reaction that a payee is likely to have to this reason for return—at least in circumstances where the bank believes the former customer had no bad intent.

(In a larger bank, the person handling check returns may have no familiarity with the particular customer’s circumstances—and must simply use a standard reason for return.)

A check written on a closed account technically meets the definition of a “false or bogus check” under Title 21, O. S., Section 1542.4.  A merchant who gets a returned check with the reason “account closed” is very likely to take it to the local district attorney for prosecution.  Depending on the facts, the customer may have done nothing bad, deliberately.  The true circumstances can eventually be established—perhaps after some unpleasantness–but it’s easier to avoid a return reason that may cause the payee and the district attorney to make mistaken assumptions about an innocent customer.

Sometimes a customer closes an account because of identity theft, and the bank knows this.  The customer doesn’t intend to defraud a payee holding a several-months-old outstanding check; rather, the customer is afraid of unauthorized items that might hit the account, or is simply moving away. 

In another example, the customer’s checkbook is lost or stolen; the bank insists that the account be closed; and the customer decides he doesn’t want to open a new account.  Or, a new account is opened, but the customer fails to list all of the outstanding items on the old account, when he authorizes the bank to pay those items on the new account.  He leaves one check out by mistake, and it is returned “account closed.”  

If a check actually written by the customer is presented to the paying bank after the account is closed, and the check is less than six months old, the bank probably must use “account closed” as a reason for return.  But it could state “account closed after identity theft,” or “account closed after checkbook stolen.”  These explanations would keep a district attorney from jumping to conclusions about wrongful intent.

A bank can also help a customer while closing an account, by preparing an affidavit of identity theft, or affidavits of forgery, which the customer can use as evidence of intent if the payee on a check overreacts.  

In a somewhat different situation, if a check is presented on a closed account and the check is seven months old (stale dated), there are two possible reasons for return, either of which is adequate.  Given a choice, I would almost always return this check as “stale dated,” because this creates no possible basis for a criminal charge against the customer.  (If a check is returned as “stale dated,” the payee can still sue on the check in small claims court, to obtain a judgment against the maker for the money owed.  But this is much less serious than a criminal charge for writing a bogus check.)  If the bank has received a long string of bogus checks written on an account that was closed shortly after it was opened, and this seven-month-old check is  another in the series, I might consider returning this one, also, as “account closed.”

If there has been any history of unauthorized items on an account that is now closed, and the paying bank receives another check, I would examine the check against the signature card.  It’s maybe enough to return any check as “account closed” after the account is closed—no matter who wrote the check. But it’s probably far better, if true, to return a check as “signature irregular”—or with multiple reasons, such as “signature irregular; account closed after apparent identity theft.”  (This signals that your customer is not at fault on the item.)

6. Forged Checks

Let’s assume that a paying bank is able to determine on a timely basis that a check presented on a customer’s account has a forged signature.  A paying bank should probably still be careful about using “forgery” as the reason for return.  (“Forgery” is a criminal violation.  It may be somewhat risky to use this reason without documentation from the customer.) If the paying bank can obtain an affidavit of forgery from the customer before the bank must return the item (before the midnight deadline), the bank is no longer guessing on its own whether the customer signed the check. With this affidavit, the paying bank is reasonable in returning the check as a “forgery.”

By contrast, if the paying bank’s customer has not yet filled out a forgery affidavit (and the bank is unable to reach the customer for at least a verbal confirmation that the item is not his check), the paying bank probably should use “signature irregular” as the reason for return, not “forgery.”  “Signature irregular” adequately informs the depository bank of the problem.  “Signature irregular” also has the advantage of accusing no one of a criminal offense.  (Remember that the paying bank’s reason for return will be seen by the payee. This is not a confidential communication between banks.)  

In a variety of situations a bank may be uncertain whether the signature on a check belongs to its customer.  The most difficult case, perhaps, is when an elderly person has become so ill or feeble that his signature no longer matches the sample on the paying bank’s signature card.  Also, a customer sometimes attempts to write on an uneven surface, or while riding in a car, and can make a very rough signature.

 The bank has a problem in such cases:  The bigger the check, the bigger the risk of loss.  A questionable signature on a $30 check for a utility bill is probably never going to be a problem, because crooks don’t pay the customer’s utility bills.  A $3,000 check written to another individual without an obvious purpose may look suspicious in itself, and a questionable signature makes it worse.  There is no way to return such an item outside the midnight deadline, so the bank must try really hard to call the customer to verify the check.  If this doesn’t work, the bank may be sweating bullets, but clearly has to choose between returning the check before its midnight deadline, or else bearing the risk of loss on the check. 

Here, the bank absolutely must use “signature irregular,” not “forgery,” as the reason for return.  If the returned check turns out to be real, the bank should apologize profusely to everyone and work to smooth out the situation quickly. As soon as the paying bank learns that the returned check was actually good, it should call the depository bank, explain the situation, and ask that bank (or the payee) to present the check a second time.  The parties on the other end may be a bit unhappy, but likely they will understand how the paying bank could send the check back as “signature irregular” if the maker’s signature is almost illegible. 

In the “frail customer” situation (after explanations), a return for “signature irregular” results in no loss of reputation for the customer—in contrast to an improper indication of “insufficient funds” or “forgery,” which, in other situations, are things that might cause some embarrassment to an innocent customer.  (The necessary apologies by the paying bank are much better than taking a $3,000 loss if it had been an unauthorized signature.)

Bank employees asking about appropriate reasons for return often tell me, “The district attorney will not prosecute on a bad check if it is returned ‘signature irregular.’  It needs to say ‘forgery.’’’

It’s true that if the paying bank returns a check as “signature irregular” and does nothing more to help the depository bank and the payee, the district attorney probably will not prosecute.  But after a paying bank sends a check back as “signature irregular,” it can continue to cooperate with the depository bank and the payee, to get a forgery affidavit from a customer who may not be immediately available.  As soon as this forgery affidavit it obtained, the paying bank can forward if to the depository bank.  With this much, a district attorney should be willing to file a bad check charge.  

In the “signature irregular” or “forgery” situation, the reason a check comes to the paying bank’s attention quickly (in spite of bulk filing) is often insufficient funds to pay the item, or uncollected funds.  It is probably technically adequate (at least to indicate intention to dishonor) to return an item as “insufficient funds” or “funds not available”—the reason why the item was noticed.But this would miss the real issue, and mislead the depository bank, in a situation where the check is not actually payable against the account balance at all, because it has a bad signature and therefore is unauthorized. 

As this example demonstrates, even when a paying bank has one obvious reason for return, it usually should examine the item closely for other possible reasons.  If a bank knows the customer’s circumstances, it might stop to consider whether the check seems to be an unusual expenditure.  If a check that won’t pay seems unusual, the paying bank should probably examine the signature card also.

If a paying bank, through lack of awareness, returns a forged check as “insufficient funds” or “funds not available,” a depository bank or payee might present the check for payment a second time.  On the second presentment, the paying bank is permitted to change its reason for return to “signature irregular” or “forgery,” if it finally catches the problem; but in the meanwhile the depository bank and the payee are possibly misled into thinking that a second presentment might work. 

The paying bank also has financial risk in this situation, if it does not discover all of the possible reasons for return on the first presentment.  For example, if the paying bank sends its customer a notice of returned item, that customer is out of town (and cannot say, “It’s not my check”), the customer’s automatic payroll deposit goes into the bank, and the bad check is presented for payment a second time, under bulk filing that bad item will pay (since funds are no longer “insufficient” or “not collected”) unless the paying bank has examined the item well enough the first time to discover the “signature irregular” problem.  

7. Dummy or Counterfeit Checks

With bulk filing, a paying bank will usually make final settlement for a dummy check without realizing it, if it is printed with the bank’s routing number and a real customer’s account number.  After the midnight deadline, a dummy check cannot be returned.

a. Not an Alteration.  Some bankers mistakenly assume that a made-up (dummy) check is an “altered” item—and that it therefore can be sent back after the midnight deadline.  This is not true.  A check must first be real—filled out by someone authorized on the account—before it can later become altered.

An example of an alteration occurs when a crook “washes” the payee name or amount on the original check, replacing it with substitute information. Or maybe a real check is “raised” by adding zeroes after the amount.

b. Dummy Checks.  A dummy or counterfeit check is one that has been printed from scratch by a fraudster—using computer technology and check stock purchased at a local office supply store.  Unlike the situation where a pad of stolen checks is finally used up, the crook can print an unlimited number of dummy checks on someone’s account.

 Bankers are especially shocked when a completely made-up item is presented to their bank. Many bankers attempt to send dummy items back as “fraudulent item” or “counterfeit,” whenever they discover the item (even after the midnight deadline). However, there is no legal basis for doing this, if the midnight deadline has passed.  This is not the way “final settlement” works. 

If a check is encoded with the bank’s routing number, and is presented in the bank’s cash letter, and for any reason is not returned within the paying bank’s midnight deadline, the UCC simply allocates the loss to the paying bank because it did not discover the item and return it within the midnight deadline.

There are several different versions of “counterfeit” or “dummy check” scams.  One involves an apparently real-looking payroll check printed with the actual name, bank routing number and customer account number of a prominent company that would have a hefty bank balance. The fraudster has a fraudulent ID, and prepares the dummy check so that the payee name matches that ID. With bulk filing the check pays automatically on the account.

In another “counterfeit” or “dummy check” situation, the thief photocopies or scans a real check of an actual bank customer (for example, intercepting the check at a store where the thief works), then uses that information to make up dummy checks.  Only the bank name, the routing number and the customer’s account number as printed on the dummy checks are accurate.  The thief prints a totally bogus customer name and address on the upper-left-hand corner of the check, matching the thief’s phony ID.  The thief then writes these bogus checks to retail stores and restaurants, showing the phony ID to prove identity. 

In a third type of counterfeit check, the thief prepares checks with a bank name and bank routing number that do not match.  The check is usually presented in the cash letter of the bank whose routing number is used.  After some confusion and delay concerning what to do, this first bank often tries to send the item to the bank whose name is printed on the check.  Instead, the bank receiving the item should recognize immediately that this is no printing error, but a fraud.  The bank should promptly return this check (within the midnight deadline) as a “fraudulent item,” or as “not on us,” or “counterfeit”—any description that fits. 

A fourth type of counterfeit check, and the most common type recently, is the phony cashier’s check.  The reason more counterfeit cashier’s checks are appearing is that Regulation CC requires a bank to give the depositor very fast credit for a cashier’s check, after which the fraudster/phony payee/depositor can withdraw the money.  Or perhaps the dummy cashier’s check is sent to a real bank customer as part of a scam, with instructions to that customer to wire funds to the fraudster as soon as those funds become available.

From the standpoint of returning the item, a dummy cashier’s check is no different from a dummy check presented on a customer’s account.  Either type of check must be discovered and returned within the paying bank’s midnight deadline, or else the paying bank will take the loss.