Pub. 10 2015-2016 Issue 5

KBS Security Officer’s By-Word First, your bank (the depositary bank) needs to determine whether the drawee bank (the payor bank) held the check past its Midnight Deadline, which is defined in the Uniform Com- mercial Code § 4-104 (a)(10): as “‘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.” UCC § 4-302 requires that the payor (drawee) bank be liable for a check, whether properly payable or not, if it does not return the check until after its midnight deadline. Regarding our $78,000 forged check, if the drawee bank receives the check and does not return it by midnight the following day, then the depositary bank can refuse the returned check. (It is also always important to promptly notify your customer when you receive notice that a check is being returned.) The next question: Did your bank receive timely notice from the drawee bank that the check was being returned? Even if the drawee bank met the UCC midnight deadline, your bank may still have a claim against the drawee bank if you did not receive a large return item notice. Under Regulation CC (12 C.F.R. 229.33), for all return items in excess of $2,500, the paying (drawee) bank is required to give notice to the depositary bank by 4:00 pm on the second business day after the drawee bank received the check. If your bank did not receive either notice or the returned item by the 4:00 pm deadline, then the drawee bank may bear some or all liability for the check. In addition, in returning a check, the drawee bank warrants that it gave proper notice of the large return required by Regulation CC. If this is not the case, the depositary bank is required to give the drawee bank notice of the breach of warranty within 30 days of receiving the check. In certain cases, Regulation CC allows a one-day extension of the Midnight Deadline. The drawee bank may be able to avoid sustaining a loss. Forged Checks & The Midnight Deadline The bankers division of Berkshire Hathaway Homestate Insurance Company Y our bank receives the return of a $78,000 returned check that had been deposited by your customer. The maker claims the check has a forgery of his signature. Your customer has withdrawn the funds and cannot be located. Who bears the loss?