Compliance Blog

Happy Halloween! Before we get into the blog, here is a picture of my niece dressed as a princess during a “trunk-or-treat” event last weekend.

I hope everyone has a Halloween filled with more treats than tricks! Speaking of tricks, what happens when a credit union receives a check that has double the forgery? For example, the drawer’s signature AND the endorsement are both forged.

Generally, check transactions are governed by Article 4 of the Uniform Commercial Code (UCC), which is adopted individually, as state law. Please keep in mind that every state may have adopted a version of the UCC that differs from the Model UCC, so make sure you check your state’s laws before proceeding!  However, the information I am going to provide is based off the Model UCC. 

Forged Drawer’s Signature

Under UCC § 4-401, if a check has a forged drawer’s signature, then the check is not properly payable. Specifically, UCC 4-302 provides that:

“If an item is presented to and received by a payor [credit union], the [credit union] is accountable for the amount of:

(1) a demand item, other than a documentary draft, whether properly payable or not, if the [credit union], in any case in which it is not also the depositary [credit union], retains the item beyond midnight of the banking day of receipt without settling for it or, whether or not it is also the depositary [credit union], does not pay or return the item or send notice of dishonor until after its midnight deadline; or

(2) any other properly payable item unless, within the time allowed for acceptance or payment of that item, the [credit union] either accepts or pays the item or returns it and accompanying documents.” (Emphasis added).

As noted above, a credit union has until its midnight deadline to return a check. Under UCC 4-104, midnight deadline means:

“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.”

However, UCC 4-302(b) states:

“The liability of a payor bank to pay an item pursuant to subsection (a) is subject to defenses based on breach of a presentment warranty (Section 4-208) or proof that the person seeking enforcement of the liability presented or transferred the item for the purpose of defrauding the payor bank.” (Emphasis added).

Based on the above, if a payor credit union holds onto an item past the midnight deadline, it may be liable unless there is a breach of a warranty.

Forged Indorsement

Under UCC 4-401, a check with a forged indorsement is also not properly payable. Thus, the paying credit union may need to recredit the drawer’s account when it pays a check with a forged indorsement.

That being said, a forged indorsement is an alteration and the UCC suggests that the other parties may have breached their presentment warranty.

UCC 4-208(a)(1) provides the following regarding 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 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 or authorized to obtain payment or acceptance of the draft on behalf of a person entitled to enforce the draft;”

In this case, the credit union may want to check if the member was entitled to enforce the draft or authorized to obtain payment.

This NAFCU Compliance Monitor article discusses allocation of loss for forged indorsements and signatures under the UCC in more detail and may also be helpful should your credit union ever find itself in this situation.

Overall, it appears that the UCC does shift liability based on whether there is a forged signature or indorsement. Ultimately, the credit union will want to speak to counsel regarding potential liability under the UCC as, again, the UCC differs state by state.

Have a great Halloween!

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