Your Full-Service Bankers' Bank United Bankers' Bank is proud to be the nation's first bankers' bank, serving over 1,000 community banks from the West Coast to the Great Lakes and South Atlantic. We can't wait to share our passion for community banking with you! To Request Pricing Visit ubbRequest.com Contact your Nebraska Calling Officer: Michael Hahn VP, Correspondent Banking Officer michael.hahn@ubb.com ubb.com alteration.13 Under the new provision, when a dispute arises between banks as to whether a substitute check or electronic check is “altered,” “forged” or “counterfeit,” and the original paper check is not available for examination, there is a rebuttable presumption that the check was altered.14 Virtually all checks today are processed electronically, and the original paper check is rarely available by the time a fraud dispute surfaces. Thus, this presumption will apply in the vast majority of cases. The presumption established in 2018 will be quite helpful to a payor bank if its dispute with a depositary bank ends up in court. In that event, the practical effect will be significant: The presumption shifts the burden to the depositary bank to prove by a preponderance of evidence that the check was either forged or counterfeit. If the depositary bank cannot carry that burden, the payor bank’s warranty claim should succeed. On the other hand, prior to litigation (when most of these disputes are resolved), the presumption’s practical effect is less significant. In the absence of clear rulings from courts establishing the distinctions between “altered,” “forged” and “counterfeit” checks, payor banks continue to argue that the right kind of electronic manipulation of imaged checks, or a sufficient number of different changes to the same imaged check, renders the check “counterfeit” instead of “altered,” even when Regulation CC’s presumption applies.15 Conclusion For community banks that learn their customer is the victim of a fraudulent check scheme, and if the bank is facing the scenario described at the outset of this article, the combination of the UCC’s presentment warranties and Regulation CC’s presumption of alteration provides a potential path to recovery from a depositary bank. The payor bank should be prepared to argue and prove that the check was not only fraudulent but also “altered.” The facts and legal issues will vary in every case. Banks are encouraged to contact counsel when dealing with particular challenges or complications related to fraudulent check schemes. David J. Routh is a partner, and Roger D. Sack is an associate with Cline Williams Wright Johnson & Oldfather LLP in Lincoln, Nebraska. They represent banks, bank holding companies and other financial institutions in the areas of mergers, acquisitions and divestitures, regulatory compliance, and lending and finance. 1 See UCC §§ 4-302(a) and 4-104(a)(10). 2 UCC § 4-105(3). 3 UCC § 4-105(2). 4 UCC §§ 3-417(a)(1) and 4-208(a)(1). 5 UCC §§ 3-417(a)(3) and 4-208(a)(3). 6 UCC §§ 3-417(a)(2) and 4-208(a)(2). 7 UCC § 4-302(b). An additional presentment warranty also exists in some cases under Articles 3 and 4 of the UCC, as well as Regulation CC, for “demand drafts” (also called “remotely created consumer items” and “remotely created checks”). Demand drafts are electronic checks that are not signed by the account holder and are created by a third party (normally the payee) under the purported authority of the account holder to charge the account holder’s account. This additional presentment warranty is not discussed in this article because most fraudulent checks include purported customer signatures. However, if the fraudulent check is a “demand draft” under the UCC, the prospects for the payor bank to recover from the depositary bank are significantly improved. For these “demand drafts” only, the depositary bank represents that the person on whose account the check is drawn has authorized the issuance of the check in the actual amount of the check. 8 UCC § 3-407. 9 UCC §§ 3-417(d)(2), 4-208(a)(2) and 4-302(b). 10 See UCC Section 1-201(b)(41) (providing that an “unauthorized signature” includes a forgery). 11 UCC § 3-403(a). 12 Nebraska courts have not yet provided definitive guidance on this distinction, and other courts have noted a “dearth of case law” in this area generally. See Community Bank, N.A. v. JPMorgan Chase & Co., 761 F.Supp.3d 469, 476 (N.D.N.Y 2024) 13 See 83 FR 46849, codified at 12 CFR § 229.38(i). 14 Id. 15 See, e.g., Community Bank, N.A. v. JPMorgan Chase & Co., 761 F.Supp.3d 469 (N.D.N.Y 2024); see also Provident Savings Bank, F.S.B. v. Focus Bank, 548 F.Supp.3d 862 (E.D.Mo. 2021). 23 NEBRASKA BANKER
RkJQdWJsaXNoZXIy MTg3NDExNQ==