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Question: Bank customer altered the payee on a check to reflect their name…from “IRS” to “MRS” followed by their name. The alteration was not an obvious one. The check was drawn on another bank and was paid by that bank when it was presented through the system for payment. According to regulations, what (if any) liability does our Bank as the depositing bank have regarding reimbursement of funds on this altered check since the alteration is not an obvious one? I know that our Bank would be responsible if the endorsement was forged, but, in this case, the endorsement was as the check payee read.
Answer: I read somewhere that the law of negotiable instruments is frustrating because it is hard to see the forest for the trees.
If the original check writer (drawer) turns to his or her bank for recredit, he/she is entitled to have his/her bank (drawee bank) recredit their account because their bank may only charge their account according to the original terms of the time. The original terms were that the check was payable to the IRS, not Mrs. X, so, if the bank paid it, it wasn't according to its original terms. See Business and Commerce Code §4.401(d)(1). Of course, if drawer has the drawee bank recredit his/her account, the drawee bank will likely turn to your bank for the funds. Will your bank prevail? No. Your bank breached a presentment warranty that the check was not altered. §§ 3.418(c), 3.417(a)(2), and 4.208(a)(2). Would you then prevail against the person who altered the check? Yes, because he also breached a transfer warranty that the check was not altered. See §§ 3.416(a)(3) and (b) and 4.207(a)(3) and (b).
When this does happen though, make sure that the drawer notified their bank timely. If they didn't, the drawee bank is not required to recredit the drawer's account, but if they do recredit the account, you do not have to honor the warranty because the drawer did not act timely.
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