Articles
FAQs
Check Cashing
Question: Can an individual deposit checks payable to his sole proprietorship into his personal account? Can he cash checks made out to the sole proprietorship?
Answer: Typically, financial institutions have policies that prohibit an individual from depositing checks made payable to partnerships or corporations into a personal account, even if that individual is a primary owner/officer of the corporation or partner in the partnership. Such policies prevent the bank from aiding fraudulent activities such as breach of fiduciary duty, conversion of funds, tax evasion, etc. However, sole proprietorships present a “gray area” for banks. After all, the sole proprietorship is not a separate legal entity. The individual owner and business are considered one person and are not separated for the purposes of taxes, contracts, or legal actions, so the risks related to allowing such practices are much smaller. Institutions must weigh the benefits to both the bank and customer when determining how to handle sole proprietorship accounts. A good reason to allow individuals to deposit and cash checks payable to their sole proprietorships into personal accounts is to accommodate the customers and keep things convenient for them. A good reason to prohibit such practices is that some regulations (for example Truth in Savings and Reg. E) only apply to consumer purpose accounts, not business accounts. By allowing sole proprietorships to deposit items payable to the business into their individual consumer accounts, you may be affording the individual more consumer protections and limitations than required by regulation. Ultimately, it’s your institution’s decision.
CAUTION: If a sole proprietor has authorized others to transact business on behalf of the proprietorship, they should be designated as authorized signers on the account. It is NOT appropriate for such authorized persons to cash items payable to the proprietorship or deposit items payable to the proprietorship to the authorized signers’ personal account.
Question: Are we required to cash state or federal tax refund checks? Does it make a difference if the person wanting to cash their tax refund is a bank customer or not?
Answer: No, you are not required to cash tax refund checks (state or federal) for either customers or non-customers of the bank by any state or federal law. Federal and state Treasury checks can easily be created by fraudsters with high-end color printers and because the Treasury has up to one year to inspect and return unauthorized items, banks that cash fraudulent Treasury checks often find themselves incurring a loss several months after the check has been cashed when the deposited check is returned as fraudulent. Best practice is to only accept state and federal tax refund checks for deposit into the accounts of established customers of the bank for which the bank has chargeback rights under the Uniform Commercial Code if the deposited item is returned unpaid. (March 2019)
Question: Our general policy is to not cash checks payable to a corporation or other legally organized business. Is there legal foundation for this practice?
Answer: Yes. There are several sections of the Uniform Commercial Code that govern payment of checks to a person other than the named payee.
- Iowa Code section 554.3420 assigns liability to the bank for conversion of funds if the bank pays a check to someone other than the named payee.
- Section 554.4207 assigns liability for proper endorsements to the depository bank, whereby the depository bank warrants to all others in the collection chain that endorsements are valid and authentic, and the person to whom payment was made was entitled to enforce the instrument.
- Finally, section 554.3307 establishes that a bank is put on notice that an employee may be breaching his/her fiduciary liability to his/her employer by cashing checks that are made payable to that employer, creating a liability on the bank to the employer if the employee in fact breached his/her fiduciary duty and converted the funds for his/her own use.
If a business or organization wishes to allow certain employees to cash checks payable to the business, it should provide an explicit authorization or resolution to the bank identifying which employees are authorized to cash checks payable to the business, and assuming all liability when the bank honors the authorization or resolution.
Check handling matters
Question: Recently, a customer deposited a check that was returned for forged maker’s signature. We don’t believe the paying bank returned the item within the midnight deadline. Is a paying bank’s return of an item timely if it begins its return by the midnight deadline or must the depositary bank receive the item by the midnight deadline?
Answer: If an item is presented to and received by a paying bank, the bank is accountable for the amount of the item if the bank retains the item beyond midnight of the banking day of receipt. So, as long as the paying bank has started the return process by the midnight deadline, the return is considered to be timely. However, under Regulation CC, the paying bank must ensure that the depositary bank receives the check not later than 2 p.m. (local time of the depositary bank) on the second business day following the banking day on which the check was presented to the paying bank.
Question: May a bank negotiate a post-dated check?
Answer: Banks negotiating post-dated checks do so at their own risk because the Uniform Commercial Code allows a paying bank to either pay or refuse payment of a post-dated check. Most banks refuse to negotiate post-dated checks if they have knowledge of the post-dating; for example, if the item is presented over-the-counter and the teller can see the item has been post-dated. However, this code section does provide the paying bank can pay the item before the date of the check in good faith as long as the customer has not given the bank prior notice of the post-dating.
The Iowa Code section addressing post-dated checks states:
554.4401 When bank may charge customer’s account.
3. A bank may charge against the account of a customer a check that is otherwise properly payable from the account, even though payment was made before the date of the check, unless the customer has given notice to the bank of the postdating describing the check with reasonable certainty. The notice is effective for the period stated in section 554.4403, subsection 2, for stop-payment orders, and must be received at such time and in such manner as to afford the bank a reasonable opportunity to act on it before the bank takes any action with respect to the check described in section 554.4303. If a bank charges against the account of a customer a check before the date stated in the notice of postdating, the bank is liable for damages for the loss resulting from its act. The loss may include damages for dishonor of subsequent items under section 554.4402.
4. A bank that in good faith makes payment to a holder may charge the indicated account of its customer according to:
a. the original terms of the customer’s altered item; or
b. the terms of the customer’s completed item, even though the bank knows the item has been completed unless the bank has notice that the completion was improper.
Additional information about post-dated checks can be found in IBA’s “Check Handling Guide,” online at: https://www.iowabankers.com/publications/check-handling-guide/
Question: What is the bank’s liability to recognize and enforce restrictive legends such as “void after 90 days” when our deposit account customers order checks with such restrictive legends without our knowledge or consent?
Answer: Oftentimes account owners will request special legends be printed on their checks that limit the condition under which the check may be negotiated. Such legends include, but are not limited to, “two signatures required” or “void after 90 days.” Banks may or may not agree to honor restrictive check legends. If a bank allows restrictive legends, it must monitor checks presented for payment to ensure it does not pay an item that does not meet the legend requirements. If a bank pays an item in error, it stands the risk of loss.
However, a bank is not required to monitor or enforce restrictive legends. A bank may limit its risk of loss by notifying its account owners in the account agreement that restrictive legends are not recognized by the bank. Sample language could include:
“We may disregard information on any check or item other than the signature of the drawer, the identification of the drawee financial institution and payee, the amount, the endorsements, and any other information that appears on the MICR line. In addition, the bank is not responsible to take action on, or for failure to notify you of restrictive language placed on checks or other items, including but not limited to terms such as, ‘Void after 90 days” or “Paid in Full,” “Two Signatures Required,” or “Void over $100.”
If the bank becomes aware a customer has included a restrictive legend on the face of their checks, the bank should contact the customer and notify the customer of its contract provision which states the bank will NOT honor such legends.
The bank of first deposit also needs to proceed with caution when dealing with restrictive legends. If a deposit account customer attempts to deposit or cash a check containing a restrictive legend, the bank of first deposit should ensure the restrictions are met before negotiating the item. As the bank of first deposit, the bank has no way of knowing if the maker of the check and the bank on which the check is drawn have a contractual agreement in place to monitor for the restrictive legends. So unless the bank of first deposit is certain the restrictions have been meant, they stand the risk that the check will be returned unpaid for not meeting the restrictions. For example, if the bank cashes a check that indicates it will be considered void after 90 days and the check is more than 90 days old, the bank of first deposit has no way of knowing if the account holding bank will return the item unpaid or honor the item.
FRAUDULENT CHECK ACTIVITY
Question: We have a customer who is depositing unemployment benefit checks at the same time he is depositing payroll checks from current employment. Is this possible that a person would be receiving unemployment benefits while currently employed?
Answer: According to an investigator at the Iowa Workforce Development Office, it is possible that a person who had applied for and received unemployment benefits may continue to receive benefit checks for a short time (several weeks) even after obtaining new employment. This is particularly true when employees have been laid off work or terminated, and are subsequently employed on a part-time basis. The Iowa Work Force Development has programs in place to coordinate unemployment benefits with subsequent employment wages, and generally discovers the fact that the benefit recipient has been subsequently employed when a quarterly cross-match is conducted. For more information about unemployment benefits contact the Iowa Workforce Development Office at 515-281-8820.
Remote Deposit Capture
Question: Our customer just notified us that a check he wrote posted twice to his account. We discovered that Bank A accepted the check for deposit using remote deposit capture and so did Bank B. We are outside the midnight deadline for return. We know we have to credit the customer back for one of the transactions. Do we just take the loss?
Answer: The good news is that, as the paying bank, you have the ability to make a Fed adjustment for a duplicate presentment assuming your customer notified you within six months of the date of the second presentment posting. Just a note, had you identified the duplicate item by the midnight deadline, you could have just returned it.
Question: We offer remote deposit capture services (including mobile deposit capture). We accepted an item for deposit via mobile deposit that was endorsed “For RDC [Mobile] Deposit Only” to our bank. We just received an adjustment for this item indicating that this was a duplicate presentment. After calling the paying bank, we learned that the item had first been accepted for deposit by Bank Z via their RDC service without the restrictive endorsement. Can our bank make a claim against Bank Z?
Answer: Unfortunately, no. Under Reg. CC section 229.34(f), your bank only has the ability to make an RDC indemnity claim if you had taken the paper check for deposit, not via RDC or mobile RDC. In the commentary to this section, they include the following examples:
a. Depositary Bank A offers its customers a remote deposit capture service that permits customers to take pictures of the front and back of their checks and send the image to the bank for deposit. Depositary Bank A accepts an image of the check from its customer and sends an electronic check for collection to Paying Bank. Paying Bank, in turn, pays the check. Depositary Bank A receives settlement for the check. The same customer who sent Depositary Bank A the electronic image of the check then deposits the original check in Depositary Bank B. There is no restrictive indorsement on the check. Depositary Bank B sends the original check (or a substitute check or electronic check) for collection and makes funds from the deposited check available to its customer. The customer withdraws the funds. Paying Bank returns the check to Depositary Bank B indicating that the check already had been paid. Depositary Bank B may be unable to charge back funds from its customer’s account. Depositary Bank B may make an indemnity claim against Depositary Bank A for the amount of the funds Depositary Bank B is unable to recover from its customer.
c. The facts are the same as above with respect to Depositary Bank A; however, Depositary Bank B also offers a remote deposit capture service to its customer. The customer uses Depositary Bank B’s remote deposit capture service to send an electronic image of the front and back of the check, after sending the same image to Depositary Bank A. The customer deposits the original check into Depositary Bank C without a restrictive indorsement. Paying Bank pays the check based on the image presented by Depositary Bank A, and Depositary Bank A receives settlement for the check without the check being returned unpaid to it. Paying Bank returns the checks presented by Depositary Bank B and Depositary Bank C. Neither Depositary Bank B nor Depositary Bank C can recover the funds from the deposited check from the customer. Depositary Bank B does not have an indemnity claim against Depositary Bank A because Depositary Bank B did not receive the original check for deposit. Depositary Bank C, however, would be able to bring an indemnity claim against Depositary Bank A.
As you can see, you are in the same position as Bank B in this example, so you do not have a claim against Bank Z under this section. However, remember, the reason this happened is that your customer deposited the item twice. So, you can charge back the returned RDC deposited item to the customer’s account.
Unauthorized Checks
Question: When our customers notify us of an unauthorized check, draft or ACH item paid from their account, we have them sign an affidavit of unauthorized transaction. Is it necessary to have these affidavits notarized?
Answer: Under Iowa law, affidavits are written declarations made under oath in front of a person authorized to administer the oath…e.g. a notary public, clerk of court or judge. A bank’s “Affidavit of Forgery,” “Declaration of Lost/Stolen/Destroyed Cashier’s Check” or the “Affidavit of Unauthorized/Improper ACH Activity” should be notarized, if not on its face, then by a separate acknowledgement that indicated the statements made were true and accurate and attested to in front of a legally recognized witness (the notary, clerk of court or judge). The acknowledgement should be notarized and should be attached to the affidavit. For additional information regarding affidavits, see Iowa Code sections 622.85 – 622.91.
Question: We had a customer who had several checks forged on their account. Can we return these back to the paying bank?
Answer: No. Under the “final payment” doctrine, a drawee bank (bank on which the account is held) that pays over a forged drawer’s signature bears the ultimate loss and has no recourse against anyone but the forger. The rationale is that the drawee bank is expected to know its own customer’s signature.
Section 554.4406 of the Iowa Uniform Commercial Code (IUCC) addresses the customer’s responsibility to discover and report unauthorized signatures or alterations in timely fashion. This citation states that not more than 60 days is a reasonable time in which to examine an item or statement of account and notify the bank. The IUCC also states that in no case may the time limit exceed one year. Keep in mind, any provisions of Article 4 of the IUCC can be changed by contract between the bank and the customer, so a shorter time to examine the bank statement and report the forgery may be included in the bank’s deposit account agreement.