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Even with my extensive experience in checks and check processing, I still sometimes need clarification on how the rules, laws and regulations apply to specific situations. I often think I understand what the laws and regulations mean, but sometimes when I speak to our legal counsel, I realize things aren’t as black and white as they may seem. With that in mind I want to share a few recent clarifications I have received.

Cashier’s Checks

In the past, I believed that the transfer and presentment warranties under the Uniform Commercial Code (UCC) applied to cashier’s checks (official checks), but I have since learned this is not the case. For example, I used to think that if a cashier’s check was issued, then stolen and the Payee's name altered after the return timeframe had passed, the institution could file a Breach of Warranty claim against the Depositary Institution, but that’s not the case. UCC transfer warranties do not flow to the drawee/issuing financial institution. UCC transfer warranties do not extend to the drawee or issuing financial institution; instead, they are made by the Depositor to the Depositary Institution and then passed on to any other collecting financial institution involved in handling the check in a forward cash letter. The presentment warranties do not cover a cashier’s check because they are considered accepted drafts (i.e., the Paying Institution has already agreed to accept the draft as it was drawn).

The presentment warranty applies to unaccepted drafts, which are checks drawn by the Paying Institution’s account holder. Because the Paying Institution does not know the check’s recipient, account holders can make a claim of alteration, allowing the Paying Institution to file a breach of warranty claim against the Depositary Institution. Since the Paying Institution has not yet accepted the check, these warranties apply if an alteration is discovered later.

So, what does that mean for altered and counterfeit cashier’s checks? If you are within the 24-hour return timeframe from presentment, you may return a cashier’s check for these reasons. A best practice for your financial institution is to reconcile official check accounts daily, helping your institution quickly identify and return altered or counterfeit items within the required timeframe. Outside of the return timeframe, your institution’s options are limited, so seeking legal counsel is important to determine if and how funds can be recovered. Some institutions use Payee Positive Pay on cashier’s check accounts to detect counterfeits more quickly.

UCC Transfer Warranties

I have always understood that the Paying Institution holds the warranty for a forged Drawer signature or a counterfeit item. According to UCC 3-417, these warranties are made to the Paying Institution by the Depositary Institution or other warrantors, including a guarantee that they have no knowledge that the drawer’s signature is unauthorized. This means the Paying Institution must return forged or counterfeit items promptly; otherwise, they or their account holder could be held liable for the item. Here’s what the rule states:

§ 3-417. 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 making payment or accepting 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;

(2) the draft has not been altered;

(3) the warrantor has no knowledge that the signature of the drawer of the draft is unauthorized;

(4) with respect to any remotely-created consumer item, that the person on whose account the item is drawn authorized the issuance of the item in the amount for which the item is drawn.

Updates reflecting this clarification have been incorporated into the Check Exception Resource Package and the Check/RDC Quick Reference Cards related to this clarification.

Understanding these unique rules for cashier’s checks is just one way to strengthen your knowledge and stay protected from unnecessary risk. Join us virtually November 5–6 for Check Day Camp, where we’ll equip you with practical solutions, proven strategies and fresh insights you can bring back to your institution to improve processes, safeguard operations and better serve your accountholders.