Disclaimer: This article is not intended as legal or compliance advice, and if legal advice is needed, the opinion of a competent attorney should be sought.

 

Request for Comment (RFC)

In 2014 and 2017 the Federal Reserve requested comment on whether Regulation CC should adopt an evidentiary presumption as to whether, in cases of doubt, the check should be presumed to be altered rather than forged. On September 12, 2018, the Fed announced changes to Reg CC (see https://www.federalreserve.gov/newsevents/pressreleases/bcreg20180912a.htm) to establish a new evidentiary presumption of alteration which is intended to address disputes as to whether a check is altered or issued with an unauthorized signature of the drawer when the original check is not available. The Rule takes effect January 1, 2019 and has no implementation requirements. The Rule is intended to create a uniform starting point that recognizes operational realities of check fraud in the absence of clear evidence and to provide clarity as to the burden of proof in these situations.

Check Law Liability under Uniform Commercial Code (UCC)

Under the UCC an alteration is an unauthorized change to terms made after a check is issued that modifies the obligations of a party. Forgery is a signature of a drawer made without the drawer authorization at the time the check is issued. Under the UCC, the paying bank may only charge a drawer for a properly payable check; neither an alteration nor a forgery is properly payable.

Under check law, the responsibility for check fraud is allocated between banks on whether the check is altered or counterfeit; once the check is destroyed it may be impossible to determine. Typically, the depositary bank bears the liability for loss for an altered check. And the UCC places responsibility/liability on the paying bank for identifying a forgery and therefore bears the loss for a forged check.

 

 

Check 21 and image implementation permitted banks to truncate an original check and retain a digitized electronic copy. This changed the ability to identify an altered versus a counterfeit item.

Cases

Since the implementation of image exchange, there have been three court cases with inconsistent results. These split judicial decisions create uncertainty for banks.

Wachovia v. Foster Bancshares – In this case a check was presented to Wachovia Bank as the paying bank and Wachovia destroyed the original check. Wachovia’s customer learned the intended payee did not receive the check. The court ruled for Wachovia and that the check was altered. The court made interesting observations that effect image exchange. The court did not question the lawfulness of Wachovia destroying the original check and stated Foster made no effort to show that retaining “mountains of paper checks” would be reasonable to determine who should be liable for the loss. The court could not adopt a rule to enforce that the physical paper must be retained. The court also stated that reform in light of modern copying technology should be left to Uniform State Commissioners rather than federal court.

Chevy Chase v. Wachovia was similar to Wachovia v. Foster Bancshares requiring a decision to determine if the item was counterfeit or altered. The court ruled the check was counterfeit rather than altered even though one judge observed different fonts on the item.

Bank of America v. Mazon State Bank takes Wachovia v. Fosters Bancshares and applies the holding to a dispute where the original paper check was introduced into evidence. This court upheld the Wachovia v. Fosters Bancshares verdict.

These three cases were adjudicated around the same time (2006) with two ruling altered and one ruling counterfeit. Since these cases the check collection system has become virtually all-electronic. Now the number of instances in which the original paper check is available is quite low. Today the original check is typically truncated by the payee, depositary or collecting bank before reaching the paying bank.

Updated Reg CC Rule

The new Rule applies to disputes under federal or state law for substitute or electronic checks. When disputes arise, there is a rebuttable presumption the check contains an alteration regardless of where the original check was truncated. The presumption may be overcome by a preponderance of evidence that the item was not altered. If the original check is available for examination, the presumption does not apply, nor does it apply to disputes where the original check is transferred between banks. Alteration for this Rule is as defined in the UCC. The Rule does not alter other warranties under UCC, and UCC and other applicable law continue to apply. The Rule may be varied by agreement as permitted in Reg CC.