I. INTRODUCTION
The Federal Reserve Board has adopted a final rule amending Regulation CC (Expedited Funds Availability Act) to address situations where there is a dispute regarding whether a check has been altered or was issued with an unauthorized signature, and the original paper check is not available for inspection. The rule adopts a presumption of alteration for disputes between banks over whether a substitute check or electronic check contains an alteration or is derived from an original check that was issued with an unauthorized signature of the drawer. The rule became effective on January 1, 2019.
II. BACKGROUND
Under the Uniform Commercial Code (UCC), an alteration is a change to the terms of a check that is made after the check is issued that modifies an obligation of a party by, for example, changing the payee’s name or the amount of the check. By contrast, a forgery is a check on which the signature of the drawer (i.e., the account-holder at the paying bank) was made without authorization at the time of the check’s issuance. In general, under UCC 4–401, the paying bank may charge the drawer’s account only for checks that are properly payable. Neither altered checks nor forged checks are properly payable. In the case of an altered check under the UCC, the banks that received the check during forward collection, including the paying bank, have warranty claims against the banks that transferred the check (e.g., a collecting bank or the depositary bank). In the case of a forged check, however, the UCC places the responsibility on the paying bank for identifying the forgery. Therefore, the depositary bank typically bears the loss related to an altered check, whereas the paying bank bears the loss related to a forged check.
Regulation CC does not currently address whether a check should be presumed to be altered or forged in cases of doubt. For example, an unauthorized payee name could result from an alteration of the original check that the drawer issued, or from the creation of a forged check bearing the unauthorized payee name and an unauthorized/forged drawer’s signature. Courts have reached opposite conclusions as to whether a paid, but fraudulent, check should be presumed to be altered or forged in the absence of evidence (such as the original check).
Since the time of these decisions, the check collection system has become virtually all-electronic, and the number of instances in which the original paper check is available for inspection in such cases will be quite low. Unlike the 2006 court cases, where the paying bank received and destroyed the original check, in today’s check environment the original check is typically truncated by the depositary bank or a collecting bank before it reaches the paying bank.
III. FINAL RULE – PRESUMPTIONS
Under the final rule, there is a rebuttable presumption that a substitute check or electronic check contains an alteration when there is a dispute between banks about whether a check contains an alteration or is derived from an original check with an unauthorized signature.
The presumption of alteration may be overcome by proving by a preponderance of evidence that either the substitute check or electronic check does not contain an alteration or that the substitute check or electronic check is derived from an original check with an unauthorized signature.
If the original check is available for examination by all banks involved in the dispute, the presumption no longer applies (i.e., the presumption only applies to disputes between banks when one bank has transferred an electronic or substitute check to the other bank). In addition, if the bank of deposit directly presents a paper check to the paying bank, (e.g., because of the large amount of the check), the presumption does not apply even if the paying bank has destroyed the check.