Indorsement and Payment of Checks Drawn on the United States Treasury

DEPARTMENT OF THE TREASURY

Fiscal Service

31 CFR Part 240

RIN 1510-AA45

Indorsement and Payment of Checks Drawn on the United States

Treasury

AGENCY: Financial Management Service, Fiscal Service, Treasury.

ACTION: Proposed Rule.

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SUMMARY: This reissues an earlier proposed revision of 31 CFR part 240,

which governs the indorsement and payment of checks drawn on the United

States Treasury. The purpose of this reissuance is to announce that it

is Treasury's intention to supersede existing Federal common law

regarding the apportionment of risk between Treasury and presenting

banks with respect to certain materially defective Treasury checks,

including counterfeits. Procedural changes are intended both to fix the

time by which Treasury can decline payment on Treasury checks and to

provide financial institutions with a date certain for final payment.

These rules also provide greater clarity by defining previously

undefined terms and by ensuring symmetry with current Treasury

regulations governing Federal payments utilizing the Automated Clearing

House method. In addition, these rules provide that Treasury may

instruct Federal Reserve Banks to intercept and return, unpaid, benefit

payment checks issued to deceased

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payees. These proposed revisions are issued in response to concerns

raised by financial institutions, Federal agencies, and other affected

parties.

DATES: Comments must be submitted on or before July 29, 1997.

ADDRESSES: All comments concerning these proposed regulations should be

addressed to Ronald Brooks, Senior Program Analyst, Financial

Processing Division, Financial Management Service, Prince Georges

Center II Building, 3700 East-West Highway, Room 725-D, Hyattsville,

Maryland 20782. Comments may be faxed to (202) 874-7534.

FOR FURTHER INFORMATION CONTACT: Ronald Brooks, (202) 874-7620 (Senior

Program Analyst, Financial Processing Division); Paul M. Curran, (202)

874-6680 (Principal Attorney).

SUPPLEMENTARY INFORMATION:

Limitations on Payment

The current regulation provides that Treasury shall have the right

to conduct first examination of Treasury checks presented for payment,

and to refuse payment of any checks within a reasonable time. The

current regulation also provides that such checks shall be deemed paid

only upon Treasury's completion of first examination. The proposed rule

clarifies this in two ways.

First, it defines first examination, and defines material defects

or alterations as including counterfeit checks. These definitions are

consistent with Treasury's longstanding interpretation of these terms.

Second, it fixes and narrows the time by which Treasury must

complete first examination, and provides that if Treasury fails to do

so within 150 days, the check will be deemed paid. This proposed change

is intended to accommodate financial institutions which seek not only a

more compressed time frame for first examination but also a date

certain for final payment of Treasury checks.

While Treasury will, in most cases, complete first examination well

within 30 days of presentment of a Treasury check to a Federal Reserve

Bank, the 150 day maximum period affords Treasury sufficient time to

complete first examination in certain problem cases. For example, up to

150 days may be required in instances where there are delays in

Treasury's obtaining from check certifying or authorizing agencies the

payment issue tapes necessary to complete first examination.

Recovery by Bank From Depositors

The proposed rule clarifies that the regulations contained in this

Part neither authorize nor direct any financial institution to debit

the account of any depositor. It further clarifies that any financial

institution's right of recovery against depositors is derived from both

the depository contracts with its customers and any self-help remedies

authorized by State law governing the relationship between financial

institutions and their customers. This provision mirrors the

regulations codified in 31 CFR part 210, which pertains to ``Federal

Payments Through Financial Institutions By the Automated Clearing House

Method.''

Deceased Payee Check Intercepts

Currently, where a benefit payment check has been issued and

negotiated after a payee's death, Treasury generally recovers the funds

from financial institutions through the reclamation process. Financial

institutions have expressed dissatisfaction with these procedures

because Treasury reclamation actions only occur after final payment and

because in many instances the depositors have closed their accounts or

withdrawn most or all of the funds. These financial institutions seek a

process by which Treasury can intercept such checks upon presentment

and return such checks unpaid before the financial institutions are

required under Federal Reserve Regulation CC (12 CFR part 229) to make

funds permanently available to their depositors. This proposed rule

responds to those concerns, and should result in a lower volume of

payments to nonentitled payees.

Specifically, it clarifies that benefit payment checks issued after

a payee's death are not payable. It also sets forth procedures by which

Treasury will instruct the Federal Reserve to intercept such checks

upon presentment and return unpaid those checks which are successfully

intercepted to the depositary banks.

Forged Drawer's Signature

On September 11, 1995, the United States Court of Federal Claims

filed an opinion in the case of ABN AMRO Bank, N.V. v. United States,

34 Fed.Cl. 126 (1995), which held that, under Federal common law,

Treasury generally cannot recover on a Treasury check bearing the

forged signature of a drawer (i.e., disbursing officer). The Court

further held that this result is not changed when a check also bears a

forged indorsement on the back. In so ruling, the Court relied on the

precedent of United States v. Chase National Bank, 252 U.S. 485 (1920),

which, in turn, had relied on the English case of Price v. Neal, 97

Eng.Rep. 871, 3 Burr. 1354 (1762). The Court went on to hold that

Treasury had failed to act in a manner which made evident an intent to

modify by regulation the holdings of these cases.

This ruling is inconsistent with Treasury's longstanding policy and

interpretation of its regulations, which has been that the Government

does not bear the loss on checks bearing forged drawers' signatures,

including counterfeits. In order to clarify this matter, we are

reissuing the proposed rule. Treasury is cognizant of relevant United

States Supreme Court precedent interpreting the common law in this area

and, by this regulation, will remove any ambiguity regarding Treasury

having supplanted that common law. In so acting, Treasury relies on the

Secretary's general rulemaking authority, 31 U.S.C. 321, as well as the

specific statutory authority of the Secretary to prescribe regulations

on the payment of drafts, found at 31 U.S.C. 3328(e).

Rulemaking Analysis

It has been determined that this regulation is not a significant

regulatory action as defined in E.O. 12866. Therefore, a Regulatory

Assessment is not required.

It is hereby certified pursuant to the Regulatory Flexibility Act

that this revision will not have a significant economic impact on a

substantial number of small business entities. Accordingly, a

Regulatory Flexibility Act analysis is not required.

These regulations impose time frames within which first examination

of Treasury checks must be accomplished, and establish consequences for

the failure of Treasury to honor those time frames. Consequently, these

regulations provide financial institutions with greater certainty

regarding the entire payment process, and place higher standards of

performance on Treasury in its processing of checks.

The other principal provision of these regulations will reduce the

likelihood that final payment on Treasury checks will be made to

nonentitled persons. Treasury's efficiency and its ability to serve the

needs of legitimate payees of benefit programs will thereby be

enhanced.

Although these regulations assign to banks the risk of loss on

materially defective Treasury checks, this traditionally has been

Treasury's practice and policy. Even if these regulations were to be

viewed as representing a change in practice or policy, however, the

impact on the economy, or any sector thereof, or on small business

entities, would be minor.

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Notice and Comment

Public comment is solicited on all aspects of this proposed

regulation. Comments previously received on the substance of this

proposed regulation will be considered together with comments submitted

in response to this notice.

Therefore, while commenters are free to submit additional comments

at this time, they need not re-submit earlier comments. Treasury does

not intend to hold hearings.

List of Subjects in 31 CFR Part 240

Banks, Banking, Checks, Counterfeit checks, Federal Reserve system,

Forgery, Guarantees.

For the reasons set out in the preamble, 31 CFR part 240 is

proposed to be amended as follows.

PART 240--INDORSEMENT AND PAYMENT OF CHECKS DRAWN ON THE UNITED

STATES TREASURY

1. The authority citation for part 240 is revised to read as

follows:

Authority: 5 U.S.C. 301; 12 U.S.C. 391; 31 U.S.C. 321; 31 U.S.C.

3327; 31 U.S.C. 3328; 31 U.S.C. 3331; 31 U.S.C. 3334; 31 U.S.C.

3343; 31 U.S.C. 3711; 31 U.S.C. 3712; 31 U.S.C. 3716; 31 U.S.C.

3717; 318 U.S. 363 (1943).

2. Section 240.1 is revised to read as follows:

Sec. 240.1 Scope of regulations.

(a) The regulations in this part prescribe the requirements for

indorsement and the conditions for payment of checks drawn on the

United States Treasury. These regulations also establish procedures for

collection of amounts due the United States Treasury because of

payments on checks bearing forged or unauthorized indorsements or other

material defects or alterations.

(b) Standards contained in this regulation supercede existing

Federal common law holding that Treasury generally cannot recover on

checks bearing forged disbursing officers' (i.e., drawers') signatures.

Under the provisions of this regulation, the risk of loss on checks

bearing forged disbursing officers' signatures, including counterfeits,

is placed on presenting banks.

3. Section 240.2 is revised to read as follows:

Sec. 240.2 Definitions.

(a) Agency means any department, instrumentality, office,

commission, board, service, or other establishment of the United States

authorized to issue Treasury checks or for which checks drawn on the

Treasury of the United States are issued.

(b) Bank means any financial institution, including but not limited

to, any savings bank, national bank, state bank, and credit union

created under Federal or state law.

(c) Benefit payment includes but is not limited to a payment of

money for any Federal Government entitlement program or annuity.

(d) Certifying agency means an agency authorizing the issuance of a

Treasury payment by a Treasury disbursing officer or a non-Treasury

disbursing officer in accordance with 31 U.S.C. 3325.

(e) Check or checks means a check or checks drawn on the United

States Treasury.

(f) Check payment means the amount paid to a presenting bank by a

Federal Reserve Bank.

(g) Commissioner means the Commissioner of the Financial Management

Service, Department of the Treasury.

(h) Days means calendar days.

(i) Decline payment means the process whereby Treasury refuses to

make final payment on a check by instructing the Federal Reserve Bank

to reverse its provisional credit to a presenting bank.

(j) Federal Reserve Bank means a Federal Reserve Bank and its

branches.

(k) Financial institution means any bank, including but not limited

to, any savings bank, national bank, state bank and credit union

created under Federal or state law.

(l) First examination means the process of check reconciliation

which involves comparing disbursing officer issue information on checks

with Federal Reserve Bank payment information. Where the issue

information is at odds with the payment information, first examination

will include retrieval and inspection of the check, or the best

available image thereof.

(m) Item means a reference, as in a monthly interest billing

statement or similar document, to a check.

(n) Material defect or alteration means

(1) The counterfeiting of a check; or

(2) Any physical change on a check, including, but not limited to,

the amount, date, payee name, or other identifying information printed

on either the front or the back of the check; or

(3) Any forged or unauthorized indorsement appearing on the back of

the check.

(o) Monthly interest billing statement means a statement prepared

by Treasury and sent to a bank which includes the following information

regarding each outstanding demand for refund:

(1) The reclamation date;

(2) The reclamation number;

(3) Check identifying information; and

(4) The balance due, including interest.

(p) Person or persons means an individual or individuals, or an

institution or institutions, including all forms of financial

institutions.

(q) Presenting bank means:

(1) A financial institution which, either directly or through a

correspondent banking relationship, presents checks to and receives

provisional credit from a Federal Reserve Bank; or

(2) A depositary which is authorized to charge checks directly to

the Treasury General Account and present them to Treasury for payment

through a designated Federal Reserve Bank.

(r) Protest means a bank's written statement and any supporting

documentation tendered for the purpose of establishing that the bank is

not liable for refund of the reclamation balance.

(s) Reclamation means a demand by Treasury for refund of the amount

of a check payment.

(t) Reclamation date means the date on which a demand for refund

was prepared. Normally, demands are sent to banks within 2 working days

of the reclamation date.

(u) Treasury means the United States Department of the Treasury.

(v) U.S. securities means securities of the United States and

securities of Federal agencies and wholly or partially Government-owned

corporations for which Treasury acts as the transfer agent.

(w) Unauthorized indorsement means:

(1) An indorsement made by a person other than the payee or payees,

except as authorized by and in accordance with Sec. 240.5 and

Sec. 240.11 through Sec. 240.15;

(2) An indorsement by a financial institution under circumstances

in which the financial institution breaches the guaranty of indorsement

required of it by Sec. 209.9(a) of this title;

(3) A missing indorsement where the depositary bank had no

authority to supply the indorsement.

4. Section 240.3 is amended by revising paragraphs (c), (d) and (e)

to read as follows:

Sec. 240.3 Limitations on payment.

* * * * *

(c)(1) Treasury shall have the right as drawee to examine checks

presented for payment and reconcile or direct the Federal Reserve Bank

to refuse payment of any checks.

(2) Receipt of credit by a financial institution from a Federal

Reserve Bank shall be provisional until Treasury

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completes first examination of the check.

(3) When first examination by Treasury establishes that a check has

a material defect or alteration, Treasury will decline payment on the

check.

(d) Notwithstanding the provisions of paragraph (c) of this

section, when issue information is not available within 150 days after

the check is presented to the Federal Reserve Bank for payment, or when

first examination is otherwise not completed within such time frame,

Treasury will be deemed to have made final payment on the check.

(e) Notwithstanding the provisions of paragraph (d) of this

section, if Treasury is on notice of a question of law or fact about

whether a check is properly payable upon presentment for payment, and

Treasury refers such question to the Comptroller General under 31

U.S.C. 3328(a)(2), the Commissioner may defer final payment on the

check until the Comptroller General settles the question.

* * * * *

5. Section 240.4 is amended by removing paragraph (a) introductory

text; by removing paragraph (b); by redesignating paragraphs (a)(1),

(a)(2) and (a)(3) as paragraphs (a), (b) and (c); and by revising newly

redesignated paragraphs (a) and (c) to read as follows:

Sec. 240.4 Cancellation and distribution of proceeds of checks.

(a) Any check issued on or after October 1, 1989 that has not been

paid and remains outstanding for more than 12 months will be cancelled

by the Commissioner.

* * * * *

(c) On a monthly basis, the Commissioner will provide to each

agency that authorizes the issuance of Treasury checks a list of those

checks issued for such agency which were cancelled during the preceding

month pursuant to paragraph (a) of this section.

6. Section 240.6(a) is revised to read as follows:

Sec. 240.6 Reclamation of amounts of paid checks.

(a) If Treasury determines:

(1) That a check has been paid over a forged or unauthorized

indorsement; or

(2) That a check containing a material defect or alteration is

deemed paid under Sec. 240.3, the presenting bank or any other indorser

shall be liable to the Treasury for the full amount of the check

payment. The Commissioner may reclaim the amount of the check payment

from the presenting bank, or from any other indorser that breached its

guaranty of indorsement prior to:

(i) The end of the 1-year period beginning on the date of

provisional payment; or

(ii) The expiration of the 180-day period beginning on the close of

the period described in paragraph (a)(2)(i) of this section if a timely

claim under 31 U.S.C. 3702 is presented to the certifying agency.

* * * * *

7. Section 240.9 is amended by revising paragraphs (a)(1), (a)(3),

introductory text, (a)(3)(ii), and (a)(3)(iv) to read as follows:

Sec. 240.9 Processing of checks.

(a) Federal Reserve Banks. (1) Federal Reserve Banks shall cash

checks for Government disbursing officers when such checks are drawn by

the disbursing officers to their own order. Payment of such checks

shall not be refused except for material defect or alteration of the

check.

* * * * *

(3) As a depository of public funds, each Federal Reserve Bank

shall:

* * * * *

(ii) Give immediate provisional credit therefor in accordance with

their current Time Schedules and charge the amount of the checks cashed

or otherwise received to the account of the Treasury, subject to first

examination and payment by Treasury.

* * * * *

(iv) Release the original checks to a designated Federal Records

Center upon notification from Treasury. Treasury shall return to the

forwarding Federal Reserve Bank a copy of any check the payment of

which is declined upon the completion of first examination, together

with notice of the declination. Federal Reserve Banks shall give

immediate credit therefor in Treasury's account, thereby reversing the

previous charge to the account for such check. Treasury authorizes each

Federal Reserve Bank to release a copy of the check to the indorser

when payment is declined.

* * * * *

8. Section 240.13 is amended by adding paragraph (c) to read as

follows:

Sec. 240.13 Checks issued to deceased payees.

* * * * *

(c) Deceased payee check intercepts. (1) A benefit payment check,

issued after a payee's death, is not payable. When a certifying agency

learns that a payee has died, the certifying agency shall give

immediate notice to Treasury. Upon receipt of such notice, Treasury

will instruct the Federal Reserve Bank to refuse payment on the check

upon presentment. The Federal Reserve Bank will make every appropriate

effort to intercept the check. Where a check is successfully

intercepted, the Federal Reserve bank will refuse payment, and return

the check unpaid to the bank with an annotation that the payee is

deceased. Where a financial institution learns that a date of death

triggering action under this section is erroneous, the appropriate

certifying agency which authorized the issuance of the check should be

contacted.

(2) Nothing in this section shall limit the right of Treasury to

institute reclamation proceedings under the provisions of Sec. 240.6

with respect to a deceased payee check paid over a forged or

unauthorized indorsement.

9. Section 240.16 is added to read as follows:

Sec. 240.16 Lack of authority to shift liability.

(a) This part neither authorizes nor directs a bank to debit the

account of any party or to deposit any funds from any account in a

suspense account or escrow account or the equivalent. However, nothing

in this part shall be construed to affect a bank's contract with its

depositor(s) under authority of State law.

(b) A bank's liability under this part is not affected by any

action taken by it to recover from any party the amount of the bank's

liability to the Treasury.

9. Section 240.17 is added to read as follows:

Sec. 240.17 Implementing instructions.

Procedural instructions implementing these regulations will be

issued by the Commissioner of the Financial Management Service in

volume I, part 4 and volume II, part 4 of the Treasury Financial

Manual.

Russell D. Morris,

Commissioner.

[FR Doc. 97-14174 Filed 5-29-97; 8:45 am]

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