# Indorsement and Payment of Checks Drawn on the United States Treasury

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URL: https://www.frixlaw.com/law-library/documents/fr%3A97-14174

## Record

- **Collection:** Federal Register
- **Document type:** Proposed Rule
- **Published:** May 30, 1997
- **Citation:** 62 FR 29314

## Text

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

[[Page 29315]]

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.

[[Page 29316]]

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

[[Page 29317]]

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]
BILLING CODE 4810-35-U

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A97-14174. Public record. Not legal advice.