12 C.F.R. § 229.38

Liability

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(a) Standard of care; liability; measure of damages. A bank shall exercise ordinary care and act in good faith in complying with the requirements of this subpart. A bank that fails to exercise ordinary care or act in good faith under this subpart may be liable to the depositary bank, the depositary bank's customer, the owner of a check, or another party to the check. The measure of damages for failure to exercise ordinary care is the amount of the loss incurred, up to the amount of the check, reduced by the amount of the loss that party would have incurred even if the bank had exercised ordinary care. A bank that fails to act in good faith under this subpart may be liable for other damages, if any, suffered by the party as a proximate consequence. Subject to a bank's duty to exercise ordinary care or act in good faith in choosing the means of return or notice of nonpayment, the bank is not liable for the insolvency, neglect, misconduct, mistake, or default of another bank or person, or for loss or destruction of a check or notice of nonpayment in transit or in the possession of others. This section does not affect a paying bank's liability to its customer under the U.C.C. or other law.

(b) Paying bank's failure to make timely return. If a paying bank fails both to comply with its expeditious return requirements under § 229.31(b) and with the deadline for return under the UCC, Regulation J (12 CFR part 210), or the extension of deadline under § 229.31(g) in connection with a single nonpayment of a check, the paying bank shall be liable under either § 229.31(b) or such other provision, but not both.

(c) Comparative negligence. If a person, including a bank, fails to exercise ordinary care or act in good faith under this subpart in indorsing a check (§ 229.35), accepting a returned check or notice of nonpayment (§ 229.33(b), (c), and (d)), or otherwise, the damages incurred by that person under § 229.38(a) shall be diminished in proportion to the amount of negligence or bad faith attributable to that person.

(d) Responsibility for certain aspects of checks. (1) A paying bank, or in the case of a check payable through the paying bank and payable by another bank, the bank by which the check is payable, is responsible for damages under paragraph (a) of this section to the extent that the condition of the check when issued by it or its customer adversely affects the ability of a bank to indorse the check legibly in accordance with § 229.35. A depositary bank is responsible for damages under paragraph (a) of this section to the extent that the condition of the back of a check arising after the issuance of the check and prior to acceptance of the check by it adversely affects the ability of a bank to indorse the check legibly in accordance with § 229.35. A reconverting bank is responsible for damages under paragraph (a) of this section to the extent that the condition of the back of a substitute check transferred, presented, or returned by it—

(i) Adversely affects the ability of a subsequent bank to indorse the check legibly in accordance with § 229.35; or

(ii) Causes an indorsement that previously was applied in accordance with § 229.35 to become illegible.

(2) Responsibility under this paragraph (d) shall be treated as negligence of the paying bank, depositary bank, or reconverting bank for purposes of paragraph (c) of this section.

(e) Timeliness of action. If a bank is delayed in acting beyond the time limits set forth in this subpart because of interruption of communication or computer facilities, suspension of payments by a bank, war, emergency conditions, failure of equipment, or other circumstances beyond its control, its time for acting is extended for the time necessary to complete the action, if it exercises such diligence as the circumstances require.

(f) Exclusion. Section 229.21 of this part and section 611 (a), (b), and (c) of the EFA Act (12 U.S.C. 4010 (a), (b), and (c)) do not apply to this subpart.

(g) Jurisdiction. Any action under this subpart may be brought in any United States district court, or in any other court of competent jurisdiction, and shall be brought within one year after the date of the occurrence of the violation involved.

(h) Reliance on Board rulings. No provision of this subpart imposing any liability shall apply to any act done or omitted in good faith in conformity with any rule, regulation, or interpretation thereof by the Board, regardless of whether the rule, regulation, or interpretation is amended, rescinded, or determined by judicial or other authority to be invalid for any reason after the act or omission has occurred.

(i) Presumption of Alteration—(1) Presumption. Subject to paragraphs (i)(2) and (3) of this section and in the absence of a Federal statute or regulation to the contrary, the presumption in this paragraph applies with respect to any dispute between banks arising under Federal or State law as to whether a substitute check or electronic check transferred between those banks contains an alteration or is derived from an original check that was issued with an unauthorized signature of the drawer. When such a dispute arises, there is a rebuttable presumption that the substitute check or electronic check contains an alteration.

(2) Rebuttal of presumption. 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 that was issued with an unauthorized signature of the drawer.

(3) Effect of producing original check. If the original check is made available for examination by all banks involved in the dispute, the presumption in paragraph (i)(1) of this section shall no longer apply.

[53 FR 19433, May 27, 1988, as amended at 82 FR 27583, June 15, 2017; 83 FR 46853, Sept. 17, 2018]

Notes of Decisions

Cited in 15 cases (1 in the last 5 years), 1993–2024 · leading case: Bank One Chicago, N. A. v. Midwest Bank & Trust Co., 516 U.S. 264 (1996).

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Bank One Chicago, N. A. v. Midwest Bank & Trust Co., 516 U.S. 264 (1996). · cites it 4× “" 12 CFR § 229.38 (g) (1995). II This controversy stems from an interbank dispute regarding a dishonored check.”

Nbt Bank, Nat'l Ass'n v. First Nat'l Cmty. Bank, 393 F.3d 404 (1st Cir. 2004). · cites it 2× “12 C.F.R. § 229.38 (a). Along with Regulation CC, the Federal Reserve has adopted Operating Circulars utilized by Reserve Banks in connection with their check-processing services.”

Aresty Int'l Law Firm, P.C. v. Citibank, N.A., 677 F.3d 54 (1st Cir. 2012). · cites it 2× “But suits under Regulation CC “shall be brought within one year after the date of the occurrence of the violation involved,” 12 C.F.R. § 229.38 (g), and Aresty did not meet this deadline.”

First Nat. Bank in Harvey v. Colonial Bank, 898 F. Supp. 1220 (N.D. Ill. 1995). · cites it 2× “12 C.F.R. § 229.38 (a). Under this provision, there must be a causal relationship between the bank's actions and the loss.”

First Illinois Bank & Trust, an Illinois Banking Corp. v. Midwest Bank & Trust Co., an Illinois Banking Corp., 30 F.3d 64 (1st Cir. 1994). “Pursuant to 12 CFR § 229.38 (a), First Illinois sought to recover damages resulting from Midwest’s alleged negligence.”

NBT Bank v. First Nat'l Cmty. Bank, 287 F. Supp. 2d 564 (M.D. Penn. 2003). “12 C.F.R. § 229.38 (a). This separate liability standard of ordinary care for encoding requirements would be rendered meaningless if the encoding requirements were incorporated into the strict liability standard of 13 Pa.”

Deutsche Bank Trust Co. Americas v. Doral Fin. Corp., 841 F. Supp. 2d 593 (D.P.R. 2012). “Violations of these requirements are actionable under § 229.38, which states that “a bank that fails to exercise ordinary care or act in good faith under this subpart may be liable to the depository bank.”

Southtrust Bank of Baldwin Cnty. v. Empire Corp. Fed. Credit Union, 668 So. 2d 548 (Ala. Civ. App. 1994). “We would note that 12 C.F.R. § 229.38 (a) provides, in pertinent part: “[t]he measure of damages for failure to exercise ordinary care is the amount of the loss incurred, up to the amount of the cheek, reduced by the amount of the loss that party would have incurred even if the…”

Troy Bank & Trust Co. v. The Citizens Bank, 166 So. 3d 57 (Ala. 2014). “We note that Citizens Bank also argues that Troy Bank’s claim under the encoding warranty is barred by a federal statute of limitations set forth in 12 C.F.R. § 229.38 (g): "Any action under this subpart may be brought in any United States district court, or in any other court…”

Nbd Bank, an Illinois Banking Corp., & Cross-Appellee v. Stand. Bank & Trust Co., an Illinois Banking Corp., &, 79 F.3d 37 (7th Cir. 1996). · cites it 2× “Standard Bank counterclaimed for the return of the money, arguing that Federal Reserve Regulation CC, 12 C.F.R. § 229.38 (g), promulgated pursuant to the EFAA, extended the midnight deadline through 4:00 p.”

First Nat'l Bank v. Colonial Bank, 831 F. Supp. 637 (N.D. Ill. 1993). · cites it 2× “” 12 CFR § 229.38 (a). In addition, "a bank that fails to act in good faith under this subpart may be liable for other damages, if any, suffered by the party as a proximate consequence.”

USAA Inv. Mgmt. Co. v. Fed. Reserve Bank of Boston, 906 F. Supp. 770 (D. Conn. 1995). · cites it 4× “6 , Regulation CC, 12 C.F.R. § 229.38 (a), and New York’s Uniform Commercial Code, NY UCC § 4-202(1), set forth a standard of ordinary care to which the banks must adhere in the handling of checks for collection, including the handling of returned checks.”

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