Thursday, September 29, 2022

March 2007 Legal Briefs

  1. Stop Payment Orders on Checks – Questions and Answers
  2. No Means of Stopping Payment on Cashier’s Checks
    1. Examples: When a bank would like to avoid paying a cashier’s check
    2. Is a customer’s “defense” against the payee a reason for not paying a cashier’s check?
    3. When does a bank have its own defense to paying a cashier’s check

1. Stop Payment Orders on Checks

There are no recent changes relating to “stop payment” orders, but I continually receive questions in this area.  I will review a number of stop payment issues that banks often raise.

1. Can a bank get in trouble for letting the customer place a stop payment order, if the bank knows the customer has a bad motive?

No.  Stopping payment might make the payee on the check really mad, but it’s not the bank’s fault that the customer may be trying to defraud the payee.  Under UCC §4-403(a), a customer or other person entitled to draw on the customer’s account has a right to place a stop payment order on any item drawn on the account—for any reason or no reason.  It’s not the bank’s job to evaluate the customer’s motive.

If the bank refused to accept a stop payment order because the bank didn’t like the customer’s reason, the bank would become liable to the customer because it paid the item contrary to the customer’s order.  The payee may feel that it is helping its customer to defeat the payee—but the bank has no choice.

If a bank does not like the way a customer is handling an account, the bank can close the account—usually by giving advance written notice, so that the customer’s already-outstanding checks will have time to clear.  

2.  Should the bank ask the customer what is his reason for stopping payment?

Generally, no.  The reason is irrelevant, because it won’t change the bank’s duty.  Asking “why” might irritate a customer who does not care to reveal his personal business to the bank.  (If you suspect a fraud, you might ask a little bit more to help you with SAR reporting, without explaining why you are curious–but that’s a limited exception.) 

3. What do you say when the check’s payee wants a reason?

It isn’t appropriate for a bank to tell the payee the customer’s reason for stopping payment–even if the bank knows.  The payee should be told that the customer isn’t required to state a reason—and the payee needs to discuss the issue directly with the customer. 
4.  Does stopping payment automatically reverse the customer’s transaction with the payee?

No.  Some customers mistakenly think they can reverse or cancel a transaction (even one that is perfectly legitimate) by stopping payment on a check.  This is not true.  Stopping payment sometimes can get the customer into a lot of trouble, if the customer lacks any good defenses to the payee’s demand for the full amount.  

Cutting off one method of payment (by check) will often cause the customer to be sued by the payee for the money that is owed.  A customer may be unhappy or complaining for various reasons, but still is better advised to let the check go through if the money is actually owed.  Of course, a customer is free to make his own decisions—good or bad.

5.  In what situations is a stop payment order helpful?
 
The most common stop payment situation occurs when a check is lost, stolen or destroyed, and the payee wants a replacement check.  To avoid the possibility that both checks will pay, the customer puts a stop payment order on the missing check (if it’s large enough to worry about) before issuing the second check.  The customer will have no liability for stopping payment on the lost check, if it has been replaced.  (The payee is not entitled to both checks.)

Another good scenario for stopping payment is when the customer is a victim of fraud or deception, and the check that he wrote hasn’t cleared the bank yet.  A stop payment order is the last, best chance for the customer to protect himself from loss.  (The fraudster will disappear, leaving no way to recover from him for what was fraudulently obtained.) The customer has no risk of being sued for stopping payment in this situation, either—the crook just looks for another victim.  

In other cases, there may be a dispute over certain work not completed as promised, or items purchased that are defective or of lesser quality than required.  The customer will end up owing the payee some amount after it’s all hashed out, but probably not the full amount.  Stopping payment because of a legitimate dispute about the value of what has been received may be a good idea, because retaining the money until it’s all settled is better than trying to get the excess money back from a payee who has already spent the money. 

Another good scenario for using a stop payment order is when an elderly person writes some large checks and fairly obviously doesn’t know what he is doing. Perhaps a twenty-something grandchild on drugs coaxes a nearly-senile grandparent to write a large check.  Or, over the weekend, an elderly person in the nursing home writes a $1,000 check to each person on the nursing home’s staff—but he isn’t wealthy, and needs the money for his own health care.  I have no problem if the bank informs any other joint tenant or authorized signer on the account—any of whom is entitled to sign a stop payment order. A bank can stall the payment of any check until the end of its business day without dishonoring that item, and can use the time to contact someone appropriate.

6.  Who can give the bank a stop payment order?

UCC Section 4-403(a) states, “A customer or any person authorized to draw on the account . . . may stop payment of any item drawn on the customer’s account . . .”  In other words, anyone on the signature card can stop payment.

On a corporation, LLC or partnership account, there could be three or four authorized signers.  Any of the signers can stop payment on any check.

7.  What if the signers disagree with each other?

Maybe a husband and wife are the only signers on a corporation’s account—and they have a falling out. The husband tells the bank to take the wife’s name off the corporation’s bank account as a signer, because he’s afraid she will spend or withdraw all of the money.  However, only the board of directors (not the husband) can adopt a revised banking resolution for the corporation, changing the authorized signers.  Until that occurs, the existing banking resolution remains effective—authorizing both husband and wife to sign. 

If there are only two directors of the corporation–the husband and wife– it may be impossible for the board to adopt a new banking resolution, removing or replacing one of the authorized signers (the wife).  Going farther, the board members can be changed by a vote of the shareholders—but not if the husband and wife each own 50% of the stock and do not agree.  

In “conflict” situations, each signer on an account is entitled to current account information.  Any authorized corporate officer, any general partner of a partnership, any joint tenant, or any trustee, as applicable, can find out what items are hitting an account currently, and can put a stop payment order on items (written by another signer) that aren’t approved of.  (A legitimate payee might sue for damages, but a stop payment order is still legally available.)  

Of course, a bank must respond equally to all signers who want to stop payment on each others’ checks.  Mr. A can stop payment on Mr. B’s checks, while Mr. B is equally entitled to stop payment on Mr. A’s checks.  A bank will usually put up with only so much of this, before closing the account and telling the people to take their dispute elsewhere.

Even when an account is set up with “two signatures required,” UCC Section 4-403(a) allows one authorized signer to stop payment, acting alone.

8. When is a stop payment order provided quickly enough?

UCC Section 4-403(a) says a customer or authorized signer can give a stop payment order if it is “received at a time and in a manner that affords the bank a reasonable opportunity to act on it before any action by the bank with respect to the item” that would amount to final payment of the item, as defined in UCC Section 4-303.  (If final payment has already occurred, or the bank no longer has reasonable time left to prevent final payment from occurring, a stop payment order is not considered timely, and will have no effect.)

There are two parts of this issue.  First, a bank needs to understand what events amount to “final payment” with respect to a particular check.  If such an event has already occurred, taking a stop payment order is pointless, and the bank should tell its customer that it’s too late.  Second, there is a question of how much time provides a “reasonable opportunity” to give effect to a stop payment order.  This will vary somewhat from bank to bank, depending on the nature of each bank’s system.  What is a “reasonable opportunity” may also vary with the specific circumstances—for example, what it would take to avoid the upcoming deadline that will amount to final payment of the check.

9. What events define “Final Payment”?

There are several alternative tests of “final payment” in UCC Section 4-303.  (See also Section 4-215, which sets out almost identical tests.)  Section 4-303 can be used like a “check list” for determining whether events have gone so far that a bank is no longer reasonably able to accept and act on a stop payment order on a particular check.  The first event to occur (whatever it may be) from among the events listed in Section 4-303 can be thought of as a line that, once crossed, makes it impossible to go back.  So long as none of the listed events have occurred, there still may be time to stop payment.

I will discuss several of these “tests.”  First, if a bank “pays the item in cash” (cashing it at a teller window), settlement is final and there’s no way to reverse payment or charge the item back to the payee. 

Sometimes a bank pays a check in cash to the payee at the drive-through, while at about the same time the person who wrote the check is in the bank’s lobby, filling out a stop payment order on that same check.  Banks occasionally ask whether they can charge the already-cashed check back to the payee’s bank account, based on receiving the stop payment order.  This is impossible under Section 4-403(a).  Once the bank pays the check for cash, the bank’s payment is final.  (And there is no basis for charging any check back to an account into which it was never deposited.)

In a second scenario under Section 4-303, final settlement occurs when the bank “accepts or certifies the item.”  For example, if the bank pays the item by issuing a cashier’s check (certified funds), it’s just as final as payment in cash.  If the bank later receives a stop payment order on the item against which the bank issued the cashier’s check, that cashier’s check still must be paid.

Third, for items received in a bank’s cash letter (not directly presented to a teller), payment is final when the bank “settles for the item without having a right to revoke the settlement under statute, clearing-house rule, or agreement.”  Payment for an item received in the cash letter is final when the “midnight deadline” for return of that item has passed. 

A stop payment order will generally not be effective if received at a point in the day that leaves the bank insufficient time to return the check before the “midnight deadline,” using normal, reasonable procedures.  Different banks’ circumstances may vary because of courier schedules, processing deadlines, and the number and location of branches.

As a fourth, separate test, payment for an item becomes final when the bank’s “cutoff hour” has passed.  UCC Section 4-303(a)(5) allows the bank to establish a stated time during the day, after which point any stop payment order taken by the bank can no longer affect any check received by the bank on the previous business day.

Let’s say, for example, a bank’s lobby closes at 3 p.m. but its drive-through stays open until 6 p.m.  Deposits received after 3 p.m. are treated as made on the following day’s business. Assume further that both the drawer and the payee on a particular check are bank customers.  The payee makes a deposit after 3 p.m. on Thursday (including the drawer’s check), to be processed on Friday’s business. 

Suppose a stop payment order is placed on the check on Friday before 3 p.m.  (In this case I will assume that 3 p.m. is the bank’s chosen “cutoff hour.”)  A stop payment order taken even at 2:59 p.m. on Friday can still be given effect (under the bank’s own rules) as to an item that was deposited late on Thursday, if final settlement has not otherwise been made to the depositor.  By contrast, a stop payment order received at 3:01 p.m. on Friday (such as one received online), because it falls after the bank’s stated 3 p.m. “cutoff hour,” will come too late to affect any check that was received by the bank late on Thursday. 

There might be some operations personnel still working after 3 p.m.  If they went to extreme lengths in the short remaining time available, they could probably reverse the provisional credit made for a particular check deposited late on the previous day.  As a matter of policy, however, the “cutoff hour” deliberately lays down a deadline, after which the operations personnel are off the hook. This makes things simpler and easier for the employees.

Checks received in the bank’s cash letter, which goes directly to the bank’s data processor (its agent) on the night of the previous business day, are considered “received” by the bank on the previous business day.  These checks are subject to the same internal cutoff hour that applies to checks received in customer deposits. 

Within certain limitations, a bank has wide discretion in choosing the time of day that will be its “cutoff hour.”  A bank might say, for example, “Once ‘noon’ passes, we won’t try to apply a new stop payment order to items we received in the previous night’s cash letter.”  UCC Section 4-303(a)(5) allows a bank to establish an internally-set cutoff hour that is as early as one hour after the opening of business on the next banking day after the day on which the bank received a check; or the cutoff time can be as late as the close of business on that next banking day.  If the bank establishes no cutoff hour, the close of business on the next banking day after a check is presented to the bank will be the cutoff hour.  

To summarize the above provisions, final payment of a check happens as soon as any of the following events occurs: (1) the check is paid in cash or by cashier’s check; (2) the “midnight deadline” passes for returning the check (if  received in the bank’s cash letter); or (3) the bank’s “cutoff hour” passes.

10. What’s a “Reasonable Time to Act” on a stop payment order?

UCC Section 4-403(a) gives a bank “a reasonable time to act” after receiving a customer’s stop payment order, before that stop payment becomes effective. Sometimes, very quickly after a stop payment order is received, the bank makes final payment for the check itself.  This occurs because the bank does not have reasonable time to get the stop payment order on the bank’s system, before final payment is requested. 

In this situation, a customer may get mad or even threaten to sue the bank.  Legally, the UCC allows a bank “reasonable time” to put a stop payment order into effect—even if this provision is not explained to the customer.  Still, from a customer relations standpoint it’s a very good idea to inform the customer of what he can realistically expect. 

 There will always be a difference between banks, as to how long it takes to put a stop payment order in place. In a very small bank, the process may be as fast as walking across the lobby to give copies of the stop payment order to tellers.  For a bank with dozens of branches, notifying all relevant employees may take quite a bit longer.  It all depends on the particular bank’s system, and what steps must be followed to enter a stop payment order on that system.

It is fairly common for a large bank to warn that a delay of a specific time will apply before the stop payment order will be effective.  (The form might state that the bank is not obligated to put the stop payment order into effect earlier than the same time on the bank’s next regular business day.)

This “24-hour” rule for stop payment orders (and longer if a non-business-day occurs in between) is not exactly what the UCC provides. But there are a couple of ways to explain this approach:

First, larger banks have many offices, and may be in a better position to argue that they truly need a “24–hour” provision as a “reasonable time” to make a stop payment order effective. 

Second, UCC Section 1-302(a) specifically allows almost any UCC requirement to be amended by the parties.  UCC Section 1-302(b) states, “Whenever the Uniform Commercial Code requires an action to be taken within a reasonable time, a time that is not manifestly unreasonable may be fixed by agreement.”  Based on this provision, larger banks can impose a “24-hour” time period by arguing that this amendment defines a reasonable time for the UCC’s otherwise-applicable requirement.

Although the larger banks are careful to allow themselves a longer time period to give effect to a stop payment order, they usually also try to place a stop payment order on their system as quickly as possible.  (They “underpromise”–warning of delay–but “overperform”– speeding up the stop payment order’s effective time if they can.)  

11. When does a stop payment order describe a check with “Reasonable Specificity”?

For checks received in the bank’s cash letter, the process of “stopping payment” on a check is carried out by computer.  Almost all banks use “bulk filing.” A printed check is already encoded with the paying bank’s routing number and account number.  The depository bank encodes it with the dollar amount, so that the item can be processed electronically.  After that stage, the check is not necessarily examined manually by anyone, before going into the customer’s statement.  A computer cannot “think,” nor can it guess what a customer probably meant.  A human, unlike a computer, can recognize that a particular check seems “close enough” to the somewhat-different information provided in a stop payment order.  A human also can ask the customer.

A computer that is set up to stop a check that matches a certain dollar amount does not recognize a check in a different amount that is wrong by only one penny.  A computer can recognize a specific check number that is to be stopped, but cannot deal with a check number that is off by one number, or that has two digits transposed because an online customer filling out a stop payment order is a poor typist.  UCC Section 4-403(a) provides that a stop payment order must describe the check to be stopped “with reasonable specificity”—or else it has the same effect as if no stop payment order was received.

The meaning of “reasonable specificity” depends on the capabilities of the bank’s system.  If the information provided is just inaccurate enough that the bank’s own system cannot “capture” the check when it is presented for payment, the check will not be stopped. If the customer provided inaccurate information, it will be the customer’s fault.  On the other hand, if the bank makes a data-entry error that causes the item not to be stopped, it’s the bank’s fault.

12.  Is an online stop payment order effective for six months?

Yes.  I am assuming here that the customer has signed an online banking agreement.  In it, the bank and the customer agree that electronic communications and transactions between the parties will have the same effect as actual written documents with an inked signature.  Oklahoma’s Uniform Electronic Transactions Act, in Article 15 of Oklahoma’s UCC, allows this result.  When the parties agree that an online stop payment order will have the same effect as an actual written stop payment order, this means that the effective period will be the same–six months.

13. For how long is an oral stop payment order effective?

UCC Section 4-403(b) states that a stop payment order “lapses after fourteen (14) calendar days if the original order was oral and was not confirmed in writing within that period.”  The effective period for oral stop payment orders is fixed by statute, and doesn’t change, whether the customer is aware of the rule or not.  But good customer relations dictate that the bank should advise the customer plainly of the outcome:  An oral stop payment order will expire at the end of 14 days unless a written stop payment order is filled out.

I can understand why customers place oral stop payment orders:  They want to take care of the problem as quickly as possible, although it may be inconvenient to come to the bank on that particular day. What’s surprising is that some of the same customers who were so eager to place an oral stop payment order are lax in confirming the stop payment order in writing. 

Perhaps after they handle the problem the first time (placing an oral stop payment order), it shifts downward on their list of priorities.  They procrastinate; they’re feeling tired or sick; the weather is not good; there are too many things going on at work; or other distractions occur.

Some banks give a “reminder call” to any customer who has placed an oral stop payment order but who does not come into the bank within a few days to confirm it in writing.  This call includes another warning that the oral stop payment order will expire after 14 days. However, even a telephoned reminder won’t work in all cases.  People still have to find time to come into the bank.  Many people are not home during business hours, when a bank officer would be calling; and not everyone has a telephone recorder.

Other banks make it a standard practice to mail a follow-up letter to customers, immediately after taking any oral stop payment order. Basically, a bank officer uses the oral stop payment information to fill out a written stop payment form, and mails that to the customer for signature.  A cover letter (1) explains again that the oral stop payment order, if not confirmed in writing, will expire in fourteen days, and (2) asks the customer to sign the written form and return it.  Often the bank includes a self-addressed, stamped envelope for the customer’s convenience.  The UCC certainly does not require this approach, but it may be the best way to get customers to respond.

At least one large bank takes a different approach, eliminating the written confirmation altogether.  This bank discloses in its account agreement that either an oral or a written stop payment order will be effective for six months. This is not what the UCC provides, but may be permissible based on the following logic:  UCC Section 1-302(a) allows provisions of the UCC to be varied by agreement; the suggested change with respect to an oral stop payment order helps the customer and is not a disadvantage; and no one except the payee is hurt by extending the effective time of an oral stop payment order. 

(A bank is liable only to its customer for “wrongful dishonor” of that customer’s item, under Section 4-402(b) of the UCC.  When the bank returns a check instead of paying it—in the “stop payment” situation–the customer is presumably benefited, not harmed. The payee, technically, still has no complaint against the bank for “wrongful dishonor,” even by arguing that giving a longer effective period than what the UCC requires for an oral stop payment is the only reason that the check was not paid.)

2. No Means of Stopping Payment on Cashier’s Checks

Everyone wants to know, “How can I stop payment on a cashier’s check?”  The reason people don’t have the answer is, “You can’t do it.” At least, you can’t get there by treating it as a “stop payment.”  And generally you can’t do it by any other method, either, unless you are lucky enough to be able to notify the payee before the payee receives the check.  To avoid payment, you must inform an innocent payee that you will not pay the check—before the payee (or depository bank) receives the check, relies on it, and “gives value.” 

“Stop payment” is wrong terminology to use when dealing with a cashier’s check.  The stop payment statute, UCC Section 4-403(a), only allows a customer to “stop payment on [an] item drawn on the customer’s account.”  But a cashier’s check is drawn on the bank’s own account, not a customer account.  Therefore, Section 4-403 creates no right to stop payment on a cashier’s check.

Next bankers sometimes say, “If a customer can’t stop payment because a cashier’s check is drawn on the bank’s account, can the bank stop payment on its own account?”  Again, Section 4-403 doesn’t get you there.  It only allows a “customer” (or other signer on the customer’s account) to stop payment.  This section doesn’t authorize a bank to stop payment on anything.

Concerning banks, the language of the UCC actually cuts pretty strongly in the opposite direction:  UCC Section 3-412 states, “The issuer of a . . . cashier’s check . . . is obliged to pay the instrument . . . according to its terms at the time it was issued.” 

Section 3-411(b) reinforces the same concept:  “If the obligated bank wrongfully (i) refuses to pay a cashier’s check or certified check, (ii) stops payment of a teller’s check, or (iii) refuses to pay a dishonored teller’s check, the person asserting the right to enforce the check is entitled to compensation for expenses and loss of interest resulting from the nonpayment and may recover consequential damages if the obligated bank refuses to pay after receiving notice of particular circumstances giving rise to the damages.”

In other words, a bank failing to pay a cashier’s check (or official check, or teller’s check) risks being required by a court to pay not only the amount of the check, but also legal expenses, interest, and damages.  A customer can issue a personal check and later stop the payment.  But third parties rely on a bank’s own check to be “like cash.”  (For example, see the one-business-day availability schedule imposed by Section 229.20(c)(v) of Regulation CC for any “cashier’s check, certified or teller’s check” deposited in an account of the payee.  The availability schedule does not assume that such a check can be returned at all.)

A bank issuing any type of check drawn on itself is expected to “get it right.”  A bank must determine in advance that it will pay a check drawn on itself, and, once the check has been issued, the bank cannot change its mind.  (Later I will discuss some very limited defenses to payment of a cashier’s check.)

1. When would a bank like to avoid paying a cashier’s check?

The harshest situations occur when a bank thinks it is issuing a cashier’s check for fair value, but that’s untrue. Here are a few examples:

a.  A payee on a check presents the check for payment and asks for a cashier’s check in return. The teller verifies that the drawer of the check has sufficient collected funds, and issues the cashier’s check. The teller fails to notice that there is a stop payment order on the drawer’s check.

b.  Bank A is making a loan to John Doe to pay off his debt at Bank B. The originally scheduled loan closing gets delayed a bit.  By error, the already-prepared loan proceeds check (a cashier’s check with John Doe as remitter) gets delivered to Bank B right on time, paying off the loan at Bank B before loan documents are actually signed at Bank A.  John Doe refuses to sign the new loan.

c.  A customer purchases a large cashier’s check, paying for it with a personal check written on uncollected funds.  The customer may be innocent of bad intent, but a large check previously deposited to the customer’s account is returned unpaid, overdrawing the account by a large sum. The customer has already delivered the cashier’s check to the payee, and cannot make up the loss. 

d.  A teller types too many zeroes on a cashier’s check, not noticing the mistake until the customer is gone. The customer does not respond to the bank’s telephone message to return the check.

In the last three cases, the bank has some rights against the purchaser, ifthe purchaser can be found and has some money.  As discussed below, the issuing bank has little basis not to pay the cashier’s check, if a “holder in due course” has already received the check and “given value” for it, before that holder learns that the issuing bank has defenses to the check and intends not to pay. 

2. Is a customer’s “defense” against the payee a reason for not paying a cashier’s check?

No.  A customer withdraws $3,000 from savings, purchases a cashier’s check, and mails it to pay taxes on the customer’s “winnings” in the Canadian lottery.  (It’s a scam.)  Somewhere in Canada, an innocent depository bank (a “holder in due course”) takes the cashier’s check for deposit (a real check), and allows its customer to withdraw $3,000 after an appropriate time.

The issuing bank has received full value for the cashier’s check (money that its customer withdrew from savings).  Even if it wanted to accommodate its customer, the issuing bank has no basis for declining to pay the cashier’s check when it is presented in the bank’s cash letter.  Although the bank’s customer may have been defrauded, the bank itself is “whole” and has no defenses to payment of the cashier’s check. 

In another example, a customer obtains a $5,000 unsecured loan from the bank. The proceeds are used to purchase a cashier’s check payable to someone selling a used car.  As the customer is driving home, the car develops problems, catches fire and burns up on the side of the road. The customer wants the bank to stop payment on the cashier’s check.  The bank probably has no basis for doing this.  The bank has received full value for the cashier’s check (in the form of the customer’s promissory note to the bank, which is still owed).  The car wasn’t even collateral on the loan.  The bank apparently has no defense to paying the check—although the customer has a claim against the payee.

3.  When can a bank raise a defense to paying a cashier’s check?

When a bank is tricked, or otherwise proceeds mistakenly, in issuing a cashier’s check—and that bank will sustain a loss because it failed to receive good funds or other value upon issuing the cashier’s check–the bank can attempt to return the cashier’s check (within the midnight deadline), using “payment refused” or “payment declined” as the reason.  As outlined below, this is a narrow exception, available only if the issuing bank successfully notifies an otherwise-innocent payee or depository bank soon enough to eliminate that person’s ability to claim “holder in due course” status with respect to the check.

As previously stated, a bank has liability under Section 3-411(b) for “wrongfully” refusing to pay a cashier’s check.  The trick is to have a basis for return that is not “wrongful.”  This puzzle requires two parts:  (1) the issuer of the cashier’s check must notify the innocent payee or depository bank before that person “gives value” in exchange for the check, so that person cannot become a “holder in due course” against whom most defenses are ineffective; and (2) the issuing bank needs actually to have a defense of its own to the cashier’s check (not a defense of its customer).  For example, the bank did not get good funds.

As the first step, the innocent payee or depository bank needs to receive a fast notice, intended to prevent it from becoming a “holder in due course.”  Somehow, the issuing bank needs to get to the payee and give warning, before the cashier’s check reaches the payee.  This may be difficult or impossible to accomplish, but is just about the only way to prevent the innocent payee (or depository bank) from being damaged by receiving the cashier’s check and relying that it is good. 

Suppose that a completely innocent payee (or an innocent depository bank taking the check from a defrauding remitter/payee) takes the issuing bank’s cashier’s check and “gives value” for it, being completely unaware of any fraud that has been committed or any mistake made in issuing the check.  That innocent payee (or depository bank) relies on the check being “as good as cash” and changes its financial position to its detriment. Once that bridge has been crossed, it is virtually impossible for the issuing bank to decline to pay the cashier’s check, without becoming liable to the payee and/or depository bank for “wrongful refusal” to pay, under Section 3-411(b).  (Maybe something can be worked out if the depository bank still has the funds and will cooperate—but that’s about it.)

 By contrast, a payee who receives notice of the issuing bank’s defenses and intent not to pay the check, before the payee even receives that check, will have no basis for believing that the check is good.  (A payee receiving advance notice of the check’s problems probably will not accept the check on any basis.  If the check then is not ever presented for payment to the issuing bank, it will not have to be returned.)

As an example, let’s assume that a customer purchases a cashier’s check payable to another bank.  Shortly thereafter, the issuer discovers that it has issued the check in an incorrect amount, or against uncollected funds.  The issuing bank should immediately call (in this case, another bank), as soon as the error or problem is discovered.  The payee (the other bank) should be notified that the issuing bank has defenses and will refuse to pay the cashier’s check.  If the payee (the other bank) has not received the cashier’s check yet, it has not yet “given value,” so the telephoned notice comes early enough to destroy the payee’s reliance on the check being good. 

However, if the other bank has already received the cashier’s check, and has “given value” for it by taking it as payment on a loan, or for deposit, the issuer’s effort to notify the other bank of the issuer’s defenses comes too late.

The same approach applies to an ordinary payee (not a bank).  With no address, it’s harder to learn an ordinary payee’s location and phone number.  But if the issuing bank can somehow contact the payee, and does so before the payee receives the cashier’s check, this notice will destroy the payee’s ability to rely on the check as being good.  If the holder with prior notice takes the check anyway and presents it for payment to the issuing bank, the issuer can return the check as “payment declined” or “payment refused.” 

It’s tougher when the purchaser of the cashier’s check is both the remitter and the payee.  In this case, the issuing bank has no idea to whom the check may be negotiated.  The issuing bank might call the other banks in the area, warning them that the bank will not pay this cashier’s check.  It’s a matter of “playing the odds,” but if one of the banks that the issuer warns takes the check later and presents it for payment, the issuing bank can probably decline to pay the check.  On the other hand, if someone completely unaware of the situation innocently takes the check by negotiation, the issuing bank will have to pay the check.

What I have described above is an approach to eliminating a depository bank’s or other payee’s chances of becoming a “holder in due course” with respect to a particular cashier’s check. As defined in Section 3-303 of the UCCC, a “holder in due course” is someone who (1) takes an instrument “for value,” (2) takes it “in good faith,” (3) takes it without notice that it has been dishonored, and (4) takes it without notice that the issuing bank has a defense to payment of the instrument.  My approach deliberately eliminates the payee’s or depository bank’s lack of awareness of the problem, even before the cashier’s check is received by them, by telling them that the check isn’t good and that the issuing bank won’t pay it–also explaining the nature of the issuing bank’s defenses.

The second part of this process is that the issuing bank itself must actually have some appropriate defense to payment of the check. (This doesn’t mean that the customer is unhappy and has defenses against the payee.)  The bank (not the customer) must itself have some legitimate basis not to pay the check.

When someone taking a cashier’s check has the status of a “holder in due course,” UCC Section 3-305(b) allows the issuing bank to assert as defenses to payment only the very limited matters listed in Section 3-305(a)(1).  Basically, this list won’t do the issuing bank any good.  One such defense is “duress.”  (The thief put a gun to my head and forced me to issue the cashier’s check against my will.) Another defense is that someone “fraudulently” induced the bank to sign something, with no awareness of what it was signing.  (Through trick, I did not know I was issuing a cashier’s check.)  The common thread of these defenses is that the bank never wanted or intended to issue a cashier’s check at all—and that won’t be true. 

Based on Section 3-305(b), if the issuing bank wants to raise ordinary defenses (the kind that could be raised against someone trying to enforce a promissory note), the holder of a cashier’s check must not be a “holder in due course.” (This is the purpose of my notification approach, above). 

If the “holder in due course” problem can be cut away, the issuing bank can then raise a variety of defenses that would apply to enforcing a contract in general, such as (1) “mistake” (I typed too many zeroes; I overlooked a stop payment order), (2) “failure of consideration” (the check was purchased with uncollected funds, and a deposited item was returned unpaid), or (3) “fraud in the inducement” (the customer deliberately deposited a counterfeit check to the account, waited for the funds hold to expire, and used that phony deposit to obtain a cashier’s check).  Such matters are grounds for returning a cashier’s check as “payment refused,” BUT ONLY IF the issuing bank has notified the depository bank or other payee that the issuing bank has defenses and will not pay the check–before that depository bank or other payee receives and gives value for the check.