I. WHOM MAY EXERCISE THE RIGHT?
The drawer or any person authorized to draw on an account has the right to revoke an order and stop payment by an order to the bank describing the item or account with reasonable certainty, if received in a time and manner affording the bank a reasonable opportunity to act. If the signature of more than one person is required to draw on an account, any of these persons may issue a stop payment order. Once the bank receives such valid order, the bank’s duty is to obey it, for the check is no longer properly payable (See, U.C.C. § 4-403; U.C.C. § 4-303). Any owner of an account has the right to order closure of the account or issue a stop payment order.
II. TIME OF ORDER
Any knowledge, notice or stop-payment order received by, legal process served upon, or set-off exercised by a payor bank comes too late to terminate, suspend or modify the bank’s right or duty to pay an item or to charge its customer’s account for the item if the knowledge, notice, stop-payment order or legal process is received or served and a reasonable time for the bank to act thereon expires or the setoff is exercised after the earliest of the following:
A. accepts or certifies the item;
B. pays the item in cash;
C. settles for the item without having a right to revoke the settlement under statute, clearinghouse rule or agreement;
D. becomes accountable for the amount of the item under the law relating to the payor bank’s responsibility for late return of items; or
E. with respect to checks, a cutoff hour no earlier than one hour after the opening of the next banking day after the banking day on which the bank received the check and no later than the close of that next banking day or, if no cutoff hour is fixed, the close of the next banking day after the banking day on which the bank received the check.
III. METHOD OF STOPPING PAYMENT
Method of stopping payment may be oral (e.g., by telephone) or in writing (See, U.C.C. § 4-403).
IV. WHO MAY STOP PAYMENT?
Drawer, any person authorized to draw on the account, or in case of death or incompetence, any person who claims an interest in the account.
EXAMPLE: Farmer writes check payable to Dealer. Dealer endorses check to Merchant for a refrigerator but Merchant never delivered refrigerator. Dealer orally ordered bank to stop payment on the check. Must bank comply with order?
No. Only the drawer may stop payment. Merchant cannot claim any interest in the account to satisfy the UCC provision.
V. MAY A BANK STOP PAYMENT OF A CERTIFIED ORDER?
A. No. Once check is certified, drawer no longer has right to stop payment. Certification is drawee’s (bank’s) own commitment to pay. A cashier’s check is accepted when issued.
B. Other issues:
1. Good customer v. bank’s own reputation and credit.
2. Exceptions for fraud or misrepresentation in procurement.
3. Indemnity – holder’s valid cause of action against the bank – posting of bond or other collateralization.
4. U.C.C. § 3-312, regarding lost, stolen or destroyed certified checks. See, article on lost, stolen or destroyed certified checks, in this section.
VI. MAY A BANK STOP PAYMENT ON A CASHIER’S CHECK?
No. Usually, the person procuring issuance or purchase insists on the stop-payment order. A majority of cases deny an issuing bank the ability to stop or resist payment. In some states, case law allows an issuing bank itself to stop or resist payment depending upon a “finality of Payment” test. Since the cases are split on this issue, some banks obtain indemnity agreements or agreements to defend suit from purchasers. Purchasers may also obtain a court order to enjoin payment of the check. See, U.C.C. § 3-411. The Colorado Court of Appeals issued the first decision that reviewed 1990 U.C.C. Articles 3 and 4 revisions regarding the treatment of cashier’s checks (Flatiron Linen Inc. v. First American State Bank, No. 98CA0466, 9/16/99) and allowed the bank to assert defenses due to either a lack of consideration or mistake against a holder not in due course of a cashier’s check the bank issued and refused to pay. In the case, a teller did not notice a stop payment order when issuing a cashier’s check, but immediately thereafter recognized the mistake. The check’s recipient was hand-delivered a letter requesting the check’s return, stating that it would not be honored. The court said the bank acted properly to rescind the cashier’s check under the circumstances. Flatiron Linen Inc. v. First American State Bank was later reversed by the Colorado Supreme Court (See, No. 99SC887, 5/29/01). In a unanimous opinion, the court concluded “that cashier’s checks represent the unconditional obligation of the issuing bank to pay, and therefore, banks may not dishonor their cashier’s checks once issued.” See also, U.C.C. § 3-312 regarding lost, stolen or destroyed cashier’s checks, which can be found in this section.
VII. MAY A BANK STOP PAYMENT ON A BANK MONEY ORDER?
A. No. Once bank money order issued, issuing bank generally may not stop payment.
B. Hybrid instrument – but like a cashier’s check when bank is both drawer and drawee.
C. There are “fraud” or “failure of consideration in the making” exceptions.
D. U.C.C. § 3-312 makes provision for lost stolen or destroyed checks (See, article on lost, stolen or destroyed teller’s checks, in this section).
VIII. MAY A BANK STOP PAYMENT ON A BANK DRAFT?
The cases among the various states are split in this regard. Generally, the issuing (drawer) bank has been recognized in some states to have the right to stop payment, but not in all. It is generally agreed that the purchaser of the bank draft does not have a right to stop payment. There are no Nebraska Supreme Court cases to rely upon in this regard, but Nebraska has adopted revised Articles 3 and 4 (e.g., See, U.C.C. § 3-411 and § 3-312).
IX. MAY A BANK STOP PAYMENT ON A PERSONAL MONEY ORDER?
Yes. A personal money order is treated akin to an ordinary check and does not represent itself as a bank obligation (See, U.C.C. § 3-104(f)).
X. MAY A BANK REFUSE TO PAY CASHIER’S CHECKS, TELLER’S CHECKS, AND CERTIFIED CHECKS?
As used in U.C.C. § 3-411, the term “obligated bank” means the acceptor of a certified check or the issuer of a cashier’s check or teller’s check bought from the issuer. Section 3-411 provides that 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.
Expenses or consequential damages are not recoverable if the refusal of the obligated bank to pay occurs because (i) the bank suspends payments, (ii) the obligated bank asserts a claim or defense of the bank that it has reasonable grounds to believe is available against the person entitled to enforcement the instrument, (iii) the obligated bank has a reasonable doubt whether the person demanding payment is the person entitled to enforce the instrument or (iv) payment is prohibited by law.
XI. WHAT IS THE OBLIGATION OF AN ISSUER OF A NOTE OR A CASHIER’S CHECK?
The issuer of a note or cashier’s check or other draft drawn on the drawer is obliged to pay the instrument (i) according to its terms at the time it was issued or, if not issued, at the time it first came into possession of a holder, or (ii) if the issuer signed an incomplete instrument, according to its terms when completed, to the extent stated in the U.C.C. (See, § 3-115 and § 3-407). The obligation is owed to a person entitled to enforce the instrument or to an endorser who paid the instrument.
XII. WHAT IS THE DRAWEE’S (BANK’S) LIABILITY FOR FAILURE TO STOP PAYMENT OR CLOSE THE ACCOUNT (I.E., PAYS CHECK OVER A VALID STOP PAYMENT ORDER)?
Drawer (customer) has burden of proving loss before recovering damages from the bank. The loss from payment of an item contrary to a stop payment order may include damages for dishonor of subsequent items.
A payor bank which has paid an item over the order of the drawer or maker to stop payment, or after an account has been closed, or under other circumstances giving rise to objection by the drawer or maker may be entitled to be subrogated to the rights of other parties to prevent unjust enrichment but only to the extent necessary to prevent loss to the bank by reason of its payment of the item.
Specifically, the payor bank is entitled to be subrogated to the rights of any holder in due course on the item against the drawer or maker, of the payee or any other holder of the item against the drawer or maker either on the item or under the transaction out of which the item arose and of the drawer or maker against the payee or any other holder of the item with respect to the transaction out of which the item arose. The law relating to stop payment orders creates the potential for heavy losses to a bank.