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Cashing Checks For Non-customers
by Mark Hargrave, Esq.

Greater Risk To Do ItOr To Refuse To Do It?
NOTE from Editor: In the last issue we reported that some financial institutions have established policies whereby the bank will not cash a check for a non-customer. We heard from several of our readers that this is a risky policy to adopt. We asked Mark Hargrave, UCC expert, to address the issue.

What is a financial institution's obligation with respect to cashing a check for a person who is not its customer? Nobody would seriously question a bank that refused a stranger's request to cash a check that is drawn on another bank. But if the non-customer wants to cash an "on-us" check, the situation may be different.

As any teller knows, one of the most common examples of this situation is an employee who seeks to cash a payroll check that is drawn on the employer's account at the bank. Does the bank expose itself to potential liability if it refuses to cash the check in such a situation? The answer to that question depends on whether the bank's refusal constitutes a "wrongful dishonor" of the check.

Wrongful dishonor
Under UCC 3-502(b)(2), if a bank taking a check over the counter fails to pay that check by the end of the day on which it is presented, the bank has dishonored the check. Assuming that the check is otherwise properly payable and there are sufficient funds in the account to cover it, that dishonor is probably "wrongful." Thus, the bank's customer could maintain an action against it under UCC 4-402(b) for the damages caused by that dishonor, including potential consequential damages.

Although there are a few isolated decisions to the contrary, the generally accepted view is that the payee of a check has no cause of action against a bank for refusing to cash a check.

One of the few reported decisions touching on this issue is Your Style Publications, Inc. v. Mid Town Bank & Trust Company of Chicago. In that case, Mid Town Bank had a policy of charging a 2% service fee for cashing checks for non-customers. Your Style maintained an account at MidTown Bank, and one of its employees sought to cash his payroll check there. The check appeared to be properly payable and Your Style's account had sufficient funds to cover the check. After the bank deducted its 2% service fee, both Your Style and the employee sued MidTown alleging wrongful dishonor, breach of contract, misrepresentation, and breach of contract as to third party beneficiaries.

The court began by finding that the bank had, in fact, dishonored the check by refusing to cash it without deducting the service fee.

It then held that dishonor to be wrongful because the check was otherwise properly payable and the account contained sufficient funds.

Disclosure not applicable
Moreover, the court held that the bank breached its deposit agreement with Your Style because it failed to pay a check in accordance with its customer's order. In doing so, the court rejected the bank's argument that its fee schedule disclosed a 2% non-customer check cashing fee. In the court's view, that fee applied only to somebody who was a complete stranger. That is, the fee only applied to a non-customer seeking to cash a not-on-us check.

Finally, the court found that the employee had a direct cause of action against the bank as a third party beneficiary of the deposit agreement.

We disagree with several aspects of this decision. However, it's on the books and is one of the few cases that deal with the issue.

Charge-by Agreement
At the same time, the decision may actually suggest a way for you to solve this problem.

The court refused to give effect to the 2% service fee disclosed in Mid Town's disclosure of fee schedules because, in its view, the fee was not clearly applicable to on-us checks. If the deposit agreement is drafted clearly, freedom of contract under UCC 4-103(a) should allow the bank to impose a check cashing fee or, perhaps, to flatly refuse to cash on-us checks for non-customers.

After all, UCC 4-401(a) provides that an item is properly payable if it is authorized by the customer and conforms to any agreement between the customer and the bank. If the deposit agreement gives the bank the right to impose a fee or to decline a request to cash an on-us check, the exercise of that right should not result in a "wrongful" dishonor.

A possible deposit agreement for that could be:
You agree that the bank may impose a fee on the payee or other holder of a check or other item drawn against your account that is presented for payment over the counter at the bank rather than being deposited in an account at another institution and presented for payment through the check collection system.

Non-customer-On-Us-No-Cash Policy
On the other hand, if you want to adopt a blanket prohibition on cashing on-us items, you might consider this agreement:
You agree that the bank may decline payment of a check or other item drawn against your account that is presented for payment over the counter at the bank rather than being deposited in an account at another institution and presented for payment through the check collection system.

Of course, adopting one of these provisions won't stop a disgruntled customer or payee from bringing suit and there is no guarantee that a court will respect the contractual provision. However, if you are determined to adopt strict policies relating to cashing on-us checks for non-customers, these provisions at least give you a basis for claiming that your actions are consistent with the deposit agreement.

Mark Hargrave is a partner with Shook, Hardy & Bacon L.L.P. and is resident in the firm's Kansas City, Missouri office. An expert on the Uniform Commercial Code, Mark speaks frequently on the UCC at regional and national programs. He is also the author of many articles addressing financial institution liability.

Copyright © 1996 Bankers' Hotline. Originally appeared in Bankers' Hotline, Vol. 7, No. 1, 12/96

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