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Question & Answer
Question: We have a unique problem with one of our business accounts. Can you help? Here's the story: Let's call them Ann and Charlotte - are partners in a contracting business. No formal partnership agreement exists. Mom (Ann's mother) is their bookkeeper. Ann and Mom are authorized signers on the business DDA account.
Ann and Charlotte are in the bank together at the teller window. Ann makes a deposit to the account and, with the teller present, says to Charlotte, "Why don't you just cash that check you have on the account while we're here?"
Charlotte presents a check for encashment that is drawn on their account. The check is signed by Ann as the payor and Charlotte is the payee. Having just handled the deposit transaction, the teller knows that sufficient funds are in the account, so the teller cashes the check without first running the computer transaction.
Ann and Charlotte leave the bank. Then the teller runs the transaction and sees the stop payment order on the check she just cashed.
Ann and Charlotte were unaware that Mom (Ann's mother) had previously placed a stop payment order on the check because of a disagreement between Mom and Charlotte. Mom is very upset and demands through her attorney that the bank replace the funds in the account for the amount of the check which had been stopped.
The bank argues that the check was correctly paid, despite the stop payment order, because Ann asked Charlotte at the teller counter to cash the check. We figure as an owner of the account Ann, the payor on the check, gave permission for the check to be cashed, thereby overriding Mom's stop payment order.
We looked up the UCC - §4-407 of the Uniform Commercial Code states, "If a payor bank has paid an item over the order of the drawer or maker to stop payment…or otherwise under circumstances giving a basis for objection by the drawer or maker, to prevent unjust enrichment and only to the extent necessary to prevent loss to the bank by reason of its payment of the item, the payor bank is subrogated to the rights (1) of any holder in due course on the item against the drawer or maker; (2) 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 (3) 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."
One last fact. In reviewing the stop payment provisions in our account agreement, it does state that only the individual who places the stop payment order may rescind the order.
Answer: (Ed. Note - You really DO have a problem. We went to the expert for the answer to this. Here is the response from Mary Beth Guard, Esq.)
Since the provisions of Articles 3 and 4 can be varied by agreement and this bank's own contract says that only the person who placed the stop payment order can rescind it, only Mom could have "rescinded" the order.
Nonetheless, Mom is not an owner of the account, but is merely an authorized signer. Mom may have acted outside the scope of her authority in ordering the stop pay (although that is a matter to be settled between her and the owners. As between her and the bank, she would be authorized.)
If Charlotte has an enforceable claim against the business for the amount of the check, the bank will step into the Charlotte's shoes under the subrogation language in 4-407. Mom has the burden of showing the loss and proving the amount of the loss. Let's say the check was for $1,000 and Charlotte had an enforceable claim against the business for that amount. Since Charlotte got the funds, Mom should find it difficult to show a loss.
This is one of those scenarios where there are strong arguments for Mom, but strong arguments for the bank as well. I would lean heavily on Ann to settle her mother (Mom) down, and get the bank out of the middle.
Copyright © 2000 Bankers' Hotline. Originally appeared in Bankers' Hotline, Vol. 10, No. 4, 4/00
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