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Problems with automatic 6-month designation for stop payments?
Question: I read with interest the banker's suggestion that when a stop payment is placed by a customer, that we put the stop in effect for six months no matter how notified, with the confirmation notice only to be returned if it is in error. Otherwise that stop is on. What a time saver! When I tried to institute this in my bank, my legal people told me I couldn't do that. Help!
Answer: It's not clear from your question why your legal department believes that your suggested handling of stop payment orders can't be implemented. There very well may be a legitimate reason why your legal department has concerns, including a special state statute on stop payment orders or the like. Under the standard version of the Uniform Commercial Code, however, your proposal should be permissible if properly implemented.
There are two provisions of the UCC that come into play here: UCC §4-403(b), which sets forth the default rules for stop payment; and UCC §4-103(a), which allows the parties to vary the general rules of the UCC by agreement, so long as the agreement doesn't disclaim the bank's responsibility for its lack of good faith or failure to exercise ordinary care or limit the measure of damages for either. Under the standard rules of the UCC, an oral stop payment order is good for 14 calendar days and a written stop payment order is effective for six months. Financial institutions are interested in modifying these general rules for two basic reasons.
First it's very expensive to track whether or not a written confirmation has been received on an oral stop payment order. Second, if the bank is unable to obtain a confirmation from the customer during the 14-day window, it's often unsure as to whether to pay or dishonor the item if it is thereafter presented. Either alternative presents the possibility of a wrongful dishonor claim. Thus, the bank finds itself in a quandary.
In an effort to avoid these issues, several banks have included provisions in their deposit agreements indicating that every stop payment order will be confirmed in writing by the bank and that the stop order will be effective for the period of time indicated in the written confirmation. This seems to be a valid and effective use of the freedom of contract provided by UCC §4-103(a). Moreover, this type of agreement should not be construed as an attempt to disclaim negligence or bad faith by the institution. Rather, it is purely an operational matter designed to reduce the costs for all parties involved. Thus, in the absence of a state-specific issue, a good argument exists for using freedom of contract to move toward the type of stop payment system you have in mind.
Thanks to Mark Hargrave, Esq. Mark is a partner with Shook, Hardy & Bacon L.L.P., Kansas City. His practice focuses on the law of financial institutions, with special emphasis on issues involving commercial paper, bank deposits, collections, and regulatory compliance matters.
Copyright © 2001 Bankers' Hotline. Originally appeared in Bankers' Hotline, Vol. 11, No. 10, 10/01
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