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Stop Payments On Official Bank Checks
Answer by: Ken Golliher, BOL Guru

Question: Is there any guidance as to when it is appropriate to put stop payments on official bank checks? We've had a couple of instances where customers have purchased cashier's checks, the checks eventually get lost in the mail, and then the customer wants us to readvance the funds without putting a stop payment on the original cashier's check. We've always told the customer that in order to readvance the funds they would first need to put a stop payment on the 1st check or wait until the 90 days has expired. We also have the customer sign an indemnification agreement.

Answer: We should all avoid using terms "stop payment" and "cashiers check" in the same sentence. Cashiers checks are accepted by the drawee bank when they are signed by an employee; i.e., at the moment of issuance. The bank cannot revoke its acceptance by stopping payment. That is one of the principal reasons why cashiers checks are generally required at real estate closings; the issuer of the item is irrevocably committed to making the payment. The remitter's or payee's perspective is not relevant; neither is liable on the item and neither can stop payment on it.

Section 3-411(b)(i) of the UCC explains how to calculate damages if a bank "...wrongfully refuses to pay a cashier's check or certified check." In many circumstances, a holder in due course on the cashiers check on which payment is refused would be entitled to compensation for expenses, interest and consequential damages in addition to the amount of the item. Please review your state's parallel provision of the UCC to make certain it takes the same approach.

Section 3-312 of the UCC controls the reissuance requirements. As you indicate, the remitter or payee is to execute the declaration of loss. After 90 days, if the item has not been presented, the bank is obligated to reissue the check. If the original check is presented later, the drawee bank may return it unpaid using "previously paid under declaration of loss" or "reissued under 3-312" as a reason for return. Even though the bank that replaced the check has been discharged on the item by replacing it under the terms of the statute, returning the check "payment stopped" is simply wrong. (In order to get the check to reject, you might have to put a stop payment on your system, but don't confuse the mechanics with the legalities.) Again, please check the parallel provision of your state's UCC to make certain the language is comparable.

Paragraph 3-312 was added to the UCC both to protect consumers and to give banks clear guidance on how to replace a cashiers check without enhancing their own liability. Measures used prior to its 3-312's passage included indemnification agreements and indemnification bonds.

An indemnification agreement is a simple contract between the bank and the party seeking to have the check replaced. According to its normal language, the customer agrees to make the bank whole if the original check is ever presented.

The value of the indemnification agreement depends on the customer's willingness to pay and ability to pay when the day comes. Obviously, that varies substantially based on the amount and the person involved. My personal opinion is that an indemnification agreement does not reduce the risk involved in any measurable way.

An indemnification bond is issued by an insurance company. The customer buys the bond at his own expense. If the original check ever shows up, the insurance company promises to make the bank whole. Such bonds are expensive and nearly impossible to get.

Banks who want to avoid all this commonly 1) pre-print a notice on the customer's copy of the cashiers check indicating it will not be replaced for 90 days if it is lost or 2) sell checks that do not meet the definition of a cashiers check; e.g. one drawn on the bank, but signed by the customer. (Such an instrument is often called a money order, but that term has no specific meaning under the UCC.)

First published on 12/2/2002

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