Early Stop Payment On An Official Check
by Mary Beth Guard, BOL Guru
Question: We have a customer who closed an account with the bank and requested the
funds from the closing be sent to their out of state address. It was mailed about a month ago and the customer has not received the cashier's check the bank mailed. Can we put a stop payment on our own cashier's check before 90 days?
Answer: Don't use a stop payment. Instead, use the procedure under Section 3-312 of the Uniform Commercial Code to provide a legal basis for you to return the check unpaid and protect your institution against getting sued for wrongful refusal to pay the cashier's check. If you truly can't wait ninety days, there are some precautions you will want to take, too.
First, have the customer sign a Declaration of Loss form under oath before a notary attesting to the fact that the customer has lost the cashier's check or never received it. It should include all the facts, as the customer knows them. You will want to make sure the customer states that he never received it, or that if he received it, then lost it, that he did not endorse it prior to losing it. If the lost item has already been endorsed, the customer is out of luck.
Once 90 days have passed, if the item is presented for payment, you can return it unpaid due to an enforceable claim being made under UCC 3-312
If the customer does not want to wait until the ninety days have passed, you are taking a risk if you place a stop payment on the item. If the check is presented for payment, but has a forged endorsement, you can return the check unpaid by the midnight deadline marked "forged endorsement" -- NOT "stop payment". We would hope that having a stop payment on the item would simply give you a method, operationally, to kick it out and allow you to process it in a timely fashion. You would not want to return it marked "stop payment" under the scenario just described because that doesn't alert the depositary bank to the real problem - and it makes it look like you have wrongfully refused to pay the check.
If the check comes in during the 90 day period after it was issued and it has a valid endorsement on it and has been negotiated over to a holder in due course, you would need to pay it. Failure to do so could give rise to a claim against you. If you decide (and I wouldn't advise it) as an accommodation to the customer, to refuse payment of the check, even if it appears to have a good endorsement, you would want the customer to agree to indemnify you for all claims and charges you incur as a result of not paying the check during that 90 day period (before the declaration of loss becomes enforceable and you have a legal right to return the check unpaid). You can only require the indemnification for the period of time that you have exposure to liability before the Section 3-312 protection clicks into place.
As with many other banking matters, it's simply an issue of risk management. If you are willing to take the risk that the check might show up validly endorsed and you could end up paying twice - or if you are willing to take the risk with prudent steps to insulate yourself from liability by getting an indemnity agreement or a bond, then you can put the stop payment on. You simply need to understand the potential liability before you do and you need to make an informed decision about whether it's worth it - or whether you should wait it out.
The original version appeared in the October 2002 edition of the Oklahoma Bankers Association Compliance Informer.
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