Who Takes the Loss?
by John Burnett, BOL Guru Guru Bio
Question: An employer issues a payroll check only to find out the employee was over paid. A stop payment was placed on the check and the employee was notified. The dishonest employee goes to ABC check cashing store and cashes the check with the stop payment in effect. ABC puts it in the check reader (where it reads the check information) and pays cash to the dishonest employee. It was no good and rejected by the bank. Now ABC wants the issuer (employer) to pay it. Who is responsible, other than the dishonest employee? Who takes the loss, ABC, the employer or the bank?
Answer: When ABC put the check through the check reader, it would not find out about the stop payment. It's more likely that the check reader is comparing the check information with a "black list" of accounts with which ABC has had problems in the past. ABC is in the legal position of a "holder in due course." Although the bank is required to honor stop payment orders, ABC is entitled to recover the amount it paid out to the dishonest employee. It can pursue either of two avenues of recourse, the employee (an unpromising target) or the check issuer (the employer) who remains liable on the check to a holder in due course. The language of the Uniform Commercial Code (which creates the result I've described) is designed to put the greatest risk of loss with the party most able to prevent the loss. In this case, it is the employer who issued the check. The employer is also the most capable of recovering, in theory, its loss from the dishonest employee.
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