Stop Payments - It's Not Over Until It's Over

by Mary Beth Guard, Esq.

Stan writes a check for $6,000 to Tom to pay for a shipment of ten ostriches. When they arrive at Stan's hacienda, two are found to have buried their heads in the sand a wee bit too long. They're history. Stan immediately places a stop payment order on the check, but through a glitch at the bank, the check is paid anyway. Stan demands the bank give his money back, since it paid over a valid stop order. If you're his banker, don't raid the cash vault yet!

Countless times over the years I've spoken to bankers who have paid claims because they mistakenly believed they were required in each instance to do so, when, in fact, the law may have been on the bank's side. Before any customer claim is paid, there should be a thorough analysis of the underlying facts and law. In some cases, the bank may elect to pay even where the bank has no liability, simply to promote good customer relations, avoid bad publicity, or to avoid the time and hassle spent on the dispute, particularly if the amount in question is fairly small. This is always an option, but the bank should attempt to discern, before it exercises the quick pay option, whether the customer's claim has a sound legal basis.

Take the Stan and Tom stop payment scenario described above. The first thing the bank should do is pull the sections of the Uniform Commercial Code which relate to stop payment orders and examine its deposit agreement and state law to determine if there are any special provisions affecting stop payments that would come into play. Section 4-303 of the UCC gives any person authorized to draw on an account the right to stop payment on any item, but he must describe the item with reasonable certainty and the stop order must be received at a time and in a manner that affords the bank a reasonable opportunity to act on it before the bank takes action on the item. An oral stop payment order lapses after 14 calendar days unless confirmed in writing within that time. In total, the order is good for six months, unless renewed. [Note: Some institutions have, by contract, extended the effective period, but so far as I know those clauses have not been court-tested yet - Nor have the arrangements whereby the initial verbal stop order is considered validated unless the bank is notified.]

Did Stan describe the check with reasonable certainty in his stop order? Did the bank have a reasonable time to act on it before the check was paid? Was the stop order still in effect, or had it lapsed? Even if Stan did everything right and the bank should have refused to pay the check, the bank still shouldn't hurry to credit Stan's account for $6,000 because under ?4-303 the burden of establishing that a loss occurred and the proof of the amount of loss resulting from the payment of the check contrary to a stop payment is on the customer. It is likely that, at most, Stan would only be able to show that he suffered a loss equal to 1/5 the amount of the check, because 8 out of 10 of the ostriches were alive and healthy when they reached his doorstep.

Copyright © 2000 Bankers' Hotline. Originally appeared in Bankers' Hotline, Vol. 10, No. 12, 12/00