UCC: Practical Application, Part III
Your depositor, Hilda Hasaproblem, goes into your Uptown Branch on Monday morning to tell you that her husband, Harry, wrote check number 587 on their joint account to a car dealer for $16,750 two days ago (on Saturday) and she wants to put a stop payment on the check. Can she?
Section 4-403: Yes, she can. She is joint on the account and either she or her husband, Harry, have a right to stop payment on any check they choose, regardless of who wrote the check. Section 4403(a) says, in part: Right of customer to stop payment - A customer or any person authorized to draw on the account if there is more than one person may stop payment of any item drawn on the customer's account or close the account by an order to the bank describing the item or account with reasonable certainty received at a time and in a manner that affords the bank a reasonable opportunity to act on it...
While Hilda is in the branch, she introduces you to her mother, who is with her. Hilda has made check number 588, drawn on the same joint account with her husband, payable to her mother, for $9,000, and her mother cashes the check. While all this is going on, at exactly the same time Hilda and her mother are in the Uptown Branch, Harry Hasaproblem has gone into your Downtown Branch. He says his wife, Hilda, has written check number 488 for $9,000 and he wants to put a stop payment on it. Can he? And what is your liability in all of this?
Harry can put a stop on the check if he wants to - he has the same right to do so as Hilda does on the one he wrote. Depending on the timing, your other branch may have already cashed the check. In which case the stop payment is, of course, too late. But even if it had not yet cashed the check, Section 4-403(a) protects you. It says: ...received at a time and in a manner that affords the bank a reasonable opportunity to act on it.
Even though most of our financial institutions have the ability to enter a stop payment into their system the moment it is received, in court cases a "reasonable time" has been determined to be as long as 48 hours. Therefore, you should not be held liable for the encashment of the $9,000 check as being paid over a stop payment order. Even if the stop was received before the transaction took place, it was before posting.
In June Clara Collector placed a stop payment on a check for $500 she had written to an antique dealer for a vase she had purchased. She changed her mind about the vase, and had tried to return it and get her money back, but the antique dealer had refused to refund her money. The check came in through the exchange the following week after she had placed the stop, and was returned, correctly, for reason "Stop Payment". The following January the check again came in to you through the exchange and this time was posted against her account and paid. She came in, demanding her $500 back, saying you paid a check on which she had placed a stop payment.
Does she get her $500 from you?
No, she doesn't. Section 4403(b) covers it nicely: Duration of stop-payment orders -A stop-payment order is effective for six months, but it lapses after 14 calendar days if the original order was oral and was not confirmed in writing within that period. A stop-payment order may be renewed for additional six-month periods by a writing given to the bank within a period during which the stop-payment is effective.
If you look at your stop payment form that your customer signs, you probably find this wording from the Uniform Commercial Code right on your form. And you might think she has a claim because you paid a check that was over six months old. Most of our financial institution policies say that such a check is stale-dated. But the UCC covers that also, in Section 4-404 which reads: A bank is under no obligation to a customer having a checking account to pay a check, other than a certified check, which is presented more than six months after its date, but it may charge the account of its customer for a payment made thereafter in good faith. (Emphasis is the Editor's)
Because the Uniform Commercial Code accepts the fact that we do bulk filing, you would have no opportunity to examine the date on the check. Your payment of the check was made in good faith. The negotiating bank, on the other hand, would have had a chance to observe the date on the check. Clara could go back to them and argue the case if she wanted to. But unless she has renewed the stop after six months, the stop has dropped from your computer and is no longer on your system.
Other arguments that can rise over stop payments can come from a check that has been successfully stopped, and returned to the depository bank. Most of our systems then drop the stop payment information once the check has been presented and returned. Many merchants are aware of this practice, and even though "Payment Stopped" is stamped right on the face of the check, that check can be buried in a group of checks being deposited, and not noticed by the teller who accepts the deposit from the merchant. Again, this comes in through the exchange and is bulk filed, possible leading to a very irate depositor when the statement is received. In essence, the stop payment order is still valid, even though it is no longer on our computer.
One way to completely eliminate this is extremely simple. In your return items area, when a check is being returned for reason of payment stopped, just punch a hole in the account number area on the bottom of the check. This check will reject when being processed, and the "Payment Stopped " stamp on the face of the check will be quickly noticed.
(Editor's Note) We are running a series of training pages to address some of the confusion that sometimes occurs when trying to apply the Uniform Commercial Code to claims. For complete UCC text for your state, please go to www.BankersOnline.com, click on "Launch Pad" - once on that screen click on UCC on the list on the top of the page - then on Article 4. Once on that site, click on "state rules". Only relevant part of sections will be included in these pages.
Copyright © 2003 Bankers' Hotline. Originally appeared in Bankers' Hotline, Vol. 13, No. 2, 4/30
First published on 04/30/2003