Learn More - Click Here!

Thread Options
#217669 - 07/29/04 09:59 PM Stop Payments
Anonymous
Unregistered

What issues surround, if any, taking stop payments on checks made payable to cash advance or payday loan business?

Return to Top
Operations Compliance
#217670 - 07/29/04 10:20 PM Re: Stop Payments
HappyGilmore Offline
10K Club
Joined: Jun 2004
Posts: 19,334
Pulling people out of the ditc...
the same ones that are in effect for any other stop payment. If you are acting on orders from your customer and he has presented a reason and signed the paperwork, you pretty much need to honor it. One question for you...if your customer writes checks to these places, then puts stop payments, how long will you let him be a customer? This could be approaching fraudulent activity.
_________________________
Providing alternative truths since the invention of time

Return to Top
#217671 - 07/29/04 11:45 PM Re: Stop Payments
Paragon Offline
Diamond Poster
Paragon
Joined: Dec 2003
Posts: 2,164
Food for Thought only:
I'm thinking that it goes beyond that, in that check cashing services are now infamous for using the holder in due course defense and winning. The scenario normally involves, for example, a check payable to someone (not the maker of the check), drawn on your bank and is cashed by one of these outfits. You can have a stop in place, but the check cashing entities have perfected a defense that voids the stop with that entity purportedly an innocent party as a holder in due course.

Now, having someone cash their own check at a check cashing entity and place a stop on that check is a new twist, but Iím wondering if the same stop defense can be used. Perhaps someone with a little more direct experience will chime in on this issue. I see big trouble sending a check back, based on a stop under this scenario, but perhaps the fact that itís actually the customers own check makes a big difference. I hope that that is true.

Return to Top
#217672 - 07/30/04 04:09 AM Re: Stop Payments
JacF Offline

Power Poster
Joined: Nov 2001
Posts: 6,719
PA
As far as I know, the check casher could still use the same defense in this scenario that they use when they cash a check for a third party. What the stop order does, above all else, is take the bank out of the loop.

Also, to address what Happy said- the customer has a right to stop payment on his check, and the bank is obligated to comply with the stop regardless of the customer's reason. Yes, that means the customer can claim 'NSF' as a reason to stop payment, and we have to oblige. As such, I'd like to emphasize the importance of your point about getting rid of the customer.

Return to Top
#217673 - 07/30/04 03:04 PM Re: Stop Payments
John Burnett Offline
10K Club
John Burnett
Joined: Oct 2000
Posts: 39,408
Cape Cod
If the customer's check is made payable directly to the check cashing outfit, the payee may or may not be a holder in due course. But if it gave the customer value (cash), there's no question it could (and should) pursue your customer for the amount of the check. And there's nothing remotely wrong with that scenario, since the check casher is out the money, and your customer, if effect, ripped the check casher off.

Regardless of any of the underlying facts, a stop payment order is what it is -- a revocation of the bank's authority to pay the check when it's presented. It doesn't involve the bank in any fraud or theft (although the bank may have to respond to subpoenas relative to the facts of the stop order).
_________________________
John S. Burnett
BankersOnline.com
Fighting for Compliance since 1976
Bankers' Threads User #8

Return to Top
#217674 - 07/30/04 03:24 PM Re: Stop Payments
Paragon Offline
Diamond Poster
Paragon
Joined: Dec 2003
Posts: 2,164
John - OK, check is returned payment stopped, check casher claims holder in due course - but there are no funds in the account - are you saying that the bank is out of the loop - no liability?

In the normal scenario - a customer issues a payroll check, it's reported lost by the payee (ex-employee) and a new check is issued - the old check is negotiated through a check casher, stopped, but the check casher claims holder in due course - it's my understanding that the bank must reimburse the check casher and charge the customer, correct? But what if the customer does not have funds?

Return to Top
#217675 - 07/30/04 03:29 PM Re: Stop Payments
JacF Offline

Power Poster
Joined: Nov 2001
Posts: 6,719
PA
Quote:

In the normal scenario - a customer issues a payroll check, it's reported lost by the payee (ex-employee) and a new check is issued - the old check is negotiated through a check casher, stopped, but the check casher claims holder in due course - it's my understanding that the bank must reimburse the check casher and charge the customer, correct? But what if the customer does not have funds?



In this scenario, the check casher goes after the maker, not the bank. If the check casher tries coming to the bank to collect, the bank is still obligated to stand on the stop order for as long as it is in effect.

Return to Top
#217676 - 07/30/04 05:55 PM Re: Stop Payments
Pup Offline
Power Poster
Pup
Joined: Sep 2003
Posts: 5,045
Pedaling along a scenic highwa...
Wasn't this scenario discussed recently? And wasn't the verdict that the Check Casher was able to (or would be able to) get the money from the bank while the bank was to go after the employee?

Paragon, I'm with you in that it's a problem. Unfortunately, I don't think there is much the bank can do to deter the customer from placing that stop payment order, even when we KNOW that he/she is ripping off the check cashing agency. If there is something that we can do if this is the known scenario, please fill me in, I'd LOVE to be able to reject a stop order in this case.

Return to Top
#217677 - 07/30/04 06:16 PM Re: Stop Payments
JacF Offline

Power Poster
Joined: Nov 2001
Posts: 6,719
PA
Here is a recent thread from the Ask A Banker forum that discusses this issue in depth. The verdict was that the check casher would be able to get the money from the maker, rather than the bank.

Return to Top
#217678 - 07/30/04 07:11 PM Re: Stop Payments
Paragon Offline
Diamond Poster
Paragon
Joined: Dec 2003
Posts: 2,164
Yes, the whole thing gets down to customer liability, not bank liability with a stop payment not working very well when there is a holder in due course scenario. Here's a question and response from a legal advice site on the web (to compliment the BOL thread) that appears to outline the liability. Of course, the interesting part is when you have to explain to a customer that stop payments are not all equal.

Question:

We run a small business in the garment industry. A while ago, we sub-contracted certain work to another business ("Sub"). Sub completed the work satisfactorily, and we issued them a check for $19,536.47, the agreed amount. Four days later, we were contacted by the State Labor Department officials, who told us that Sub had absconded overnight, without paying its employees. The State officials told us that we were liable for those employees' wages to the extent of $19,536.47, the amount for which we had contracted. Very disturbed, we immediately called up our bank and inquired about the check. Finding that the check had not been encashed, we promptly issued a "Stop Payment Order" on that check. We paid the entire sum to the State officials who, presumably, paid Sub's unpaid employees.

Meanwhile, Sub had already encashed the check from a Check Cashing Company ("Check Cashing"). Check Cashing had deposited the check with its bank, and our Stop Payment Order was just in time to prevent that check from being paid.

Check Cashing now seeks the entire amount ($19,536.47) from us, and has threatened a lawsuit. Are we liable to pay this, although we already paid this amount to the State officials on account of Sub's employees' wages?

Also, we notice a slight irregularity in the endorsement on the back of the check: While we had issued the check in the name of "Sub Choice Clothing," the endorsement is only in the name of "Sub Choice." Is this of any consequence?

Answer:

Yes, you are liable to pay Check Cashing, even though you may not be liable to Sub now. And No, the irregularity in endorsement does not matter. I sympathize with you, but here's why.

Check Cashing was a complete stranger to you as well as to Sub. It appears that Check Cashing promptly deposited the check with its bank, and nothing suggests that Check Cashing was aware of anything improper or irregular before it accepted the check and paid Sub. I'm sure you realize that your "Stop Payment Order" four days after issuing the check worked only because the check routing for payment(from Check Cashing to its bank to your bank) took some time, not because of any negligence of Check Cashing.

Check Cashing paid good money for the check, and accepted your check in good faith. Thereby, it became what the law calls a "holder in due course" of the check ("HIDC"). Under the Uniform Commercial Code (a statute which is the same throughout the United States and similar to that in most other countries), an HIDC is a (1) holder (2) of a negotiable instrument (3) who took it for value (4) in good faith and (5) without notice that it is overdue or has been dishonored or of any defense against or claim to it on the part of another. Once these requirements are satisfied, someone who pays on a check, such as Check Cashing, gets the special protection specified by the Code.

This protection is detailed essentially in Section 3-305 of the Code. An HIDC "takes the instrument free from (1) all claims to it on the part of any person; and (2) all defenses of any party to the instrument with whom the holder has not dealt," subject to exceptions that don't help you now.

The reason for this special protection was best explained by New York's highest court, the Court of Appeals, in a dispute between Hartford Accident & Indemnity Co. and American Express Co.:

The holder in due course doctrine--which has particular importance in commercial transactions like those at issue here--has as its objective encouraging and facilitating the ready transaction of negotiable instruments, central to our credit economy; people can rely on the fact that negotiable instruments in the hands of good-faith purchasers will be paid according to their tenor and intent and not paid otherwise. Holder in due course status advances that objective by providing that persons in that category take free of virtually all claims and defenses.
You concede the validity of the check itself, i.e., that you signed it, that it was for the proper amount and to the proper person. The check was not materially altered. And since you have said nothing about the endorser's signature, I assume that too is genuine. So also, since you have no evidence to the contrary, the endorsement is presumed to be authorized by Sub.

True, the endorsement is in the name of "Sub Choice," not "Sub Choice Clothing." But courts have not permitted such minor irregularities in name or endorsement -- even spelling errors and incorrect names -- to defeat the holder in due course. "A signature made by use of any name, including an assumed name, or other symbol, with intention to authenticate a writing, would appear to be sufficient," as one court observed. Indeed, even where a person deposits a check without endorsing it, his bank's stamp placed on the check indicating that it was credited to his account may be sufficient. Thus, the irregularity in endorsement will not help you at all in court.

In sum, Check Cashing acquired the check in good faith, for value, and without notice of any defenses; it became an "HIDC." Hence, you'd be better off talking settlement with Check Cashing instead of wasting your time and money litigating a sure loser. And send those blood hounds out to find Sub, with a hope and a prayer that Sub now has the money to repay you.

Return to Top

Moderator:  Andy_Z, John Burnett