Please help settle a friendly bet between the CFO and myself. We issued two cashiers checks to a customer who in turn cashed them at XYZ Bank. After the checks were issued, we discovered massive fraud in the account used for purchase of the two CCs and ordered our third party processor not to pay the two items. The CC processor sent them back to XYZ 'refer to maker'.

Now XYZ is demanding payment for the two items. I believe we owe XYZ the money. Our CFO says not so fast. The CFO's argument is that XYZ should have called us to see if the checks were good, etc., etc.

I understand the CFO's take but I believe we still damaged an innocent third party (XYZ bank) and now we owe them the cash. Thoughts anyone?

I suggest you contact bank counsel. Cashier's checks represent the bank's promise to pay. They are not subject to stop payments because the bank changed its minds. We have to do our homework before we issue the checks. I think you have to honor the checks.

Hmmm... Does your CFO require all of your teller staff to call in and verify each and every cashier's check before accepting them for deposit as well?

Not sure of the real answer here, but I do not think I would rush making XYZ whole just yet. I would suggest contacting your legal counsel first and get their input.

Hmm, I'm not an expert by any means but I'd have to agree with you. The CC themselves aren't fraudulent, and you can only stop pay on CC if they've been lost, destroyed, or stolen - and you can only do that after 90 days from the date of issuance.

My vote is that you owe the bank the money

I agree with BrendaC. As I recall the language regarding official checks has mention of instances where the purchase of the instruments involved fraud.

One more vote with you. CC can not have a stop pay & can not be refused to pay other than lost, stolen as other posters said.

Just a thought, make sure it is truly a CC - drawn on your bank and signed by the bank's authorized agent. Some banks actually issue "Teller Checks" that are drawn on another bank.

Many, many years ago I was on the loan desk, but also handled many of the problem accounts. I went to lunch (and learned a lesson) and a new but supposedly senior lender met one of my "problem accounts" while I was out. This new (but very confused) lender gave him NEW money secured by liens on literally, swampland in FL. It doesn't matter that appraisals weren't in our hands or that we knew diddly about the property. This was a classified borrower and loan.

Well, cashier's checks were issued for the loan. The gal over our Ops area called the customers other bank, the one where he kept his deposits (preventing setoff - yes) and told them we simply were not going to pay those checks. They were issued in error. The other bank didn't want to fight over this and sent the customer back.

Could we do this? Well, not really, but the bluff worked. Your CFO can only take his bluff so far. If you could just willy nilly stop a cashier's check, they'd be a lot less attractive to the scammers out there. You can't just not pay them.

Techically, the other bank is a "holder in due course" - you owe them the money.

In Andy's case, the "other bank" appears to have gotten notice about the check before accepting it for deposit, so they never became a holder in due course. The law does allow a bank to refuse payment of its own cashier's (or teller's) check if the person presenting it for payment happens to be the payee and if the bank has a defense against payment to the payee (such as fraud).

But otherwise, the depositary bank in this this case is a HIDC if it gave value for the money. So it's entitled to enforce the cashier's or teller's checks.

If the depositary bank is willing to take the hit because it's still able to recover the funds from its depositor (the payee), that's a horse of a different color. But given the scenario you painted, I don't think the depositary bank will be so cooperative.

Get counsel involved if the dollars are big enough to warrant the expense. And when counsel is done fighting the good fight on this and the bank loses, ask counsel to provide your CFO with a UCC primer on cashier's, tellers and certified check obligations.

The first cashiers check was made payable to our so-called customer, Mr. Fraudster. Fraudster knew my bank was not going to honor the CC. That is why he cashed it at XYZ where he also has (had) an account. In your response you indicate "...law does allow a bank to refuse payment of its own cashier's (or teller's) check if the person presenting it for payment happens to be the payee and if the bank has a defense against payment to the payee." That shoe fits Mr. Fraudster perfectly. I would love to know the chapter and verse of the 'law'. Is it case law or UCC?

The second CC was made payable to Fraudster's wholly owned company. Same scenario as the first CC; he knew we would refuse to pay the CC so he went to XYZ bank. The CFO's argument is that XYZ should be going after Mr. Fraudster for reimbursement, not us. Fraudster knew the CC's were not going to be honored by my bank.

I would greatly appreciate any feedback.

The person presenting the check for payment was XYZ, not the payee of the check. XYZ was holder in due course.

For future reference, look at UCC in your state, section 3-411 and 3-412.

The UCC protects parties who accept negotiable instruments ignorant of any underlying problem with the issuance of the instrument. XYZ didn't know about your problems with the customer. On the contrary, your bank was in the best position to know of the fraud, although you apparently had not uncovered it when the checks were issued. So the UCC puts the onus on your bank to chase your customer for the fraud he perpetrated against you.