Court Rules Bank’s Refusal to Cash Cashier’s Check is Justified

By Craig W. Smith, J.D., Author, CCH Deposit Law Notes.

A bank’s refusal to pay its cashier’s check is not wrongful if the bank has a reasonable doubt about whether the person demanding payment is the person entitled to receive payment.

nder the Uniform Commercial Code, a cashier’s check is defined as a draft with respect to which the drawer and the drawee are the same bank or branches of the same bank (Revised UCC § 3-104(g)). Furthermore, a check is a draft that is always payable on demand and drawn on a bank (Revised UCC § 3-104(f)). Put another way, a cashier’s check is a check drawn by a bank on itself. Moreover, under the UCC a bank is defined to include a savings bank, credit union, savings and loan association and trust company (Revised UCC § 4-105(1)).

A Bank’s Obligation to Pay its Cashier’s Checks

A bank’s obligation to pay its cashier’s check is the same as a maker’s obligation to pay a promissory note when it is due (Revised UCC § 3-412). In other words, a bank must pay a cashier’s check to a legitimate holder of the instrument when it is presented for payment. In addition, the fact that a dispute exists between the remitter (purchaser) and payee of a cashier’s check on the transaction giving rise to the issuance of the check does not excuse the bank’s obligation to pay the check. This is because the UCC explicitly states that a bank cannot unilaterally assert a defense the purchaser has against the payee of a check (Revised UCC § 3-305(c)).

For instance, suppose a person buys a cashier’s check from a bank to purchase a used car. Suppose also that the used car dealer, named as the payee, has intentionally misrepresented the mileage on the automobile by stating that it has been driven only 5,000 miles when in fact it has been driven 50,000 miles. Upon discovering the fraud, the purchaser requests the bank to stop payment on the cashier’s check. Under these circumstances, the bank cannot assert the purchaser’s defense of fraud as a justification to stop payment on the item. Instead, it must pay the check to the holder.

As a rule, the only time a bank may refuse to pay its cashier’s check is when the bank has its own defense against paying the item and the person attempting to enforce payment is not a holder in due course. A holder in due course is a person who takes an item for value, in good faith and without notice that is overdue or has been dishonored or of any defense or claim to it on the part of any person (Revised UCC § 3-302). Thus, if a cashier’s check is issued under fraudulent circumstances or without consideration, the issuing bank may be able to refuse to pay it as long as the item is not in the hands of a holder in due course.

For example, if a cashier’s check is issued in exchange for a check on which payment has been stopped, the bank may refuse to pay it if the purchaser attempts to cash it. This is because the purchaser is subject to the bank’s defense of failure of consideration since he knows he has not paid for the item. Thus, he cannot claim the status of a holder in due course.

If, however, the purchaser has deposited the check with another bank and then withdraws the proceeds, the bank issuing the cashier’s check may not refuse to pay it to the depository bank. This is because the depository bank is a holder in due course and, as such, is not subject to the issuing bank’s defense of failure of consideration. The depository bank is a holder in due course since it acted in good faith, gave value for the item by permitting its customer to withdraw the proceeds and was unaware of the issuing bank’s defense of failure of consideration when it took the check for deposit.

Bank’s Liability for Dishonor of its Cashier’s Check

The revised UCC strongly discourages a bank from stopping payment on its cashier’s check solely as an accommodation to its customer when a dispute exists between the customer and the payee of the check or when the bank’s own defense against paying the item cannot succeed because the person requesting payment is a holder in due course. The UCC states that if a bank wrongfully refuses to pay its cashier’s check, the person who is entitled to receive payment on the item may recover from the bank his or her expenses resulting from the nonpayment, which could include attorneys’ fees and loss of interest (Revised UCC § 3-411).

On top of this, the bank also runs the risk of being liable to the holder for consequential damages. In other words, if the holder informs the bank of the losses that he or she may experience if the check is not paid and the bank still refuses to pay the item, then it will be liable to the holder for these damages.

For instance, suppose the holder informs the bank that he or she needs the proceeds of the check to purchase a piece of equipment on which he has an option to buy for $25,000. The holder also informs the bank that he is purchasing the equipment for resale to another party who has agreed to pay $40,000 for it. If the bank wrongfully refuses to pay the check, resulting in the holder being unable to exercise the option, the bank may be responsible for the $15,000 loss in profits sustained by the holder of the cashier’s check.

Exceptions to Liability for Expenses and Consequential Damages

Nevertheless, a bank will not be liable for expenses and consequential damages for its refusal to pay a cashier’s check if the bank asserts its own defense that it reasonably believes is available against the person attempting to enforce payment of the check. In other words, the bank must be able to assert its own defense against a person who is not a holder in due course.

In addition, the UCC states that a bank will not be liable for expenses and consequential damages when it refuses to pay a cashier’s check if the bank has a reasonable doubt whether the person demanding payment is the person entitled to enforce the instrument (Revised UCC § 3-411(3)(c)).

For example, suppose a cashier’s check is made payable to “ABC Supplier, Inc.” The person who has possession of the check presents it for payment over the counter and claims to be an officer of ABC Supplier, Inc. Under these circumstances, as illustrated in the following recently decided case, the bank may refuse to pay the item without exposing itself to liability for expenses and consequential damages.

Associated Carriages, Inc. v. International Bank of Commerce

THE FACTS. On November 5, Debra Farmer asked International Bank of Commerce to cash a personal check drawn on a customer’s account that was payable to Associated Carriages, Inc. Farmer represented that she was the president of the payee. The Bank teller refused to cash the check, informing Farmer that the Bank did not cash checks made payable to corporations.

The next day Farmer returned to the Bank with her brother, Tom Vela, who presented the same check for payment. Vela represented that he was the president of Associated Carriages, Inc. Again, the Bank refused to cash the check advising Vela that the Bank did not cash checks made payable to corporations. The Bank, however, offered to exchange the personal check for its cashier’s check. Vela agreed to the exchange and then requested that the Bank cash the cashier’s check. The Bank refused and the next day Associated Carriages filed suit against the Bank claiming that it violated provisions of the UCC by wrongfully refusing to cash its cashier’s check and, thus, is liable for damages. The trial court entered judgment in favor of the Bank and Associated Carriages appealed the ruling.

THE ARGUMENTS. Associated Carriages argued that the Bank violated Section 3-411 of the Uniform Commercial Code by wrongfully refusing to pay the cashier’s check. The Bank responded stating that its refusal to cash the check was not wrongful since it had a reasonable doubt about whether the person demanding payment was entitled to enforce payment. The Bank noted that the check was payable to a corporation and it had no way of knowing whether Mr. Vela was authorized by the corporation to cash the check.

THE COURT DECISION. The Court first stated that a bank’s refusal to pay its cashier’s check is not wrongful if the bank has a reasonable doubt about whether the person demanding payment is the person entitled to receive payment. The Court then pointed out that the evidence presented in this case shows that the teller refused to cash the check because bank policy prohibited tellers from cashing checks made payable to corporations. The Court further noted that this policy was based upon the assumption that a reasonable doubt exists about whether a person demanding payment of a check payable to a corporation is authorized by the corporation to cash the check.

The Court next observed that the Bank’s policy is sound banking policy since a business cannot be recognized merely by the presence of an individual standing in front of a teller who claims he or she is an officer of the company authorized to cash the check; under these circumstances a reasonable doubt will always exist as to the authority of the individual to cash the check on behalf of the corporation.

It also noted that the bank’s policy is imposed not only to protect the Bank and its customer, but also the payee, the very party who is complaining in this action. Accordingly, the Court ruled that the Bank did not wrongfully refuse to cash the check in question since it had a reasonable doubt about whether Mr. Vela was authorized to cash the check on behalf of Associated Carriages. Associated Carriages, Inc. v. International Bank of Commerce, No. 04-00-00139-CV (TX 2000).

Protection Points

A cashier’s check is viewed as the equivalent of cash since the bank’s credit is substituted for that of the remitter of the item. Consequently, a bank under the most circumstances may not refuse to pay its own cashier’s check. If it does so, it may be liable to the holder for expenses, loss of interest and consequential damages.
Nevertheless, there are limited circumstances under which a bank may refuse to pay a cashier’s check. For instance, if a bank issues a cashier’s check pursuant to a fraudulent scheme or without receiving payment for the item, then it may refuse to pay the check to a holder who cannot claim the status of a holder in due course. In other words, in most instances, the bank will still be required to pay the check unless it can demonstrate that the holder was aware of the bank’s defense when the holder received the item.
Another circumstance under which a bank may refuse to pay its cashier’s check without incurring liability is when it has reasonable doubt that the person demanding payment has the authority to do so. This situation will most often arise when an individual is attempting to cash a cashier’s check made payable to a corporation.
However, if the individual presenting the check for payment can prove that he or she is acting on behalf of the corporation, then the bank may be obligated to pay the check. For instance, this may occur when an individual presents a certified corporate resolution passed by the corporation’s board of directors which specifically authorizes the individual to cash the check in question.