National Check Fraud Center

Other Check Problems:
Lost, Stolen, or Destroyed Cashier Checks,
Teller and Certified Checks

Introduction - Special Notice

Money Orders - Postdated Checks - Restrictive Legends

Stale Dated Checks - Ownership Disputes - Stop Payment Orders

Over Drafts - Dead or Incompetent Customer - Breach Of Fiduciary Duty

If a customer reports that one of the above types of instruments (hereinafter referred to collectively as cashier's check) is lost, stolen, or destroyed, and the check was issued in a state which has adopted revised Section 3-312 of the UCC, there is a procedure to be followed to make a claim. Here are some of the issues inherent in the procedure:

Who is the claimant? If the cashier's check has not been delivered to the payee, the remitter is the proper party to make a claim. If, however, it has been delivered, it is the payee that should make the claim unless the payee has agreed the remitter can make it.

The claim becomes effective the later of 90 days after the cashier's check or teller's check is issued or the certified check is accepted OR the date the claim is made. Again, we need to stress that it is whichever is LATER.

The claim only becomes effective if the item is not presented for payment and paid in the meantime. However, once a claim has been made, you need to find a way to flag that check so that if it comes in you kick it out and investigate before your midnight deadline. If the customer has made a claim alleging that the check was stolen, you will want to determine if the endorsement has been forged by a thief.

Once the claim becomes effective (enforceable) , the bank is no longer obligated on the check and may pay the claimant the amount of the check or reissue a check to the claimant.

This is not the equivalent of a stop payment. If an enforceable claim is made under Section 3-312 and the check is later presented for payment, you do NOT return it stop payment. You return it marked, "Not properly payable due to enforceable claim made under UCC 3-312."

If the customer wants to get his money back before his claim becomes enforceable, you have three choices:

  1. Just say no.

  2. Give the money back only on the condition that the customer post an indemnity bond or sign an indemnification agreement to protect you in the event the check shows up and gets paid before the claim becomes enforceable.

  3. Give the customer's money back and risk the loss that could occur if the claim under the declaration of loss is defeated.

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The lesson to remember from 3-312 as a depositary bank is that if a customer is seeking to cash or deposit a cashier's check that is nearly 90 days old (or is older than 90 days), there is a chance that the check will be returned unpaid from the drawee bank due to an enforceable claim made under UCC 3-312. It is therefore wise not to treat such an instrument as a cash equivalent. If it is nearing, or is over, the 90 day mark, you should accept it only for deposit and consider putting a Reg CC reasonable cause exception hold on it to protect your bank.

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There are two types of money orders:

  1. Personal money orders - which are like one-shot checking accounts. The customer gives the bank his money, the bank encodes the instrument, and the customer signs it. This type of money order fits the definition of check under the UCC.

  2. Bank money orders. With a bank money order, the bank issues the instrument and signs it. That means that the bank is both the drawer and drawee, which makes this type of money order fit within the definition of cashier's check.

The crucial point to the distinction is this:

  • Since a personal money order is a check, it is permissible for the customer to place a stop payment on it. Both the drawee and the depositary bank should take note of this special rule.
  • Since the bank money order is a cashier's check equivalent, it is NOT possible to place a stop payment on it. However, if it is lost, stolen, or destroyed, the Section 3-312 claim procedure may be used.

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Under the old version, a check was not properly payable until the date listed thereon. Since the MICR encoding did not include the date, banks often did not even know they had paid a postdated check until the customer angrily informed them, demanding his account be credited.

The new rule on postdated checks is found in Section 4-401. It provides that a bank may charge a postdated check against the account of its customer unless the customer has given notice to the bank of the postdating describing the check with reasonable certainty! The effective length of the notice is just like a stop payment order. Also like a stop payment order, the notice of postdating must be received at such time and in such manner as to afford the bank a reasonable opportunity to act on it before the bank takes any action with respect to the check.

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One area that the revised UCC Articles 3 and 4 did not address was restrictive legends and similar items printed on the front of checks. In order to protect itself, therefore, a bank must build language into its deposit account contract to limit its liability.

Examples of restrictive or similar legends include:

  • Void after 90 days

  • Not valid over $500

  • Two signatures required

One way for the bank to protect itself is to have a provision in the deposit contract that states that the bank shall not be liable for payment of any check contrary to a restrictive legend or other limitation contained in or on the check unless the bank has specifically agreed in writing to the restrictions or limitations.

Particularly with the use of third-party check printer, this language is crucial, because the bank might not even have knowledge that the legend is on the check until a problem surfaces.

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The payor bank holds all the cards here. Section 4-404 of the UCC places the ball firmly in the bank's court by stating that a bank is under no obligation to a customer having a checking account to pay a check which is presented more than six months after its date, but it may charge the customer's account for a payment made thereafter in good faith.

This provision is intended to protect the payor bank as, once again, the date is not in the MICR line and often is not noticed prior to payment of the check.

The bank may thus

  1. pay the check and be protected, or

  2. refuse to pay the check and be protected.

The one thorn in this otherwise pretty provision is the requirement that the payment be in good faith. Generally that is interpreted as meaning the bank can't have reason to know the customer does not want the check paid. There have been numerous cases dealing with the question of whether an expired stop payment order puts the bank on such notice. Generally, the answer in most cases has been that it does not.

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Many deposit account problems arise from disputes over ownership of the account. A common example is partially executed signature cards. Let's say Jane Doe comes in to open a joint account for herself and her husband John. She fills out all the paperwork, orders checks with both their names, and signs the signature card. John was supposed to come in a few days later, but never did. Now it's three years down the road and the two of them are getting a divorce. For the first time ever, he writes a check on the account. When you pay it, Jane comes unglued, alleging that it was not properly payable because he was not an owner of the account.

Is he or isn't he? The best way to avoid the uncertainty is to require the accounts in those situations to remain single ownership accounts until the remaining parties sign the signature cards.

Other problems arise with what I call "tragedy" accounts. A paper I wrote on this subject a couple of years ago may be obtained by calling my office at the number given above. An example is where a group of concerned friends wants to collect money to pay for a livery transplant for Alvin Alkie. They collect a ton of money, but before the operation can be performed, Alvin dies. Who gets the money? Who can write checks? Under what conditions? Who knows?! Unless your deposit account agreement provides for all the contingencies, you've got a problem on your hands.

Entity accounts can also pose problems. Be sure, if you are dealing with an account for an organization, corporation, partnership, limited liability company, or other entity, that you obtain proper documentation and observe the limitations on the authority of the authorized representatives of the entity and only deal with the authorized representatives.

Minors' accounts can similarly spell trouble. If you allow someone to set up an account styled, "Little Johnny Smith, a minor, by Sally Smith", does your state legally recognize that form of styling? Who is the owner? Who can sign checks? What about where momma puts here little baby daughter on a joint account with her. Baby is now 16 and has found the checkbook. You don't have her signature on file, but you've sent 16 years worth of statements showing her as a joint owner. The one thing we can guarantee is that whatever you do in such a situation, somebody is not going to be happy.

All of the above scenarios are examples of situations that should be dealt with in a preventive fashion. Think about possible pitfalls up front and provide for them, either through your internal procedures, refusing to have certain types of accounts, or through a carefully drafted deposit account agreement.

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The customer's right to stop payment is set forth in Section 4-403. That section provides that a customer or any person authorized to draw on the account [which means authorized signers or joint owners] can stop payment of any item [not just the ones they personally signed on the account] by:

  • an order to the bank,

  • describing the item or account with reasonable certainty,

  • receiving at a time and in a manner that affords the bank reasonable opportunity to act on it before any action by the bank with respect to the item.

A stop payment order is effective for six months, but it lapses after 14 calendar days if not confirmed in writing within that period. It may be renewed for additional six month periods.

If a bank pays an item over a stop order, it can assert as defenses:

  • the customer did not describe the item or account with reasonable certainty; or

  • the stop payment order was not received at a time or in a manner that afforded the bank reasonable opportunity act on it before any action with respect to the item.

Consult Section 4-303 of the UCC to determine if the stop payment order has been received in time. It sets forth the priorities.

If the bank pays an item over a stop payment order and does not have a valid defense, it should remember that the burden of establishing that a loss occurred and what the amount of the loss was resulting from the payment contrary to a stop payment order is on the customer. Note, however, that the damages may include damages for dishonor of subsequent items.

The drawee bank has a right of subrogation if it improperly paid the check in order to prevent unjust enrichment, but only to the extent necessary to prevent loss to the bank by reason of its payment of the item. The payor bank is, under Section 4-407, subrogated to the rights:

  1. of any holder in due course on the item against the drawer or the maker;

  2. of the payee or any other holder of the item against the drawer or maker either on the item or under the transaction out of which the item arose; and

  3. of the drawer or maker against the payee or any other holder of the item with respect to the transaction out of which the item arose.

Warning: Be sure your system has a mechanism for removing expired stop payment orders. If you return a check on which a stop payment order has expired, you have returned it improperly.

It is wise to disclose to the customer that if the check amount is not described with exact certainty that the bank's system will not be able to effectuate the stop payment order. Perhaps the deposit account agreement, in defining what is meant by describing the check with "reasonable certainty" should define it as entailing a description of the exact amount of the check.

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As noted previously in these materials, under Section 4-401 a bank may charge against the account of a customer an item that is properly payable from that account, even though the charge creates an overdraft.

As previously noted, however, under that same section it states that on a joint account, a customer is not liable for the amount of an overdraft unless he signed the item or benefited from the proceeds OR unless the deposit agreement makes him liable.

Banks should exercise extreme caution in charging a daily fee for balances remaining in overdraft. In my opinion, that is a lawsuit waiting to happen for the following reasons. When a bank pays an overdraft it is, in essence, extending credit to the customer. If the bank then charges a fee for each day the "credit" is outstanding, it is essentially charging interest. If the fee is interest, it doesn't take very much or very long for the interest rate to violate state usury limits.

The other word of caution with respect to overdrafts relates to changing the bank's policy or procedure. If the bank has repeatedly or consistently paid overdrafts for customers, or for a particular customer, and it then decides not to do so any longer, it should not cease the payments without first giving adequate notice to the customer for the reason that the customer could file suit for attempted reversal of a course of dealing. Basically, the customer would allege that through habit and custom, an implied contract for the payment of overdrafts has arisen between the parties. The customer is entitled to notice before that custom and practice is changed so the customer will be able to protect itself from damage.

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The UCC offers some protection for a bank which pays checks written by a customer who is, at the time of payment, deceased or incompetent. Section 4-405 provides that a payor or collecting bank's authority to accept, pay, or collect an item or to account for proceeds of its collection, if otherwise effective, is not rendered ineffective by incompetence of a customer of either bank existing at the time the item is issued or its collection is undertaken if the bank does not know of an adjudication of incompetence.

Neither death nor incompetence of a customer revokes the authority to accept, pay, collect, or account UNTIL the bank:

  1. knows of the death; or

  2. knows of an ADJUDICATION of incompetence and has reasonable opportunity to act on it.

Even after the bank learns of the customer's death, it may for 10 days after the date of death pay or certify checks drawn on or before that date unless it is ordered to stop payment by a person claiming an interest in the account.

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Another new provision in the revised UCC, Section 3-307, sets forth certain circumstances under which a bank is deemed to be on notice that there is a breach of fiduciary duty.

When the term "fiduciary" is used in Section 3-307, it is not used in its ordinary sense. Instead, fiduciary means "an agent, trustee, partner, corporate officer or director, or other representative owing a fiduciary duty with respect to an instrument."

The term "represented person" is also key. It means the principal, beneficiary, partnership, corporation, or other person to whom the duty is owed by the fiduciary.

There are three circumstances under which the bank is deemed to be on notice of a breach of fiduciary duty where an instrument is taken from a fiduciary for payment or collection or for value and the bank has knowledge of the fiduciary status of the fiduciary: The bank is on notice of the breach if, in the case of an instrument payable to the represented person or the fiduciary as fiduciary, and the instrument is

  1. taken in payment of or as security for a debt known b y the taker to be the personal debt of the fiduciary; or

  2. taken in a transaction known by the taker to be for the personal benefit of the fiduciary; or

  3. deposited into an account other than an account of the fiduciary, as such, or an account of the represented person.

Note, however, that if an instrument is issued by the represented person or the fiduciary as such , and is made payable to the fiduciary personally, the taker does NOT have notice of the breach of fiduciary duty unless the taker knows of the breach of fiduciary duty.

If the instrument is issued b the represented person or the fiduciary (as fiduciary), to the taker as payee, the taker has notice of the breach of fiduciary duty if the instrument is:

  1. taken in payment of or as security for a debt known by the taker to be the personal debt of the fiduciary;

  2. taken in a transaction known by the taker to be for the personal benefit of the fiduciary; or

  3. deposited to an account other than an account of the fiduciary, as such, or an account of the represented person.

Copyright, 1994, Mary Beth Guard. All rights reserved. Mary Beth Guard is Executive Editor of

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Copyright 1994-2011, Mary Beth Guard
All Rights Reserved