UCC: Practical Application, Part IV

Problem 9
Paul Perfectionist called to put a stop payment on a check he had written to a furniture store for a sofabed for $1,500. The sofa had been delivered to him, his wife hated the color, and the store insisted the sale was final. The stop was put on and confirmed. However, when the check came in a week later, it was missed by bookkeeping and was paid. He came roaring in when he got his statement, finding the check had been paid over the stop payment order, and wants his $1,500 back. Does he get it from you?

Do you give him back $1,500?

Maybe. But, as the saying goes, you can't have your cake and eat it too. This type of a problem is covered in Section 4403 - Right of customer to stop payment; (c) Burden of proof of loss. - The burden of establishing the fact and amount of loss resulting from the payment of an item contrary to a stop-payment order...is on the customer.

In problem 9 above, the customer did indeed stop payment, the bank received it, and the bank was in error. But the fact remains that the customer still has the sofa. There is no loss. Without a loss, there cannot be a claim. If the bank gives the customer the $1,500, then the bank gets the sofabed. While employees might enjoy the addition to the break room, there really is not much you can do with a sofabed in a branch office. Because the bank really is at fault in this case, bankers need to become innovative and work "out of the box" in order not to lose funds. Perhaps a call to the furniture store and see if they'll take back the couch. If they say they will, but it will have to be transported to them, arrange the transport. It may cost $100 to get it back, but your loss will be reduced from $1,500 to $100. Do whatever is necessary to reduce your loss.

If there is a loss to the customer, and the bank is indeed in error, further troubles can arise. If the check is paid, and then other checks come in and are bounced because of the pay-over-stop, the bank could be liable not only for the amounts on the returned checks. It can also be liable for damages caused by those returns. Section 4403 (c) The loss from payment of an item contrary to a stop payment order may include damages for dishonor of subsequent items under section 4402 (relating to liability of bank to customer for wrongful dishonor; time of determining insufficiency of account).

One last thought on stop payments. Many financial institutions now use the mailed stop payment form as confirmation that the stop is placed as per the information mailed to the customer unless the bank hears otherwise from the customer. That way the stop is received, placed and confirmed all at once. No follow-up necessary. BANKERS' HOTLINE has checked out this practice with several banking attorneys and has found no legal objection to this method of handling stop payments. To the best of our knowledge, it has never been challenged.

Problem 10
Mr. Grabbit tells you he'd like to open a new account. He already has a joint account with his wife with you, but he'd like to also open a single name account. He has a check for $37,000 that he wants to deposit to open the account. The payee reads:
Gabriel Grabbit
Lorena Grabbit

There is no "and" and no "or" in the payee area. Just the two names. He endorses the back of the check with his name and gives it to you to deposit into his single name account.

Can you accept the check?
Do you need both endorsements?
Yes, you can accept the check.
No, you don't need both endorsements.

This is one of the most important changes in the revised Uniform Commercial Code because it is a complete reversal of the old rule. Section 3110. Identification of person to whom instrument is payable. (d) Instrument payable to two or more persons. - If an instrument is payable to two or more persons alternatively (Ed. Note: Alternative = Either) it is payable to any of them and may be negotiated, discharged or enforced by any or all of them in possession of the instrument. If an instrument is payable to two or more persons not alternatively (Ed. Note: Not to either, but to both or all) it is payable to all of them and may be negotiated, discharged or enforced only by all of them.

So we see from that language that if the payee says "or" (alternative), then any one of the payees can negotiate the check. If, on the other hand, the payee reads "and", then both (or all) the payees must endorse the check. The last part of this section is where the big change occurred.

If an instrument payable to two or more persons is ambiguous as to whether it is payable to the persons alternatively, the instrument is payable to the persons alternatively.

The check described above is ambiguous. (Ambiguous means having more than one possible meaning: open to two or more interpretations; lacking clarity of meaning) Therefore it is payable alternatively (to either).

There are still many in our industry that are not aware of this major change in the revised UCC. And there are still many insurance companies that issue checks to joint payees that will print payees' names ambiguously, indicating any one of them can negotiate the check. And then on the back of the check will be the warning "Endorsement of all payees required", or some such wording. In those cases, the financial institution should abide by the caution printed on the reverse of the check and get all payees' endorsements.It is safest, of course, to obtain all endorsements. But if a claim should arise by one of the payees that his/her endorsement was forged on a check that was payable ambiguously, and one payee's endorsement is genuine, there can be no claim on the financial institution. The defense, of course, is that the second endorsement is not necessary. (Please note - IRS tax refund checks are always "and" payees - requiring both endorsements!)

(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. 3, 6/03