Cashier's Checks - Are They Really 'Same as Cash'?

by Mary Beth Guard, Esq.

Time to clean out the attic and force yourself to give up those last vestiges of childhood - the Barbie and G.I. Joe dolls, the stack of Superman comics. Probably worth a small fortune on eBay, don't you think?

As you prepare to part with your vintage toys and reading material, you find yourself feeling a little nervous about selling to a stranger. If someone responds to your ad in the newspaper, or your listings on the online auction site, you want to be sure you get paid before they get their grubby paws on the treasures of your youth. No way would you accept a check drawn on any purchaser's personal account. Way too risky. You will require a cashier's check. That will give you peace of mind.

This isn't a far-fetched scenario. It is the type of thought process consumers and businesses go through every day when deciding what method of payment will offer them the comfort level they need for a particular transaction. When the method of choice is a cashier's check, it's because the prospective payee has the expectation that a cashier's check will be a trustworthy payment mode, as reliable and risk-free as cash. Is that a sound premise?

First, let's look at what a cashier's check is. A cashier's check is defined under Section 3-104(g) of the Uniform Commercial Code as "a draft with respect to which the drawer and drawee are the same bank or branches of the same bank." If an item meets this functional definition, it will be considered a cashier's check - whether or not it actually bears that label. For example, a bank money order (where the bank is the drawer and the item is drawn on the same bank) is actually a cashier's check.

A draft is simply an order to pay money. It is a negotiable instrument. Under UCC 3-412, the issuer of a cashier's check is obliged to pay the instrument according to its terms at the time it was issued. The obligation is owed to a person entitled to enforce the instrument or to an endorser who paid the instrument under UCC 3-415.

So, in plain English, what does that mean? It means that the law has been constructed in such a way as to make it difficult for the issuer of a cashier's check to escape its duty of payment. Note that I said "difficult" - not impossible. The drawee bank could argue that someone trying to obtain payment on the check is not a "person entitled to enforce the instrument" or is not an "endorser who paid the instrument under UCC 3-415". Only after consultation with counsel should a bank wade into those murky waters.

For the most part, the old axiom - that a cashier's check is considered "accepted" when issued - is true. That means there is a high degree of finality about it. If it is accepted when issued, then it's too late, after issuance, to try to stop payment of the item. The drafters of the UCC wanted the public to view cashier's checks as money substitutes. For that reason, in Section 3-110, they state that if a cashier's check is taken in payment of an obligation, the obligation is discharged to the same extent as if money were taken in payment.

To discourage issuers of cashier's checks from refusing to pay them, UCC Section 3-411 provides for damages to be imposed upon a bank who refuses to pay a cashier's check. If the obligated bank wrongfully refuses to pay a cashier's check, the person asserting the right to enforce the check is entitled to compensation for expenses and loss of interest resulting from the nonpayment and may, in some instances, even recover consequential damages. That's a pretty big deterrent to refusal to pay!

Of course, the hitch is that in order for the bank to be liable for damages, its refusal to pay must be wrongful. It won't get stuck with damages if the refusal to pay occurs because payment is prohibited by law (such as when it's for an illegal gambling debt), or the bank suspends payments (heaven forbid!), or the bank asserts a claim or defense of the bank that it has reasonable grounds to believe is available against the person entitled to enforce the instrument, or if it refuses to pay because it has a reasonable doubt whether the person demanding payment is the person entitled to enforce the instrument.

Suppose you list your vintage '60s G.I. Joe for sale online, where Ralph places the successful bid of $4,030. The next highest bidder is Steve at $3,050. Nobody else is even close.

Ralph promptly sends you a cashier's check drawn on Auction Buddy's Bank. You overnight him the merchandise. When Ralph's wife finds out he's lost his mind and threatens to divorce him if he doesn't back out of the deal, Ralph makes a beeline for the bank and begs it to place a stop payment on the cashier's check. Unlike a check drawn on his personal account, Ralph does not have a right to stop payment on the cashier's check, but since he's a good customer, his bank wants to accommodate him and it stops payment.

Ralph overnights the doll back to you with a note to inform you of the stop payment. You panic and call Auction Buddy's Bank to let them know you object to the stop payment. You then contact Steve, the next highest bidder. Steve's found another G.I. Joe elsewhere and is no longer interested in yours. The next highest bid was a measly $1,200. Make your claim against the issuing bank and you should be successful. After all, the bank doesn't have a defense against you. You would probably even stand a good chance of collecting consequential damages.

What if the facts were different and Ralph had purchased a cashier's check made payable to himself with a counterfeit check? Could the bank stop payment? It would appear so, because the bank would have reasonable grounds to believe it has a claim or defense against Ralph, the person entitled to enforce the check. On the other hand, if Ralph used the counterfeit check to purchase a cashier's check made payable to you, the bank doesn't have a defense against you, so it would risk wrongful refusal if it didn't pay the check.

Let's say the facts were that your G.I. Joe doll wasn't what you advertised it to be, so Ralph wants to back out of the deal and stop payment on the cashier's check. Should the bank stop payment? Nope. Ralph might have a defense against paying you on the sales contract, but the bank doesn't have a defense against you.

The bottom line is that it's a very risky proposition for a bank to stop payment on a cashier's check. These items are intended to be accepted as readily as cash. A bank that stops payment on a cashier's check without having grounds for a defense or claim against the person entitled to enforce the check is asking for trouble - and damages.

Copyright © 2001 Bankers' Hotline. Originally appeared in Bankers' Hotline, Vol. 11, No. 9, 9/01