UCC Legal Recourse for Stop Payments (Bank)

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Question:

I was contacted by my customer "Charlie Customer" and he asked to have two stop payments placed against two personal checks each for $5,000.00. The following day a now previous employee cashed these two checks for Frank Fraud, the payee. These two checks were supposed to be earnest money for a upcoming home sale that fell through due to Frank Fraud and no contract was signed since they operated under a gentleman's agreement so Charlie Customer did not receive any services or products for these two checks. We made contact with Frank Fraud who of course refused to bring the funds back to the bank. Question: Does the bank have any legal recourse to recover these funds? It seems the only person that would be able to file a suit would be Charlie Customer; however, since he placed the stop payment, the funds came from the bank instead of Charlie Customer's account and he now has no motivation to file suit since he isn't out any money. We referred to the UCC code for our state however; like most states it covers the customer's damages and doesn't seem to give any guidance to the financial institution.

Answer:

Start with the basics:

Was the stop payment order received in sufficient time before the bank had to act on paying the checks? Apparently so. The checks were presented to the bank for payment on the day after the stops were placed.For what amount was the bank responsible to its depositor for paying the checks over the stop order? The burden is on the depositor to establish the fact and the amount of the loss. Based on your narrative, the bank has already reimbursed its customer for the amount of the checks. Whether or not any added damages will be claimed is unknown.

Can the bank recover from anyone under UCC 4-407? The bank is subrogated to the rights of its customer as against the payee of the checks (Frank Fraud). That means the bank can stand in its customer's legal position to sue under the agreement between the customer and the payee. If Frank Fraud can be located and has any assets, the bank can sue him for recovery to the extent of its losses.

The problem here is that Frank Fraud isn't easy to pin down, and, of course, the agreement between Charlie and Frank appears to be oral, which often doesn't play well in a court. You'll need some legal advice on whether it's worth the effort to try to go after Fraud in the courts.

First published on BankersOnline.com 10/15/12