Introduction: Stop-payment Orders

Stop-payment orders, or orders from a customer directing his or her financial institution not to pay a particular check that the customer has written, are the source of much litigation between financial institutions and their customers. The problem usually arises when the customer stops payment on a check and, for one reason or another, the financial institution pays it anyway. The customer demands that the financial institution recredit his or her account in the amount of the check, on the grounds that the financial institution is required to follow the customer’s instructions regarding payment of a check and the financial institution failed to do so. The financial institution might argue that the customer’s stop-payment order was insufficient or that the customer has not actually suffered any loss because the check was paid. In any event, the financial institution is reluctant to recredit the account because that means it will have to pursue some other party to avoid suffering a loss.

This section will review the law that applies to conflicts concerning stop-payment orders. It will also explore potential steps you can take to limit your liability in the event that you pay a check in spite of a customer’s stop-payment order. Our hope is that you can first, reduce the number of incidents in which you do pay a check contrary to a stop-payment order, and second, reduce or eliminate your liability for doing so in circumstances when the payment was not really your fault.

First, we will look at the provisions of the Uniform Commercial Code (UCC) having to do with stop-payment orders. Then we will look at problems presented by the UCC provisions. After that, we will look at ways in which you can improve your legal position by incorporating language into your deposit account agreement and stop- payment order forms. Next, we will study “subrogation,” a legal concept that may help limit your liability in the event you pay a check over a valid stop-payment order. Then, we will explore some practical ways in which you can minimize the problems presented by stop-payment orders. Finally, we will look at a few miscellaneous questions about stop-payment orders that come up from time to time.