Miscellaneous Questions on Stop-payment Orders

At Wolters Kluwer, we receive many telephone-call questions from customers about stop-payment orders. We thought it might be helpful to you if we included some common ones in this manual, along with our answers.

— Question: “We issued a certified check to one of our customers. Now he wants to stop payment on it. What should we do?”

Your customer does not have a right to stop payment on a certified check, or a cashier’s or teller’s check. Official Comment 5 to Section 4-403 of the UCC says:

There is no right to stop payment after certification of a check or other acceptance of a draft, and this is true no matter who procures the certification…. The acceptance is the drawee’s own engagement to pay, and he is not required to impair his credit by refusing payment for the convenience of the drawer.

(This appears in Official Comment 4 of Section 4-403 in the revised Article 4.)

This means that when you certify a check, you have made a promise on behalf of your institution that the check will be paid. If it is not, your institution’s own reputation may be damaged. Or, to put it another way, the customer should not be allowed to interfere with your institution’s fulfillment of its own obligations to others. This rationale also prevents a customer from demanding that payment be stopped on a cashier’s or teller’s check issued by you.

New York law and the revised version of Articles 3 and 4 of the UCC provide an exception to this rule.

The New York exception says that either the “remitter” (the drawer of a certified check or the buyer of a cashier’s or teller’s check) or the payee on the check can stop payment on cashier’s or certified check (or demand that you order payment stopped on a teller’s check) at any time after 90 days from the date of issuance of the cashier’s or teller’s check or acceptance of the certified check. The person ordering that payment be stopped must do so at a time and in a manner affording the bank a reasonable opportunity to act before taking any of the actions described in Section 4-303(1) of the UCC, which we generally referred to as “paying” the item. The person ordering that payment be stopped must supply: (1) a written stop-payment order, which must describe the item with reasonable certainty; and (2) an affidavit containing a statement that the check was destroyed, or its whereabouts cannot be determined, or it is in the wrongful possession of an unknown person or a person that cannot be found or is not amenable to service of process. See NY UCC §4-403(1) and (2). Once the stop-payment order is effective (after the 90-day period has lapsed), the institution must refund the amount of the item to the remitter or payee who demanded that payment be stopped. The bank is not obligated to pay the check after making such a refund.

The revised UCC rule (Section 3-312) is similar to the New York rule, saying that a bank that issued a cashier’s or teller’s check or that certified a check must refund the amount of the check to a “claimant” if certain conditions are met. [A “claimant” is the “remitter” or payee (in the case of a cashier’s or teller’s check) or the drawer or payee (in the case of a certified check).] The claimant must give a written “declaration of loss” and must make the claim at a time and in a manner affording the bank a reasonable time to act on it before the check is paid. The claimant must also provide identification if requested by the bank. A “declaration of loss” is a written statement that the claimant lost possession of the check, that the claimant is the drawer or payee (if a certified check) or the remitter or payee (if a cashier’s or teller’s check), that the loss of possession was not the result of a transfer by the claimant or a lawful seizure, and that the declarer cannot reasonably obtain possession of the check for certain specified reasons.

If these conditions are met, then the claim becomes enforceable when the claim is made, but not sooner than 90 days after the date of the check (if a cashier’s or teller’s check) or the date of acceptance (if a certified check). If the claim becomes enforceable before the check is presented, the bank must pay the amount of the check to the claimant and is not obligated to pay the check itself.

As you can see, the New York rule and the revised UCC rule are functionally very similar.

The New York rule and the revised UCC rule spell out a specific procedure to follow in order to stop payment on one of these checks without your institution incurring any liability. Should you be thinking about gratuitously stopping payment as a customer service without following these procedures, be aware that you could be subjecting your institution to liability toward the person to whom the item should be paid. Section 3-411, subsections (b) and (c), of the UCC says:

(b) If the obligated bank wrongfully (i) refuses to pay a cashier’s check or certified check, (ii) stops payment of a teller’s check, or (iii) refuses to pay a dishonored teller’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 recover consequential damages if the obligated bank refuses to pay after receiving notice of particular circumstances giving rise to the damages.

(c) Expenses or consequential damages under subsection (b) are not recoverable if the refusal of the obligated bank to pay occurs because (i) the bank suspends payments, (ii) the obligated 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, (iii) the obligated bank has a reasonable doubt whether the person demanding payment is the person entitled to enforce the instrument, or (iv) payment is prohibited by law.

— Question: “What sort of fee can we charge our customers when they ask us to stop payment on a check?”

We are not familiar with any statutes or regulations that specify a maximum fee for stop-payment orders. (Connecticut requires that a charge for a stop-payment order cover the initial stop-payment order that is effective for six months and the first six-month renewal. See 2000 Conn. Acts 00-15.) However, you should take the following into consideration when deciding what, if any, fee to charge.

First, as we point out in our chapter dealing with deposit account agreements, there is a trend in the courts to not allow financial institutions to charge fees for services unless the customer has agreed to those fees. Therefore, you should probably not be charging a fee for stop-payment orders unless you disclosed the fee in a deposit account agreement signed by the customer or in a Truth-in-Savings disclosure, if applicable.

Second, there have also been some recent cases that seem to say that fees that are too high (1) could constitute a breach of the financial institution’s obligation to act in “good faith” in the performance of its contracts where the amount of the fee is not specifically agreed to by the customer; and (2) are unconscionable and, therefore, unenforceable. See Best v. US National Bank, 739 P.2d 554 (Or. 1987) and Perdue v. Crocker National Bank, 702 P.2d 503 (Cal. 1985).

Third, Section 7.8000 of the regulations of the Office of the Comptroller of the Currency (OCC) [12 CFR 7.8000] is an interpretive ruling that states the following with respect to national bank service charges:

a) All charges to customers should be arrived at by each bank on a competitive basis and not on the basis of any agreement, arrangement, undertaking, understanding, or discussion with other banks or their officers.

b) Establishment of deposit account service charges, and the amounts thereof, is a business decision to be made by each bank according to sound banking judgment and federal standards of safety and soundness. In establishing deposit account service charges, the bank may consider, but is not limited to considering:

i. Costs incurred by the bank, plus a profit margin, in providing the service;

ii. The deterrence of misuse by customers of banking services;

iii. The enhancement of the competitive position of the bank in accord with the bank’s marketing strategy; and

iv. Maintenance of the safety and soundness of the institution.

c) A national bank may establish any deposit account service charge pursuant to paragraphs (a) and (b) of this section notwithstanding any state laws that prohibit the charge assessed or limit or restrict the amount of that charge. Such state laws are preempted by the comprehensive federal statutory scheme governing the deposit-taking function of national banks.

d) This interpretive ruling does not apply to: (1) charges imposed by a national bank in its capacity as a fiduciary that are governed by 12 CFR Part 9; and (2) service charges on dormant accounts that are governed by 12 CFR 7.7515.

This regulation seems to allow national banks to impose charges for service fees regardless of state law limitations, including state law concepts of unconscionability and good faith. However, you should note that the correctness of the OCC’s conclusion that federal law preempts state law limitations on service charges by national banks was strongly questioned by the court in the Perdue case, cited previously.

Fourth, according to a couple of Michigan Attorney General opinions, stop-payment fees in Michigan are allowed only if specifically agreed to by the customer. The Attorney General relied on the Official Comment we referred to earlier stating that the ability to stop payment on a check is a service that customers expect and are entitled to receive. Based on that provision, the first of the two Attorney General opinions concluded that financial institutions were prohibited from charging a fee for stop payments since the fee would be a limitation on the customer’s exercise of a “right.” In the second opinion, however, the Attorney General acknowledged that parties to a contract are permitted to vary the terms of the UCC and that, therefore, “…a bank may charge a fee for a stop-payment request pursuant to an agreement with its customers if the terms of the contract clearly and specifically provide that the customer consents to pay the fee.” So, if you are located in Michigan, be very sure your deposit account agreement clearly allows for a stop-payment fee if you intend to charge one. Of course, we recommend that all financial institutions follow this practice, whether located in Michigan or not.

— Question: “The husband on a joint account wrote the check. Now the wife on the joint account wants to stop payment on the check. Should we pay the check or obey the stop-payment order?”

Section 4-403 of the UCC seems to say you should obey the stop-payment order. The first sentence of the section reads: “A customer may, by order to his bank, stop payment of any item payable for his account….” (Emphasis added.) The customer does not seem to be restricted to stopping payment only on checks written by himself or herself. However, to make it clear that the institution has the authority to obey the stop-payment order and not pay the check, we have included the following language in our deposit account agreements: “We will honor a stop-payment request by the person who signed the particular item and by any other person, even though such other person did not sign the item, if such other person has an equal or greater right to withdraw from this account than the person who signed the item in question.” So, if you are using a Wolters Kluwer account agreement, you can feel safe in stopping payment on the check, so long as the person wanting to stop payment has withdrawal rights equal to or greater than the person who wrote the check. That will usually be the case.

The revised version of Section 4-403 clarifies this issue in the states that have adopted it. The revised section reads: “A customer or any person authorized to draw on the account if there is more than one person may stop payment of any item drawn on the customer’s account….” (Emphasis added.)

— What about stopping payment on an electronic funds transfer? What rules apply?

Regulation E governs electronic funds transfers and it does have rules on stopping payment of preauthorized transfers. See our chapter in this manual titled “The Electronic Fund Transfer Act and Regulation E: Responsibilities After Account Opening” for details on those rules. Also be aware that the National Automated Clearing House Association (NACHA) has rules that govern the stopping of payment of an ACH transfer. See the NACHA Operating Rules for details.

“We issued a certified check to one of our customers. Now he wants to stop payment on it. What should we do?”

Your customer does not have a right to stop payment on a certified check, or a cashier’s or teller’s check. Official Comment 5 to Section 4-403 of the UCC says:
There is no right to stop payment after certification of a check or other acceptance of a draft, and this is true no matter who procures the certification…. The acceptance is the drawee’s own engagement to pay, and he is not required to impair his credit by refusing payment for the convenience of the drawer.

(This appears in Official Comment 4 of Section 4-403 in the revised Article 4.)

This means that when you certify a check, you have made a promise on behalf of your institution that the check will be paid. If it is not, your institution’s own reputation may be damaged. Or, to put it another way, the customer should not be allowed to interfere with your institution’s fulfillment of its own obligations to others. This rationale also prevents a customer from demanding that payment be stopped on a cashier’s or teller’s check issued by you.

New York law and the revised version of Articles 3 and 4 of the UCC provide an exception to this rule.

The New York exception says that either the “remitter” (the drawer of a certified check or the buyer of a cashier’s or teller’s check) or the payee on the check can stop payment on cashier’s or certified check (or demand that you order payment stopped on a teller’s check) at any time after 90 days from the date of issuance of the cashier’s or teller’s check or acceptance of the certified check. The person ordering that payment be stopped must do so at a time and in a manner affording the bank a reasonable opportunity to act before taking any of the actions described in Section 4-303(1) of the UCC, which we generally referred to as “paying” the item. The person ordering that payment be stopped must supply: (1) a written stop-payment order, which must describe the item with reasonable certainty; and (2) an affidavit containing a statement that the check was destroyed, or its whereabouts cannot be determined, or it is in the wrongful possession of an unknown person or a person that cannot be found or is not amenable to service of process. See NY UCC §4-403(1) and (2). Once the stop-payment order is effective (after the 90-day period has lapsed), the institution must refund the amount of the item to the remitter or payee who demanded that payment be stopped. The bank is not obligated to pay the check after making such a refund.

The revised UCC rule (Section 3-312) is similar to the New York rule, saying that a bank that issued a cashier’s or teller’s check or that certified a check must refund the amount of the check to a “claimant” if certain conditions are met. [A “claimant” is the “remitter” or payee (in the case of a cashier’s or teller’s check) or the drawer or payee (in the case of a certified check).] The claimant must give a written “declaration of loss” and must make the claim at a time and in a manner affording the bank a reasonable time to act on it before the check is paid. The claimant must also provide identification if requested by the bank. A “declaration of loss” is a written statement that the claimant lost possession of the check, that the claimant is the drawer or payee (if a certified check) or the remitter or payee (if a cashier’s or teller’s check), that the loss of possession was not the result of a transfer by the claimant or a lawful seizure, and that the declarer cannot reasonably obtain possession of the check for certain specified reasons.

If these conditions are met, then the claim becomes enforceable when the claim is made, but not sooner than 90 days after the date of the check (if a cashier’s or teller’s check) or the date of acceptance (if a certified check). If the claim becomes enforceable before the check is presented, the bank must pay the amount of the check to the claimant and is not obligated to pay the check itself.

As you can see, the New York rule and the revised UCC rule are functionally very similar.

The New York rule and the revised UCC rule spell out a specific procedure to follow in order to stop payment on one of these checks without your institution incurring any liability. Should you be thinking about gratuitously stopping payment as a customer service without following these procedures, be aware that you could be subjecting your institution to liability toward the person to whom the item should be paid. Section 3-411, subsections (b) and (c), of the UCC says:
(b) If the obligated bank wrongfully (i) refuses to pay a cashier’s check or certified check, (ii) stops payment of a teller’s check, or (iii) refuses to pay a dishonored teller’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 recover consequential damages if the obligated bank refuses to pay after receiving notice of particular circumstances giving rise to the damages.

(c) Expenses or consequential damages under subsection (b) are not recoverable if the refusal of the obligated bank to pay occurs because (i) the bank suspends payments, (ii) the obligated 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, (iii) the obligated bank has a reasonable doubt whether the person demanding payment is the person entitled to enforce the instrument, or (iv) payment is prohibited by law.

“What sort of fee can we charge our customers when they ask us to stop payment on a check?”

We are not familiar with any statutes or regulations that specify a maximum fee for stop-payment orders. (Connecticut requires that a charge for a stop-payment order cover the initial stop-payment order that is effective for six months and the first six-month renewal. See 2000 Conn. Acts 00-15.) However, you should take the following into consideration when deciding what, if any, fee to charge.

First, as we point out in our chapter dealing with deposit account agreements, there is a trend in the courts to not allow financial institutions to charge fees for services unless the customer has agreed to those fees. Therefore, you should probably not be charging a fee for stop-payment orders unless you disclosed the fee in a deposit account agreement signed by the customer or in a Truth-in-Savings disclosure, if applicable.

Second, there have also been some recent cases that seem to say that fees that are too high (1) could constitute a breach of the financial institution’s obligation to act in “good faith” in the performance of its contracts where the amount of the fee is not specifically agreed to by the customer; and (2) are unconscionable and, therefore, unenforceable. See Best v. US National Bank, 739 P.2d 554 (Or. 1987) and Perdue v. Crocker National Bank, 702 P.2d 503 (Cal. 1985).

Third, Section 7.8000 of the regulations of the Office of the Comptroller of the Currency (OCC) [12 CFR 7.8000] is an interpretive ruling that states the following with respect to national bank service charges:

a) All charges to customers should be arrived at by each bank on a competitive basis and not on the basis of any agreement, arrangement, undertaking, understanding, or discussion with other banks or their officers.

b) Establishment of deposit account service charges, and the amounts thereof, is a business decision to be made by each bank according to sound banking judgment and federal standards of safety and soundness. In establishing deposit account service charges, the bank may consider, but is not limited to considering:

i. Costs incurred by the bank, plus a profit margin, in providing the service;

ii. The deterrence of misuse by customers of banking services;

iii. The enhancement of the competitive position of the bank in accord with the bank’s marketing strategy; and

iv. Maintenance of the safety and soundness of the institution.

c) A national bank may establish any deposit account service charge pursuant to paragraphs (a) and (b) of this section notwithstanding any state laws that prohibit the charge assessed or limit or restrict the amount of that charge. Such state laws are preempted by the comprehensive federal statutory scheme governing the deposit-taking function of national banks.

d) This interpretive ruling does not apply to: (1) charges imposed by a national bank in its capacity as a fiduciary that are governed by 12 CFR Part 9; and (2) service charges on dormant accounts that are governed by 12 CFR 7.7515.

This regulation seems to allow national banks to impose charges for service fees regardless of state law limitations, including state law concepts of unconscionability and good faith. However, you should note that the correctness of the OCC’s conclusion that federal law preempts state law limitations on service charges by national banks was strongly questioned by the court in the Perdue case, cited previously.

Fourth, according to a couple of Michigan Attorney General opinions, stop-payment fees in Michigan are allowed only if specifically agreed to by the customer. The Attorney General relied on the Official Comment we referred to earlier stating that the ability to stop payment on a check is a service that customers expect and are entitled to receive. Based on that provision, the first of the two Attorney General opinions concluded that financial institutions were prohibited from charging a fee for stop payments since the fee would be a limitation on the customer’s exercise of a “right.” In the second opinion, however, the Attorney General acknowledged that parties to a contract are permitted to vary the terms of the UCC and that, therefore, “…a bank may charge a fee for a stop-payment request pursuant to an agreement with its customers if the terms of the contract clearly and specifically provide that the customer consents to pay the fee.” So, if you are located in Michigan, be very sure your deposit account agreement clearly allows for a stop-payment fee if you intend to charge one. Of course, we recommend that all financial institutions follow this practice, whether located in Michigan or not.