Problems with the Uniform Commercial Code Rules

The problem with Section 4-403—in its original and revised versions—is that it is not specific as to what constitutes a valid stop-payment order. The original UCC language says the order must be given early enough and in such a way that the financial institution has a “reasonable opportunity” to act on it. The revised language says the stop-payment order must describe the item with “reasonable certainty.” Unfortunately, neither version says that the stop-payment order must be exactly correct in its description of the item, particularly with regard to the amount and number of the item, and the account number of the account on which the item is drawn. An exact description of these features is necessary for most financial institutions due to mechanical check processing. Most institutions cannot stop payment on a check unless their machines can identify the check and route it out of the system. The machines look for a certain piece of MICR information at the bottom of the check to identify the check to be stopped, usually the amount of the check and sometimes the number of the check. If the stop-payment order is not precise about this information, then the machine will not be able to find the check to be stopped and the check will probably slip through and be paid. This is generally true even if the stop-payment order is off by as little as one digit.

The original UCC was drafted at a time when humans processed checks and slight errors in the stop-payment order would not necessarily prevent a financial institution from spotting a check to be stopped. In those days, a “reasonableness” standard may have been appropriate since a human being can view an entire check, not just the MICR information, and can identify a check even if the amount or check number is not exactly correct on the stop order. However, it is now a fact that most institutions need exact information about certain features of the check to be stopped, especially the amount of the check. Further, it does not seem unreasonable to require a customer to supply exact information about the check since the customer either wrote the check or has access to the person who did and, therefore, should know the exact information unless he or she has been careless. In view of all this, it would be a great benefit to financial institutions if the UCC required the customer to be exact about certain information in order for the stop order to be valid.

Left with the “reasonableness” standard, the courts have not been particularly kind to financial institutions that have failed to stop payment on an item misidentified by the customer. A good example is Staff Service Associates, Inc. v. Midlantic National Bank, 504 A.2d 148 (N.J. Super. L. 1985). In that case, the customer filled out a stop-payment order form and listed the check amount as $4,117.72. The actual amount of the check was $4,117.12. The customer admitted that he had read the notice at the bottom of the stop-payment order that read: “IMPORTANT: The information on this Stop-Payment Order must be correct, including the exact amount of the check to the penny, or the Bank will not be able to stop payment and the Stop-Payment Order will be void.” Of course, the bank paid the check. When the customer sued, the bank moved for summary judgment on the grounds that since the customer supplied the incorrect amount, the bank did not have a reasonable opportunity to act on the stop-payment order. The court felt otherwise. Its holding: “…the court holds that a bank has a reasonable opportunity to stop payment on a check when a customer accurately describes the check in all respects except for a single-digit error in the check amount. The result would be different only if the bank specifically informed the customer that its computer requires the exact check amount for stop payment.” [Staff Service Associates, at 152] In short, it was not enough to tell the customer that exact information was needed; the bank also should have told the customer why the exact information was needed.

We have found that most of the cases involving misstated check amounts go against the financial institutions. In spite of the absolute necessity that financial institutions have exact information, courts have simply not wanted to impose that burden on customers. The feeling has been that the costs of these sorts of mistakes ought to be borne by the financial institutions as part of the cost of doing business, and the Official Comment language we quoted earlier to that effect has often been cited by courts ruling this way. [Official Comment 2, Section 4-403 (1978 version), Official Comment 1, Section 4-403 (1990 version)]

In other states, however, courts have been somewhat kinder to financial institutions. For example, in the Florida case of Capital Bank v. Schuler, 421 So.2d 633 (Fla. App. 1982), the court ruled that a stop-payment order that incorrectly stated the amount of the check did not describe the check “with certainty” as required by the Florida statute. (At the time of this case, Florida had a nonconforming version of Section 4-403. Florida has since adopted the revised version of Articles 3 and 4.) Therefore, the stop-payment order was not binding on the bank, even though the bank apparently did not inform the customer of the need for the amount to be exactly correct. (The court, in this case, went on to say that the stop-payment order had not given the bank a reasonable opportunity to act, meaning that the bank would have won even if the Florida statute had not required a description “with certainty.” This part of the case might be used by financial institutions in states with the standard UCC language of Section 4-403 to argue that incorrect amounts do not meet the reasonableness standard of Section 4-403.)

In Rimberg v. Union Trust Co. of the District of Columbia, 12 UCC Rep.527 (DC 1973), the customer was unsure of the amount of the check to be stopped and informed the bank tellers with whom she dealt of her uncertainty. The customer claimed that the bank tellers left her with the impression that the check would be stopped regardless of whether the amount shown in the stop-payment order was correct or not. Of course, she misstated the amount. The court ruled that the actions of the tellers amounted to a waiver by the bank of the provision in the District of Columbia Code (at that time) requiring that stop-payment orders “specifically” describe the item to be stopped. Therefore, the stop-payment order was valid, and the bank was liable for the amount of the check that it should have stopped.

As you can see, the language of Section 4-403 of both the original and revised UCC does not go as far as most financial institutions would like in establishing the requirements of a valid stop-payment order. In view of this, financial institutions should explore what steps they can take to reduce their potential liability when accepting a stop-payment order. That brings us to our next topic.