Uniform Commercial Code Provisions Dealing with Stop-payment Orders
The UCC is a set of commercial laws drafted by a national commission in the hopes that all jurisdictions (the 50 states and the District of Columbia) would adopt it and thereby create uniformity among the jurisdictions in the area of commercial law. The idea was that the business community needed this uniformity in order to efficiently conduct commerce between the jurisdictions. The national commission that drafted the UCC issued a revised version of Articles 3 and 4 of the UCC. (Articles 3 and 4 generally govern commercial paper and bank deposits and contain the rules concerning stop-payment orders.) All the states except New York have adopted this revised version, meaning that we need to look at the original version of the UCC and the revised version. We will look first at the original version of the UCC, then at the revised version. We suggest that everyone read about the original version, since most of the legal issues concerning stop-payment orders are raised in that section. Only if your state has adopted the revised version of Articles 3 and 4 do you need to read that section. (The states that have not adopted the revised version are listed at the beginning of the discussion of the revised version.)
Original version of the UCC
- Customer’s Right to Stop Payment; Burden of Proof of
Loss.
- A customer may, by order to his bank*, stop payment of any item payable for his or her account but the order must be received at such time and in such manner as to afford the bank a reasonable opportunity to act on it prior to any action by the bank with respect to the item described in Section 4-303.
- An oral order is binding upon the bank only for 14 calendar days unless confirmed in writing within that period. A written order is effective for only six months unless renewed in writing.
- The burden of establishing the fact and amount of loss resulting from the payment of an item contrary to a binding stop-payment order is on the customer.
*The UCC defines the term “bank” as “any person engaged in the business of banking.” Therefore, the term includes most financial institutions, not just those that are chartered as banks.
- The position taken by this Section [Section 4-403] is that stopping payment is a service which depositors expect and are entitled to receive from banks notwithstanding its difficulty, inconvenience and expense. The inevitable occasional losses through failure to stop should be borne by the banks as a cost of the business of banking.
This particular portion of the Official Comment has been relied upon by many courts to rule against financial institutions in their stop-payment disputes with customers. The point to remember is that the UCC gives the customer a decided advantage when it labels the customer’s ability to stop payment as a “right,” and this makes the financial institution’s legal position, whatever it might be, somewhat more difficult to establish.
Second, notice that the customer must give the stop-payment order “at such time and in such manner as to afford the bank a reasonable opportunity to act on it” before taking any actions described in Section 4-303. This is the crucial clause of the section. Most of the litigation concerning stop-payment orders has to do with whether the customer gave the stop-payment order soon enough and in a sufficient manner. Section 4-303, referred to in this provision, describes actions that you might think of as “paying” an item. Specifically, they are: (1) accepting or certifying the item; (2) paying for the item in cash; (3) settling for the item without retaining in some way a right to revoke the settlement; (4) completing the process of posting or evidencing in some other way a decision to pay the item; and (5) becoming accountable for the item in some other way provided by the UCC. In short, the customer must give the stop-payment order soon enough, and in such a fashion, as to give the financial institution reasonable opportunity to act on the order before “paying” the item by doing one of the five things listed. If not, the financial institution will not be liable for “paying” the item by taking one of those five actions.
Third, be aware that oral stop-payment orders must be confirmed in writing within 14 days of the oral order, and written stop-payment orders must be renewed within six months of the original written order. If the stop-payment order is not confirmed or renewed within these time frames, you can pay the check in spite of the stop-payment order without fear of liability to the customer for paying contrary to a stop order. However, Section 4-404 of the UCC creates the concept of “stale checks.” This section states that financial institutions need not pay a check that is presented more than six months after its date (a stale check), but that the financial institution may charge its customer’s account for payment of a stale check made in good faith. So, checks presented after a customer’s written stop-payment order expires will normally be stale. The financial institution, if it pays the check, will not be liable for paying over the stop order but may be liable for paying a stale check, unless the payment is made in “good faith.” The UCC defines “good faith” as “honesty in fact in the conduct or transaction concerned.” [UCC Section 1-201(19)] We are not sure whether this means a financial institution is free to pay a stale check under any circumstances or if it can do so only if it is unaware of the age of the check. In any event, most financial institutions have a policy of not paying stale checks without permission from their customer, and that is probably the soundest approach.
Fourth, notice that the financial institution is not automatically liable to the customer when it pays a check contrary to a stop order. Subsection (3) of Section 4-403 says that the burden is on the customer to prove the existence and amount of any loss caused by the payment. If payment of the check did not cause the customer to suffer a loss, then the institution is not liable. For example, suppose John Doe wants to stop payment on his rent check but has no legal justification for not paying his rent. His bank pays the check anyway. In this circumstance, the bank will probably not be liable to John because he has not suffered a loss. The payment of the check resulted in the payment of a debt John was obligated to pay. (John may argue that he suffered a loss, however, if the payment of the rent check meant other checks drawn by John were dishonored. The harm suffered by John might include things like damage to reputation, bounced-check charges, and even criminal liability.)
Revised version of Articles 3 and 4 of the UCC
Since the list of states that have not adopted revised Articles 3 and 4 is shorter than the list of those that have, that is what we will give you. Only New York has not adopted revised Articles 3 and 4.
- a. 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 or close the
account by an order to the bank describing the item or
account with reasonable certainty received at a time and
in a manner that affords the bank a reasonable opportunity
to act on it before any action by the bank with respect to
the item described in Section 4-303. If the signature of
more than one person is required to draw on an account,
any of these persons may stop payment or close the
account.*
b. A stop-payment order is effective for six months, but it lapses after 14 calendar days if the original order was oral and was not confirmed in writing within that period. A stop-payment order may be renewed for additional six-month periods by a writing given to the bank within a period during which the stop-payment order is effective.**
c. The burden of establishing the fact and amount of loss resulting from the payment of an item contrary to a stop-payment order or order to close an account is on the customer. The loss from payment of an item contrary to a stop-payment order may include damages for dishonor of subsequent items under Section 4-402.***
*Florida requires that the order be in writing and be received by an officer of the bank during a banking day. Texas also requires that the order be in writing to be binding on the bank. (Presumably, a bank can choose to accept oral stop-payment orders.)
**Since Florida and Texas require that stop-payment orders be written, the Florida and Texas versions of this subsection delete references to oral orders. In addition, the following states provide for a “record” rather than “writing.”
***Florida adds that the bank may be liable to its customer for the actual loss incurred by the customer resulting from the wrongful payment of an item contrary to a valid and binding stop-payment order or order to close an account.
The revised version of this section differs from the original in a number of ways.
First, the revised version makes clear that anyone with authority to draw on the account may stop payment on a check, whether or not that person is a “customer.” The original version gives the right to stop payment only to “customers.” The revised version also clarifies that if more than one person can draw on the account, any one of them may stop payment on any item drawn on the account.
Second, these persons are authorized to either stop payment on an item drawn on the account or close the account. The original version of this section only dealt with stopping payment.
Third, in order to be effective, the order must describe the item to be stopped with “reasonable certainty.” This addition is intended to take into account an institution’s mechanism for flagging an item to be stopped. As the Official Comment to the revised section puts it: “In describing the item, the customer, in the absence of a contrary agreement, must meet the standard of what information allows the bank under the technology then existing to identify the item with reasonable certainty.” [Official Comment 5, Section 4-403]
Fourth, the rewriting of Subsection (b) adds some clarity to the rules concerning the effective life of oral and written stop-payment orders.
Fifth, and perhaps most significant, Section 4-303, which is referred to in Subsection (a) above, has been revised to provide a cutoff time for the receipt of stop-payment orders. It works like this: Subsection (a) of 4-403 above says the stop-payment order must be received by the bank soon enough to give the bank a reasonable opportunity to act on the order before taking any action described in Section 4-303. The original Section 4-303 described a variety of actions you might normally think of as paying the item (paying for it in cash, settling for it without right to revoke settlement, becoming accountable for the item in some other way, etc.). So the person who wants to stop payment must give the stop-payment order to the bank early enough so that the bank can act on the order before taking a Section 4-303 action. However, the revised Section 4-303 adds a cutoff time. It says that no stop-payment order will be effective if the bank receives it after a cutoff time on the banking day following the banking day on which the bank received the check. This cutoff time can be as early as one hour after opening. If the bank does not establish a cutoff time, then the cutoff time will be the close of that banking day.
For example, suppose on Tuesday morning a bank receives a check drawn on a customer’s account. Section 4-303 says any stop-payment order for that check received after the cutoff time on Wednesday will not be effective, regardless of what actions the bank has or has not taken on the check. So if the bank has a cutoff time of 11 A.M., a stop-payment order received at 11:30 A.M. on Wednesday will not be effective, regardless of whether or not the bank has sufficient time to stop payment.
The existence of a cutoff time does not, however, mean all stop-payment orders received before the cutoff time will be effective. All stop-payment orders must be received early enough to give the bank a reasonable opportunity to act on them prior to taking some other Section 4-303 action. So, in our example above, if the bank paid the check in cash Tuesday morning, a stop-payment order received Tuesday afternoon will not be effective, even though it is received before the Wednesday cutoff. Section 4-303 simply sets an outside limit that applies without regard to the status of the check—no stop-payment orders received after this time will be effective. Stop-payment orders received before the cutoff time must still meet the preexisting test of allowing the bank a reasonable time to act before paying the check.
These are the five ways in which the stop-payment rules are different under the revised Articles 3 and 4 of the UCC. Let’s look now at some of the problems financial institutions have in operating under both the old and new rules.