Stop Payment
Stop payments are a very common request members make of their credit unions. Members write share drafts to pay for goods and services, and then often, the member decides (s)he doesn't want the goods or is unhappy with the services for which (s)he just paid. The member then calls the credit union to request a stop payment be placed on the check, so the member can avoid paying for the goods or services, until (s)he is satisfied.
General stop payment requirements
Stop payments are governed by a state law called the Uniform Commercial Code (UCC). Section 4-403 of the UCC outlines the legal requirements regarding stop payments.
When a member writes a share draft drawn on his/her account, (s)he has the right to ask the credit union to place a stop payment on the share draft. UCC §4-403(1) addresses the right of the member to stop payment on a share draft, by giving notice to the credit union in enough time for the credit union to stop payment on the share draft and in enough detail to identify the share draft.
UCC §4-403(3) states an oral stop payment (i.e., requested in person or over the phone) is binding on the credit union for fourteen (14) calendar days, unless the request is confirmed in writing within that period. A written stop payment order is effective for six (6) months. At the end of the six months, the stop payment order would expire, unless the member chooses to extend it for another six (6) months, by providing another written statement to the credit union.
Stale dated checks
While the issue of stale dated checks (UCC §4-404) is legally unrelated to stop payments, please note the time frame after which a check becomes "stale" is six (6) months. This is the same time frame in which a written stop payment order expires. Once a check is considered stale dated, the credit union is under no obligation to cash the check or accept it for deposit. Upon receipt of a stale dated check, your credit union may want to contact your member to ask what (s)he would like you to do with the check.
Additionally, if a written stop payment order has previously been issued for that check, at six (6) months, the stop payment order is set to expire. Your member may wish to continue the stop payment order. By notifying your member that you have just received a check which is six (6) months old, you give your member the opportunity to provide you with another stop payment order.
NOTE: The law does not prohibit you from accepting a stale dated check, so there is no liability on the credit union for taking a stale dated check, unless you state in your share draft policy, or otherwise communicate to your members, that you will not accept a check dated more than six (6) months, prior to contacting the member.
Special requirements for certified checks, cashier's checks and teller's checks
Due to the legal and commercial status of certified checks, cashier's checks and teller's checks, the law does not treat these instruments as ordinary checks for purposes of stop payments. Unfortunately, New York courts have not been consistent on the proper approach to stop payments of certified checks, cashier's checks and teller's checks.
Definitions
Certified check
A certified check is a check on which the credit union has written or stamped the words "accepted" or "certified", along with the date and signature of a credit union official. The credit union then becomes primarily liable on the check. Through certification, the credit union sets forth a warranty that sufficient funds are on deposit and those funds are set aside to pay to check upon presentment. This means the credit union is liable for the amount of the check.
Under UCC §3-411, credit unions are not obligated to certify checks, unless by agreement they promise to take responsibility.
Cashier's check
A cashier's check is a check drawn by the credit union and payable on itself (i.e., from its own corporate account). Many times, members will ask to "purchase" an 'official' or 'bank' check from the credit union. The credit union will first look to make sure the member has the funds on deposit to cover the amount of the check, and then the credit union will transfer the funds from the member's account to the credit union's account, to be used to pay the check upon presentment. The credit union would then issue a cashier's check according to the member's instructions. By issuing a cashier's check, the credit union is "guaranteeing" the funds will be available to cover the check upon presentment.
Teller's check
Since New York has not adopted the 1990 version of the UCC (New York still operates under the 1962 UCC), which is where the definition of teller's check appears in state law, we will use the definition of teller's check found in the Federal Reserve Board's Regulation CC. Under Reg. CC, a teller's check is a check drawn by the credit union, and payable by or through another institution, such as Empire Corporate Federal Credit Union. In this case, the credit union is still promising to pay the instrument upon presentment, but the funds are actually drawn on the credit union's account at Empire, rather than on the credit union's own corporate account.
As you can see from the definitions, due to the "guaranteed" nature of these instruments, it is assumed they will be paid upon presentment. Thus, they are considered "cash equivalents" in commerce.
Stop payments
Section 4-403(2) of the UCC provides guidance on the proper treatment of certified checks, cashier's checks and teller's checks, with regard to stop payments, when specific circumstances exist. If the circumstances of UCC §4-403(2) are not present, the stop payment decision becomes more difficult.
Under §4-403(2), a remitter (your member) who "purchases" a check from your credit union, or payee (entity to whom the check is payable) may order your credit union to stop payment on the check. This stop payment may only be placed after 90 days have passed since the date the instrument was issued and only if (i) the check was destroyed; (ii) its whereabouts cannot be determined; or (iii) it is in the wrongful possession of an unknown person or a person who is not amenable to service of the process (i.e., it is known who has the check, but that person cannot be served with court papers, and therefore, a lawsuit cannot be initiated under applicable law). In addition, the credit union must receive (i) an affidavit from the remitter or payee to this effect; and (ii) a written stop payment order, which must describe the relevant item, within a reasonable time and in a reasonable manner for the credit union to act on the stop payment order.
A sample affidavit and a sample written stop payment order are attached at Exhibit A[to STOPAFVT.pdf] and Exhibit B [to STOPPYMT.pdf], respectively. While these affidavits make reference only to cashier's checks, they may be altered to refer to certified checks or teller's checks, as needed.
Hold harmless clause/indemnification agreement
One provision incorporated into the written stop payment request is a "hold harmless clause." By signing the stop payment request, the remitter or payee agrees to take on all responsibility with regard to the stopped certified check, cashier's check or teller's check. Additionally, another provision incorporated into the written stop payment request allows the credit union to require the remitter or payee to furnish a bond or other security which would protect the credit union against any legal action which may be initiated against the credit union. A party who feels they were wrongly harmed by the credit union's action to place the stop payment may try to sue the credit union in an effort to recoup any loss. Provided the credit union allowed the stop payment to occur only under the permissible reasons, the credit union should not have any problem defending against such a lawsuit.
Remitter/payee liability after stop payment
Upon compliance with the above requirements, the remitter or payee requesting the stop payment is entitled to a refund of the amount of the certified check, cashier's check, or teller's check from your credit union. At this point, your credit union has no further liability on the instrument. Moreover, even though stop payment is permitted, the remitter or payee requesting the stop payment is, nevertheless, obligated to pay, subject to defenses, the amount of the certified check, cashier's check, or teller's check to any subsequent holder or endorser. In other words, once the remitter or payee provides the credit union with a written stop payment order and affidavit, the credit union is no longer liable on the check. Instead, if the certified check, cashier's check, or teller's check "turns up" and is somehow cashed, or if the party to whom the check was made payable attempts to collect the debt, it is the remitter or payee who is responsible for the underlying debt, not the credit union.
Circumstances under which stop payments not addressed in the law
There are many situations which are not specifically addressed in §4-403 of the UCC. For example, stop payments on certified checks, cashier's checks and teller's checks under the following circumstances are not specifically addressed in §4-403: (i) stop payments ordered prior to the 90th day after issuance of the check; (ii) stop payments ordered after the 90th day of issuance of the check, but for reasons other than the destruction of, loss of or wrongful retention by an unknown person or person not amenable to process of the cashier's check; or (iii) stop payment was ordered by someone other then the remitter or the payee. At this time, New York courts have not addressed the proper treatment of stop payments under circumstances, such as those noted above, which are not specifically addressed in that section. Since the UCC is specific with regard to the circumstances under which a stop payment is permissible, we can assume there would be consequences should a stop payment be allowed on a check for circumstances other than those specifically listed.
Legal opinion recommended
In light of the ambiguity surrounding the proper course of action under various facts which may be associated with the stop payment of certified checks, cashier's checks and teller's checks, your credit union should discuss the liability concerns associated with the stop payment of these instruments with your attorney. Before granting the stop payment, your credit union may want to consider, among other things, the likelihood a stop payment would be challenged, the likelihood of recovery if a stop payment is challenged and the need to obtain an indemnification agreement and/or bond/security from the member requesting the stop payment. You may also want your attorney to review the attached sample affidavit and sample written stop payment order prior to their use.
Conclusion
In addition to the legal reasons for limiting stop payments on certified checks, cashier's checks and teller's checks, there may be a very important commercial reason for this limitation. If the credit union expects to have these instruments accepted in commerce as readily as similar instruments of other financial institutions, it should consider the effect its stop payment policy will have on this expectation. Merchants or other third parties which may require "bank checks" for transactions, upon the assumption such instruments will be treated as cash equivalents, will surely reject these instruments from credit unions, on which stop payments are routinely allowed.
Suggestion: your credit union may want to review the instances in which it offers these instruments. For example, a credit union issuing these instruments to disburse "Holiday Club" money, may instead want to consider depositing the funds into the member's share account. This would make the funds immediately available to the member, and it would relieve the situation which arises when the credit union sends the holiday club check to the member, and (s)he subsequently notifies the credit union that (s)he never received it and asks you to place a stop payment on the check. Since you cannot stop payment on the check for 90 days, the holiday season will be long past before the member receives those funds. This solution saves the credit union from attempting to explain this section of the UCC to members, which in turn provides an opportunity to improve member relations.