July 30, 2009
Daniel King

 

A fairly recent Indiana Court of Appeals decision addresses an issue of first impression, namely, under what circumstances, if any, an issuing bank may properly refuse to pay a cashier’s check. A cashier’s check is “[a] check drawn by a bank on itself, payable to another person, and evidencing the payee’s authorization to receive from the bank the amount of money represented by the check; a draft for which the drawer and drawee are the same bank, or different branches of the same bank.” South Central Bank of Davies County v. Lynnville National Bank, 901 N.E.2d 576 (Ind.App. 2009); Black’s Law Dictionary, 230 (7th Edition 1999). Cashier’s checks are generally treated the same as certified checks and teller’s checks.

In South Central Bank, the Lynnville National Bank entered into a loan agreement for the purchase of a manufactured home. Lynnville issued the proceeds of the loan in the form of a cashier’s check made payable to the manufactured home dealer named Landmark. Landmark deposited the cashier’s check into its business checking account with South Central Bank of Davies County. South Central’s branch manager telephoned Lynnville and confirmed the date, amount, and payee of the cashier’s check. Subsequently, an employee of the manufacturer of the home indicated that Landmark was no longer an authorized dealer for the manufacturer.

The Court applied Indiana Code §26-1-3.1-411, which governs situations in which an obligated bank wrongfully refuses to pay a cashier’s check. The Court noted that the comments to Article 3 of the Uniform Commercial Code could not be “clearer.” Only under certain, very specific, circumstances is a bank entitled to stop payment on a cashier’s check: first, if the bank suspends payments-becomes insolvent; second, if the bank has its own defense-as distinguished from its customer's defense-against the person entitled to enforce the instrument; third, if the bank has a reasonable doubt about the identity of the person demanding payment; and finally, if the payment is prohibited by law. Ind. Code §26-1-3.1-411(c).

After the proceeds of the check had already been paid out to Landmark’s account, South Central stopped payment on the cashier’s check. Lynnville relied on the defense of fraud as its basis for stopping payment on the cashier's check. The court agreed with South Central that Lynnville cannot maintain an action of its own against Landmark for fraud. Lynnville was never a victim of fraud. The court held that it was Lynnville's customers who claim a fraud was perpetrated upon them by their seller, Landmark. The court concluded that no interaction occurred between Lynnville and Landmark such that Lynnville could assert its own defense of fraud.