Can we establish a limit over which we will not cash checks for non-customers? Also, can we refuse to cash our bank’s certified checks, cashier’s checks and money orders for non-customers?

Checks Drawn on Your Customer’s Account

Yes, we believe you may set a limit over which your bank will not cash checks for noncustomers. However, we recommend reviewing your account agreements to assess the possibility of liability under the Uniform Commercial Code (UCC) when refusing to honor your customer’s checks.

Your bank’s refusal to cash a valid check drawn on a customer’s account generally would constitute the wrongful dishonor of a properly payable check. This wrongful dishonor may subject your bank to liability if not addressed in your account agreement. The potential for liability is somewhat limited, as Illinois courts have held that a noncustomer lacks standing to sue a bank for wrongful dishonor, but the UCC does provide your accountholders with standing to sue for wrongful dishonor.

For this reason, many transaction account agreements expressly reserve the right of the bank to refuse to cash checks drawn on the bank and presented in person by noncustomers. If your account agreements do not include such protections, your bank should consider the potential for liability under the UCC before proceeding. Additionally, you should review your account agreements to ensure that you have not directly or indirectly agreed to cash checks drawn by your customers and presented by noncustomers.

Certified Checks, Cashier’s Checks and Money Orders

As to certified checks and cashier’s checks, we do not recommend refusing to cash such checks unless you have a valid defense to making the payment.

Under the UCC, if an “obligated bank” refuses to pay a cashier’s check or certified check, the person entitled to enforce the check may be entitled to expenses and consequential damages, regardless of whether they are a customer of the bank. A bank is “obligated” for these purposes if it was the issuer of the cashier’s check or the “acceptor” of the certified check — meaning it agreed to pay the certified check as presented and a representative of the bank signed the certified check.

The UCC provides defenses to paying such cashier’s checks or certified checks, such as a reasonable doubt that the person demanding payment is entitled to enforce the payment, but these defenses would arise only in specific situations — not across the board to all cashier’s checks or certified checks over a certain dollar amount.

As to money orders, our answer depends on whether the money order was signed by an authorized signer of your bank. Illinois courts have held that a personal money order “functions as a personal check” and “does not become the obligation of a bank unless or until it is signed by a bank official or it is accepted by a bank from a named payee.” Consequently, we believe your bank may refuse to cash a personal money order — that was not signed by your bank — when presented by a noncustomer. However, if a valid money order has been signed by a representative of your bank, we believe that your bank is obligated to honor it.

For resources related to our guidance, please see:

Illinois UCC, 810 ILCS 5/4-402(b) (“A payor bank is liable to its customer for damages proximately caused by the wrongful dishonor of an item.”)

Johnson v. First Banks, Inc., 889 N.E.2d 233, 235 (5th Dist. 2008) (“Pursuant to the plain language of the [Uniform Commercial] Code, the plaintiff, who does not have an account with the defendant, is not a ‘customer’ and therefore lacks standing to pursue a cause of action against the defendant for a wrongful dishonor.”)

Kronemeyer v. U.S. Bank Nat. Ass’n, 857 N.E.2d 686, 689 (5th Dist. 2006) (“Section 4-402(b) confers no cause of action on the holder of an allegedly dishonored item. Accordingly, the plaintiffs have no standing to pursue a cause of action against U.S. Bank for a wrongful dishonor. the plaintiffs have no standing to pursue a cause of action against U.S. Bank for a wrongful dishonor.”)

Illinois UCC, 810 ILCS 5/3-411 (“Refusal to pay cashier’s checks, teller’s checks, and certified checks

(a) In this Section, “obligated bank” means the acceptor of a certified check or the issuer of a cashier’s check or teller’s check bought from the issuer.

(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.”)

Illinois UCC, 810 ILCS 5/3-409(d) (“‘Certified check’ means a check accepted by the bank on which it is drawn. Acceptance may be made as stated in subsection (a) or by a writing on the check which indicates that the check is certified. The drawee of a check has no obligation to certify the check, and refusal to certify is not dishonor of the check.”)

Illinois UCC, 810 ILCS 5/3-409(a) (“‘Acceptance’ means the drawee’s signed agreement to pay a draft as presented. It must be written on the draft and may consist of the drawee's signature alone. Acceptance may be made at any time and becomes effective when notification pursuant to instructions is given or the accepted draft is delivered for the purpose of giving rights on the acceptance to any person.”)

Illinois UCC, 810 ILCS 5/3-104(g) (“‘Cashier's check’ means a draft with respect to which the drawer and drawee are the same bank or branches of the same bank.”)

Illinois UCC, 810 ILCS 5/3-104(f) (“‘Check’ means (i) a draft, other than a documentary draft, payable on demand and drawn on a bank or (ii) a cashier's check or teller's check. An instrument may be a check even though it is described on its face by another term, such as ‘money order’.”)

Duggan v. State Bank of Antioch, 540 N.E.2d 1111, 1113 (2nd Dist. 1989) (“Ordinarily, when an individual purchases a money order, the bank fills in only the amount of the purchase. . . . In contrast, when a bank issues a cashier’s check, the bank fills in the date, the name of the payee, and the amount of the check. Additionally, an authorized signer of the bank signs as drawer of the check. By its act of issuance, a bank accepts a cashier's check in advance, and any subsequent stop-payment order is ineffective. In the case of a money order, we agree with the trial court . . . that a personal money order functions as a personal check and not as a banker’s or cashier’s or traveler’s check. Since the only signature on a personal money order is that of the purchaser, since the instrument takes the form of an order to pay, and since it is drawn on a bank and payable on demand, it is within the classification of a check. As such, a money order does not become the obligation of a bank unless or until it is signed by a bank official or it is accepted by a bank from a named payee.”) (internal citations omitted)

Chicago Cicero Currency Exchange, Inc. v. Continental Illinois National Bank & Trust Co., 545 N.E.2d 250, 250 (1st Dist. 1989) (“. . . a personal money order is not signed by an authorized representative of the issuing bank, it is more in the nature of an ordinary check than a bank obligation . . .”)

Chicago Cicero Currency Exchange, Inc. v. Continental Illinois National Bank & Trust Co., 545 N.E.2d 250, 252 (1st Dist. 1989) (“The instrument in the instant case was a personal money order which did not contain the signature of a representative of the issuing bank. Section 3-401(1) of the Uniform Commercial Code provides that no one is liable on an instrument unless his signature appears upon it.”)

Center Video Industrial Co. v. Roadway Package System, 90 F.3d 185, 189 (7th Cir. 1996) (“Money orders differ from cashier's checks and certified checks in that the latter contain the signature of a bank official, while money orders do not. Because the UCC provides that no one is liable for an instrument unless his signature appears on it, some states have held that money orders are not primary obligations of the bank. See, e.g., Chicago Cicero Currency Exchange Inc. v. Continental Illinois Nat'l Bank & Trust Co. of Chicago . . .”)