IBA Compliance Connection

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What are the consequences for our bank if one of our employees signs a cashier’s check for an amount higher than they are authorized to sign (for example, where an employee has authority to sign up to $10,000 but signs a cashier’s check for $50,000)? What if the employee steals and writes a cashier’s check? In either of these cases, can the check be returned? We tell our customers that they must wait ninety days and sign an affidavit of loss before we can put a stop payment on a cashier’s check.

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We do not believe your bank would be able to return or stop payment on an unauthorized cashier’s check if presented by a holder in due course, unless it sent notice of dishonor before your midnight deadline, on the next banking day after the check was received.

As a general rule, a bank may not dishonor a cashier’s check after the midnight deadline has passed and the check has entered the stream of commerce. Under the Uniform Commercial Code (UCC), the issuer of a cashier’s check is obliged to pay the check to a legitimate holder of the instrument when presented for payment. The Illinois Supreme Court has held that a cashier’s check is the equivalent of cash and recognized that “[p]eople accept a cashier’s check as a substitute for cash because the bank stands behind it, rather than an individual.”

Under the UCC, a payor bank is required to pay a demand item unless it returns the item or sends notice of dishonor before midnight on the next banking day after the banking day on which the check was received. Past this deadline, your bank’s only defenses to not paying a cashier’s check upon demand would be a breach of a presentment warranty or proof that the person seeking payment of the check was defrauding the bank. If the unauthorized cashier’s check is presented by a holder who has no knowledge that your bank’s employee was not authorized to sign a cashier’s check because the value was too high or because the employee stole the check, your bank would be required to pay the check upon presentment (unless your bank had returned the check before its midnight deadline).

Failing to do so would subject your bank to liability under the UCC, as the person entitled to receive payment on the check may recover against your bank for their expenses and loss of interest resulting from non-payment. Your bank also could be liable for the holder’s consequential damages if they inform your bank of the additional losses they may suffer if the check is not paid and your bank still refuses to pay it.

Your bank would be able to assert a defense to paying such consequential damages if it had a reasonable belief that the person demanding payment was not a holder in due course or is not the person entitled to enforce the instrument. However, it may be very difficult to discern whether the person presenting the check has the authority to do so or has any knowledge of the employee’s fraud or lack of authorization.

We note that upon the discovery of an employee’s theft, your bank should report the incident to the police and your primary regulators. The FDIC’s SAR rules require banks to report “violations requiring immediate attention, such as when a reportable violation is ongoing” to its FDIC regional office. Even in cases that do not involve ongoing violations, we believe it is a best practice to inform your prudential regulator about any material incident of theft or embezzlement by a bank employee, officer or agent, particularly with respect to “any of the moneys, funds or credits” of the bank or “any moneys, funds, assets or securities entrusted to the custody or care” of the bank.

For resources related to our guidance, please see:

  • Illinois Uniform Commercial Code, 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 Uniform Commercial Code, 810 ILCS 5/3-412 (“The issuer of a note or cashier's check or other draft drawn on the drawer is obliged to pay the instrument (i) according to its terms at the time it was issued or, if not issued, at the time it first came into possession of a holder, or (ii) if the issuer signed an incomplete instrument, according to its terms when completed, to the extent stated in Sections 3-115 and 3-407. The obligation is owed to a person entitled to enforce the instrument or to an indorser who paid the instrument under Section 3-415.”)
  • Midamerica Bank, FSB. v. Charter One Bank, FSB, 905 N.E.2d 839, 844 (2009) (“‘People accept a cashier’s check as a substitute for cash because the bank stands behind it, rather than an individual.’ . . . Thus, prior court precedent supports our interpretation of the UCC’s treatment of cashier’s checks as the equivalent of cash.”)
  • Illinois Uniform Commercial Code, 810 ILCS 5/4-302(a) (“If an item is presented to and received by a payor bank, the bank is accountable for the amount of: (1) a demand item, other than a documentary draft, whether properly payable or not, if the bank, . . . retains the item beyond midnight of the banking day of receipt without settling for it or. . . does not pay or return the time or send notice of dishonor until after its midnight deadline.”)
  • Illinois Uniform Commercial Code, 810 ILCS 5/4-104(10) (“‘Midnight deadline’ with respect to a bank is midnight on its next banking day following the banking day on which it receives the relevant item or notice or from which the time for taking action commences to run, whichever is later.”)
  • Illinois Uniform Commercial Code, 810 ILCS 5/4-302(b) (“The liability of a payor bank to pay an item pursuant to subsection (a) is subject to defenses based on breach of a presentment warranty (Section 4-208) or proof that the person seeking enforcement of the liability presented or transferred the item for the purpose of defrauding the payor bank.”)
  • Illinois Uniform Commercial Code, 810 ILCS 5/3-302(a) (“Subject to subsection (c) and Section 3-106(d), ‘holder in due course’ means the holder of an instrument if: (1) the instrument when issued or negotiated to the holder does not bear such apparent evidence of forgery or altercation or is not otherwise so irregular or incomplete as to call into question its authenticity, and (2) the holder took the instrument (i) for value, (ii) in good faith, (iii) without notice that the instrument is overdue or has been dishonored or that there is an uncured default with respect to payment of another instrument issued as part of the same series, (iv) without notice that the instrument contains an unauthorized signature or has been altered, (v) without notice of any claim to the instrument described in Section 3-306, and (vi) without notice that any party has a defense or claim in recoupment stated in Section 3-305(a).”)
  • Illinois Uniform Commercial Code, 810 ILCS 5/3-411(b) (“If the obligated bank wrongfully refuses to pay a cashier's check or certified 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.”
  • Illinois Uniform Commercial Code, 810 ILCS 5/3-411(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.”)
  • FDIC Suspicious Activity Report Rules, 12 CFR 353.3 (“A bank shall file a suspicious activity report with the appropriate federal law enforcement agencies and the Department of the Treasury, in accordance with the form’s instructions, by sending a completed suspicious activity report to FinCEN in the following circumstances . . . .”)
  • FDIC Regulations, 12 CFR 353.3(b)(2) (“In situations involving violations requiring immediate attention, such as when a reportable violation is ongoing, the bank shall immediately notify, by telephone, an appropriate law enforcement authority and the appropriate FDIC regional office (Division of Supervision and Consumer Protection (DSC)) in addition to filing a timely report.”)