Can we limit the amount of cash we will provide to a non-customer when they present an on-us check in person? We would pay the remainder with a cashier’s check. Our deposit account terms describe the check cashing fees and identification requirements for non-customers, but they do not indicate that we may refuse to cash a customer’s check for a non-customer.

We recommend consulting with your bank counsel to amend your account agreements before setting a limit on cashing checks for noncustomers. By setting a limit on cashing checks, your bank would be refusing to cash (or fully cash) some checks issued by your customers to noncustomers. While it is unlikely that a noncustomer would have standing sue your bank for your refusal to cash a customer’s check, your bank may not be protected from liability to your customers when refusing to cash their checks.

Potential Liability to Noncustomers

When refusing to cash an otherwise bona fide check drawn on your bank, your bank is dishonoring a properly payable check, an act which generally can subject the bank to liability for on-us checks. Nonetheless, Illinois courts have held that a noncustomer lacks standing to sue the bank for wrongful dishonor of a properly payable check under the Uniform Commercial Code (UCC), which provides a cause of action only for accountholders. Consequently, we do not believe that a noncustomer could sue your bank for refusing to fully cash a check drawn on your bank.

Potential Liability to Check-Issuing Customers

It is possible that your customer, as drawer of a check, could seek to hold your bank liable for wrongful dishonor of the check (for example, if your customer suffered a loss caused by your bank’s refusal to cash the properly payable check for the payee), particularly if your account agreement is silent as to this situation. 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.

Your account agreements do not expressly reserve your bank’s right to refuse to cash checks for noncustomers; in fact, your account agreement implies that your bank will cash such checks by describing the fees charged and identification requirements for noncustomers who cash your customers’ checks at your bank. Consequently, we recommend amending your account agreements before imposing limits on cashing on-us checks for noncustomers.

Cashing Cashier’s Checks

We also note that if you cash a portion of a check for a noncustomer and pay the remainder with a cashier’s check, your bank may be required to immediately cash the cashier’s check if requested by the noncustomer. Under the UCC, if an “obligated bank” refuses to pay a cashier’s 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. Additionally, while the UCC provides defenses to paying a cashier’s check, such as a reasonable doubt that the person demanding payment is entitled to enforce the payment, such a defense would be difficult to assert where your bank issued the cashier’s check to the payee.

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.”)