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Civil: Court of Appeals Explains When Refusal To Pay Cashier's Check Is Wrongful
Posted in Litigation

Friday, the Indiana Court of Appeals addressed an issue of first impression in Indiana law:  under what circumstances, if any, an issuing bank may properly refuse to pay a cashier’s check.

In South Central Bank of Daviess County v. Lynnville National Bank, the Court of Appeals reversed a trial court’s conclusion that an issuing bank rightfully refused to pay a cashier’s check after receiving a request from its customer that the bank stop payment.

South Central Bank provided the Court of Appeals its first opportunity to address the question of when, under Indiana Code section 26-1-3.1-411, an “obligated bank” is liable for wrongfully refusing to pay a cashier’s check.  The court explained that, under the statute (which is patterned after the model UCC) and in light of comments to it, the issuing bank may refuse payment based on its own defenses, but not simply at the direction of its customer.  In fact, as set forth in the comment to the UCC, “Section 3-411 is designed to discourage [the practice of refusing payment as an accommodation to a customer].”

In light of the statute and its official comment, the court concluded:

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.

The court held that none of these defenses applied, and that the issuing bank’s “obligation to pay was clear and it was able to pay, but it refused payment on the check as an accommodation to [its customer], who had no right to make that request.”  Therefore, the bank was liable for wrongfully refusing to pay the check.

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