What Is Wrongful Dishonor?
Let me explain wrongful dishonor directly: it's when a bank fails to honor a valid negotiable instrument, like a check or draft, that's presented for payment. If the instrument is legitimate and there are enough funds in the account, the bank's refusal within the Uniform Commercial Code's stipulated time frame counts as wrongful dishonor. You need to know this because it can lead to serious issues if you're on the receiving end.
Understanding Wrongful Dishonor
The Uniform Commercial Code, or UCC, is a set of laws that standardize business practices across states, making it simpler for companies to operate interstate. It includes nine articles covering everything from general provisions to letters of credit, sales, and investment securities. Article 4 specifically deals with checks, drafts, and other negotiable instruments.
Under Article 4, Section 402, a bank commits wrongful dishonor by refusing payment on a properly payable instrument—one authorized by the customer and aligned with the bank's agreement. A bank might dishonor due to insufficient funds anytime between receiving the instrument and returning it or notifying of dishonor, and only one such decision is needed. But if they reevaluate later, they must consider the account balance at that new time.
Bank Liability and Important Considerations
Remember, courts ultimately decide if consequential damages stem from the wrongful dishonor. A payer bank is liable to its customer for damages from wrongful dishonor, limited to actual, provable amounts including consequential ones, such as those from arrest or prosecution due to the dishonored instrument.
Key Takeaways
- Wrongful dishonor happens when a bank or credit union doesn't honor a valid check or draft.
- The bank is liable if wrongful dishonor is proven to have occurred under its responsibility.
- Dishonor typically means a check or draft is presented with insufficient funds.
Special Considerations
There are scenarios where a bank can dishonor an instrument without breaking UCC rules. For instance, if honoring it would overdraft the account, unless there's a pre-existing overdraft protection agreement. So, if you have overdraft protection, the bank should generally honor the check or draft.
Example of Wrongful Dishonor
Consider the case of Loucks v. Albuquerque National Bank, which is often studied. The plaintiff, Loucks, co-owned L & M Paint and Body Shop with Martinez, and they had a partnership checking account at the bank. Loucks owed the bank $402 personally, but the bank debited it from the partnership account, knowing it wasn't a partnership debt.
This debit caused insufficient funds, leading the bank to dishonor multiple checks. Loucks and Martinez sued for the $402 plus thousands in damages, but the court awarded only the $402, finding no wanton conduct by the bank.
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