42 JULY / AUGUST 2021 Cashier’s Checks Liability in case of fraud COMPLIANCE CONNECTION Brett J. Ashton Partner Krieg DeVault LLP bashton@kdlegal.com Question: We recently accepted for deposit a $30,000 cashier’s check payable to our customer on behalf of a third party issued by another bank. We credited the customer’s account for the $30,000 deposit on the day it was received, and we submitted the cashier’s check to the issuing bank within 24 hours. The next day the same customer returned and purchased three $10,000 cashier’s checks payable to three different individuals. On the third day the issuing bank called to inform us it was refusing to pay the original cashier’s check for $30,000, because the check had been reported stolen by the third party which purchased the instrument. Later that day all three of the $10,000 cashier’s checks purchased by our customer were presented for payment, and we determined to pay them. The issuing bank is now refusing to pay the $30,000 cashier’s check, because it was reported stolen. Additionally, it claims we should have canceled the three $10,000 cashier’s checks – purchased by our customer with the initial cashier’s check funds – immediately upon learning of the alleged theft. In fact, if the other bank’s customer who claimed the check was stolen instead used the check to pay our customer, the alleged “theft” is actually fraud. Which bank is entitled to the $30,000 under Indiana law? Do we have any liability because we paid the $10,000 cashier’s checks after we were told about the fraud? Answer: Because you accepted the original $30,000 cashier’s check for value in good faith, without notice that it had been reported stolen, or of any other issue or claim that would bring its validity into question, your bank is considered a “holder in due course”1 under Indiana law. Moreover, Indiana case law supports the position that you did not fail to mitigate your damages as a result of being told of the fraud prior to the cashing of the three $10,000 cashier’s checks.2 Cashier’s checks are somewhat akin to cash: “By definition a cashier’s check is a bill of exchange drawn by a bank upon itself and accepted in advance by the act of issuance.”3 A cashier’s check is a draft with respect to which the drawer and drawee are the same bank or branches of the same bank.4 A bank is permitted to stop payment on a cashier’s check only under limited circumstances without risking liability, including: in the event the bank suspends all payment as a result of insolvency; if the bank has its own defense (as opposed to its customer’s defense) against the person entitled to enforce the instrument; if there is reasonable doubt about the person seeking to enforce the instrument; or if payment is prohibited by law.5 In the scenario in question, while the issuing bank’s customer may have been the victim of fraud when the third party which gave your customer the cashier’s check reported the cashier’s check stolen, because your bank had no notice of the fraud prior to accepting the original $30,000 cashier’s check (or even before issuing the three new $10,000 cashier’s checks), or any indication that the original $30,000 cashier’s check may not be duly authorized, you have no responsibility for the loss. Further, given the subsequent three cashier’s checks of $10,000 each were purchased before your bank had knowledge of the alleged fraud, not only would you have no duty to mitigate the other bank’s losses by refusing to pay the subsequent checks, you would have liability if you didn’t honor them. Indiana law provides that if an obligated bank (the bank that issued the cashier’s check, which in this case would be your bank when it issued the three $10,000 cashier’s checks) wrongfully refuses to pay a cashier’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.6 In summary, the bank that relied upon the affidavit of fraud from its customer that started this chain of Krieg DeVault LLP is a Diamond Associate Member of the Indiana Bankers Association.
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