I have a question regarding stop payment orders on checks. I mailed a tenant his security deposit back (less a few deductions). He called to say that the check must have been lost in the mail.
I stopped payment on the original check and wrote him a new one. It turns out that he cashed both checks, despite the stop payment order. Now I have received a threatening letter from one of those check cashing places (lets call them “CHEXRUS”) threatening to sue me because they paid they guy on the first check, but haven’t gotten paid by me because of the stop payment order. What can I do to solve this problem?
Answer
Unfortunately, your only solution is to pay CHEXRUS. To understand why this is the case, you need to understand from a legal standpoint exactly what a check is, as well as how checks are governed by the Uniform Commercial Code (UCC).
Under RCW 62A.4-403, a maker of a check can issue a stop payment order to his or her bank. Provided that a bank has a reasonable time to act on you r request, it is required to follow your instruction that the check not be paid. In fact, this is what happened in your case. You have no dispute with your bank.
Instead, your former tenant (the “holder” of the check as defined in the UCC) negotiated the check “for value” to CHEXRUS. Because CHEXRUS had no knowledge of your stop payment order, they are what the UCC calls a “holder in due course.”
Without discussing this in its entirety, a holder in due course is a person or entity who takes a check for value (gives something in return – in this case cashed the check), in good faith and without notice that it has been dishonored or that there are any defenses to payment (had no knowledge of your potential claim against the tenant or the stop payment order).
Since CHEXRUS is a holder in due course, they can bring an independent lawsuit against you to collect on the check for the monies they paid out. Even worse, under RCW 62A.3-520, CHEXRUS can (and probably already has) sent you a Notice of Dishonor. This notice informs you that you have to pay the face amount of the check, plus:
collection costs;
interest; and
$300 or three times the amount of the check, whichever is less.
The Notice of Dishonor also states that you may be liable criminally for writing a bad check.
The unfortunate lesson is that a stop payment order does not release you from liability on a check, it just prevents your bank from paying the check. Innocent third persons still have a claim against you if they cashed your check. An example of someone who isn’t innocent (not a holder in due course) would be the tenant him/herself or a friend who cashes the check for the tenant knowing payment had been stopped.
If you do end up refunding the deposit double because you must pay CHEXRUS, you could bring a civil action against the tenant to recover your losses. You may also wish to report the tenant’s action to the police and they may prosecute the tenant criminally.
Because of the problem you have unfortunately experienced, I recommend that deposit refunds always be mailed registered or certified mail.
