Q 24Q 24
MidAmerica Bank, FSB v. Charter One Bank
Illinois Supreme Court, 232 Ill.2d 560, 905 N.E.2d 839 (2009).
FACTS Mary Christelle was the mother of David Hernandez, president of Essential Technologies of Illinois (ETI). Christelle bought a $50,000 cashier's check from Charter One Bank payable to ETI. ETI deposited the check into its account with MidAmerica Bank, FSB. Four days later, Christelle asked Charter One to stop payment (see the discussion on page 319). Charter One agreed and refused to honor the check. MidAmerica returned the check to ETI. Within two weeks, ETI's account had a negative balance of $52,000. MidAmerica closed the account and filed a suit in an Illinois state court against Charter One, alleging that the defendant wrongfully dishonored the cashier's check. Charter One argued that a cashier's check should be treated as a note subject to the defense of fraud. The court ruled in MidAmerica's favor, but a state intermediate appellate court reversed the ruling. MidAmerica appealed.
ISSUE Can a bank obtain payment on a cashier's check over the drawee bank's stop-payment order?
DECISION Yes. The Illinois Supreme Court reversed the lower court's decision, awarded MidAmerica the amount of the check, and remanded the case for a determination of interest and fees.
REASON A bank's refusal to pay a cashier's check based on its customer's request to stop payment is wrongful under UCC 3-411. A customer has no right to stop payment on a cashier's check under UCC 4-403, which permits payment to be stopped only on items drawn "on the customer's account." A cashier's check is drawn on the issuing bank, not on the customer's account. Thus, Christelle had no right to stop payment after she gave the check to ETI. Charter One argued that the check should be treated as a note, and the court agreed. The court reasoned that the drawer of a cashier's check has the same liability as the maker of a note "because a bank issuing a cashier's check is both the drawer and drawee of the check." But "the UCC provides that cashier's checks are drafts, not notes." Besides, the bank cannot assert fraud as a defense because it did not know of any fraud when it dishonored the check.
WHY IS THIS CASE IMPORTANT? The UCC has been amended periodically since it was first issued in 1949. In particular, Article 3 was significantly revised in 1990 when many sections were rewritten and renumbered. The reasoning in this case underscores that through all of the changes, the treatment of cashier's checks as "cash equivalents" in the world of commerce has never varied, and none of the amendments to Article 3 have been intended to alter that status.