Stopped Payment on Check

[kindraballard]

I stopped payment on a check for services that were not performed. Apparently, the business owner cashed the check at a check cashing store (Check Mart) the same day that I stopped payment. Now, Check Mart is taking me to small claims court to collect the money that they payed to the business. I don't think I have to pay because the services were never performed. To make matters even more complicated, the business owner is in jail now and the business went bankrupt. What can I do? Any advise would help. Thanks

 

[Michael Wechsler]

This isn't a simple question to answer since you need to provide all the facts. The amount of time involved here is important and also whether there was good faith involved in your agreement to pay for services to be provided. You need to explain the story in detail and tell us the circumstances for which the agreement was made.

 

[kindraballard]

Clarification of stop payment check story

Well, I will try to explain it the best that I can. But, as you can probably tell-it is very complicated! The company that I wrote the check to was a florist that I hired for my wedding. They did not provide the flowers that I ordered in my contract with them. They only delivered about 1/4 of the flowers I paid for and what they did deliver was completely wrong. I gave the owner a check 1 hour before I was getting married, without seeing the flowers he delivered to the reception. When I saw the incomplete job he did, I immediately stopped payment on the check. Apparently, he cashed the check around the same time that I canceled it. But, we can't figure out who acted first, me or the florist. Well, now the check cashing service is taking me to small claims court to collect the amount of the check-$700.00. I can't take the florist to small claims court, because they are now in jail and the business has gone bankrupt. I hope that this helps further explain the story.

 

[Michael Wechsler]

Wow... that's a good one. Typically the signature on a check means that the drafter has stated that he will pay the amount on the check and must make the payment on the check. Typically it would be no defense if you wrote a check and then decided to cancel since you are guaranteeing that the amount on the check is valid. However, you may have a defense which is that the check was obtained by fraud -- you were induced to sign by the false promise to provide you with flowers and which was never intended to be properly provided. The florist never intended to provide you with the flowers and then declared bankruptcy immediately thereafter. The check cashing store might have been a victim or in on the scam... but it should make no difference and you should, according to law, not be found responsible to pay the check. I'll tell you why I think so.

According to the Uniform Commercial Code Section 3-302, a "holder in due course" is someone who obtains a check or promisorry note for value in good faith with no suspicion that it might be no good, claimed by another, overdue or previously dishonored. Such a holder is entitled to payment by the maker of the check. However, there are exceptions according to paragraph (a)(vi) which refers to Section 3-305 which states the following:

§ 3-305. DEFENSES AND CLAIMS IN RECOUPMENT.
(a) Except as stated in subsection (b), the right to enforce the obligation of a party to pay an instrument is subject to the following:
(1) a defense of the obligor based on (i) infancy of the obligor to the extent it is a defense to a simple contract, (ii) duress, lack of legal capacity, or illegality of the transaction which, under other law, nullifies the obligation of the obligor, (iii) fraud that induced the obligor to sign the instrument with neither knowledge nor reasonable opportunity to learn of its character or its essential terms, or (iv) discharge of the obligor in insolvency proceedings;
(2) a defense of the obligor stated in another section of this Article or a defense of the obligor that would be available if the person entitled to enforce the instrument were enforcing a right to payment under a simple contract; and
(3) a claim in recoupment of the obligor against the original payee of the instrument if the claim arose from the transaction that gave rise to the instrument; but the claim of the obligor may be asserted against a transferee of the instrument only to reduce the amount owing on the instrument at the time the action is brought.
(b) The right of a holder in due course to enforce the obligation of a party to pay the instrument is subject to defenses of the obligor stated in subsection (a)(1), but is not subject to defenses of the obligor stated in subsection (a)(2) or claims in recoupment stated in subsection (a)(3) against a person other than the holder.
(c) Except as stated in subsection (d), in an action to enforce the obligation of a party to pay the instrument, the obligor may not assert against the person entitled to enforce the instrument a defense, claim in recoupment, or claim to the instrument (Section 3-306) of another person, but the other person's claim to the instrument may be asserted by the obligor if the other person is joined in the action and personally asserts the claim against the person entitled to enforce the instrument. An obligor is not obliged to pay the instrument if the person seeking enforcement of the instrument does not have rights of a holder in due course and the obligor proves that the instrument is a lost or stolen instrument.
(d) In an action to enforce the obligation of an accommodation party to pay an instrument, the accommodation party may assert against the person entitled to enforce the instrument any defense or claim in recoupment under subsection (a) that the accommodated party could assert against the person entitled to enforce the instrument, except the defenses of discharge in insolvency proceedings, infancy, and lack of legal capacity.

Now this makes sense that these exceptions should apply. You might ask why since if, on the face of the check, a person may have had it endorsed without even knowing that there could have been some wrongdoing. The answer is simple -- it makes it too simple in cases of real fraud and in areas where the public policy states we should not enforce this law to put the onus on the holder who could have investigated the validity of the check more fully. Additionally, to enforce it would make it to simple to commit fraud -- what would happen is Mr. A induces Mr. Z to write a check while held at gunpoint and can simply endorse the check to Mr. B who claims that he knew nothing about the incident. Thus a criminal could easily wash the check clean in this situation by passing it to a third person. But the law says no, we don't want to enforce these types of contracts.

In your situation I'd argue that 3-305 applies, subsection 2 probably the strongest since you have a valid contractual defense of fraud. I can't guarantee you'll win but the judge should be pretty impressed and I think should recognize that this should be "right on the money!" Good luck... hope this helps...