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Parks v. Commerce Bank, N.A.

377 N.J. Super. 378, 872 A.2d 1116 (App. Div. 2005)

BANKS; CASHIER’S CHECKS; WIRE TRANSFERS — A bank may not unilaterally stop payment on a cashier’s check or on a wire transfer based on insufficient funds in its customer’s account.

A man served as the president and chief financial officer of two automobile companies. One provided consulting services to customers seeking to import cars from Europe; the other company sold used cars. The man’s partner in the used car company also owned a separate car dealership. The two of them opened several bank accounts in which they deposited monies generated through their companies. The business partner deposited checks drawn from his car dealership’s bank account into the jointly held used car company’s bank account. Relying on these deposits, the man obtained several cashier’s checks from the bank using funds from the joint account. In addition, the man wire transferred funds from this joint account. A couple of days later, the bank discovered that the checks deposited by the business partner into the joint account had been dishonored for insufficient funds. In response, the bank immediately issued a stop-payment order on the cashier checks and wire transfers, and requested that the other banks involved in the chain of distribution withhold the release of the funds. The man filed an order to show cause seeking a mandatory injunction to compel the bank to honor the instruments. The lower court held that the bank lacked the authority to unilaterally stop-payment on the certified checks and wire transfers, and enjoined the bank from dishonoring the instruments. The bank appealed the lower court’s ruling. On appeal, the bank asserted that it had the legal authority to stop payment on the instruments pursuant to Federal Regulation, 12 C.F.R. 229.19(c)(iii). This provision grants a bank the right to charge back funds made available to its customer for an electronic transfer for which the bank has not received payment.

The Appellate Division affirmed the lower court’s holding. It rejected the bank’s contention that federal regulation granted it the authority to stop-payment on the instruments. It ruled that 12 C.F.R. 229.19(c)(iii) only gives a bank the right to charge back a customer’s account for the release of uncollected funds in connection with cashier’s checks and wire transfers, and not to stop payment on these instruments. The Court focused on the fact that cashier’s checks and wire transfers are irrevocable by nature and relied upon as cash. Therefore, a bank that issues one of these instruments is not merely serving as a drawee or depositary for a person’s money, but it is making a commitment to pledge its own assets with regard to the payment of the instrument. As a result, the Court held that the bank lacked the authority to unilaterally stop-payment on the cashier’s checks and wire transfers.

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