Banks Not Liable when Check Returned "NSF"

Even After Confirming Funds Are On Hand

A credit professional dealing with a customer whose financial condition is uncertain may insist on cash before releasing goods. Suppose your customer offers a check, and after getting phone confirmation from the customer's bank that cash is on hand to cover the order, you release the goods. The check is then returned NSF because there were outstanding checks that cleared prior to yours. The customer files Chapter 11. After you make a reclamation demand, you ask whether the customer's bank should make good on the check, given their representation that cash was on hand.

No Claim Against Bank

In Harrington v. MacNab, 45 UCC Rep. 2s 698 (2001), the creditor sued the debtor's bank because the creditor had obtained the bank's confirmation over the telephone that there were sufficient funds to cover the check. Yet the check bounced. The creditor's suit was filed under a theory of negligent misrepresentation based on the bank representative's confirmation of sufficient funds. The court rejected the creditor's claims, contending that there is no contractual privity between the creditor and the bank.

The court also found that the creditor was not a third-party beneficiary. The court pointed to Article 3 of the Uniform Commercial Code, section 3-408, citing that the bank is not liable as an assignee of the drawer on a check. Further, the court recognized that a cause of action under the circumstances would create a tort remedy allowing suit to be brought for certification of a check, which violates UCC policy. The court reasoned that to adopt the creditor's position "would place substantial and potentially unlimited liability on [bank] for uncertified checks in contravention of the basic policies underlying the checking system in the United States as codified in the Uniform Commercial Code." Harrington, 45 UCC Rep. Serv. 2d at 701.

Lesson for the Credit Executive

Harrington illustrates that you may want to hold the order until the debtor's check clears. As the court stated: "The sound practice of requiring the buyer to pay with an accepted draft (certified check) or a bank draft is justifiable. Indeed, the reason for the practice of requiring certified or bank checks is that, in the eyes of the U.C.C., such instruments are the equivalent of cash as far as satisfying the underlying obligation goes." In other words, the vendor cannot look to the customer's bank as a guarantor for payment if it does not insist on certified funds. Otherwise it must wait for the check to clear before releasing the goods.

Reprinted by permission from The Trade Vendor Quarterly Blakeley & Blakeley LLP
Winter 02