What Is Wrongful Dishonor?

Wrongful dishonor refers to a bank’s failure to honor a valid negotiable instrument, such as a check or draft, that has been presented to it for payment. If an instrument is legitimate and there is enough money to cover it, a bank’s refusal to fulfill it within the Uniform Commercial Code’s (UCC) deadline would constitute unjust dishonor.

Understanding Wrongful Dishonor

The Uniform Commercial Code includes an explanation of business behavior rules and regulations. The code’s creation and adoption were to facilitate cross-state commercial transactions for corporations. Nine articles make up the code, covering topics such as investment securities, letters of credit, general provisions, and sales of goods and services. Checks, drafts, and other negotiable instruments are covered in the fourth article.

A bank wrongfully dishonors a negotiable instrument, such as a check or draft, under Article 4, Section 402 of the code if it declines payment even though the instrument is properly payable, which means that it has the customer’s authorization and is in compliance with the bank’s agreement with that customer.

Anytime between the time an instrument is received and the payer bank returns it or notifies the bank of dishonor, the bank has the right to dishonor the instrument for lack of money. There has to be only one of these determinations. However, the customer’s account balance should be included in the bank’s reevaluation if it subsequently chooses to reconsider its decision to dishonor.

The courts will determine whether the unjust dishonor caused the resultant losses.

A payer bank is responsible to its client for any harm resulting from an instrument’s improper dishonor. The bank’s liability is restricted to tangible, demonstrable losses, including any possible consequential damages. Damages for acts like the customer’s arrest or prosecution resulting from the instrument’s unlawful dishonor may be included in the damages.

Particular Points to Remember

Sometimes, a bank may only honor a negotiable instrument if it goes against the UCC’s rules. A bank may dishonor an agent under the code’s regulations if keeping it will result in an overdraft on the client’s account. Naturally, that assumes the bank has an existing arrangement allowing it to fulfill the customer’s overdrafts. For this reason, the bank will usually honor the check or draft, provided the consumer has overdraft protection on their account.

An Illustration of Unjust Dishonor

The unjust dishonor case of Loucks v. Albuquerque National Bank has received much research. Along with Martinez, the plaintiff, Loucks owns L & M Paint and Body Shop. They had a joint checking account with Albuquerque National Bank, the defendant’s bank. Although the bank knew Loucks’ $402 obligation was not a partnership debt, it still charged the amount to the partnership’s checking account.

The bank dishonors several checks drawn on the partnership’s account because there was not enough money after the $402 debit. The two plaintiffs sued the bank for $402 in addition to many thousand in damages. Ultimately, the court determined there was no justification for the defendant bank’s wanton behavior. Therefore, they were only given $402.

Conclusion

• A bank or credit union commits wrongful dishonor when it rejects a legitimate check or draft delivered to it.
• If it can be shown that a bank allowed unjust dishonor to occur, the bank is accountable for its error.
• A check or draft that a person with insufficient cash presents to a bank is dishonor.