What is Wrongful Dishonor?
The term wrongful dishonor refers to a bank’s failure to honor a valid negotiable instrument, such as a check or draft, presented to it for payment. If a negotiable instrument is valid and the account has sufficient funds, the bank’s failure to honor it within the time period stipulated by the Uniform Commercial Code (UCC) constitutes wrongful dishonor.
Understanding Wrongful Dishonor
The Uniform Commercial Code (UCC) comprises a set of laws and regulations designed to standardize business operations across state lines. Article 4 of the UCC specifically deals with checks, drafts, and other negotiable instruments.
According to UCC Article 4, Section 402, a bank wrongfully dishonors a valid negotiable instrument if it refuses payment when the instrument is properly authorized and aligned with the customer’s bank agreement.
A bank may choose to dishonor an instrument due to lack of funds at any time between the receipt of the instrument and the notification of dishonor. However, if the bank reevaluates its decision later, it must consider the account balance at that subsequent time. Ultimately, courts determine whether wrongful dishonor leads to consequential damages.
If wrongful dishonor is established, the payer bank is liable for the damages. These damages must be actual and provable, and can include consequential damages such as instances of customer arrest or prosecution resulting from the bank’s failure to honor the instrument.
Key Takeaways
- Wrongful dishonor occurs when a bank fails to honor a valid check or draft presented for payment.
- A bank is liable for damages if wrongful dishonor is proven.
- Dishonor refers to the refusal to pay a negotiable instrument due to insufficient funds.
Special Considerations
There are scenarios where a bank may legitimately dishonor a negotiable instrument without violating UCC terms. One such scenario is if honoring the instrument would cause an overdraft in the customer’s account, unless there is a preexisting overdraft protection agreement. In such cases, with overdraft protection in place, the bank will usually honor the check or draft.
Inspirational Example of Wrongful Dishonor
A notable case of wrongful dishonor involves Loucks v. Albuquerque National Bank. The plaintiff, Loucks, alongside partner Martinez, operated L & M Paint and Body Shop and held a checking account with Albuquerque National Bank. Loucks personally owed the bank $402, which the bank inaccurately debited from the partnership’s account, unaware it wasn’t a partnership debt. The wrongful deduction led to the dishonor of multiple partnership checks due to insufficient funds. Consequently, Loucks and Martinez sued the bank for the $402 plus additional damages. They were awarded the $402 as the court determined the bank’s conduct lacked wanton intent.
Related Terms: negotiable instrument, bank liability, consequential damages, overdraft, payer bank.
