Check Handling, Stop Payment: Are We Required to Accept an Oral Stop Payment?

Question 

I read Legal Ease last week on stop payments and it caused some concern. We routinely accept oral stop payment orders over the telephone and inform the customer that the order will expire in 14 days unless they submit a written request during that timeframe.  We developed this from UCC comments number 6 to Section 4.403 of the Texas Business and Commerce Code, which provide:

6.  "Under subsection (b), a stop-payment order is effective after the order, whether written or oral, is received by the bank and the bank has a reasonable opportunity to act on it. If the order is written it remains in effect for six months from that time.  If the order is oral it lapses after 14 days unless there is written confirmation.  If there is written confirmation within the 14-day period, the six-month period dates from the giving of the oral order."

Aren’t we are bound by the UCC and the comments to accept an oral stop payment order even though it does not contain a signature and is not authenticated? 

Answer 

Prior to 2005, Section 4.403 of the Texas Uniform Commercial Code (UCC) said that a stop payment order was not effective unless it was in writing.  In 2005, the word “writing” was changed to the phrase “authenticated record.”  (We discussed the meaning of authenticated record” in our March 7, 2011, Legal Ease.) Both the word “writing” and the phrase “authenticated writing” were non-uniform amendments to the UCC.  Non-uniform amendments are different from the same sections adopted by other states, unless they adopt the same non-uniform amendment.  The UCC in other states allow for oral stop payments and they are effective for six months, but they lapse if they are not confirmed within 14 days.  Therefore, the UCC Comment on this is incorrect and irrelevant in Texas.  Look at the State Bar Committee Comments, which unfortunately hasn’t been updated to include the phrase “authenticated record,” but you can just substitute it for “written” when you read it.

UCC Section 4.403 doesn’t prohibit your bank from accepting oral stop payment orders, but an oral stop payment would not conform with Section 4.403, as adopted in Texas.  And because it doesn’t conform, accepting oral stop payments would involve additional risk to the bank.

I personally think it would be a mistake to accept oral stop payments, particularly for large items.  If you require conformance with Section 4.403 and receive a stop payment order doesn’t comply with a requirement of 4.403, if your bank then pays the item, you have no liability under the law because your bank isn’t obligated to comply with an oral stop payment.  However, if you accept oral stop payments, there are uncertainties and significant questions of proof.  An oral stop payment dispute becomes a “he said, she said” because there is no authenticated record.  Juries tend to side with customers on “he said, she said” matters.

And who is the customer supposed to give an oral stop payment to?  May your customers just walk in and tell anyone at the bank to stop payment or are there instructions on how to do it in the account agreement?  What if the employee they talk to doesn’t pass it along to the correct employee and the bank pays?  Have all your employees been trained on what to do with an oral stop payment?

The requirement that a stop payment be in writing is as much for the bank’s protection as it is for the customer’s.  If you deviate from it, you and your customer lose those protections.