Check Verification Sufficient, Says Court



Qualifying as a holder in due course is not always a cut-and-dried matter. Often there are shades of gray over whether specific irregularities are enough to shoot down a check casher’s claim of holder status.

Recently, a currency exchange that claimed to be a holder in due course discovered that some check irregularities, if handled correctly, can still survive a challenge to that status.

A title insurance agency served as a settlement agent for closing real estate transactions. The agency cut checks to distribute funds to all the parties to such transactions.

On Dec. 23, 2005, an Illinois currency exchange cashed a check from the agency, made out to a woman whose first name was Charae, for $1,945.99.

Four days later, the currency exchange cashed another check for Charae, again from the agency, for $2,500. On Jan. 11, 2006, Charae returned to the exchange with another agency check, No. 22221, for $29,588.31.

Unlike the prior checks, this check misspelled Charae’s first and last names. The check indicated that it was for a loan payoff. Charae presented the check to the exchange’s manager. Charae showed her state identification card, which had been issued on Dec. 30, 2005.

She told the manager that the agency issued the check to her to pay her a commission she earned from the sale of property.

OK From Upstairs

The check cashing company that owned the currency exchange did not authorize the manager to cash checks in excess of $5,000 without approval from her supervisor. The manager contacted her supervisor, who authorized her to cash the check.

Police arrested Charae on Jan. 23, 2006, charging her with check fraud. Two days later, police arrested an employee of the title insurance agency on the same charge.

The agency had hired the employee to work as a funder, meaning that it authorized her to cut checks for the parties to real estate transactions.

According to the agency’s investigator, the employee cancelled checks intended for parties to real estate transactions and then issued new checks to different payees for the amounts of the original checks.
Charae admitted that the employee gave her the three checks that the currency exchange cashed for her. Charae kept about $5,000 of the proceeds and gave the rest to the employee.

The agency told its bank to stop payment on the check. The currency exchange sued the agency for payment of the check, claiming that its status as a holder in due course entitled it to payment, despite the evidence that the employee and Charae conspired to defraud the title insurance agency.

At the trial, the exchange manager testified that she looked up Charae in the company’s database and found that she had recently cashed two other checks from the agency for lesser amounts. The manager called the agency, using a phone number she found in the database.
The person who answered the call for the title insurance agency confirmed that it issued the check to Charae for the dollar amount shown, as payment of a commission.

According to the person who answered the call, she earned the commission from her work as an employee of the agency.
The director of operations for the exchange’s owner testified that she approved about three checks each week for amounts exceeding the amount of the title agency’s check number 22221.

She spoke with the exchange’s manager about the check, and then she looked up the phone number for the agency at its Web site.
The director testified that she called the number and asked to speak with someone about verifying a check. The woman with whom she spoke confirmed that the agency issued the check to Charae in the amount shown.

The director then contacted the bank, which confirmed that the check came from a valid account with sufficient funds to cover the check, and the agency had not stopped payment on the check.
On cross examination, the director of operations for the exchange’s owner admitted that according to its manual, the misspelling of Charae’s name could signal fraud. Her recent identification card should also have raised suspicion.

The director did not remember whether she noticed that the check indicated its purpose as “loan payoff,” instead of listing the payment as a commission.

The title insurance agency introduced the check casher’s manual into evidence. The manual emphasized that it earns its fees by cashing checks, so the employee should “spend time proving that the check can be cashed and not looking for excuses not to cash it.”

The manual identified several signs that a check might not be valid, including several of the factors present in this case. According to the manual, the employee should verify that the check is good by phoning the maker.

The president of the agency’s commercial division testified that Charae never worked for the company, and no woman working at the agency would have fielded a call about who worked there.

He admitted that the check appeared to bear an authorized signature but added that he did not know whether that person actually signed the fraudulently issued check.

The trial court summarized its findings of fact. It found that the exchange manager and the owner’s supervisor called the agency to verify the check. When they called, they failed to ask about the discrepancy between the purpose shown on the check and the purpose Charae stated.

According to the court, that discrepancy “was enough to cause the currency exchange to pause and think twice about cashing the check. And then when they decided to go ahead with negotiating the check, they did it at their own risk.”

The trial court entered an order on Dec. 18, 2008, in favor of the title insurance agency. The currency exchange filed an appeal with the Illinois Court of Appeals.

Holder in Due Course

The Appeals Court noted that the trial court awarded the judgment based on its finding of fact that the exchange did not qualify as a holder in due course of the check. The Uniform Commercial Code defines a holder in due course as: “the holder of an instrument if:
(1) the instrument when issued or negotiated to the holder does not bear such apparent evidence of forgery or alteration or is not otherwise so irregular or incomplete as to call into question its authenticity, and (2) the holder took the instrument (i) for value, (ii) in good faith, (iii) without notice that the instrument is overdue or has been dishonored or that there is an uncured default with respect to payment of another instrument issued as part of the same series, (iv) without notice that the instrument contains an unauthorized signature or has been altered, (v) without notice of any claim to the instrument, and (vi) without notice that any party has a defense or claim in recoupment.”

The trial court found that the exchange did not qualify as a holder in due course because the check at issue was “so irregular as to call into question its authenticity.”

However, noted the Appeals Court, grounds for suspicion about a check will not always prevent one from taking the check as a holder in due course. Where all of the evidence available to the holder shows that it lacked notice of a defense, it becomes a holder in due course.

To defeat the rights of one dealing with negotiable securities, it is not enough to show that the person took them under circumstances which ought to excite the suspicion of a prudent man and cause him to make inquiry, but that the person had actual knowledge of an infirmity or defect, or of such facts that a failure to make further inquiry would indicate a deliberate desire to evade knowledge because of a belief or fear that investigation would disclose a vice in the transaction.

Similar Case

The Appeals Court noted that a 1977 federal case of McCook County National Bank v. Compton involved a similar issue.

The bank cashed a check despite several irregularities, including a discrepancy in the amount of the check. The McCook bank contacted Northwestern, the bank on which the payor drew the check, and Northwestern confirmed the correct amount and assured the McCook bank that the check was “OK to cash.” The trial court held that McCook did not qualify as a holder in due course.

On appeal, the United States Court of Appeals for the Eighth Circuit noted that the McCook bank was presented with a check that had an obvious $10,000 discrepancy on its face. As any prudent bank would, McCook contacted the Northwestern bank to ascertain the correct amount and whether adequate funds existed to cover the check.

Assured by the bank and indirectly by Compton, who issued the check, that the check was “OK,” McCook proceeded to cash the check and issue money orders. There were no remaining irregularities in the instrument itself.

Since the Eighth Circuit court in McCook found no actual notice and insufficient constructive notice, and no other notice at the time the check was cashed, it found no bad faith or dishonesty on the part of the McCook bank in cashing the check.

The Eighth Circuit noted that while a better judgment concerning the negotiability of the check might have been made, it could not find the requisite notice or bad faith that would deprive the McCook bank of its status as holder in due course and therefore, it reversed the trial court.

Readers who would like a free copy of this case sent electronically should send an E-mail to with “Holder-IL” in the subject line.

Posted in Spring 2011.