Getting Paid With Cashier's Check, Teller's Check, or Certified Check

Mike King
February 15, 2011 — 18,258 views  
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Parties to real estate transactions, commercial transactions, or credit arrangements often seek to avoid the risk of non-payment by insisting upon payment in the form of cashier's checks, teller's checks or certified checks.  Essentially, the party seeking to be paid is insisting that the debt be paid by an obligation of a bank, rather than a check from an individual or business.  After all, bank obligations don't "bounce."  Unfortunately, even this level of diligence will not always guarantee payment.

For example, let's say that you are selling real estate and take a cashier's check, teller's check, or certified check as the earnest money.  You are comfortable taking the property off the market because the earnest money will serve as your liquidated damages if the buyer defaults.  But then the buyer goes to the bank and says that you have committed fraud by not disclosing that there could be fissures on the property in the future.  Because the buyer is a good customer of the bank, the bank refuses payment on the check as an accommodation to its customer.  So you no longer have the earnest money deposit you anticipated, you have lost two other "non-flakey" offers to purchase because of the delay, and the buyer that induced the bank to refuse payment on the check has now filed bankruptcy.  You may be able to sue the bank for your consequential damages and for interest, but the bank will defend by asserting that its customer had the right to rescind negotiation of the check based upon its allegations of fraud.  Who knows who will win that lawsuit, but you have just learned that cashier's checks, teller's checks and certified checks are not necessarily as "good as gold."

Before we can more fully explain why banks may not pay bank obligations, we need to define some terms.  First, what is a "check?"  A check is a "draft" that is not a "documentary draft."  A check must be payable on demand and drawn on a bank.  A check can also be a cashier's check or teller's check.  Sometimes an "instrument" might be a "check" even if it is called a "money order" or something else.

So if a "check" is a "draft" what is a "draft?"  Well a "draft" is an "instrument" that is not a "note." 

So if a "check" is a "draft" and a "draft" is an "instrument" what the heck is an "instrument?"  An "instrument" is defined as a "negotiable instrument."  (Wasn't that helpful?)  Well, a "negotiable instrument" is an unconditional promise or order to pay a fixed amount of money, if it is payable to bearer or to order at the time it is issued or first comes into possession of the holder, is payable on demand or at a definite time, and does not include any other undertaking or instructions by the person promising or ordering payment with a few limited exceptions. 

So now that we have the basic definitions, we can turn our attention to what are "cashier's checks," "teller's checks," and "certified checks."  Once we understand what these types of checks are, we can figure out why banks can refuse to pay them. 

A "cashier's check" is a "draft" on which the "drawer" (the person writing the check) and the "drawee" (the person ordered to make payment), are the same bank or branches of the same bank. 

A "teller's check" is a "draft" drawn by a bank either on another bank or payable at or through a bank.  So a "teller's check" is one where a bank issues a check on an account at another bank or issues a check that is only payable through the bank.

A "certified check" is a check "accepted" by the bank on which it is drawn.  "Acceptance" by the bank means that it has signed an agreement to pay the check as presented.  Usually, this "acceptance" is written on the check by the bank and indicates that the check is now "certified."  So a "certified check" is one where the bank on which the check is drawn has agreed in writing to pay the check as presented. 

So if all three of these types of checks are bank obligations, how can a bank refuse to pay them?  After all, if a bank "accepts" a certified check or issues a cashier's check or buys a teller's check from the issuing bank, it is generally obligated to pay the check according to its terms.  But the obligated bank has the right to assert any claim or defense that it has reasonable grounds to believe is available against the person trying to cash the check.  The obligated bank can also refuse payment if it has a reasonable doubt whether the person demanding payment is entitled to cash the check.  The bank can also refuse payment if payment is prohibited by law or if the bank has suspended payments in general (after all if the bank is out of money, it won't be honoring any checks.) 

If the obligated bank wrongfully refuses to pay a cashier's check or certified check or stops payment of a teller's check or refuses to pay a dishonored teller's check, then the party enforcing the check is entitled to seek compensation for expenses and loss of interest resulting from the non-payment.  The party trying to enforce the check may also seek to recover consequential damages.  To seek consequential damages the party must give the bank notice of the reasons causing those damages.   These damages against the bank come into play when the bank refuses to pay even thought its obligation to pay is clear and it has the ability to pay. 

While the bank may assert any claim or defense that it may have, it seldom has a claim or defense to payment of these types of instruments.  Usually, it will be the bank's customer or the remitter that will be asserting a claim to the check on the basis of a dispute it has with the payee.  The bank can assert its customer-remitter's claim, but is not protected from damages unless the remitter's defense is upheld. 

What might you do differently in our original example?  On a substantial transaction, you should wait until you have confirmation that the check has actually cleared the bank and funds are in your account before taking the property off the market or otherwise acting in reliance upon the payment.  Perhaps, requiring an electronic transfer of funds to be confirmed before opening escrow or taking other action may be wise in a large transaction. 

 The law of checks and other negotiable instruments is far more complicated than most of us realize.  If you have questions about how to structure your transactions and how to make sure you actually get paid, please feel free to call me.

Mike King


Michael R. King is a founding partner of Gammage & Burnham, P.L.C., a Phoenix law firm with diverse areas of emphasis. His practice primarily centers around bankruptcy and creditors' rights, commercial litigation, including uniform commercial code cases, and real estate and business law. Mr. King is a former of the Creditor/Debtor Rights Committee and is a current member of the Bankruptcy, Real Estate and Construction Law Sections of the State Bar of Arizona. He is the past chair of the Board of Trustees of the Maricopa County Bar Foundation. Mr. King is an active alumnus of The University of Arizona, where he received his B.A. and J.D. degrees, with distinction and high distinction.