Even in Virginia, which recently placed first in a ranking of the “Best States for Business” by Forbes.com, businesses often fail. Particularly in small companies, relationships among the owners sour and partnership disputes arise. Here in Fairfax County, where my practice is located, it is not uncommon for disgruntled partners to attempt to withdraw large sums from corporate bank accounts prior to dissolution or to attempt to block other owners’ access to the company’s accounts. Banks need to be careful not to get caught in the crossfire by inadvertently facilitating a wrongful cash grab by one of the business owners. Fortunately, as illustrated by a recent decision by Fairfax Judge Bellows, Virginia’s adoption of the Uniform Commercial Code provides some valuable protection to banks.
Khan v. Alliance Bank (Fairfax Circuit Court, Dec. 22, 2009) involved a dispute between two owners of Advantage Title and Escrow, LLC, Khan and Kazmi. Both were authorized signatories on the company’s account held with Alliance Bank. After the two had a falling out, Kazmi instructed the bank to remove Khan as a signatory. A few days later, Khan wrote a $35,000 check against Advantage Title’s account in exchange for a cashier’s check for that amount. Upon learning of the transaction, Kazmi sent an “Affidavit of Unauthorized Transaction” to Alliance Bank. This document alleged, under oath, that Khan obtained the cashier’s check through fraud as Khan was (according to Kazmi) not authorized to withdraw funds from the company’s account. In reliance on that affidavit, Alliance Bank canceled the cashier’s check and credited $35,000 back to the Advantage account.
Normally, putting a stop-payment order on a check is not a big deal. But cashier’s checks, which are governed by the UCC, are different. Unlike personal checks, cashier’s checks carry a promise of the bank to the holder. For that reason Khan sued
The court disagreed and threw out the case. Under the applicable provisions of the UCC, a bank will only be liable for canceling a cashier’s check if the bank acted “wrongfully.” A bank is justified in refusing to honor a cashier’s check if the bank “asserts a claim or defense of the bank that it has reasonable grounds to believe is available against the person entitled to enforce the instrument” or the bank “has a reasonable doubt whether the person demanding payment is the person entitled to enforce the instrument.” See Va. Code § 8.3A-411(c).
In this case, Kazmi’s affidavit gave Alliance Bank all the protection it needed. The affidavit (like all affidavits) was made under oath, and its allegations were reasonable on their face. Therefore, the court found, the sworn statement provided the bank with reasonable grounds to believe the check was procured by fraud, which is a defense to the negotiability of the check. Alliance Bank did not act “wrongfully” within the meaning of the UCC, so the court dismissed the case.