The Potential Ineffectiveness of Stop Payment Orders

July 23, 2010

Issue

The Office of the Superintendent of Bankruptcy has been made aware that a recipient of a cheque from a trustee may be in a position to cash that cheque at a cheque-cashing organization after the deadline indicated on the cheque and that, in spite of a stop-payment order having been issued, the trustee may be held liable for the amount of the cheque as a negotiable instrument.

Background

Cheque-cashing organizations have been held to be entitled to accept a cheque for payment without any further due diligence if the organization has no reason to believe that the cheque is invalid or non-negotiable.Footnote 1

Conclusion

Trustees may want to consider the following steps to reduce the risk of liability in this type of circumstance:

1. Indicate any deadline for cashing a cheque on the face of the cheque rather than on a removable cheque stub, which should give notice to a cheque-cashing organization that the cheque may have a stop-payment order issued against it; and

2. Indicate in the memo field that the cheque is "payable to the named and intended payee only," which would prevent the cheque from being cashed by another individual or organization once endorsed by the designated payee.


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