Wrongful Dishonor - Explained
What is Wrongful Dishonor?
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Table of ContentsWhat is Wrongful Dishonor?How Does Wrongful Dishonor Work?Dishonor for Insufficient FundsBank Liability for Wrongful DishonorExamples of Wrongful Dishonor
What is Wrongful Dishonor?
Wrongful dishonor occurs when a bank fails to honor a valid instrument endorsed and presented to it for payment. Examples of valid negotiable instruments are checks and drafts, if a payee tenders such a valid instrument to a bank for payment and the bank refuses to honor the instrument, a wrongful dishonor has occurred. There is statutory period stipulated for a valid negotiable instrument to honored according to the Uniform Commercial Code (UCC), failure to honor it is regarded as wrongful dishonor.
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How Does Wrongful Dishonor Work?
As stated in the Uniform Commercial Code, refusal to make payment for a negotiable instrument tendered by a customer to a bank i wrongful dishonor. It there is sufficient funds in an account to cover for the payment of a valid negotiable instrument and the bank fails to comply, it is wrongful dishonor. As stated in Article 4, Section 402 of UCC, if the valid negotiable instrument is endorsed by the customer who issued it and the customer has enough money in the account but the bank fails to make payment, it is wrongful dishonor. In some cases, if honoring a valid negotiable instrument would cause an overdraft in the customers account. The bank might dishonor the instrument unless the customer agreed to overdrafts.
Dishonor for Insufficient Funds
There are many situations that can cause a bank to commit wrongful dishonor. If the funds in the customer account is not sufficient to cover the negotiable instrument tendered, the bank decided to dishonor the instrument. In some cases, the customer can make more payment into the account, then a bank may decide to reevaluate the dishonor that occurred earlier. When such a revaluation occurs, the balance in the customer's account that the later time should be used for the reevaluation.
Bank Liability for Wrongful Dishonor
The bank that commits wrongful dishonor is liable for any damage that happens to the customers account. There are varying degrees of damages that a customer might face as a result of wrongful dishonor. If actual damages or consequential damages result from a wrongful dishonor, the customer can be arrested, sued and prosecuted in court for wrongful dishonor. The payor bank however answers for all of the damages, including actual and consequential damages. Once the customer is prosecuted, the court determines the extent of the damages.
Examples of Wrongful Dishonor
Wrongful dishonor is not a myth, it happens in real life situations. There are common cases where banks wrongfully dishonor a valid negotiable instrument, they fail to make payment for an endorsed and valid instrument such as check and draft that recipients present to them. A common example of wrongful dishonor was the case of Loucks and the Albuquerque National Bank, the case was later dragged to top the court.