How to Protect Yourself from Check Fraud-Who Can Actually Cash a Check? - PhoenixCEOCFO.com

How to Protect Yourself from Check Fraud-Who Can Actually Cash a Check?

Answer: There is more to cashing a check than you would think. The person or person who should be able to cash a check depends upon how the check is written and how the check is endorsed.

Anymore, you only need to look a few offices down the hallway or a few houses down the street to find someone with a story about check fraud. While the topic of how to protect yourself against the bad guys can be complicated, some basic understanding of the laws relating to checks can at least help to prevent unintended consequences, and sometimes prevent fraud.

WHAT ARE WE TALKING ABOUT?

Let's start with "What is a check?" A "check" is an "instrument" that is a "draft," other than a "documentary draft" that is payable on demand and drawn on a bank, or is a "cashier's check" or "teller's check." Yeah, no kidding! Not only that, but something can be a check even if on its face it has another name such as "money order." No wonder people can't keep this stuff straight.

So backing up, a "negotiable instrument" is an unconditional promise or order to pay a fixed amount of money if it complies with a few other rules. Okay, then an "instrument" is a "draft" if it is an "order." Alright, let's try again:

"Order" means a written instruction to pay money signed by the person giving the instruction. The instruction may be addressed to any person, including the person giving the instruction, or to one or more persons jointly or in the alternative but not in succession. An authorization to pay is not an order unless the person authorized to pay is also instructed to pay.

So, a "check" is an "instrument" that is a "draft" because it is an "order." (We just defined "order" above.) And remember that in addition to meaning a "draft" payable on demand and drawn on a bank, a check also means a "cashier's check" or "teller's check." A "cashier's check" is a "draft" on which the "drawer" and "drawee" are the same bank or branches of the same bank. A "teller's check" is a draft drawn by a bank on another bank or payable at or through a bank.

"Whew!"

HOW SHOULD THE CHECK BE WRITTEN TO GET THE RIGHT PERSON PAID?

So now that we have gone through the simple process of figuring of what a "check" is, let's try to figure out who gets to cash a check. A check can be payable to "bearer" or to "order." The "bearer" is the person in possession of the check who is able to present the check for payment. A check is payable to "order" if it is payable either to the order of an identified person (that means that person gets to say who is to be paid), or to an identified person or "order." A promise or order that is payable to order is payable to the "identified person."

So if you make a check out to "bearer" or you don't state to whom it's payable, or if you state that it is payable to, or to the order of "cash", or somehow otherwise fail to say that it is payable to an identified person, then anyone possessing the check can cash it. So long as you make the check out to an identified person, only that person should be able to negotiate the check.

The person to whom the check is initially payable is determined by the intent of the person who originally signed the check. The check is payable to the person intended by the signer even if that person is identified by an incorrect name or other identification. If more than one person signs the check and all of the signers do not intend the same person as the payee, the check is payable to any person intended by one or more of the signers.

If the signature of the issuer of the check is made by something like a check writing machine, the person to whom the check is payable is determined by the intent of the person who supplied the name or identification of the person to whom the payment is intended, whether or not authorized to do so. The person to whom a check is payable may be identified in any way, including name, identifying number, office or account number. But this is starting to get too complicated.

How about if a check is payable to two or more persons? We see lots of joint checks, especially in the construction industry. If a check is payable to Joe "or" Bill, then either of them in possession of the check can cash it. If the check is payable to Joe "and" Bill, then it can be negotiated or cashed only by both of them. If the check is payable to Joe "and/or" Bill or is otherwise ambiguous as to whether it might be payable to Joe or Bill alternatively, then either one of them with possession may negotiate or cash the check.

So much for how you make out the check in the first place.

DOES IT MATTER HOW YOU INDORSE THE CHECK?

If you sign the check over to an identified person, then you have made a "special endorsement." With a special endorsement, the check becomes payable to the person you identified and may be negotiated or cashed only by the endorsement of the person you identified when you signed the check over "payable to the order of Jimmy Bob Jones."

On the other hand, if you simply signed the check, you have made a "blank endorsement." When a check has a blank endorsement, not specifying who it should be paid to, it becomes payable to bearer and may be cashed by simply transferring possession (unless someone further down the chain of possession specially endorses it.)

You see, if a check is payable to bearer, it may become payable to an identified person, if it is specially endorsed to an identified person. Conversely, a check payable to an identified person may become payable to bearer if it is endorsed in blank, meaning that it is simply signed with no direction as to the person to whom it is to be paid.

The holder of the check can make a blank endorsement into a special endorsement by writing above the signature of the endorser, words identifying the person to whom the instrument should be paid.

Be careful to whom you make checks payable and be careful how you sign them when you get them. Once you sign them, make sure you don't lose them.

You may have concluded that the law relating to checks and other negotiable instruments can get somewhat complicated. You would be right in that conclusion. If you know someone who needs some clarification or advice on these issues, please tell them to call me.

Michael R. King is a Partner with the law firm of Gammage and Burnham which is a sponsor of the Phoenix CEO-CFO Group. You can reach him at (602) 256-056.