Banks can stop payment of cashier’s checks

Banks have a limited right to stop payment of cashier’s checks under the current version of Missouri’s Uniform Commercial Code, a state appellate court said.

The decision by the Missouri Court of Appeals in St. Louis says state law regarding payment of cashier’s checks is where it was before the UCC was revised in 1992, said Michael W. Bartolacci, a Thompson Coburn partner who represented First Banks Inc. in the lawsuit filed by Transcontinental Holding Ltd.

The case arose out of the dispute between two businessmen, Ron Scharf, the owner of Transcontinental, and Alexander Kogan, a Russian immigrant who proposed to Scharf that they promote and sell air structures in Russia. Kogan didn’t have the money, and Scharf agreed to provide financing.

The business relationship broke down, and despite filing lawsuits and negotiating settlements, Kogan didn’t pay Scharf the money owed, according to the opinion. At trial, Scharf testified that Kogan affiliates owed his affiliates more than $5 million. The parties also took their disputes to arbitration, and in August 2007 the arbitrator awarded the Scharf affiliates lost profits, exceeding $16.5 million, and other damages.

But when Kogan failed to meet his settlement obligations, Scharf took matters into his own hands and decided to go after Kogan’s bank accounts. Armed with an escrow agreement, which gave him power of attorney, and accompanied by his lawyer, Duane L. Coleman, Scharf went to First Bank in May 2006 to withdraw money from Kogan’s accounts.

Briefly, Scharf opened a new account at First Bank in the name of IPD Sales & Marketing, a Kogan company. Then he had a banker withdraw money from all of Kogan’s accounts. That included one in the name of IPD Capital Inc, which had $664,000 in it. The banker added Scharf as a signatory on that account and then transferred, at Scharf’s request, $650,000 into the IPD Sales & Marketing account.

Then Scharf had a teller prepare a $650,000 cashier’s check, made payable to Transcontinental. He opened another account, in Transconti-nental’s name, at Southwest Bank, deposied the cashier’s check into the account and then asked the bank to wire transfer $649,000 of the money. Scharf and Coleman testified that Scharf asked that the money be transferred to New York, but Southwest Bank’s security officer testified that the bank had instructions to transfer it to an offshore account in the Bahamas.

Later the same day, after First Bank found out Kogan disputed Scharf’s right to access the IPD Capital account, the bank put a stop payment order on the cashier’s check. About a week later, First Bank reversed the $650,000 deposit into the newly created IPD Sales & Marketing account and put the money back where it came from.

A provision of the UCC, Section 400.3-412 RSMo., means First Bank was obligated to pay the $650,000 cashier’s check “according to its terms at the time it was issued,” Transcontinental argued.

If a bank can decide “when and if it’s going to honor a cashier’s check when sold, we argued to the court this could undermine the strength and certainty that’s necessary for commercial transactions,” Transcontinental’s lawyer, David S. Corwin, of Devereux Murphy, said Thursday.

But Bartolacci countered, “The money was only there because they persuaded our teller to take it from another customer’s account, and they had no right to do that.”

The case is Trans-continential Holding Ltd v. First Banks Inc., ED91469.