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When a Check Is Paid Over a Stop Pay
What is the rule for when a liquor store cashes a stop-paid check? My employee said he did not receive his check; I stopped it and reissued another check to him. One month later, a liquor store called me and said they cashed the check that I placed a stop payment on. (I'm in California, if that matters.)
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 The liquor store owner probably also said: "Pay up, please!" It appears that your bank dutifully followed your instruction not to pay the original paycheck. If the check was truly lost and your employee's endorsement was forged, you don't have to pay the liquor store. See if your employee will cooperate and sign an affidavit that the endorsement was forged, and send a copy of that affidavit (keep the original) to the liquor store with your letter advising them you won't repay them.
If, on the other hand, your employee was lying about the check, and actually cashed it at the liquor store (the store's security cameras might help them prove it), you're on the hook. That's because the liquor store has a special status as "holder in due course" of the check. That means the store cashed the check without knowing about the stop payment or the employee's claim the check was not received.
As a holder in due course, the store can require you to pay it for the check. The Uniform Commercial Code creates a protected status for holders in due course in order to put the risk of loss with the party best able to prevent it. In this case, assuming your employee was lying about the check, the party left "holding the bag" will be you, since you could have prevented the loss by not issuing the duplicate check.
The liquor store has two ways to go to recover its loss on the check. It can go after the check payee based on the fact that he endorsed the check (giving a warranty that the check would be paid), or it can go after you, the drawer of the check. In most cases like this, the drawer of the check provides the better source of repayment. Once you've redeemed the check, your options will be limited to attempting to recover the amount of the check from your (presumably former) employee.
How should you handle the next case of an employee claiming non-receipt (or loss, or "the dog ate my check")? Stall for a few days after placing the stop payment. Then check with the bank to see if the check has shown up (and been bounced) before issuing a replacement. If the check has been stopped and returned, see if you can figure out whether your employee cashed the check. If he has, you can lift the stop order, tell the liquor store (or whoever the holder in due course is) to redeposit it (or otherwise make it whole), and cashier your dishonest employee.
Published on BankingQuestions.com 3/26/07
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