I wrote a check to John. He endorses it, and gives it to Jane to repay her for money he owes her. Jane endorses check and takes it back to my bank to cash. It turns out John owes some old fees. The bank takes the check from Jane and tells her that they are applying the money against John's fees and send Jane away empty handed. Was that legal? I could understand if John presented the check that the bank would have a right to collect the debt, but was it legal to take the money from Jane?
Whatever the bank's situation was with John in your scenario, Jane didn't owe the bank anything. What the bank did was steal from Jane, plain and simple. John surrendered his interest in that check to Jane, and it was inexcusable for the bank to take the check from Jane without payment. Hopefully, Jane is able to convince the bank that it erred, and hopefully, the bank's management did not condone what was done, and that it was the act of an overzealous employee -- an act that the bank can undo by offering Jane her funds and a profound apology.
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Whatever the bank's situation was with John in your scenario, Jane didn't owe the bank anything. What the bank did was steal from Jane, plain and simple. John surrendered his interest in that check to Jane, and it was inexcusable for the bank to take the check from Jane without payment. Hopefully, Jane is able to convince the bank that it erred, and hopefully, the bank's management did not condone what was done, and that it was the act of an overzealous employee -- an act that the bank can undo by offering Jane her funds and a profound apology.