Wrongful Dishonor: Meaning and Legal Basis

Wrongful dishonor occurs when a bank refuses to pay a valid negotiable instrument—such as a check or draft—presented for payment, even though the instrument is properly payable and the customer’s account covers it. Such refusals can violate the Uniform Commercial Code (UCC), which governs negotiable instruments.

How it works under the UCC

• Article 4 of the UCC governs checks, drafts, and other negotiable instruments. Under § 4-402, a payer bank wrongfully dishonors an instrument if it refuses payment despite the instrument being properly payable (authorized by the customer and consistent with the bank’s agreement with that customer).
• A bank may determine to dishonor an instrument at any time between receipt and the return or notice of dishonor. If the bank later reconsiders that decision, it must use the customer’s account balance as it exists at the time of reevaluation.
• A bank is permitted to dishonor an instrument when honoring it would create an overdraft, unless the bank has a preexisting agreement (such as overdraft protection) to cover overdrafts for that account.

Liability and damages

• A payer bank is liable to its customer for damages caused by wrongful dishonor. Liability is generally limited to actual, provable damages, and may include consequential damages when supported by the facts.
• Examples of consequential damages can include losses that arise from actions triggered by the dishonor (for instance, arrest or prosecution tied to the dishonored instrument), but whether such damages are recoverable is a matter for the courts to decide.

Example case

In Loucks v. Albuquerque National Bank, the bank improperly charged an individual debt to a partnership’s checking account, which left insufficient funds and caused the bank to dishonor multiple partnership checks. The plaintiffs sued for the debt and additional damages; the court awarded the $402 improperly charged but found no basis for awarding the larger consequential damages claimed.

Key takeaways

• Wrongful dishonor is a bank’s improper refusal to pay a valid, properly payable check or draft.
• The UCC (Article 4) sets the rules for when dishonor is wrongful and when a bank may lawfully refuse payment.
• A bank can lawfully dishonor checks that would create an overdraft unless it has agreed otherwise with the customer.
• Customers may recover actual, provable damages for wrongful dishonor; recovery of consequential damages depends on the court’s findings.

If you believe a wrongful dishonor occurred

• Contact the bank to request an explanation and a written record of the reason for dishonor.
• Keep all relevant documents (checks, account statements, communications).
• If damages are significant or disputed, consider consulting an attorney familiar with UCC and banking law.