Legal Question in Banking Law in California

My company issued a payroll check to an employee and it was mailed to the employee's home. The employee is working on a project for us that is far away from his home so he asked for his paycheck to be sent to the project location in California. We stopped payment on the check sent to his home and re-issued a check that was sent to the project location. The employee received and cashed that check. Then the employee got his hands on the check sent to his home and convinced a bar owner (in California) to cash it for him. The bar owner has now come to our company demanding we make good on the check. Are we liable to the bar owner? Whether or not we are liable to the bar owner, can we hold wages from the employee to pay the bar owner?

Thanks.


Asked on 2/07/11, 6:18 am

1 Answer from Attorneys

Your issue falls into the middle between somewhat arcane laws of negotiable instruments versus banking regulations. I do not believe the bar owner has a case, but I cannot say that for sure, because there is a rule that a holder in due course of a negotiable instrument, without notice of a defect in or defense to the note, can hold the maker liable for the instrument even thought the named payee would not be allowed to collect. And checks are negotiable instruments. I am fairly confident that a valid stop payment is a proper defense to a claim by a holder in due course of a check, but I can't point you to a law that says that. Legality aside, however, from a practical standpoint the solution would seem to be to let the employee know that unless he makes good to the bar owner he will be fired and the matter will be turned over to the police. If he chooses to go that route, you do have the right to treat the fraudulently cashed check as an advance on wages.

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Answered on 2/07/11, 11:08 am


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