A few months ago, a friend of mine—who is a lawyer, no less!—got involved in a dilemma in which he wrote a check to a construction company that was post-dated, and the construction company deposited it immediately.
He had just finished getting a deck added to his backyard, and he had a final payment due for approximately $4,800. He had $3,500 in his bank account at the time the work was completed on a Tuesday—the same date that the construction company requested final payment.
My friend wrote a check for the $4,800, mentioned that he didn’t get paid until Friday, and requested that the construction company deposit the check a day or two after his pay day. Sure enough, the construction company deposited the check the next day, and the bank processed it and my friend had a negative -$1,300 or so balance in his account.
The kicker is that he was simultaneously using his debit card to make other transactions unknowingly, such that he was subject to a $50 fee for each for each transaction that he entered into but technically could not fund. By the time he realized what the construction company had done, he was staring at $400 in bad check fees from his bank.
What rules govern this type of situation, and if we accept the premises that led up to it as necessary, how could it have been mitigated?
It is important to understand that, by itself, post-dating a check has no legal significance. The rule here, which comes from the Uniform Commercial Code which is adopted in every U.S. state except Louisiana, is Rule 4-401(a) which states the following: “A bank may charge against the account of a customer an item that is properly payable from that account even though the charge creates an overdraft. An item is properly payable if it is authorized by the customer and is in accordance with any agreement between the customer and the bank.” This is construed alongside Rule 3-113(a) which holds that antedating or postdating a written instrument does not affect its validity.
The construction company had the legal authority to deposit the check, and the bank had the discretion to process it. There are two alternatives that could have prevented this situation from happening—one that could’ve taken away the construction company’s authority to deposit the check, and another that could have taken away the bank’s discretion to process it.
To take away the discretion from the construction company, my friend could have gotten the construction company to actually agree in writing to not deposit the check until after Friday. Rule 3-113(a) provides an exception that: “The date stated determines the time of payment if the instrument is payable at a fixed period after date.”
In other words, if my friend and the construction company agreed that final payment was actual due on Friday, then the post-dated check would have legal effect. If the construction company deposited it anyway after such an agreement and the bank processed it, my friend would have a remedy to make the construction company pay for any late fees attached by the bank.
The risk with this part of the strategy is that its legal effect varies state by state. Some states permit this type of modification of a contract, and others give it no legal effect because it is considered a “mere gratuity” rather than a contract because the construction company isn’t actually receiving anything in exchange for delaying the payment date other than a promise to comply with the original contract agreement.
The better solution, or perhaps one that should be pursued jointly, is to call the bank and notify them ahead of time not to accept that particular check until Friday. It can be simple as calling the bank and saying “I just wrote a check No. 182 for $4,523.01 to Construction company X dated June XX, 2017 and I don’t want you to accept it before then.” Obviously, it would be better to do this via e-mail to the bank so that you can have a written record of your communication. If you make such a call or e-mail to the bank, you are invoking the provision of U.CC. 4-401(c) which states: “A bank may charge against the account of a customer a check that is otherwise properly payable from the account, even though payment was made before the date of the check, unless the customer has given notice to the bank of the postdating describing the check with reasonable certainty.”
In some states, changing the agreement with the construction can take away their authority to deposit it early and enable you to collect damages that result from their breach. In every state, you can call the bank ahead of time and tell them not to accept the check until its proper date provided it is post-dated to match what you state in your communications with the bank. Those can provide you with protection against a post-dated check getting deposited prior to your anticipation.
Of course, the best practice would be to have the money in the account or to delay writing the check altogether until you have money in the account. But of course, there are moments when we have to make the best of a situation as is rather than how we wished it would be. It is important to remember that post-dating a check does not mean anything by itself, unless it is carried out either with a agreement with the party receiving the check or advance notice to the bank, ideally both and in writing.
Notice to Comply with Missouri Law: All articles that I write are written for general information purposes only to help my audience learn more about items that I personally find of interest. The information that I present is not legal advice, and is not to be acted upon as such. It may not be current and may be subject to change without notice.