Teller's Check

A teller's check is a check drawn by a bank on another bank, or payable at or through another bank, and issued to a customer who pays the bank for it. The definition is in Uniform Commercial Code 3-104(h), enacted in each state from the uniform text: a teller's check "means a draft drawn by a bank (i) on another bank, or (ii) payable at or through a bank." Regulation CC gives the same instrument a slightly fuller banking definition at 12 CFR 229.2(gg), as a check "provided to a customer of a bank or acquired from a bank for remittance purposes, that is drawn by the bank, and drawn on another bank or payable through or at a bank." The practical point of both definitions is the same. The signature that matters on the check is the bank's, not the customer's, so the payee is relying on a bank's credit rather than on whether a stranger's account has money in it.

Three bank instruments, three different structures, and the difference is who owes what. A cashier's check is drawn by a bank on itself, so the drawer and the drawee are the same institution and the issuing bank is directly obligated on the instrument. A certified check starts life as the customer's own check and becomes a bank obligation only when the bank accepts it. A teller's check sits between them: the bank draws it, so it is a bank instrument from the moment it is issued, but it is drawn on or payable through a second bank, which is the one that will actually pay it. UCC 3-414(a) says the drawer's-obligation section "does not apply to cashier's checks or other drafts drawn on the drawer," which is precisely the sentence that separates the two: the issuer of a cashier's check is not a drawer at all, while the issuer of a teller's check is, and its obligation under 3-414(b) arises if the check is dishonored.

That structure is why the wrongful-refusal rule is worded asymmetrically. UCC 3-411 covers all three instruments, and defines the "obligated bank" as the acceptor of a certified check or the issuer of a cashier's or teller's check. But it lists three different wrongs. For a cashier's check or a certified check the wrong is refusing to pay. For a teller's check it is stopping payment, or refusing to pay after the check has been dishonored. The drafting follows the mechanics: the issuer of a teller's check is not the bank standing at the counter when the check is presented, so the way it can wrongfully deny payment is by ordering the drawee not to pay, or by declining to make good afterwards. Where the refusal is wrongful, 3-411(b) entitles the person enforcing the check to compensation for expenses and lost interest, and to consequential damages if the bank refused after being told of the circumstances that would cause them. Subsection (c) withdraws those damages where the bank suspended payments, had a reasonable claim or defense, reasonably doubted that the person demanding payment was entitled to enforce the check, or was barred from paying by law.

Taking one in payment does something an ordinary check does not. UCC 3-310(a) provides that where a certified, cashier's or teller's check is taken for an obligation, the obligation is discharged to the same extent as if that amount of money had been taken in payment. Subsection (b) treats an uncertified check differently: the obligation is only suspended, and revives if the check is dishonored. So a seller who accepts a teller's check has, by operation of the statute, released the buyer from the underlying debt and exchanged it for a claim on the instrument. That is a real benefit to the buyer and a real transfer of risk to the seller, and it is the legal reason these instruments feel like cash at the closing table.

What none of this settles is whether the piece of paper is genuine. The protections above run against a bank that actually issued the check. They do nothing for someone holding a counterfeit, because no bank ever issued it and no bank is the obligated bank. Regulation CC compounds the impression by giving cashier's, certified and teller's checks next-business-day availability, subject to conditions, so the money appears in the account quickly and the forgery surfaces later. Published guidance on counterfeit-instrument scams belongs with the cashier's check, which is the instrument most often used in them, but the same caution applies here: quick availability is a statement about access to funds, not about whether the item will be paid.

1. The customer buys the check. The bank debits the customer's account, or takes cash, for the face amount plus any issuance fee.

2. The bank draws the check. The bank signs as drawer and names the payee. The drawee is another bank, typically the correspondent that holds the issuing institution's account, or the check is made payable through that bank.

3. The payee takes it in payment. Under UCC 3-310(a) the underlying obligation is discharged at that moment, as though the same amount of cash had been handed over.

4. The payee deposits it. Deposited in person into an account held by the payee, and on a special deposit slip if the bank requires one, it qualifies for next-business-day availability under Regulation CC. Deposited any other way, it does not.

5. The drawee bank pays it and charges the issuing bank's account. If the issuing bank stopped payment or refuses to make good after dishonor, UCC 3-411 gives the holder a claim against the issuing bank.

Take an example. Marisol owes a contractor $4,800 and does not want to send a personal check. Her credit union issues a teller's check for $4,800 and charges a $10 fee, so $4,810 leaves her account and the check is drawn on the bank that clears for the credit union. When the contractor accepts the check, the $4,800 debt is discharged; his claim is now on the check. He deposits it in person at his own bank into an account in his name, so the full $4,800 must be available to him the next business day. If the credit union later stopped payment without a good reason, his remedy under UCC 3-411 runs against the credit union for his costs and lost interest, not against Marisol for a debt the statute has already discharged.

Pros

• The payee is relying on a bank's obligation rather than on the balance in a stranger's checking account.
• Accepting one discharges the underlying debt outright under UCC 3-310(a), rather than suspending it as an ordinary check does.
• It qualifies for next-business-day availability under Regulation CC when deposited in person into a payee's account.
• Institutions that do not clear checks in their own name, which includes many credit unions, can still issue a bank instrument.
• A wrongful stop payment by the issuer carries statutory liability for expenses, lost interest and, after notice, consequential damages.

Cons

• The issuing bank can stop payment, which a cashier's check does not allow, so the instrument is a shade less final than it looks.
• Two banks are involved, so tracing or replacing a lost check is slower than with a check drawn on a single institution.
• None of the statutory protections reaches a counterfeit, because no bank issued it and there is no obligated bank to sue.
• The discharge rule cuts against the payee: once the check is taken, the underlying debt is gone and the claim is on the instrument.
• Issuers charge a fee, and the customer's money leaves the account when the check is bought rather than when it is cashed.