Why Is It Important For A Business To Have HIDC Status?

When a business cashes a check they act as an intermediary between the maker of the check and the payee. This status is known by the Uniform Commercial code (UCC) as a “holder in due course” (HIDC). An analysis of Any kind checks cashed,inc v. Talcott will illustrate how fragile HIDC status is. There are benefits for a business to have HIDC status, which will protect them in the event of check fraud. However, businesses must perform some due diligence in order to maintain this status. Ultimately, a business should lose their holder in good faith status when they fail to act responsibly with negotiable instruments, and that irresponsibility facilitates fraud. Checks cashed inc v. Talcott is one such example of HIDC status being lost for lack
of due diligence.
Facts
Any checks cashed Inc v. Talcott is a case in which an elderly man, Talcott, invested $75000.00 with Mr. Guarino and Mr. Rivera who were acting as investment brokers. Some time passed and Mr. Guarino requested $10,000 for travel expenses in order to receive a return on the original investment. Talcott issued a check to Guarino for the $10,000 and sent it out via FedEx. On the morning of January 11th Mr. Rivera then called Talcott and told him that the $10,000 wouldn’t be necessary and $5700 would cover their travel expenses, Talcott stopped payment on the original check. Later that day Guarino cashed the $10,000 check at location of Any Checks Cashed incorporated (ACC). The manager of ACC could not reach Talcott on the phone so she used the Fedex envelope to indicate that the check was issued to Guarino in good faith and cashed the check, depositing $9,500 (the check amount minus a 5% fee) into Guarino’s bank account. On January 15th Rivera took the check for $5700.00 to ACC and cashed it, minus a 3% fee; this time the manager of ACC got a hold of Talcott for authorization. On January 19th Rivera called Talcott and warned him that Guarino was a thief and Talcott responded by stopping payment on the $5700.00 check.
Issues
The issues surrounding this case are regarding liability for checks cashed after a stop payment was issued. ACC cashed these checks: the $10,000 check without ordinary and responsible precautions, and the $5700.00 with precautions. Tolcott should have realized that the $10000 check had posted to his bank account prior to or shortly after authorizing ACC to cash the $5700 check. Guarino and Rivera were acting out of good faith, a fact that is not challenged in this case.
Ruling
ACC issued a two part complaint against Tolcott and Guarino citing that they were acting as a holder in due course for all checks. The Judge found that ACC did not take ordinary and responsible precautions when they honored the $10,000 check therefore, they were held liable and had to return the $10,000 to Tolcott. In the matter of the $5700.00 check, the Judge found that ACC did act responsibly by contacting the maker of the instrument and obtaining approval prior to cashing, resulting in Tolcott being liable for that loss. The question of fairness in this ruling has been raised. Was ACC a holder in due course in either case? An understanding of what a holder in due course is and the role they play in financial transactions will illustrate the fairness of the ruling. UCC §3-302 defines holder in due course as “any person who accepts an instrument that does not bear evidence of forgery or alteration.
The instrument must be taken for value and in good faith and without notice that the instrument has been dishonored.” This means that in order for someone to be considered a holder in due course they need to accept the instrument, inspect it for fraud or alteration and have no notice that the instrument has been dishonored. In the case of a check cashing business they are acting as a fourth party as they are agreeing to cash a check when they are not the maker, payee or the issuing/depositing banks moreover there tends to be a level of anonymity when dealing with a check cashing company. This puts additional burden on the check cashing company to ensure that the maker and payee are acting in good faith before they cash the check. The check cashing company has no way of determining if a check has been dishonored if additional steps are not taken. In the event of fraud and if the company has taken the proper steps they can lose HIDC status. HIDC status is extremely important for anyone who is honoring checks because it will limit the liability of the holder if they have taken precautions that are ordinary and responsible for their industry. In determining the fairness of the case ruling in Any Checks Cashed inc. v. Tolcott, we must determine if ACC acted with ordinary and responsible precautions when they agreed to cash that
check. As Gurarino and Rivera were acting as brokers, they probably should never have cashed a business related check at a check cashing company.
Check cashing companies are often in lower income sections and charge large fees for their services that a bank would not charge (5% and 3%). The question of the legitimacy of their broker status immediately rises when they do business in one of these establishments; their only benefit is anonymity in the transaction. This should have tipped off the managers of ACC that authorized the cashing of these checks. In either case ACC should have checked with the maker and the maker’s bank to determine the validity of the checks. ACC was in a real position to stop the fraud and failed to do so. If Tolcott was contacted regarding the cashing of the $10,000, check ACC would have retained their holder in due course status and therefore not been liable when the deal went sour. This would have put the loss entirely on Tolcott and he would have to recover his losses by filing suit on Guarino and Rivera. In light of these facts it is perfectly reasonable to hold ACC liable for the $10,000 check because ACC could have easily determined that there was fraudulent activity going on if they would have contacted Tolcott. The Judge found that Tolcott was liable for the loss of the other check because ACC’s holder in due course status wasn’t revoked in that case; ACC had taken ordinary and responsible measures to avoid the
fraud.
A business has the obligation to understand laws that affect them. If a business fails to fulfill their obligations by acting irresponsibly with negotiable instruments they deserve some penalty. It is perfectly reasonable for a check cashing business to be aware of all laws pertaining to the handling of checks, and act only within those laws to protect themselves and their customers. It was that failure that caused ACC to be partially liable for the actions of Guarino and Rivera; it was a mistake that easily could have been avoided.