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Lucy, Esq.
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Collection right on a check with a stopped payment

Resolved Question:

I am a business owner in Arizona. I have an employee who borrowed money from the company, signed a promissory note and an Authorization Form authorizing the company to make payroll deductions toward the promissory note. The form does not specify any amount, it is what I would like to consider a carte blanc authoriztion form. The employee was fired upon discovery of theft. He had gotten his paycheck early (payday is Friday, he got it Wednesday, the day the theft was discovered). We stopped pay on the check and applied the net pay toward his promissory note. Gross pay was still made, taxes withheld and remitted, child support withheld and remitted. Only the net pay was kept. The issuing bank was given the reason for stop payment, and our bank representative tell us that the grocery store that took the check only recourse is the ex-employee as the holder in due course. As I said, the ex-employee signed the check over to a grocery store. The ex-employee has not made good on the check to the grocery store, and that store is calling us. Our bank called the grocery store and advised them that their recourse is the ex-employee but it has not been able to collect from him. What is my company's exposure? I am a CPA, and in my limited training on negotiable instruments, the check has to go back in the line of issuance. Could you update and explain to me what the law is? Thank you Mike

Submitted: 2 years ago.
Category: Legal
Expert:  Lucy, Esq. replied 2 years ago.

My name is XXXXX XXXXX I'd be happy to answer your questions today. I'm sorry to hear that this happened.

Unfortunately, the law on this is that the grocery store is entitled to recover the check from the person that issued it. They are a holder in due course that accepted the instrument in good faith. Any dispute regarding payment is between you and the employee. That means that the grocery store is allowed to get the money from you, leaving you to sue the employee for the money that he got and shouldn't have.

Ariz. Rev. Stat., Section 47-3301 outlines who is entitled to enforce a check. A holder in due course is defined in Section 47-3302. Section 47-3414 addresses what happens when a person accepts a check for payment that is not later honored by the bank.

I realize that it's not fair, because the end result is that you're probably not going to be able to get the money back from the employee. But the law is designed to protect the person who accepts the instrument in good faith, because that person is 100% innocent and is not a party to the dispute at all.

If you have any questions or concerns about what I've written, please reply so that I may address them. It's important to me that you are 100% satisfied with the service I provide. Otherwise, please rate my service positively so that I get credit for answering your question. Thank you.
Customer: replied 2 years ago.

Is Arizona the same as most other states in this respect?


I don't disagree with the law on this, but my clear recollection is that the check went back in the line of each holder. Holder in Due Course is the terminology that I recall.




Expert:  Lucy, Esq. replied 2 years ago.
When I first started hearing about these laws, I was surprised - for exactly the same reasons you said. I'm not sure how common they are, but I have seen them in a few other states.
Lucy, Esq., Attorney
Category: Legal
Satisfied Customers: 23651
Experience: Lawyer
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