Anyone carrying on the business of check cashing in New York must be licensed by the Superintendent of Banking. Banking Law §367; 3 NYCRR 400.1.
A common fraud is that a person or small business paid by check (the “payee”) lies to the company paying the check (the “payor”) that the check was never received, in order to get a second, replacement check. The payee deposits the replacement check and uses a check casher to cash the first one on which the payor stopped payment. By the time the check casher gets notice of the stop payment, the payee who cashed the check is long gone and/or probably judgment proof. Legally, despite the stop payment, the payor is generally liable to the check casher upon the first check. Garden Check Cashing Service, Inc. v. Chase Manhattan Bank, 46 Misc. 2d 163, 164-166 . This is because under the Uniform Commercial Code, the check casher can claim “holder in due course” status which cuts off defenses on the check, even if payment was stopped. For the check casher to enjoy this privilege, if the payee was a business the check casher had to have on file a corporate resolution of the business, establishing that whoever cashed the check on its behalf was authorized to do so. N.Y. Banking Law, Article 1, §9.
The payor has an available legal protection from this potential fraud by a payee. A payor who is told that a check is lost can demand that the payee post indemnity for twice the amount of the check, in case the check is later presented for payment. Uniform Commercial Code §3-804. The payor has an absolute right to this indemnity before issuing a replacement check even if the payor mailed the check and the payee claims never to have gotten it in the mail. Guttman v. National Westminster Bank, USA, 146 Misc. 2d 391, 394 .
A difficulty facing the check casher trying to collect from the payor on a returned or stopped check is when the payor is located outside of New York. The payor is not automatically subject to jurisdiction in New York just because its check was cashed in New York. CLB Check Cashing, Inc. v. Dinan Eng’g, Inc., 2007 NY Slip Op 51666(U). However, the Weinberg Law Office, on its usual 25% contingent fee, has brought actions for check cashers against out of state payors where the check arose from the payor’s conduct of business with the payee in New York sufficient to have enabled the payee to obtain jurisdiction against the payor in New York upon their transaction. Courts have found jurisdiction over an out of state payor who assured payment to the plaintiff for its transaction with another party within the jurisdiction. Van Schaack & Co. v. District Court, 189 Colo. 145; American Nat’l Bank & Trust Co. v. International Seafoods, 735 P.2d 747. In the suits we are bringing for check cashers, the out of state payor did not just undertake an obligation to provide payment to the payee but made the underlying transaction with the payee for work or services in New York benefiting the payor. To find jurisdiction in a check casher’s lawsuit against a payor, the court must find that the lawsuit arose from the payor’s transaction of business in New York. The suit need only have a substantial New York connection to the transaction not a direct one. It bears emphasis that this legal theory has not yet been tested by any New York court.