Check or Cheque Legal Definition:

A form of bill of exchange where the order to pay is given to a bank which is holding the payor’s money.

Related Terms: Bill of Exchange , Drawer , Drawee , Bank

A form of bill of exchange where the order to pay a person is given to a bank which is holding the payor’s money on deposit.

Justice Bufford of the United States Bankruptcy Court wrote:

"A check is a species of documents called instruments or negotiable instruments.

"In addition to checks, negotiable instruments include promissory notes, drafts, cashier's checks, teller's checks, money orders, traveler's checks and certificates of deposit.... "A check typically involves three parties, (1) the drawer who writes the check, (2) the payee, to whose order the check is made out, and (3) the drawee or payor bank, the bank which has the drawer's checking account from which the check is to be paid.

"In form, a check is an order to the drawee bank to pay the face amount of the check to the payee. After receiving the check, the payee typically indorses it on the back in the payee's own name, and then deposits it in the payee's account in a different bank, the depositary bank. The depositary bank credits the check to the payee's account, and sends the check through the check clearing system to the payor bank for ultimate payment from the drawer's account. Any bank through which the check passes in the clearing process is an intermediary bank. Any bank handling the check for collection, including the depositary bank but excluding the payor bank, is referred to as a collecting bank.

"When a payee receives a check, the payee becomes its holder. The payee may negotiate the check by indorsing it and transferring it to another person, who then becomes its holder. In the normal course of events, a check is negotiated to a depositary bank, which then submits the check for collection through the check clearing system. If the check is indorsed in blank, it then becomes payable to bearer, and can be negotiated thereafter simply by delivery (just like cash).

"A holder who takes a check (that is regular on its face) for value, in good faith, and without notice of certain defects or defenses, becomes a holder in due course. The right of a holder in due course to enforce a check is not subject to most defenses, even if the defenses might have been good against the payee. Thus a holder in due course may obtain better rights in a check that its predecessor. Banks always want to be holders in due course with respect to checks that are deposited with them.

"The payee may transfer a check, where the transfer is not a negotiation. A check is transferred when it is delivered for the purpose of giving the recipient the right to enforce it. If the check is transferred without negotiation, the transferee does not become a holder, let alone a holder in due course, and usually has no better rights than its transferor."1

REFERENCES:

  • In re McMullen Oil Co., 250 BR 558 (2000; Note 1)

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