What is a Notice of Dishonor
A notice of dishonor is a formal notice stating that the bank that a check or draft is presented to will not honor the instrument. A notice of dishonor may be given to the holder or presenter of the instrument. It may also be given to the issuing institution.
BREAKING DOWN Notice of Dishonor
For example, Person A writes a check to Person B, but Person A has insufficient funds to pay the check. When Person B attempts to deposit that check in his or her bank account, Person B’s bank returns it to Person A’s bank with a notice of dishonor, stating that they will not pay the check due to insufficient funds. Person A is now liable for the amount of the check, and, secondarily, so is Person A’s bank.
Uniform Commercial Code
The creation of a notice of dishonor is governed by Article 3 of the Uniform Commercial Code (UCC), which is one of many uniform acts that exist to standardize laws governing commercial transactions across all 50 U.S. states, the U.S. territories and the District of Columbia. Article 3 governs the use of negotiable instruments, including checks and promissory notes.
Sufficient Notice of Dishonor
According to Article 3, Section 503 of the UCC, a notice of dishonor “may be given by any commercially reasonable means,” including electronic, written or oral communication. The notice is valued as long as it is issued and delivered in a reasonable and professional manner. A notice of dishonor must be signed by a notary public, but any person can deliver it. Any notice that is promptly delivered completely discharges any obligation of the endorser of the instrument.
A properly executed notice of dishonor should identify the instrument being dishonored and clarify that said instrument is not being honored, accepted or paid. The return of an instrument that has been given to a bank for collection can serve as sufficient notice of dishonor, such as the return of a check for insufficient funds.
Time Limits for Notice of Dishonor
Article 3, Section 503 of the UCC states that when a bank takes a negotiable instrument for collection, it must give a notice of dishonor “before midnight of the next banking day following the banking day on which the bank receives notice of dishonor of the instrument.” If another person takes an instrument for collection, they must give a notice of dishonor within 30 days of the dishonor of the instrument.