Legal Definitions - certificate of dishonor

A certificate of dishonor is a formal, official document, typically prepared by a notary public, that serves as legal proof that a negotiable instrument (such as a check, promissory note, or bill of exchange) was presented for payment or acceptance but was refused. This refusal, known as "dishonor," occurs when the party obligated to pay or accept the instrument fails to do so upon proper demand. The certificate provides conclusive evidence of this event, which is often necessary to enforce the rights of the holder against other parties, such as endorsers, who might be secondarily liable for the instrument.

Here are some examples illustrating the application of a certificate of dishonor:

• Bounced Business Check: Imagine a small graphic design firm that completes a project for a new client. The client pays with a check, but when the firm deposits it, the bank returns the check marked "insufficient funds." To formally document this refusal of payment, the graphic design firm could obtain a certificate of dishonor from a notary public. This certificate would officially state that the check was presented for payment and dishonored due to lack of funds, providing crucial evidence if the firm needs to pursue legal action against the client for the unpaid amount.

• Unpaid Promissory Note: Consider a situation where a person borrows money from a friend and signs a promissory note, agreeing to repay the loan with interest by a specific date. On the due date, the borrower fails to make the payment as stipulated in the note. If the lender wishes to formally establish that the promissory note was not paid when due, they could have a notary public present the note for payment. Upon the borrower's failure to pay, the notary would issue a certificate of dishonor, which serves as official evidence that the note was presented and dishonored, strengthening the lender's position if they need to enforce the debt.

• Refused Acceptance of a Bill of Exchange: An international electronics distributor in New York ships a large order of components to a buyer in Germany. The distributor draws a bill of exchange, instructing the buyer's bank in Germany (the drawee) to accept the bill, thereby promising to pay the distributor at a future date. However, when the bill is presented to the German bank for acceptance, the bank refuses to accept it, perhaps due to a dispute between the buyer and seller. The New York distributor would then obtain a certificate of dishonor (specifically, dishonor by non-acceptance) from a notary public. This document would formally attest that the bill of exchange was presented to the drawee bank for acceptance, but acceptance was refused, which is vital for the distributor to then pursue payment from the buyer or any other parties liable on the bill.