Legal Definitions - wrongful dishonor

Wrongful dishonor occurs when a bank or another party improperly refuses to pay or accept a valid financial document, such as a check or a promissory note, even though all the necessary conditions for payment have been met.

Essentially, it means that a party that is obligated to pay a financial instrument refuses to do so without a legitimate legal reason, causing potential harm to the person who presented the instrument for payment.

Here are some examples to illustrate this concept:

• Example 1: Refusal of a Personal Check with Sufficient Funds

  Imagine Sarah writes a check to her landlord for her monthly rent. Her bank account contains more than enough money to cover the check. When the landlord deposits the check, Sarah's bank returns it, mistakenly marking it as "insufficient funds," even though the account balance was adequate. The bank's refusal to pay the check, despite the presence of sufficient funds, constitutes a wrongful dishonor. This action could lead to late fees for Sarah and damage her relationship with her landlord, for which the bank might be held responsible.

• Example 2: Refusal to Honor a Certified Check

  A small business, "Bright Ideas Inc.," receives a certified check from a client as a down payment for a large project. A certified check means the bank has already verified and set aside the funds from the client's account, guaranteeing payment. When Bright Ideas Inc. attempts to deposit the check, the client's bank refuses to honor it, citing an internal processing error that incorrectly flagged the check. This refusal is a wrongful dishonor because the bank had already guaranteed the funds, and its subsequent refusal to pay was without a valid legal basis related to the check's validity or the client's funds.

• Example 3: Refusal to Pay a Promissory Note

  John lent money to his friend, Michael, who signed a promissory note agreeing to repay the loan by a specific date. On the due date, John properly presents the promissory note to Michael for payment. Michael, however, refuses to pay, stating he simply doesn't have the money right now and needs more time, despite the note being valid and due. Michael's refusal to pay the properly presented and due promissory note is a wrongful dishonor. He is legally obligated to pay according to the terms of the note, and his personal financial difficulties do not constitute a valid legal reason to refuse payment.