If a payor bank has paid an item over the order of the drawer or maker to stop payment, or after an account has been closed or otherwise under circumstances giving a basis for objection by the drawer or maker, to prevent unjust enrichment and only to the extent necessary to prevent loss to the bank by reason of its payment of the item, the payor bank is subrogated to the rights:

(1) of any holder in due course on the item against the drawer or maker;

(2) of the payee or any other holder of the item against the drawer or maker either on the item or under the transaction out of which the item arose; and

(3) of the drawer or maker against the payee or any other holder of the item with respect to the transaction out of which the item arose.

History: 1953 Comp., § 50A-4-407, enacted by Laws 1961, ch. 96, § 4-407; 1992, ch. 114, § 192.

OFFICIAL COMMENTS

UCC Official Comments by ALI & the NCCUSL. Reproduced with permission of the PEB for the UCC. All rights reserved.

1. Section 4-403 [55-4-403 NMSA 1978] states that a stop-payment order or an order to close an account is binding on a bank. If a bank pays an item over such an order it is prima facie liable, but under Subsection (c) of Section 4-403 [55-4-403 NMSA 1978] the burden of establishing the fact and amount of loss from such payment is on the customer. A defense frequently interposed by a bank in an action against it for wrongful payment over a stop-payment order is that the drawer or maker suffered no loss because it would have been liable to a holder in due course in any event. On this argument some cases have held that payment cannot be stopped against a holder in due course. Payment can be stopped, but if it is, the drawer or maker is liable and the sound rule is that the bank is subrogated to the rights of the holder in due course. The preamble and paragraph (1) of this section state this rule.

2. Paragraph (2) also subrogates the bank to the rights of the payee or other holder against the drawer or maker either on the item or under the transaction out of which it arose. It may well be that the payee is not a holder in due course by still has good rights against the drawer. These may be on the check but also may not be as, for example, where the drawer buys goods from the payee and the goods are partially defective so that the payee is not entitled to the full price, but the goods are still worth a portion of the contract price. If the drawer retains the goods it is obligated to pay a part of the agreed price. If the bank has paid the check it should be subrogated to this claim of the payee against the drawer.

3. Paragraph (3) subrogates the bank to the rights of the drawer or maker against the payee or other holder with respect to the transaction out of which the item arose. If, for example, the payee was a fraudulent salesman inducing the drawer to issue a check for defective securities, and the bank pays the check over a stop-payment order but reimburses the drawer for such payment, the bank should have a basis for getting the money back from the fraudulent salesman.

4. The limitations of the preamble prevent the bank itself from getting any double recovery or benefits out of its subrogation rights conferred by the section.

5. The spelling out of the affirmative rights of the bank in this section does not destroy other existing rights (Section 1-103) [55-1-103 NMSA 1978]. Among others these may include the defense of a payor bank that by conduct in recognizing the payment a customer has ratified the bank's action in paying in disregard of a stop-payment order or right to recover money paid under a mistake.

The 1992 amendment, effective July 1, 1992, substituted "order of the drawer or maker to stop payment, or after an account has been closed" for "stop payment order of the drawer or maker" near the beginning of the introductory paragraph, substituted "is" for "shall be" near the end of that paragraph, and substituted numbers for letters in the paragraph designations.

This section is intended to provide broad, liberal remedy that incorporates and is based upon the common-law equitable principles of unjust enrichment and restitution and is to be applied even where the technical mechanical requirements of common-law subrogation have not been met. Swiss Credit Bank v. Balink, 614 F.2d 1269 (10th Cir. 1980).

Bank making erroneous payment over stop order can recover from drawer or payee: if the drawer has no defense to payment of the check, the bank recovers by charging the drawer's account; if the drawer has a defense, then the bank recovers as a subrogee to the drawer's right against the payee. Swiss Credit Bank v. Balink, 614 F.2d 1269 (10th Cir. 1980).

Law reviews. — For article, "New Mexico's Uniform Commercial Code: Who Is the Beneficiary of Stop Payment Provisions of Article 4?" see 4 Nat. Resources J. 69 (1964).

Am. Jur. 2d, A.L.R. and C.J.S. references. — 10 Am. Jur. 2d Banks § 654.

Rights and liabilities of drawee bank, as to persons other than drawer with respect to uncertified paid check which was altered, 75 A.L.R.2d 611.

Extent of bank's liability for paying postdated check, 31 A.L.R.4th 329.

83 C.J.S. Subrogation § 22.