By Jonathan Nowlin
The difference between a “draft” and a “check” is explained in Jackson v. Pride Oil & Gas Properties, Inc., a Louisiana case. To the lessor,they might look and feel the same, but in reality they aren’t. “Draft” is a general term for an instrument that directs one person or entity to pay another person or entity. It does not have to be a check; it can be any type of instrument directing payment. A “check” is a special type of draft that is payable on demand – that is, the bank pays the check without first consulting the person who wrote it. With the prevalence of drafts in the oil and gas industry, it was only a matter of time before more litigation on this topic arose.
Lonnie and Betty Lou Jackson gave an oil and gas lease to Pride Oil, with Pride giving the Jacksons a draft—not a check—payable no later than 10 days after the draft’s arrival at the collecting bank. The draft required Pride’s bank, Chase, to get Pride’s authorization before paying the instrument. The day after receiving the draft, the Jacksons took the draft to their bank, BancorpSouth, who in turn sent it to Chase for collection. Pride authorized Chase to make the payment, but Chase did not send the corresponding cashier’s check to BancorpSouth until well beyond the maximum 10-day lead time agreed by the parties.
In the time between the initial deposit to BancorpSouth and the receipt of Chase’s cashier’s check, the Jacksons demanded rescission of the lease for failure to timely pay the draft as promised. Pride refused and the Jacksons sued, claiming Pride violated the agreement because the Jacksons did not receive the money within 10 days of the draft’s arrival at the collecting bank.
According to the court, Pride paid the Jacksons when it authorized Chase to make the payment on the draft. The court explained that a depository bank is the first bank to which a draft is taken for payment, a payor bank is the bank which is the drawee of a draft, and a collecting bank handles the draft merely for purposes of collecting the amount due on the draft and is not responsible for drawing the amount stated on the draft.
Based on this framework the court reasoned, first, that Chase was a collecting bank because it had to receive prior authorization from Pride before issuing a cashier’s check drawn on Pride’s account. Second, a collecting bank is the agent for the owner of the draft. Thus, payment to the collecting bank – Chase – is the same as payment to the owner of the instrument – the Jacksons. As a result, when Pride authorized the payment by Chase, it was the same as paying the Jacksons on that day, which satisfied the 10-day lead time agreement. Thus, the difference between “check” and “draft” was important.