BUSINESS LAW TODAYEssentials 9th Ed.Roger LeRoy Miller - Institute for University Studies, Arlington, TexasGaylord A. Jentz - University of Texas at Austin, Emeritus Chapter 15 Checks and BankingIn the Digital Age
Learning Objectives • What type of check does a bank agree in advance to accept when the check is presented for payment? • When may a bank property dishonor a customer’s check without liability to the customer? • What duties does the UCC impose on a bank’s customers with regard to forged and altered checks? What are the consequences if a customer is negligent in performing those duties? • What are the four most common types of electronic fund transfers? • What laws apply to e-money transactions and online banking services?
Cashier’s Checks • Cashier’s Check—bank is both drawer and drawee. • CASE 15.1MidAmerica Bank, FSB v. Charter One Bank (2009).Bank must pay cashier’s check over the drawee’s stop payment order which is wrongful under UCC 3-411.
Traveler’s Checks and Certified Checks • Traveler’s Check—payable on demand, payable by a financial institution, designated as a traveler’s check. • Certified Checks—accepted in writing by drawee bank.
The Bank-Customer Relationship • Creditor-Debtor: Bank owes money to customer and must honor customer’s checks. • Agency Relationship: Bank must pay customer’s checks and collect for customer if she deposits checks. • Contractual Relationship: specific rights and duties depend on the terms of the transaction.
Bank’s Duty to Honor Checks • Banks that wrongfully dishonor customer’s checks are liable for actual damages only. • Overdrafts: bank’s choice to honor or not, then hold customer liable for amount. • Postdated Checks: Bank can pay unless notified in time to act on it.
Bank’s Duty to Honor Checks • Stale Checks: after 6 months, it is bank’s choice whether to honor or not. • Stop-Payment Orders: • Customer can’t stop certified checks and must give bank enough time to act. • Oral Stop Payment = 14 days, Written = 6 months. • Bank’s Liability for Wrongful Payment: Bank is obligated to recredit account, plus all ‘bounced’ costs. • Customer's Liability for Wrongful S.P. Order: Must have valid legal ground, but is still liable to payee for damages.
Bank’s Duty to Honor Checks • Death or Incompetence of a Customer: • Bank can pay until it knows and can pay checks drawn before death or incompetence 10 days after it knows - unless notified by a family member or executor.
Checks Bearing Forged Drawers’ Signatures • General Rule: forged signature has no legal effect, and bank must recredit customer’s account. • Customer Negligence: if customer substantially contributes to forgery, bank will not have to recredit the account. • CASE 15.2Auto-Owners Insurance Co. v. Bank One (2008). Bank One did not breach a duty to Auto-Owners and did not substantially contribute to the loss when it opened the account .
Checks Bearing Forged Drawers’ Signatures • Customer Negligence (cont’d) • Timely Examination of Bank Statements Required. Customer has a duty to promptly examine statements and report any forgeries or alterations, usually within 30 days. • Consequences of Failing to Detect Forgeries. Bank is not liable for all forged checks it pays prior to the notification. • When the Bank is Also Negligent. • Bank fails to exercise ordinary care, in keeping with established banking standards. • Regardless of bank’s care, UCC places absolute time limit on liability for forged check: ONE YEAR.
Checks Bearing Forged Indorsements • Payment on a Forged Indorsement – if not to customer’s order, bank must re-credit unless customer is negligent before or after forgery. • Before forgery: if large gaps or incompleteness. • After forgery: customer must notify bank (i) within 3 days after forged items made available to customer, or (ii) if a series of forgeries, within 30 days of receipt of either the bank statement or canceled checks.
Checks Bearing Forged Indorsements • Bank may recover from the person it paid (not cashier, teller, or certified checks) if Warranty. Presenter did not have Good Title because of the forged indorsement.
Altered Checks • Altered Checks. • Bank has implied duty to inspect checks. • Customer Negligence shifts loss to customer if bank pays in good faith without notice. • Bank may recover from other parties.
Bank’s Duty to Accept Deposits • Expedited Funds Availability Act (1987) and Regulation CC: • Local checks, 1 day availability. • Non-local checks, not more than 5 days.
Traditional Collection Process • Designations of Banks in Process. • Depositary Bank: first bank to receive payment. • Payor Bank: on which check is drawn. • Intermediary Bank: other banks in collection chain.
Traditional Collection Process • Local checks: one business day from the date of deposit. • Non-local checks: five business days from the date of deposit. • Some deposits must be available the next business day. • Deposits made in non-proprietary ATMs: 5 business days. • Some exceptions for new-customer deposits and large deposits.
The Traditional Collection Process • Bank must present check to be paid on or before midnight of the next day following receipt. • “Deferred posting” bank can set e.g., 2:00 pm as cutoff hour. • Bank can dishonor the check by the opening of the second banking day following its receipt or check is considered paid.
The Traditional Collection Process • Each bank in the collection process must pass the check on before midnight of the next banking day following its receipt. • Payor bank must dishonor or return it by midnight on the next banking day following receipt, or the payor bank is accountable for the face amount of the check. • CASE 15.3Bank One, N.A. v. Dunn. (2006). Bank was not liable to its customer for delay in determining whether the check was counterfeit.
How the Federal Reserve System Clears Checks • Fed acts as a Clearinghouse. • Electronic Check Presentment. • Much faster in contrast to manual check processing. • Check may not be physically moved, but encoded information sent by computer. • Those parties who encode and notify make the same warranties as if the check were sent physically
Electronic Fund Transfers • Types of EFT Systems. • ATMs. • Point-of-Sale systems. • Direct deposits and withdrawals. • Internet Payment Systems. • Consumer Fund Transfers: governed by Electronic Fund Transfer Act of 1978. • Loss limited to $50.00. • Commercial Fund Transfers: governed by Article 4A of the UCC.
E-Money and Online Banking • Digital Cash (e-money) in smart cards. • Online Banking Services. • Online contract between bank and customer governs terms. • Regulatory Compliance. • Privacy Protection. • Electronic Communications Privacy Act (1986). • Consumer Financial Data: Gramm-Leach-Bliley Act (1999).