34-1 Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

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7• Negotiable Instruments

• Negotiation and Holder in Due Course• Liability of Parties

• Checks and Electronic Transfers

Commercial Paper

PART

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Checks and Electronic Transfers

PA ET RHC 34

Whether we like it or not mankind now has a completely integrated international financial and informational marketplace capable of moving money and ideas to any place on this planet in minutes.

Walter Wriston in a speech to the International Monetary Conference, London (June 11, 1979)

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Learning Objectives

• Recall that bank must pay any properly drawn & payable check

• Explain bank’s obligation to customer when presented with stop-payment order, certified check, cashier’s check, or a forged or altered check

• Discuss major features of Electronic Funds Transfer Act

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• Two sources of law govern the relationship between the depositor and the drawee bank: the deposit agreement and Articles 3 and 4 of the UCC

Overview

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• The deposit agreement establishes depositor and drawee/payor bank relationship as creditor and debtor so that when a person deposits money into a bank account:– Depositor is a creditor of the bank to extent

of deposits and the bank becomes the debtor

Deposit Agreement

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• As agent, bank owes duty of ordinary care to follow depositor’s reasonable direction about payment of checks and collect checks and other deposits to the account

Bank as Agent of Depositor

• Bank is a depositor’s agent for check collection

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• Bank has a duty to pay a properly drawn and payable check and is liable for actual damages caused by a wrongful dishonor plus consequential damages [4–402]– No duty to pay stale checks (> 6 mo. old)– Duty to pay may be terminated by

depositor’s stop payment order or bankruptcy

Bank’s Duty to Pay

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• Bank has the right to charge any properly payable check to depositor’s account even if an overdraft results

• An altered check or one with a forged signature is not properly payable since bank should be familiar with drawer’s signature– But if drawer negligently contributes to forgery

or alteration or fails to report forgery, drawer’s account may be rightfully be charged

Bank’s Right to Charge

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• Stop-payment order is a customer’s request to drawee bank to not pay or certify a check– Bank must receive timely notice and a

reasonable description of the check

• While stop-payment order is in effect, bank is liable to drawer of a check it pays for any loss drawer suffers by reason of bank’s error– Burden of proof for loss placed on drawer

Stop-Payment Order

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• A drawee bank isn’t bound to certify a check, but if it certifies, it substitutes its promise to pay the check for the drawer’s promise and becomes obligated to pay the check– Bank debits customer’s account and

transfers the funds to a special bank account

• Adding the bank’s signature to the check shows it accepted primary liability and is essential for certification [3–409]

The Certified Check

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• A cashier’s check is a check on which a bank is both the drawer and drawee, thus the bank is primarily liable on the cashier’s check

• A teller’s check is similar, but one bank is the drawer and another bank is the drawee

The Cashier’s Check

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• Forged check not properly payable from the customer’s account and bank must exercise ordinary care in processing instruments, but customer must avoid being negligent, too

Forged and Altered Checks

Customer has duty to report forgeries and alterations

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• In 2004, Congress enacted a federal law short-titled Check 21 that allows banks to handle more checks electronically and provides a federal overlay state-based law

• Check 21 allows check trunctation, which means drawee bank keeps original checks and provides a monthly bank statement bearing images of cancelled checks

Check Collection

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• When a bank takes a check for deposit to a customer’s account, it places a hold on the funds represented by the check until it collects from the drawee bank

• The 1987 Expedited Funds Availability Act set mandatory schedules limiting check holds and stating when depositary banks must make funds available to customers– See Federal Reserve Board Regulation CC

Funds Availability

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• Electronic funds transfer systems (EFTs) for consumers include:

– Automated teller machines – Point-of-sale terminals: consumers use EFT

cards like checks to transfer money from their checking account to the merchant

– Telephone transfers between accounts or authorization to pay specific bills.

Electronic Funds Transfers

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• Preauthorized payments, such as automatic deposit of paychecks or bill payment

– Example: online banking

Electronic Funds Transfers

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• The EFT Act established rights, liabilities, and duties of participants in electronic funds transfer systems and consumer rights and liabilities for unauthorized electronic funds transfers

• Kruser v. Bank of America NT & SA illustrates EFTA provisions that require a customer to timely notify the bank of any unauthorized use of his card to limit liability

Electronic Funds Transfer Act

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• For business and financial institutions, wire transfers of funds are commonly used to move large sums of money very quickly across the country or around the world

• The Federal Reserve operates Fedwire, a domestic wire transfer system and international wire transfers may be made through the New York Clearinghouse Interbank Payments System (CHIPS)

Wire Transfers

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Thought Questions

• The increased use of online banking and electronic transfers has raised concerns about privacy. Are you concerned? How should the banking industry and businesses respond to a customers’ concern about privacy?