chapter 34 – checks and electronic transfers
DESCRIPTION
TRANSCRIPT
Negotiable Instruments
Negotiation and Holder in Due Course
Liability of Parties
Checks and Electronic Transfers
© 2010 The McGraw-Hill Companies, Inc. All rights reserved.
Checks and Electronic Transfers
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)
© 2010 The McGraw-Hill Companies, Inc. All rights reserved.
Learning Objectives
The drawer-drawee relationshipForged and altered checksCheck collection and funds availabilityElectronic transfers
34 - 3
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
34 - 4
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 the extent of
deposits and the bank becomes his debtor
Deposit Agreement
34 - 5
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
34 - 6
Bank is depositor’s agent for collection of the check
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
34 - 7
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
34 - 8
Stop-payment order: 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
34 - 9
Seigel wrote checks on his Merrill Lynch account with sufficient funds
On advice of Merrill Lynch, Seigel placed stop-payment orders on all checks and closed account, but Merrill Lynch paid several checks and debited Seigel’s margin account
Seigel not entitled to have account recredited for checks paid over the order because he was unable to show he suffered any loss
Seigel v. Merrill Lynch, Pierce, Fenner & Smith, Inc.
34 - 10
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 bank’s signature to the check shows
it accepted primary liability and is essential for certification [3–409] (see page 876)
The Certified Check
34 - 11
A cashier’s check is a check on which a bank is both the drawer and the 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 See page 876 for an example
The Cashier’s Check
34 - 12
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 Customer has duty to report forgeries and
alterations Union Planters Bank, N.A. v. Rogers: customer
didn’t report forgeries in timely manner, thus precluded from having account recredited
Forged and Altered Checks
34 - 13
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
34 - 14
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
34 - 15
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
34 - 16
Preauthorized payments, such as automatic deposit of paychecks or bill payment
Example: online banking
Electronic Funds Transfers
34 - 17
The Electronic Funds Transfer 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 the provisions that require a customer to timely notify the bank of any unauthorized use of his card to limit liabilty
Electronic Funds Transfer Act
34 - 18
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 At right, bank trading room
Wire Transfers
34 - 19
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) Payments over these systems are more
than one trillion dollars per day See http://www.frbservices.org/ and
http://www.chips.org/home.php
Wire Transfers
34 - 20
UCC Article 4A (Funds Transfers) covers wholesale wire transfers between business and financial institutions Explicitly excludes
consumer payments covered by Electronic Funds Transfer Act
Wire Transfers
34 - 21
Test Your Knowledge
True=A, False = B A depositor is a creditor of the bank to the
extent of deposits; the bank is the debtor. A bank has the right to charge any properly
payable check to a depositor’s account, but not if an overdraft results.
Check 21 allows banks to handle more checks electronically and provides that state law apply to business-to-business transfers.
34 - 22
Test Your Knowledge
True=A, False = B The 1987 Expedited Funds Availability Act
set mandatory schedules limiting check holds.
An altered check or one with a forged signature is not properly payable.
A stale check is over 30 days old. A bank is an agent and owes a duty of
ordinary care to the depositor.34 - 23
Test Your Knowledge
Multiple Choice Lee went to State Bank and gave them cash
in return for a check in which State Bank was both drawer and drawee. Lee purchased a:
(a) Cashier’s check
(b) Teller’s check
(c) Special indorsement check
(d) Wire transfer
(e) none of the above
34 - 24
Test Your Knowledge
Multiple Choice A drawee bank isn’t obligated to certify a
check, but if it certifies: (a) it substitutes its promise to pay the check for
the drawer’s promise and becomes obligated to pay the check
(b) it guarantees that drawer will pay the check upon payee’s presentment
(c) it merely warrants that the drawer’s signature is authentic and authorized
(d) none of the above
34 - 25
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?
34 - 26