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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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• 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.

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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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• Cincinnati Insurance Company v. Wachovia Bank National Association: Bank defeated claim by customer’s insurance company because customer failed repeatedly to implement automated check matching service (fraud detection) and later suffered a significant check fraud loss

• Union Planters Bank, N.A. v. Rogers: customer didn’t report forgeries in timely manner, thus precluded from having account recredited

Relevant Cases

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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– At right, bank trading

room

Wire Transfers

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• 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

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• 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

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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.

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• 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.

Test Your Knowledge

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• 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 checkb) Teller’s check c) Special indorsement check d) Wire transfere) none of the above

Test Your Knowledge

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• 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

Test Your Knowledge

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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?