3. Learning Objectives
The drawer-drawee relationship
Forged and altered checks
Check collection and funds availability
Electronic transfers
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4. Overview
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
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5. Deposit Agreement
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
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6. Bank as Agent of Depositor
Bank is depositor’s agent for collection of
the check
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
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7. Bank’s Duty to Pay
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
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8. Bank’s Right to Charge
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
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9. Stop-Payment Order
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
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10. Seigel v. Merrill Lynch, Pierce,
Fenner & Smith, Inc.
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
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11. The Certified Check
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)
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12. The Cashier’s Check
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
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13. Forged and Altered Checks
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
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14. Check Collection
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
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15. Funds Availability
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
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16. Electronic Funds Transfers
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.
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17. Electronic Funds Transfers
Preauthorized
payments, such as
automatic deposit
of paychecks or bill
payment
Example: online
banking
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18. Electronic Funds Transfer Act
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
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19. Wire Transfers
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
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20. Wire Transfers
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
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21. Wire Transfers
UCC Article 4A (Funds
Transfers) covers
wholesale wire transfers
between business and
financial institutions
Explicitly excludes
consumer payments
covered by Electronic
Funds Transfer Act
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22. 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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23. 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.
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24. 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
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25. 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
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26. 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?
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Notas del editor
Figure 1 on page 872 depicts a stop-payment order.
The checks were to cover gambling expenses/losses. The Court was not sympathetic: Seigel is required to bear the burden of establishing that he in fact suffered a loss as a result of the payment of the checks…. As a payee of a dishonored check, the casino would have a prima facie right to recover its amount from Seigel as drawer, § 3–414(b), and the burden would be on Seigel to establish any defense he might assert on the instrument. § 3–308(b). Seigel asserts two such defenses: duress and illegality. We turn to an examination of those defenses. … “The entirety of Seigel’s duress argument emanates from a single sentence in his affidavit: “For years I have had [a] gambling problem.” If not ambiguous, the statement is conclusory. Unlike the gambler in Lomonaco v. Sands Hotel Casino, Seigel fails to produce any evidence in the record, specific or otherwise, regarding his problem and its relation to any unconscionable duress in the transactions at issue….”
Union Planters Bank, N.A. v. Rogers, the court concluded that the bank’s customer had not discovered and reported to the bank in a timely fashion a series of multiple forgeries on checks drawn against her account and thus was precluded from seeking to have her account recredited for the unauthorized items.
Hyperlink is to Regulation CC on the government website that provides access to regulations.
True. False. Bank has the right to charge any properly payable check to depositor’s account even if an overdraft results. False. Check 21 that allows banks to handle more checks electronically and provides a federal overlay statebased law.
True. It also states when depositary banks must make funds available to customers. True. False. A stale check is one that is over 6 months old. True.
The correct answer is (a). 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.
The correct answer is (a).
Opportunity to discuss choices about privacy and the internet, particular in light of mishaps during recent years in which large credit and banking institutions have “lost” confidential data about their customers.