Liability for Negotiable Instruments: Banks and Their Customers

1. CHAPTER 24 Liability for Negotiable Instruments: Banks and Their Customers

2. Click your mouse anywhere on the screen when you are ready to advance the text within each slide. After the starburst appears behind the blue triangles, the slide is completely shown. You may click one of the blue triangles to move to the next slide or the previous slide.

3. Quote of the Day “The law, unfortunately, has always been retained on the side of power: laws uniformly have been enacted for the protection and perpetuation of power.” Thomas Cooper, American scientist, educator

4. Who’s Who • Despositary Bank – the first to take check. • Payor Bank – the bank that pays the issuer’s check. • Intermediary Bank – any bank that handles a check during the collection process, except the depositary or payor bank. • Collecting Bank -- any bank that handles a check during the collection process, except the payor bank. • Presenting Bank – a bank that submits a check to the payor bank.

5. Bank’s Duty to Provide Information • A bank is not required to provide a monthly statement of all transactions, but most do. • The Truth in Savings Act requires banks to send statements that include: • Interest rate paid • Amount of interest earned • Fees imposed by the bank • The number of days covered by the statement • When an account is opened (and in ads), the bank must disclose: • Interest rate paid • How long this rate will be in effect • Requirements to earn the advertised rate • Fees or penalties imposed by the bank

6. The Bank’s Duty to Pay • A bank must pay a check if the check is authorized by the customer and complies with the terms of the checking account agreement. • A bank may choose the order in which it pays authorized checks. • A bank is not required to pay a check on an overdrawn account, but may choose to do so. It is then allowed to either repay itself out of the next deposit or demand immediate payment of the overdraft.

7. Wrongful Dishonor • If a bank violates its duty and wrongfully dishonors an authorized check, it is liable to the customer for all actual and consequential damages.

8. Difficult Situations for a Bank • The Death of a Customer • Bank may continue to pay checks for ten days after it learns of the death, unless it receives a stop payment order from someone claiming an interest in the account. • Incompetent Customers • Once notified that a court has found a customer to be incompetent, the bank is liable if it pays the customer’s checks.

9. Invalid Instruments • Forgery • If a bank pays when the issuer’s name is forged, it must recredit the issuer’s account. • Alteration • If a check has been altered, the customer is liable only for the original terms of the check, and the bank is liable for the rest. • Completion • If an incomplete check is later filled in by someone other than the original issuer, the bank is not liable unless it was on notice that the completion was improper.

10. Comparative Negligence and Bank Statements • Customers are responsible for checking their own bank statements for forged or altered checks. • Must notify bank of forgery within 30 days of receiving statement, or bank is not liable for even subsequent forgeries by same wrongdoer. • Customer may not recover for forgery or alteration at all if it is reported more than a year from receipt of statement. • If both the customer and the bank are careless, a comparative negligence standard is applied.

11. Dating on Checks • Stale Checks • A bank is not required to pay checks that are presented more than six months after their date, but it is not liable if it does pay. • Post-dated Checks • A bank is not liable for paying a post-dated check unless the customer has notified the bank in advance that a post-dated check is coming.

12. Stop Payment Orders • As a general rule, if a bank pays a check over a stop payment order, it is liable to the customer for the loss he suffers. • A stop payment order is only good if it describes the check accurately and is received before the check is paid. • An oral stop payment order is valid for 14 days; a written one for 6 months. • The “bank is subrogated to” the rights of the parties, which means that the bank can substitute for, or take the place of, either party.

13. Substitute Checks • The Check 21 Act is a statute that creates a new negotiable instrument called a substitute check. • Substitute checks are a re-printed version of an electronically encoded original check. • Substitute checks are legally the same as the original check. • The purpose of allowing banks to electronically encode checks is to expedite the processing time normally required for checks. • A bank that transfers or presents an electronic or substitute check gives a warranty of legal equivalency.

14. A bank may not allow funds to be withdrawn for several days after a deposit is made. Item deposited Funds may be withdrawn by check on: Cash Next business day, if deposited with a teller Cashier’s check Second business day, if deposited in an ATM Certified check Government check Check drawn on same bank Wire transfer Local check (both the depositary Next business day, for the first $100 bank and the payor bank are in the Second business day, for the balance up to $5000 same region) Ninth business day, for the balance over $5000 Nonlocal check Next business day, for the first $100 Fifth business day, for the balance up to $5000 Ninth business day, for the balance over $5000 Withdrawing Money by Check

15. Expedited Funds Availability Act • Because a bank is at greater risk of loss when a customer withdraws cash, he generally must wait about a day longer to withdraw cash against a deposit than the time period for writing a check.

16. Electronic Banking • Today’s consumers have options for banking that were barely imagined a generation ago: • Automatic Teller Machines (ATMs) that dispense cash, allow transfers and accept deposits • Point of Sale terminals that allow the use of debit cards (deducting the funds directly from a checking account) • Automatic deposit systems • Services that allow bills to be paid online or over the telephone lines

17. Provisions of the Electronic Fund Transfer Act of 1978 • Employers may require all employees to accept payment by electronic transfer (direct deposit), but may not require that it go to a particular bank. • Electronic fund transfer cards (ATM, debit, etc.) sent without a customer’s request must be invalid until the consumer activates it.

18. Electronic Fund Transfer Act(cont’d) • Documentation of electronic transfers must be provided both at the ATM and in monthly or quarterly statements. • Preauthorized transfers (such as an automatic mortgage payment) must be authorized in writing. • If an error is reported within 60 days of receipt of statement, a bank must investigate within the next 10 days or provisionally credit the account until the investigation can take place.

19. Electronic Fund Transfer Act(cont’d) • Consumer Liability for Unauthorized Transactions (stolen ATM or debit card) • If reported within 2 days of discovering loss of card: consumer liable for $50, bank liable for the rest. • If more than 2 days, but within 60 days of receiving statement: consumer liable for up to $500. • If not reported within 60 days of receiving statement, consumer is liable for the full amount of loss. • Bank’s Liability • If a bank fails to make an authorized electronic fund transfer, it is liable for damages caused by the nonpayment.

20. Electronic Fund Transfer Act(cont’d) • System Malfunctions • If a payment cannot be made due to a system malfunction, the obligation is suspended until the malfunction is repaired or the intended recipient has asked, in writing, for a non-electronic payment. • Disclosure • The provisions of the EFTA must be disclosed in clear language to a consumer opening an account with electronic fund transfer capability.

21. Wire Transfers • A wire transfer is a type of payment order that “pushes” money out of the issuer’s account into the payee’s. • UCC Article 4A governs nonconsumer wire transfers. • The originator is the person who sends the payment order; the beneficiary receives the payment order.

22. Bank Errors • Bank Sends the Wrong Amount • Bank is liable when too much money is sent; it may try to recover from recipient. • Bank Sends Money to the Wrong Person • Bank is liable when money is sent to the wrong person; it may try to recover from recipient. • If bank sends money to wrong account, but that account number was given by the originator, the bank may not be liable.

23. Privacy • Gramm-Leach-Bliley Act of 1999 (GLB) protects the privacy of consumer information. • Under this statute, banks and other financial institutions must disclose to consumers any nonpublic information they wish to reveal to third parties. • A financial institution cannot disclose this private information if the consumer opts out (that is, denies permission).

24. “This area of law is important because virtually everyone has written a check or used an ATM and because the law regarding these transactions is changing rapidly.”