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Checks and Banking In the Digital Age

BUSINESS LAW TODAY Essentials 9 th Ed. Roger LeRoy Miller - Institute for University Studies, Arlington, Texas Gaylord A. Jentz - University of Texas at Austin, Emeritus. Chapter 15. Checks and Banking In the Digital Age. Learning Objectives.

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Checks and Banking In the Digital Age

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  1. BUSINESS LAW TODAYEssentials 9th Ed.Roger LeRoy Miller - Institute for University Studies, Arlington, TexasGaylord A. Jentz - University of Texas at Austin, Emeritus Chapter 15 Checks and BankingIn the Digital Age

  2. Learning Objectives • What type of check does a bank agree in advance to accept when the check is presented for payment? • When may a bank property dishonor a customer’s check without liability to the customer? • What duties does the UCC impose on a bank’s customers with regard to forged and altered checks? What are the consequences if a customer is negligent in performing those duties? • What are the four most common types of electronic fund transfers? • What laws apply to e-money transactions and online banking services?

  3. Cashier’s Checks • Cashier’s Check—bank is both drawer and drawee. • CASE 15.1MidAmerica Bank, FSB v. Charter One Bank (2009).Bank must pay cashier’s check over the drawee’s stop payment order which is wrongful under UCC 3-411.

  4. Traveler’s Checks and Certified Checks • Traveler’s Check—payable on demand, payable by a financial institution, designated as a traveler’s check. • Certified Checks—accepted in writing by drawee bank.

  5. The Bank-Customer Relationship • Creditor-Debtor: Bank owes money to customer and must honor customer’s checks. • Agency Relationship: Bank must pay customer’s checks and collect for customer if she deposits checks. • Contractual Relationship: specific rights and duties depend on the terms of the transaction.

  6. Bank’s Duty to Honor Checks • Banks that wrongfully dishonor customer’s checks are liable for actual damages only. • Overdrafts: bank’s choice to honor or not, then hold customer liable for amount. • Postdated Checks: Bank can pay unless notified in time to act on it.

  7. Bank’s Duty to Honor Checks • Stale Checks: after 6 months, it is bank’s choice whether to honor or not. • Stop-Payment Orders: • Customer can’t stop certified checks and must give bank enough time to act. • Oral Stop Payment = 14 days, Written = 6 months. • Bank’s Liability for Wrongful Payment: Bank is obligated to recredit account, plus all ‘bounced’ costs. • Customer's Liability for Wrongful S.P. Order: Must have valid legal ground, but is still liable to payee for damages.

  8. Bank’s Duty to Honor Checks • Death or Incompetence of a Customer: • Bank can pay until it knows and can pay checks drawn before death or incompetence 10 days after it knows - unless notified by a family member or executor.

  9. Checks Bearing Forged Drawers’ Signatures • General Rule: forged signature has no legal effect, and bank must recredit customer’s account. • Customer Negligence: if customer substantially contributes to forgery, bank will not have to recredit the account. • CASE 15.2Auto-Owners Insurance Co. v. Bank One (2008). Bank One did not breach a duty to Auto-Owners and did not substantially contribute to the loss when it opened the account .

  10. Checks Bearing Forged Drawers’ Signatures • Customer Negligence (cont’d) • Timely Examination of Bank Statements Required. Customer has a duty to promptly examine statements and report any forgeries or alterations, usually within 30 days. • Consequences of Failing to Detect Forgeries. Bank is not liable for all forged checks it pays prior to the notification. • When the Bank is Also Negligent. • Bank fails to exercise ordinary care, in keeping with established banking standards. • Regardless of bank’s care, UCC places absolute time limit on liability for forged check: ONE YEAR.

  11. Checks Bearing Forged Indorsements • Payment on a Forged Indorsement – if not to customer’s order, bank must re-credit unless customer is negligent before or after forgery. • Before forgery: if large gaps or incompleteness. • After forgery: customer must notify bank (i) within 3 days after forged items made available to customer, or (ii) if a series of forgeries, within 30 days of receipt of either the bank statement or canceled checks.

  12. Checks Bearing Forged Indorsements • Bank may recover from the person it paid (not cashier, teller, or certified checks) if Warranty. Presenter did not have Good Title because of the forged indorsement.

  13. Altered Checks • Altered Checks. • Bank has implied duty to inspect checks. • Customer Negligence shifts loss to customer if bank pays in good faith without notice. • Bank may recover from other parties.

  14. Bank’s Duty to Accept Deposits • Expedited Funds Availability Act (1987) and Regulation CC: • Local checks, 1 day availability. • Non-local checks, not more than 5 days.

  15. Traditional Collection Process • Designations of Banks in Process. • Depositary Bank: first bank to receive payment. • Payor Bank: on which check is drawn. • Intermediary Bank: other banks in collection chain.

  16. Traditional Collection Process • Local checks: one business day from the date of deposit. • Non-local checks: five business days from the date of deposit. • Some deposits must be available the next business day. • Deposits made in non-proprietary ATMs: 5 business days. • Some exceptions for new-customer deposits and large deposits.

  17. Traditional Collection Process

  18. The Traditional Collection Process • Bank must present check to be paid on or before midnight of the next day following receipt. • “Deferred posting” bank can set e.g., 2:00 pm as cutoff hour. • Bank can dishonor the check by the opening of the second banking day following its receipt or check is considered paid.

  19. The Traditional Collection Process • Each bank in the collection process must pass the check on before midnight of the next banking day following its receipt. • Payor bank must dishonor or return it by midnight on the next banking day following receipt, or the payor bank is accountable for the face amount of the check. • CASE 15.3Bank One, N.A. v. Dunn. (2006). Bank was not liable to its customer for delay in determining whether the check was counterfeit.

  20. How the Federal Reserve System Clears Checks • Fed acts as a Clearinghouse. • Electronic Check Presentment. • Much faster in contrast to manual check processing. • Check may not be physically moved, but encoded information sent by computer. • Those parties who encode and notify make the same warranties as if the check were sent physically

  21. Electronic Fund Transfers • Types of EFT Systems. • ATMs. • Point-of-Sale systems. • Direct deposits and withdrawals. • Internet Payment Systems. • Consumer Fund Transfers: governed by Electronic Fund Transfer Act of 1978. • Loss limited to $50.00. • Commercial Fund Transfers: governed by Article 4A of the UCC.

  22. E-Money and Online Banking • Digital Cash (e-money) in smart cards. • Online Banking Services. • Online contract between bank and customer governs terms. • Regulatory Compliance. • Privacy Protection. • Electronic Communications Privacy Act (1986). • Consumer Financial Data: Gramm-Leach-Bliley Act (1999).

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