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Chapter 34 – Checks and Electronic Transfers
 

Chapter 34 – Checks and Electronic Transfers

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  • 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.

Chapter 34 – Checks and Electronic Transfers Chapter 34 – Checks and Electronic Transfers Presentation Transcript

  • Negotiable InstrumentsNegotiation and Holder in Due Course Liability of Parties Checks and Electronic Transfers © 2010 The McGraw-Hill Companies, Inc. All rights reserved.
  • Checks and Electronic TransfersWhether 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 relationship Forged and altered checks Check collection and funds availability Electronic transfers34 - 3
  • 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 UCC34 - 4
  • 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 debtor34 - 5
  • 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 account34 - 6
  • 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 bankruptcy34 - 7
  • 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 charged34 - 8
  • 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 drawer34 - 9
  • 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 loss34 - 10
  • 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)34 - 11
  • 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 example34 - 12
  • 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 recredited34 - 13
  • 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 checks34 - 14
  • 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 CC34 - 15
  • 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.34 - 16
  • Electronic Funds Transfers Preauthorized payments, such as automatic deposit of paychecks or bill payment  Example: online banking34 - 17
  • 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 liabilty34 - 18
  • 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 room34 - 19
  • 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.php34 - 20
  • 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 Act34 - 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 above34 - 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 above34 - 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