ch 28 - banking

articles 3 and 4 of the UCC

issues relating to checks

article 3 - sets fourth the requirements for all negotiable instruments, including checks

article 4 - establishes a framework for deposit and checking agreements between a bank and its customers

• governs the relationship of banks with one another as they process checks for payment

• if a conflict between articles 3 and 4 arises article 4 controls

check

a draft drawn by a drawer ordering the drawee bank or financial insitution to pay a certain amount of money to the holder (payee) on demand

• article 4 defines a bank as “a person engaged in the business of banking, including a savings banks, savings and loan association, credit union or trust company”

cashiers check

a check drawn on a bank by itself

• with a cashiers check the bank serves as drawer and drawee

• the bank assumes responsibility for paying cashiers check, thus making it more readily acceptable as a substitute for cash

certified check

a check that has been accepted by the bank on which it is drawn

• by certifying (accepting) the check the bank promises to pay the check at the time the check is presented. it is a promise that funds are set aside to cover the check

• bank immediately charges the drawers account for the amount of the check

• bank writes or stamps the word certified on the face of the check and typically indicates the amount it will pay

once a check is certified, the drawer and any prior indorsers are completely discharged from liability on the check

drawee bank is not required to certify a check

• banks refusal to certify a check is not a dishonor of the check

bank-customer relationship

a bank customer relationship begins when the customer opens a checking account and deposits funds

three types of relationships arise:

1. creditor-debitor

2. agency

3. contractual

creditor-debitor relationship

a creditor-debitor relationship is created between a customer and a bank when the customer makes cash deposits into a checking account

• when a customer makes a deposit:

  • the customer=a credit and

  • the bank - a debitor for the amount deposited

agency relationship

arises between the customer and the bank when the customer

1. writes a check on their account

   • the customer is ordering the bank to pay the amount specified on the check to the holder when the holder presents the check to the bank for payment

   • bank becomes the customer’s agent and is obligated to honor the customer’s request

2. deposits a check into their account

   • the bank, as the customer’t agent, is obligated to collect payment on the check from the bank on which the check was drawn

   • when checking account funds are transferred among diff banks, each bank acts as the collection agent for its customers

contractual relationship

when a bank-customer relationship is established, certain contractual rights and duties arise

• contractual rights and duties of the bank and the customer depend on the nature of the transaction

• we look at 2

  1. banks duty to honor checks

  2. banks duty to accept deposits

banks duty to honor checks

bank duties: when a bank provides checking services., it agress to honor the checks written by its customers with the usual stipulation that sufficent funds must be available in the account

• when a drawee bank wrongfully fails to honor a check, it is strictly liable to its customer for damages resulting from its refusal to pau

customer duties: the customer’s agreement with the bank includes a general obligation to keep sufficient funds on deposit to cover all checks written

• customer is liable to the payee or the holder of a check in a civil suit if a check is dishonored for insufficient funds

• when the bank properly dishonors a check for insufficient funds, it has no liability to customer

overdrafts (banks duty to honor checks)

when a customers checking account contains insufficent funds to cover a check the bank can either

1. dishonor the item or

2. pay the item and charge the customer’s account, which creates an “overdraft”

   • overdrafts = a check written on a checking account in which their are sufficient funds to cover the amount of the check

   • the bank can subtract the difference (plus a service charge) from the customer’s next deposit bc the check carries with it an enforceable implied promise to reimburse the bank

   • with a joint account, the bank cannot hold any joint-account owner liable for payment of the overdraft unless that customer signed the check or benefitted from its proceeds

bank can expressly agree with a customer to accept overdrafts through an “overdraft protection agreement”

postdated and stale checks (banks duty to honor checks)

postdated check - a bank may charge a postdated check against a customer’s account unless the customer notifies the bank, in a timely manner, not ot pay the check until the state date

• banks typically ignore dates on checls - treat as demand instrument

stale check - a check, other than a certified check, that is presented for payment more than 6 months after its dage

• bank is not obligated to pay an uncertified check presented more than 6 months from its date but can choose to do so

stop-payment orders (banks duty to honor checks)

stop payment order - an order by a bank customer to their bank not ot pau or certify a certain check

• must be a customer (or a person authorized to draw on the account)

• can’t stop payment on a check already certified or accepted by a bank

• must have valid legal ground for issuing a stop-payment order, or the payee/holder can sue the customer-drawer for payment

• must issue the stop-payment order within a reasonable time and in a reasonable manner to permit the bank to act on it

• if the bank pays the check despite a valid stop-payment order, the bank will be obligated/liable to recredit the customer’s account

incompetence or death of a customer (banks duty to honor checks)

a customer’s mental incompetence or death does not automatically revoke a bank’s authority to accept, pay, or collect an item

• banks authority becomes ineffective only after the bank is:

  • notified of the customers incompetence or death and

  • has reasonable time to act on the notice

even when a bank knows of the death of a customer, for 10 day after the date of death it can pay or certify checks drawn on or before the date of death

forged drawers signatures (banks duty to honor checks)

when a bank pays a check on which the drawers signature is forged, generally the bank suffers the loss and recredits the customers account

bank may be able to avoid recredit and/or obtain recovert from

• forger of a check (liable if the forger can be found)

• holder who presented the check for payment (only if knew the signature was forged)

• the customer if the customer’s negligence substancially contributed to the forgery

in addition:

• customer duty to inspect and report - the customer has a duty to promptly examine bank statements with reasonable care and report any altercations or forged signatures within 30 days of available statement, otherwise liable for loss

• bank also negligent - a customer can escape liability, in part, for failing to timely notify the bank if the customer can prove the bank was also negligent. the loss is allocated between bank and customer for comparative negligence

• UCC 1 year limit - a customer to fails to report forged signature within one year loses the legal right to have the bank recredit their account. agreements with banks can provide for less time but not more

checks bearing forged indorsements (banks duty to honor checks)

bank duty: a bank that pays a customer’s check bearing a forged indorsement must recredit the customer’s account or be liable to the customer(drawer) for breach of contract

customer duty: the customer has a duty to report forged indorsements promptly

• 3 year limit - the bank is relieved of liability if the customer fails to report the forged indorsements within 3 years of receiving the bank statement that contained the forged items

altered checks (banks duty to honor checks)

bank duty to examine checks: the bank has an implicit duty to examine checks before making final payments. if it fails to detect an altercation it is liable to its customer for the loss bc it did not pay as the customer ordered

• banks loss is diff between the original amount of the check and the amount actually paid

• a customer’s negligence can shift the loss when payment is made on an altered check (unless the bank was also negligent, then the loss does not shift)

banks duty to accept checks

bank has a duty to its customer to accept the customer’s deposits of cash and checks and collect payment. the bank must make funds available within certain time frames (or notify customer if holding longer)

truth in savings act (TISA)

regulates

• banks paying on customer’s interest bearing account

• info new potential customers must receive before opening a deposit account

• info that must be disclosed in customer monthly statements

the check-collection process

check clearing and check 21 act

purpose: to streamline the costly time-consuming traditonal method of check collection, congress enacted the check clearing in the 21st century act (check 21)

• created a new negotiable instrument a “subsitute check”

substitute check - a negotiable instrument that is a paper reproduction and digital image of the front and back of an original check containing the same information required on checks for automated processing. a bank processing a check electronically warrants that the encoded information and/or image is accurate

result - as the speed of check processing increased under check 21, the max time that a bank can hold funds from deposited checks was reduced. that means that account holders will have faster access to their deposited funds

electronic fund transfers

electronic fund transfer(EFT) = a transfer of funds made through the use of an electronic terminal (ATM), point of sale system, smart phone, tablet, computer, or telephone

electronic funds transfer act (EFTA) = law governng EFT’s

• regulated by federal reserve board

• governs financial institutions, offering EFT’s to customers, such as checking or saving accounts for person, familt, or household purposes

• consumer protection law requiring disclosures of tights and responsibilities to customers

UCC article 4A = law governing commercial EFT’s

• governs “wire” or “fund” transfers between commercial parties and has been adopted by most states