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Payment Systems Risk of Loss in the Checking System: Special Rules.

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Presentation on theme: "Payment Systems Risk of Loss in the Checking System: Special Rules."— Presentation transcript:

1 Payment Systems Risk of Loss in the Checking System: Special Rules

2 Basic concepts Payment only occurs if a person entitled to enforce is paid

3 Basic concepts People who are negligent and their negligence causes forgery or alteration loose the right to assert the forgery or alteration.

4 Basic concepts If you give a check to an imposter of the person you want to pay, anybody can validly sign for the payee.

5 Basic concepts If a check is made out to a fictitious person, it is payable to anyone.

6 Basic concepts If a person has authority to sign checks, his signature is valid even if he is acting outside his authority (embezzling)

7 Basic concepts If someone is authorized to indorse checks, even unauthorized indorsements (embezzlement) can be effective (unless depository bank is negligent).

8 Basic concepts Banks must send statements to customers Customers must review statements for forged or altered items If customer breaches its duty it is liable for: –Loss caused to the bank by reason of the failure –Checks forged or altered by the same wrongdoer after 30 day review period. 1 year statute of limitation to report fraud/alteration running from sending of statement.

9 4-406 d(2) and (f) (f) Day 1Day 30Day 601 year after statement Forgery StatementReasonable PaidSentTime Same forger writes checks Checks clear after this d(2)

10 Basic concepts Do banks need to return paid checks to their customers?

11 Basic concepts Do banks need to return paid checks to their customers? Not in most states (except New York and South Carolina who did not adopt 1990 version of 4-406)

12 § Customer's Duty to Discover and Report Unauthorized Signature or Alteration. (b) If the items are not returned to the customer, the person retaining the items shall either retain the items or, if the items are destroyed, maintain the capacity to furnish legible copies of the items until the expiration of seven years after receipt of the items. A customer may request an item from the bank that paid the item, and that bank must provide in a reasonable time either the item or, if the item has been destroyed or is not otherwise obtainable, a legible copy of the item.

13 Basic concepts Can the bank charge for a copy of an item?

14 Comment 3 Moreover, this Act does not regulate fees that banks charge their customers for furnishing items or copies or other services covered by the Act, but under principles of law such as unconscionability or good faith and fair dealing, courts have reviewed fees and the bank's exercise of a discretion to set fees... In addition, Section provides that every contract or duty within this Act imposes an obligation of good faith in its performance or enforcement.

15 § Negligence Contributing to Forged Signature or Alteration of Instrument. (a) A person whose failure to exercise ordinary care substantially contributes to an alteration of an instrument or to the making of a forged signature on an instrument is precluded from asserting the alteration or the forgery against a person who, in good faith, pays the instrument or takes it for value or for collection.

16 § Impostors; Fictitious Payees. (a) If an impostor, by use of the mails or otherwise, induces the issuer of an instrument to issue the instrument to the impostor, or to a person acting in concert with the impostor, by impersonating the payee of the instrument or a person authorized to act for the payee, an indorsement of the instrument by any person in the name of the payee is effective as the indorsement of the payee in favor of a person who, in good faith, pays the instrument or takes it for value or for collection.

17 § Impostors; Fictitious Payees. (b) If (i) a person whose intent determines to whom an instrument is payable (Section 3-110(a) or (b)) does not intend the person identified as payee to have any interest in the instrument, or (ii) the person identified as payee of an instrument is a fictitious person, the following rules apply until the instrument is negotiated by special indorsement: (1) Any person in possession of the instrument is its holder.Section 3-110(a)(b) (2) An indorsement by any person in the name of the payee stated in the instrument is effective as the indorsement of the payee in favor of a person who, in good faith, pays the instrument or takes it for value or for collection.

18 § Signature by Representative. (a) If a person acting, or purporting to act, as a representative signs an instrument by signing either the name of the represented person or the name of the signer, the represented person is bound by the signature to the same extent the represented person would be bound if the signature were on a simple contract. If the represented person is bound, the signature of the representative is the "authorized signature of the represented person" and the represented person is liable on the instrument, whether or not identified in the instrument.

19 § Employer's Responsibility for Fraudulent Indorsement by Employee. (a) In this section: (3) "Responsibility" with respect to instruments means authority (i) to sign or indorse instruments on behalf of the employer, (ii) to process instruments received by the employer for bookkeeping purposes, for deposit to an account, or for other disposition, (iii) to prepare or process instruments for issue in the name of the employer, (iv) to supply information determining the names or addresses of payees of instruments to be issued in the name of the employer, (v) to control the disposition of instruments to be issued in the name of the employer, or (vi) to act otherwise with respect to instruments in a responsible capacity. "Responsibility" does not include authority that merely allows an employee to have access to instruments or blank or incomplete instrument forms that are being stored or transported or are part of incoming or outgoing mail, or similar access.

20 § Employer's Responsibility for Fraudulent Indorsement by Employee. a) In this section: (2) "Fraudulent indorsement" means (i) in the case of an instrument payable to the employer, a forged indorsement purporting to be that of the employer, or (ii) in the case of an instrument with respect to which the employer is the issuer, a forged indorsement purporting to be that of the person identified as payee.

21 3-405 (b) For the purpose of determining the rights and liabilities of a person who, in good faith, pays an instrument or takes it for value or for collection, if an employer entrusted an employee with responsibility with respect to the instrument and the employee or a person acting in concert with the employee makes a fraudulent indorsement of the instrument, the indorsement is effective as the indorsement of the person to whom the instrument is payable if it is made in the name of that person. If the person paying the instrument or taking it for value or for collection fails to exercise ordinary care in paying or taking the instrument and that failure substantially contributes to loss resulting from the fraud, the person bearing the loss may recover from the person failing to exercise ordinary care to the extent the failure to exercise ordinary care contributed to the loss.

22 3-405 (b) For the purpose of determining the rights and liabilities of a person who, in good faith, pays an instrument or takes it for value or for collection, if an employer entrusted an employee with responsibility with respect to the instrument and the employee or a person acting in concert with the employee makes a fraudulent indorsement of the instrument, the indorsement is effective as the indorsement of the person to whom the instrument is payable if it is made in the name of that person. If the person paying the instrument or taking it for value or for collection fails to exercise ordinary care in paying or taking the instrument and that failure substantially contributes to loss resulting from the fraud, the person bearing the loss may recover from the person failing to exercise ordinary care to the extent the failure to exercise ordinary care contributed to the loss.

23 § Customer's Duty to Discover and Report Unauthorized Signature or Alteration. (a) A bank that sends or makes available to a customer a statement of account showing payment of items for the account shall either return or make available to the customer the items paid or provide information in the statement of account sufficient to allow the customer reasonably to identify the items paid. The statement of account provides sufficient information if the item is described by item number, amount, and date of payment.

24 4-406 (c) If a bank sends or makes available a statement of account or items pursuant to subsection (a), the customer must exercise reasonable promptness in examining the statement or the items to determine whether any payment was not authorized because of an alteration of an item or because a purported signature by or on behalf of the customer was not authorized. If, based on the statement or items provided, the customer should reasonably have discovered the unauthorized payment, the customer must promptly notify the bank of the relevant facts.

25 4-406 (d) If the bank proves that the customer failed, with respect to an item, to comply with the duties imposed on the customer by subsection (c), the customer is precluded from asserting against the bank: (1) the customer's unauthorized signature or any alteration on the item, if the bank also proves that it suffered a loss by reason of the failure; and (2) the customer's unauthorized signature or alteration by the same wrongdoer on any other item paid in good faith by the bank if the payment was made before the bank received notice from the customer of the unauthorized signature or alteration and after the customer had been afforded a reasonable period of time, not exceeding 30 days, in which to examine the item or statement of account and notify the bank.

26 4-406 (f) Without regard to care or lack of care of either the customer or the bank, a customer who does not within one year after the statement or items are made available to the customer (subsection (a)) discover and report the customer's unauthorized signature on or any alteration on the item is precluded from asserting against the bank the unauthorized signature or alteration. If there is a preclusion under this subsection, the payor bank may not recover for breach of warranty under Section with respect to the unauthorized signature or alteration to which the preclusion applies.Section 4-208

27 4-406 d(2) and (f) (f) Day 1Day 30Day 601 year after statement Forgery StatementReasonable PaidSentTime Same forger writes checks Checks clear after this d(2)


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