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Chapter 1: Legal Ethics 1. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use.

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Presentation on theme: "Chapter 1: Legal Ethics 1. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use."— Presentation transcript:

1 Chapter 1: Legal Ethics 1

2 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Learning Objectives 1.What type of check does a bank agree in advance to accept when the check is presented for payment? 2.When may a bank properly dishonor a customer’s check without being liable to the customer? 2

3 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Learning Objectives 3.What duties does the UCC impose on a bank’s customers with regard to forged and altered checks? What are the consequences of a customer is negligent in performing those duties? 4.What are the four most common types of electronic fund transfers? 5.What laws apply to e-money transactions and online banking? 3

4 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.Introduction  Checks and electronic fund transfers (EFT’s) are governed by Articles 3 and 4 of the UCC. – Article 3: covers all negotiable instruments, including checks. – Article 4: establishes a framework for deposit, EFT’s and checking agreements between banks and customers. 4

5 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.Checks  Cashier’s Checks: bank serves as drawer and drawee. Bank assumes responsibility. – CASE 17.1 M ID A MERICA B ANK, FSB V. C HARTER O NE B ANK, FSB (2009). – CASE 17.1 M ID A MERICA B ANK, FSB V. C HARTER O NE B ANK, FSB (2009). Why did the Illinois Supreme Court reverse the decision and award MidAmerica the amount of the check?  5

6 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.Checks  Traveler’s Checks. – Must be signed by the drawer again when cashed.  Certified Checks. – Check that has been accepted by the bank in which it is drawn. 6

7 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. The Bank-Customer Relationship  Creditor-Debtor Relationship. – 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. – Between bank and customer. 7

8 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Bank’s Duty to Honor Checks  Banks that wrongfully dishonor customer’s checks are liable for actual damages only.  Overdrafts. Bank has two options: dishonor, or pay the check and charge the customer’s account. – Overdraft Protection Agreements: wrongful dishonor if bank breaches contract. 8

9 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Bank’s Duty to Honor Checks  Postdated Checks. – Bank can pay unless notified in time to act on it.  Stale Checks. – After 6 months, it is bank’s choice whether to honor or not.  9

10 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Bank’s Duty to Honor Checks  Stop-Payment Orders: – Customer can’t stop certified checks and must give bank enough time to act. – Oral S.P.= 14 days, Written = 6 months. – Customer's liability for wrongful stop- payment order = must have a real or personal defense as needed. 10

11 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Bank’s Duty to Honor Checks  Stop-Payment Orders: – Customer can’t stop certified checks and must give bank enough time to act. Oral S.P.= 14 days, Written = 6 months. – Bank’s Liability for Wrongful Payment: must recredit customer’s account.  11

12 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Bank’s Duty to Honor Checks  Stop-Payment Orders (cont’d): – Bank’s Liability for Wrongful Payment: And bank will be liable if subsequent checks bounce. – Customer's Liability for Wrongful Stop- Payment Order: customer must have a valid legal defense, otherwise the holder can sue for nonpayment. 12

13 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Bank’s Duty to Honor Checks  Death or Incompetence of Customer. – Neither death nor incompetence revokes bank’s authority to pay until it has knowledge, up to 10 days after death. 13

14 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Bank’s Duty to Honor Checks  Checks Bearing Forged Drawers’ Signatures. – General Rule: Forged signature on a check has no legal effect as signature of the drawer. If negligent, bank must re-credit customer’s account when it pays on a forged signature.  14

15 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Bank’s Duty to Honor Checks  Checks Bearing Forged Drawers’ Signatures. – Customer Negligence: if customer substantially contributes to loss, bank is not liable. If bank is substantially negligent, it will be liable for loss. CASE 17.2 A UTO -O WNERS I NSURANCE C O. V. B ANK O NE (2008). CASE 17.2 A UTO -O WNERS I NSURANCE C O. V. B ANK O NE (2008). Why was Bank One not liable for the losses?  15

16 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Bank’s Duty to Honor Checks  Checks Bearing Forged Drawers’ Signatures. – Customer Negligence. Timely Examination of Bank Statements Required. Consequences of Failure to Detect Forgeries: customer must examine statements, and has 30 days from detection of forgery to inform bank.  16

17 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Bank’s Duty to Honor Checks  Checks Bearing Forged Drawers’ Signatures. – Customer Negligence. Negligence and the Bank’s Duty of Care. One – Year Time Limit: limits bank’s liability. Other Parties From Whom the Bank May Recover. 17

18 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Bank’s Duty to Honor Checks  Checks Bearing Forged Indorsements. – Bank that pays a customer’s forged check must recredit the account, or be liable to the customer-drawer for breach of contract.  Altered Checks. – Bank has a duty to inspect each check.  18

19 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Bank’s Duty to Honor Checks  Altered Checks. – Customer Negligence: may shift the loss when payment is made on an altered check (unless bank is negligent). – Bank must always follow reasonable commercial standards of care in paying checks.  19

20 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Bank’s Duty to Honor Checks  Altered Checks. – Other Parties from Whom the Bank may Recover. Bank is entitled to recover the amount of loss from the transferor who warrants that the check has not been materially altered. Two exceptions: if the bank is the drawer cannot recover from HDC, and if HDC presents in good faith. 20

21 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Bank’s Duty to Accept Deposits  Availability Schedule for Deposited Checks.   Interest-Bearing Accounts.   The Collection Process.  21

22 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Bank’s Duty to Accept Deposits  Availability Schedule for Deposited Checks. – Expedited Funds Availability Act of 1987 and Federal Reserve Board’s Regulation CC. – Require that checks deposited into banks must be available for withdrawal by check or cash within a certain number of days from the date of deposit.  22

23 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Bank’s Duty to Accept Deposits  Availability Schedule for Deposited Checks. – 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. 23

24 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Bank’s Duty to Accept Deposits  Availability Schedule for Deposited Checks. – Deposits made in non-proprietary ATMs: 5 business days. – Some exceptions for new-customer deposits and large deposits. 24

25 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Bank’s Duty to Accept Deposits  The Traditional Collection Process. – Designation of Banks Involved in the Collection Process: Depository Bank. Payor Bank. Intermediary Banks. Collecting Banks. 25

26 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Ex The Check Collection Process 26

27 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Bank’s Duty to Accept Deposits  The Traditional Collection Process.  Check Collection Between Customers of the Same Bank.  27

28 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Bank’s Duty to Accept Deposits  Check Collection Between Customers of Different Banks. – Depositary bank must present check to next intermediary or payor bank before midnight of the next banking day following receipt.  28

29 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Bank’s Duty to Accept Deposits  Check Collection Between Customers of Different Banks (cont’d). – UCC permits “deferred posting” bank can set a particular time (e.g. 2:00 pm) as cutoff hour. After that hour, items are posted for the next business day. – CASE 17.3 Cumis Mutual Insurance Society, Inc. v. Rosol (2011). – CASE 17.3 Cumis Mutual Insurance Society, Inc. v. Rosol (2011).  29

30 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Bank’s Duty to Accept Deposits 30  How the Federal Reserve System Clears Checks. – Fed serves as “clearinghouse” where checks and drafts are exchanged, and drawn on each other’s accounts. 

31 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Bank’s Duty to Accept Deposits 31  Check Clearing and the Check 21 Act. – Creates a new negotiable instrument called a substitute check (original is destroyed). – What is a Substitute Check? A paper reproduction of the front and back of an original check. 

32 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Electronic Fund Transfers  Types of EFT Systems. – ATM’s. – Point-of-Sale Systems. – Direct Deposits and Withdrawals. – Internet Payment Systems.  32

33 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Electronic Fund Transfers  Consumer Fund Transfers: governed by Electronic Fund Transfer Act of – Disclosure Requirements. – Unauthorized Transfers. – Violations and Damages.  33

34 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Electronic Fund Transfers  Consumer Fund Transfers: transferred “by wire” between commercial entities. – Disclosure Requirements. – Unauthorized Electronic Fund Transfers. – Violations and Damages.  Commercial Transfers. 34

35 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. E-Money and Online Banking  Digital Cash (e-money) in smart cards.  Stored Value Cards (magnetic striped, e.g., gift cards).  Smart Cards: contain microchips.  35

36 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. E-Money and Online Banking  Online Banking Services.  Privacy Protection. – E-Money Issuer’s Financial Records (Financial Privacy Act of 1978). – Consumer Financial Data (Gramm- Leach-Bliley Act of 1999). 36

37 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. E-Money and Online Banking  E-Money Issuers’ Financial Records. – Right to Financial Privacy Act (1978).  Consumer Financial Data. – Financial Services Modernization Act (1999). 37


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