Commercial Paper Negotiable Instruments Negotiation & Holder in Due Course Liability of Parties Checks and Electronic Transfers

PA E TR HC 34 “Whether 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)

Learning Objectives The drawer-drawee relationship Forged and altered checks Check collection and funds availability Electronic transfers

Two sources of law govern the relationship between the depositor and the drawee bank: the deposit agreement and Articles 3 and 4 of the UCC Overview

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 debtor Deposit Agreement

Bank also becomes depositor’s agent for collection of the check As agent, bank owes a duty of ordinary care to (a) follow depositor’s reasonable direction about payment of checks and (b) collect checks and other deposits to the account Bank as Agent of Depositor

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 bankruptcy Bank’s Duty to Pay

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 charged Bank’s Right to Charge

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 drawer –See Seigel v. Merrill Lynch, Pierce, Fenner & Smith, Inc., Stop-Payment Order

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 840) The Certified 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 840 for an example The Cashier’s Check

In 2004, Congress enacted a federal law short-titled Check 21 that allows banks to handle more checks electronically and provides a federal overlay statebased law Check trunctation means the drawee bank keeps original checks and provides a monthly bank statement bearing images of cancelled checks Check Collection

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 CCFederal Reserve Board Regulation CC Funds Availability

The 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 Electronic Transfers

Preauthorized payments, such as automatic deposit of paychecks or bill payment Telephone transfers between accounts or authorization to pay specific bills. Electronic Transfers

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 liabilty Electronic Funds Transfer Act

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 room 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 and 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 Act Wire Transfers

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

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

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 above

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 above

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?