Chapter 27 Checks, The Banking System and E-Money

2 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.

3 §1: Checks Cashier’s Check: bank serves as drawer and drawee. Bank assumes responsibility. Traveler’s Check: must be signed by the drawer again when cashed. Certified Check: bank accepted money and bank will pay check from its own account.

4 Checks [2] Lost, Destroyed, or Stolen Checks. Must ask for a refund from bank before the check is paid by bank. Then wait 90 days - if someone comes within 90 days, bank pays them, if no one comes within 90 days, bank gives refund.

5 §2: Bank-Customer Relationship Creditor-Debtor: Bank owes money to customer and must honor customer’s checks. Agency created: Bank must pay customer’s checks and collect for customer if she deposits checks.

6 §3: Honoring Checks Banks that wrongfully dishonor customer’s checks are liable for actual damages only. Overdrafts: bank’s choice to honor or not, then hold customer liable for amount. On a Joint account, customer is only liable if signed overdraft or benefited from it.

7 Honoring Checks [2] 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. Death or Incompetence of a Customer: Bank can pay until it knows and can pay checks drawn before death or incompetence 10 days after it knows - unless notified by a family member or executor.

8 Honoring Checks [3] 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.

9 Honoring Checks [4] Payment on a Forged Signature of the Drawer. Bank must re-credit customer’s account - unless customer is negligent before or after the forgery. Before: leaves big spaces, leaves check-cashing machine unlocked, rubber stamp unlocked, sloppily written. After: fails to examine statement and notify bank within one year.

10 Honoring Checks [6] Bank may not recover from the person it paid, or who was paid in course of business if that person acted in good faith because there was no Breach of Presentment Warranty. Presenter did not know that the signature or the maker or drawer was forged. Bank can recover from forger because the forger did know.

11 Honoring Checks [7] Payment on a Forged Endorsement - not to customer’s order, bank must re-credit unless customer negligent before or after forgery. Before forgery: leaving large gaps, incompleteness. After forgery : not notifying the bank within 3 years after forged items made available to customer within 30 days of receipt of bank statement and canceled checks if a series of forgeries.

12 Honoring Checks [8] Bank may recover from the person it paid (not cashier, teller, or certified checks) because of Breach of Presentment Warranty. Presenter did not have Good Title because of the forged indorsement! Remember Presentment Warranties are: no forged endorsements (good title). instrument has not been altered. person obtaining payment or acceptance has no knowledge that the signature of the drawer of the instrument is authorized.

13 §4: Accepting Deposits Availability Schedule for Deposited Checks. Interest-Bearing Accounts. The Collection Process.

14 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.

15 Regulation CC Availability Requirements 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. Deposits made in non-proprietary ATMs: 5 business days. Some exceptions for new-customer deposits and large deposits.

16 Interest-Bearing Accounts Truth-in-Savings Act of 1991 and Regulation DD require banks to: Pay interest based on the full balance of the customer’s interest-bearing account each day. Provide customers with certain information concerning balance required, amount of interest on account, fees, charges, penalties, and to supply customer with statement containing certain information of the interest in the account.

17 The Collection Process Players: Depository Bank. Payor Bank. Intermediary Banks. Collecting Banks.

18 Check Collection Between Customers of the Same Bank Bank must present check to be paid on or before midnight of the next day following receipt. “Deferred posting” bank can set e.g., 2:00 pm as cutoff hour. Bank can dishonor the check by the opening of the second banking day following its receipt or check is considered paid.

19 Check Collection Between Customers of Different Banks Each bank in the collection process must pass the check on before midnight of the next banking day following its receipt. Payor bank must dishonor or return it by midnight on the next banking day following receipt, or the payor bank is accountable for the face amount of the check.

20 How the Federal Reserve System Clears Checks Electronic Check Presentment. Much faster in contrast to manual check processing. Check may not be physically moved, but encoded information sent by computer. Those parties who encode and notify make the same warranties as if the check were sent physically.

21 §5: Electronic Fund Transfers Types of EFT Systems. Consumer Fund Transfers: governed by Electronic Fund Transfer Act of Commercial Fund Transfers: governed by Article 4A of the UCC.

22 §6: E-Money Stored-Value Cards (pre-paid cards for use with long distance, cellular and library copy machines) Smart Cards— can authenticate the validity of transactions with digital signatures. Deposit Insurance Legal Protection Encryption and Privacy Protection

23 §§7-8: Online Banking Virtual Banks (e.g., Bank of the Internet at ) Uniform Money Services Act August 2001, NCCUSL would subject online banking and e-money to same regulations as traditional banks. Internet-Based Money—Paypal.com?

24 Case 27.4: Kendall Yacht v. United California Bank (Overdrafts) FACTS: Kendalls were officers and principal shareholders of Kendall Yacht Corp. When the corporation ran into financial problems, UCB agreed to honor overdrafts on the corporate account. Over the next few months, however, UCB failed to honor a number of corporate checks. As a result, the Kendalls’ business failed, and they sued the bank, charging that its dishonor of the checks had damaged the Kendalls’ personal and credit reputation. The trial court ruled in favor of the Kendalls, and the bank appealed.

25 HELD: FOR KENDALLS. UCB is liable to Kendall for damages proximately caused by the wrongful dishonor of an item. When the dishonor occurs through mistake liability is limited to actual damages proved.” It was entirely foreseeable that UCB’s dishonor of corporate checks would reflect on the personal credit and reputation of the Kendalls and that they would suffer the adverse personal consequences which resulted when the bank reneged on its commitments. Case 27.1: Kendall Yacht v. United California Bank (Overdrafts)

26 Case 27.2: Marx v. Whitney Nat’l Bank (Forged Signatures) FACTS: Marx had a checking account at WNB and did not review statements showing seventeen forged checks. Marx added two of his children, Stanley and Maxine, as joint owners of the account. When Marx discovered five forged checks he reported the forgeries to the bank and asked the bank to credit the account. The bank refused. Marx sued WNB who argued that Marx’s failure to discover and report the initial forgeries precluded recovery for the subsequent forgeries.

27 HELD: FOR WNB UCC 4–406(d)(2) imposes on a bank’s customer “the risk of loss on all subsequent forgeries by the same wrong­ doer after the customer had a reasonable time to detect an initial forgery if the bank has honored subsequent forgeries prior to notice.” Case 27.2: Marx v. Whitney Nat’l Bank (Forged Signatures)

28 Case 27.3: Halifax v. FUNB (Forged Signatures) FACTS: Adams served as Halifax’s comptroller and wrote at least eighty-eight checks on Halifax’s FUNB account, using facsimile signatures on the checks, making them payable to herself or cash and deposited them in her personal account at Wachovia Bank. FUNB knew Adams was an employee of Halifax, paid the checks and debited Halifax’s account. Over a year later, Halifax discovered that Adams had embezzled more than $15 million from its checking account. Halifax sued FUNB. FUNB filed a motion for summary judgment.

29 HELD: FOR FUNB. CASE DISMISSED. BARRED BY STATUTE OF LIMITATIONS. UCC 4–406(f) “bars a customer, who received a statement or item from a bank but failed to discover or report the customer’s unauthorized signature or alteration on the item to the bank within one year after the statement or item is made available to the customer, from asserting a claim against the bank for the unauthorized signature or alteration.” Case 27.3: Halifax v. FUNB (Forged Signatures)