Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning Chapter 31 Checks and Funds Transfers Twomey Jennings Anderson’s Business Law and the Legal Environment, Comprehensive 20e Anderson’s Business Law and the Legal Environment, Standard 20e Business Law: Principles for Today’s Commercial Environment 2e

Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 2 A check is a draft drawn on a bank and payable on demand. A delivery of a check is not an assignment of money on deposit with the bank on which it is drawn. A check does not automatically transfer the rights of the depositor against the bank to the holder of the check. Checks

Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 3 Types of Checks A check may be an ordinary check, a cashier’s check, or a teller’s check. A check may be certified by the bank. Unless otherwise agreed, the delivery of a certified check, a cashier’s check, or a teller’s check discharges the debt for which it is given, up to the amount of the check.

Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 4 CheckDraft 1.Drawee is always a bank 2.Check is drawn on assumption money in bank to cover check 3.Check is payable on demand 1.Drawee is not necessarily a bank 2.No assumption drawee has any of drawer’s money to pay instrument 3.Draft may be payable on demand or at future date Check vs. Draft

Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 5 Certified Checks Certification of a check by the bank is the acceptance of the check—the bank becomes the primary party. Certification may be at the request of the drawee or the holder. Certification by the holder releases all prior indorsers and the drawer from liability.

Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 6 Presentment and Dishonor Presentment to the drawee bank is the first step in payment of a check. Notice of nonpayment of a check must be given to the drawer of a check. – If no notice is given, the drawer is discharged from liability to the same extent as the drawer of an ordinary draft.

Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 7 Presentment and Dishonor Liability of a secondary party cannot be enforced unless that party was given proper notice of the dishonor. Wrongful Dishonor by Bank.

Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 8 Stopping Payment A depositor may stop payment on a check. The depositor is still liable to a holder in due course unless the stop payment was for a reason that may be raised against a holder in due course. The stop payment order may be oral (binding for 14 calendar days) or written (effective for six months).

Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 9 Wrongful Dishonor Check is wrongfully dishonored by bank when: –It is properly payable, and –The account has sufficient funds to pay the check. Bank’s liability to Drawer. Banks’ liability to Holder.

Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 10 Bank’s Duty of Care The depository bank is the agent of the depositor for the purpose of collecting a deposited item. –The bank does not become the owner of the item being deposited. –The bank does become a holder of the item if it gave cash (value) to the depositor. As agent, a bank is required to exercise ordinary care in the handling of items.

Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 11 Liability of a Bank A bank may be liable when it: Pays a postdated check too soon IF the drawer gave notice of the postdating. Pays a check subject to a valid stop payment order. Pays an item with a forged signature (in most cases) or missing indorsement. Pays a check which has been altered. Collects on an unauthorized check.

Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 12 Consumer Funds Transfers An electronic funds transfer is a transfer of funds that is initiated through an electronic terminal, telephone, computer, or magnetic tape. The Electronic Fund Transfers Act requires that a financial institution furnish consumers with specific information containing all the terms and conditions of all EFT services. Upon notice, consumers have a maximum liability of $50. (Failure to notify: $500)

Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 13 Funds Transfer UCC Article 4A vs. EFTA. Originator: person starting the fund transfer. Beneficiary: ultimate recipient. Beneficiary’s bank: final bank in the chain. Payment Order: direction by Originator.

Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 14 Errors in Funds Transfer Unauthorized Order. –Bank is liable to any prior party in the transfer chain. Failure to Act. –Bank is liable-at most-for interest loss and expenses (no consequential damages).