© 2007 West Legal Studies in Business, A Division of Thomson Learning Chapter 19 Checks, the Banking System, and E-Money

© 2007 West Legal Studies in Business, A Division of Thomson Learning 2 On what types of checks does a bank serve as both the drawer and the drawee? What type of check does a bank agree in advance to accept when the check is presented for payment? When may a bank properly dishonor a customer’s check without being liable to the customer? What happens if a bank wrongfully dishonors a customer’s check? Learning Objectives

© 2007 West Legal Studies in Business, A Division of Thomson Learning 3 What duties does the UCC impose on a bank’s customers of a bank with regard to forged and altered checks? What are the consequences of a customer’s negligence in performing those duties? What are the four most common types of EFT’s? What is the basic purpose of the EFT Act, and how does it benefit customers? What is e-money? How is e-money stored and used? What laws apply to e-money transactions and online banking services? Learning Objectives

© 2007 West Legal Studies in Business, A Division of Thomson Learning 4 Checks Special type of draft by maker (drawer) drawn on a bank (drawee) ordering bank to pay third party (payee). –Cashier’s Check—bank is both drawer and drawee. –Traveler’s Check—payable on demand, payable by a financial institution, designated as a traveler’s check. –Certified Check—accepted in writing by drawee bank.

© 2007 West Legal Studies in Business, A Division of Thomson Learning 5 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.

© 2007 West Legal Studies in Business, A Division of Thomson Learning 6 Bank’s Duty to Honor Checks Drawee has a legal duty to honor Drawer’s checks. –If it wrongfully dishonors a check, it is liable for damages. Overdrafts. Postdated Checks (Notice required). State Checks (six months). Stop-Payment Orders.

© 2007 West Legal Studies in Business, A Division of Thomson Learning 7 Bank’s Duty to Honor 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.

© 2007 West Legal Studies in Business, A Division of Thomson Learning 8 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. 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.

© 2007 West Legal Studies in Business, A Division of Thomson Learning 9 Bank’s Duty to Honor Checks 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.

© 2007 West Legal Studies in Business, A Division of Thomson Learning 10 Bank’s Duty to Honor Checks 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. –CASE 19.1 Nesper v. Bank of America (2004).

© 2007 West Legal Studies in Business, A Division of Thomson Learning 11 Bank’s Duty to Honor Checks Bank may not recover from the person it negligently paid, who was paid in course of business if that person acted in good faith because there was no Breach of Presentment Warranty. CASE 19.2 Halifax Corp. v. First Union National Bank (2001).

© 2007 West Legal Studies in Business, A Division of Thomson Learning 12 Bank’s Duty to Honor Checks Presenter did not know that the signature or the maker or drawer was forged. Bank can recover from forger because the forger did know.

© 2007 West Legal Studies in Business, A Division of Thomson Learning 13 Checks Bearing Forged Indorsements Payment on a Forged Indorsement – if not to customer’s order, bank must re-credit unless customer is negligent before or after forgery. –Before forgery: if large gaps or incompleteness. –After forgery: customer must notify bank (i) within 3 days after forged items made available to customer, or (ii) if a series of forgeries, within 30 days of receipt of either the bank statement or canceled checks.

© 2007 West Legal Studies in Business, A Division of Thomson Learning 14 Bank’s Duty to Honor Checks Bank may recover from the person it paid (not cashier, teller, or certified checks) if Warranty. Presenter did not have Good Title because of the forged indorsement. Altered Checks. –Bank has implied duty to inspect checks. –Customer Negligence shifts loss to customer if bank pays in good faith without notice. –Bank may recover from other parties.

© 2007 West Legal Studies in Business, A Division of Thomson Learning 15 Bank’s Duty to Accept Deposits Availability Schedule for Deposited Checks. Interest-Bearing Accounts. The Collection Process.

© 2007 West Legal Studies in Business, A Division of Thomson Learning 16 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.

© 2007 West Legal Studies in Business, A Division of Thomson Learning 17 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.

© 2007 West Legal Studies in Business, A Division of Thomson Learning 18 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 on the interest in the account.

© 2007 West Legal Studies in Business, A Division of Thomson Learning 19 The Collection Process Players: –Depository Bank. – Payor Bank. – Intermediary Banks. – Collecting Banks.

© 2007 West Legal Studies in Business, A Division of Thomson Learning 20 The Collection Process 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.

© 2007 West Legal Studies in Business, A Division of Thomson Learning 21 The Collection Process 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.

© 2007 West Legal Studies in Business, A Division of Thomson Learning 22 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. CASE 19.3 NBT Bank, N.A. v. First National Community Bank (2004).

© 2007 West Legal Studies in Business, A Division of Thomson Learning 23 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.

© 2007 West Legal Studies in Business, A Division of Thomson Learning 24 E-Money and Online Banking Digital Cash (e-money) in smart cards. Online Banking Services. –Online contract between bank and customer governs terms. –Regulatory Compliance. Privacy Protection. –Electronic Communications Privacy Act (1986). –Gramm-Leach-Bliley Act (1999).

© 2007 West Legal Studies in Business, A Division of Thomson Learning 25 Recommended by NCCSL covers: –Traditional Money Services. –Internet-based Money Services. –UMSBA online.UMSBA online. UMSA may also apply to: –E-money. –Internet scrip. –Stored-value products (pre-paid cards). Uniform Money Services Act (UMSA)