CHAPTER 24 BANK-CUSTOMER RELATIONS/ ELECTRONIC FUNDS TRANSFERS DAVIDSON, KNOWLES & FORSYTHE Business Law: Cases and Principles in the Legal Environment (8 th Ed.)

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 2 BASIC CONCEPTS Nearly every business organization has a checking account. Nearly every business organization has a checking account. Checking accounts create several banking relationships between banks and customers. Checking accounts create several banking relationships between banks and customers. Checking account is a contract between bank and the customer as evidenced by signature card: Checking account is a contract between bank and the customer as evidenced by signature card: – Making bank an agent of the customer. – Depositor is the principal.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 3 BASIC CONCEPTS Customer governed by Article 4 of UCC. Customer governed by Article 4 of UCC. Bank must pay when ordered by customer. Bank must pay when ordered by customer. Bank is debtor of the customer as long as funds are in checking account. Bank is debtor of the customer as long as funds are in checking account. Relationship is variable. Relationship is variable.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 4 THE CUSTOMER: RIGHTS AND DUTIES Main duty of customer is to act with due care and diligence, whether: Main duty of customer is to act with due care and diligence, whether: – Writing check; – Inspecting monthly statement; – Making a deposit; – Indorsing a check; and – Cashing a check.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 5 THE CUSTOMER: RIGHTS AND DUTIES Customers have several rights they may exercise: Customers have several rights they may exercise: – Stop payment of previously issued check. – Collect damages from bank if bank errs in handling account to detriment of customer. Before customer can exercise rights: Before customer can exercise rights: – Show customer acted properly. – And/or bank acted improperly.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 6 THE CUSTOMER: RIGHTS AND DUTIES Customer has rights to damages should bank wrongfully dishonor check. Customer has rights to damages should bank wrongfully dishonor check. Damages covered by UCC include: Damages covered by UCC include: – Damages due to arrest. – Damages due to prosecution. – Consequential damages which can be proved. In seeking damages customer, must prove bank’s conduct was proximate cause of the losses suffered by customer. In seeking damages customer, must prove bank’s conduct was proximate cause of the losses suffered by customer.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 7 THE CUSTOMER: RIGHTS AND DUTIES Customer may recover exemplary damages if bank acted with malice or recklessly. Customer may recover exemplary damages if bank acted with malice or recklessly. Customer right to issue stop-payment order must be done properly for bank to be liable. Customer right to issue stop-payment order must be done properly for bank to be liable. Order can be oral or written. Order can be oral or written. Valid order to stop-payment must include: Valid order to stop-payment must include: – The check number; – Payee’s name and amount of the check; and – Date of check and reason for stop-payment request.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 8 THE CUSTOMER: RIGHTS AND DUTIES Bank must send periodic statements to customer. Bank must send periodic statements to customer. Statement provides sufficient information if item described by number, amount, and date of presentment. Statement provides sufficient information if item described by number, amount, and date of presentment. Customer has duty to examine and reconcile statements. Customer has duty to examine and reconcile statements. Customer must keep adequate and accurate records. Customer must keep adequate and accurate records.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 9 THE CUSTOMER: RIGHTS AND DUTIES Customer must notify bank of any discrepancies promptly in order to retain maximum rights. Customer must notify bank of any discrepancies promptly in order to retain maximum rights. Failure to notify bank promptly, customer loses right to assert against bank: Failure to notify bank promptly, customer loses right to assert against bank: – Any unauthorized customer signatures. – Any material alterations of any check. – Any unauthorized signatures or alterations made by same person.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 10 THE CUSTOMER: RIGHTS AND DUTIES Customer must report any discrepancy within 30 days and gets all the money back on unauthorized signature or alterations. Customer must report any discrepancy within 30 days and gets all the money back on unauthorized signature or alterations. Reporting discrepancies between 30 days to one year allows only recovery for first unauthorized signature or alterations. Reporting discrepancies between 30 days to one year allows only recovery for first unauthorized signature or alterations.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 11 THE BANK: RIGHTS AND DUTIES Bank is the agent for the customer, bank has duty to obey any lawful orders of customer. Bank is the agent for the customer, bank has duty to obey any lawful orders of customer. Duty to obey gives banks very important rights: Duty to obey gives banks very important rights: – Charge to customer’s account items properly payable from customer’s account. – Refusing to honor any stale check. – Must pay on customer’s account until it learns of death or incompetency of customer.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 12 THE BANK: RIGHTS AND DUTIES Banks make mistakes and are protected by subrogation. Banks make mistakes and are protected by subrogation. Three set of rights through subrogation: Three set of rights through subrogation: – Rights as holder in due course against maker/drawer. – Rights of payee against maker/drawer. – Rights of drawer/maker against payee or other holders.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 13 THE BANK: RIGHTS AND DUTIES Bank has right to enforce terms of contract with customer and impose service charges. Bank has right to enforce terms of contract with customer and impose service charges. Bank is required to honor terms and conditions of contract. Bank is required to honor terms and conditions of contract. Bank required to obey rules of agency and to act in good faith in a commercially reasonable manner. Bank required to obey rules of agency and to act in good faith in a commercially reasonable manner.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 14 SPECIAL PROBLEMS Certified Checks. Certified Checks. – Already been accepted by drawee bank. – Make banks primarily liable. – Require payment of check upon presentment. – Steps if bank agrees to certify: Charges customer account and credit its own. Charges customer account and credit its own. Punches a hole in the encoded account number so check will not be paid again. Punches a hole in the encoded account number so check will not be paid again. Stamp made on face of check and terms of certification written. Stamp made on face of check and terms of certification written.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 15 SPECIAL PROBLEMS Unauthorized Signatures. Unauthorized Signatures. – Made without authority, expressed or implied, includes forgery. – Wholly inoperative against the person whose name was signed unless later ratified. – Can’t be used to impose liability unless customer was negligent or contributed to unauthorized signature.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 16 FUNDS TRANSFERS Changes in banking laws. Changes in banking laws. Growth in International business. Growth in International business. Technological breakthroughs. Technological breakthroughs. International trade requires large amounts of money be transferred quickly between nations. International trade requires large amounts of money be transferred quickly between nations. These changes have created the need for several new banking regulations. These changes have created the need for several new banking regulations.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 17 FUNDS TRANSFERS Electronic Funds Transfers. Electronic Funds Transfers. – Computerization of checking accounts and more accurate and faster bank transactions. – Electronic Funds Transfer Act (EFTA) governs these methods of bank transactions. – Purpose of (EFTA) is provide a basic framework establishing rights, liabilities, and responsibilities of participants in electronic transfer fund systems.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 18 FUNDS TRANSFERS Electronic Funds Transfers. Electronic Funds Transfers. – Electronic funds transfer are other than a transaction originated by check, draft, or similar paper instrument. – Four methods of EFT: Point of Sale (POS) Transactions: transfer with debit card. Point of Sale (POS) Transactions: transfer with debit card. Debit/ATM Cards: automated teller machine (ATM) transfers with bank card and PIN. Debit/ATM Cards: automated teller machine (ATM) transfers with bank card and PIN. Telephone Transactions: authorize transactions by phone via network. Telephone Transactions: authorize transactions by phone via network. Preauthorized Transactions: preauthorized payment and direct deposits. Preauthorized Transactions: preauthorized payment and direct deposits.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 19 FUNDS TRANSFERS Rights and Duties with EFT’s Rights and Duties with EFT’s – Consumer has same type of rights and duties as a consumer with a checking or drafting account in a financial institution. – Protections also exist for consumer using EFTs. Consumer liability in case of an unauthorized use of an account. Consumer liability in case of an unauthorized use of an account. Provided the consumer gives proper and timely notice to the bank. Provided the consumer gives proper and timely notice to the bank.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 20 FUNDS TRANSFERS Article 4A: Funds Transfers. Article 4A: Funds Transfers. – Type of transferring funds via wire transfers. – Funds transfers used to provide rapid movement of funds from one account to another without use of traditional negotiable instruments. – Provides guidance for receiving banks in carrying transfer funds. – Article 4A specifically excludes coverage of areas already governed by EFTA. – UCC provides state coverage of funds transfers but defers to federal regulation of EFTs.