©2002 by West Legal Studies in Business A Division of Thomson Learning Chapter 20 Checks, Banks and Cyberbanking

©2002 by West Legal Studies in Business A Division of Thomson Learning 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.

©2002 by West Legal Studies in Business A Division of Thomson Learning 3 Checks  Check is a special type of draft, drawn on a bank, ordering the bank to pay a fixed amount of money on demand.

©2002 by West Legal Studies in Business A Division of Thomson Learning 4 Checks  Cashier’s Check: bank serves as drawer and drawee. Bank assumes responsibility. –Case 20.1 First Railroad v. Columbia County Bank (1994).  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.

©2002 by 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.

©2002 by West Legal Studies in Business A Division of Thomson Learning 6 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.

©2002 by West Legal Studies in Business A Division of Thomson Learning 7  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. Bank’s Duty to Honor Checks

©2002 by West Legal Studies in Business A Division of Thomson Learning 8  Stop-Payment Orders: –Customer can’t stop certified checks and must give bank enough time to act. –Oral Stop Pmt.= 14 days, Written = 6 months. –Case 20.2 Thomas v. Marine Midland (1976).  Death or Incompetence of customer does not affect bank’s power to honor the check until notice is given. Bank’s Duty to Honor Checks

©2002 by West Legal Studies in Business A Division of Thomson Learning 9  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 20.3 Marx v. Whitney Nat’l Bank (1998). Forged Drawer’s Signature

©2002 by West Legal Studies in Business A Division of Thomson Learning 10  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. Bank’s Duty to Honor Checks

©2002 by West Legal Studies in Business A Division of Thomson Learning 11 Forged Indorsements  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.

©2002 by West Legal Studies in Business A Division of Thomson Learning 12 Bank’s Duty to Accept Deposits  Availability Schedule for Deposited Checks.  Interest-Bearing Accounts.  The Collection Process.

©2002 by West Legal Studies in Business A Division of Thomson Learning 13 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.

©2002 by West Legal Studies in Business A Division of Thomson Learning 14 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.

©2002 by West Legal Studies in Business A Division of Thomson Learning 15 The Collection Process  Players: –Depository Bank. – Payor Bank. – Intermediary Banks. – Collecting Banks.

©2002 by West Legal Studies in Business A Division of Thomson Learning 16 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.

©2002 by West Legal Studies in Business A Division of Thomson Learning 17 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.

©2002 by West Legal Studies in Business A Division of Thomson Learning 18 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.

©2002 by West Legal Studies in Business A Division of Thomson Learning 19 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.

©2002 by West Legal Studies in Business A Division of Thomson Learning 20 Cyberbanking  Online Payment Systems. –First Virtual Holdings developed online payment system.  E-Money: alternatives to checks and cash  Legal Protection –FTC prohibits unfair practices online. –Electronic Communications Privacy Act.