Commercial Paper

Negotiable InstrumentsNegotiation & Holder in Due

CourseLiability of Parties

Checks and Electronic Transfers

Checks and Electronic Transfers

PA ET RHC 34“Whether we like it or not mankind now has a

completely integrated international financial and informational marketplace capable of moving

money and ideas to any place on this planet in minutes.”

Walter Wriston in a speech to the International Monetary Conference, London (June 11, 1979)

Learning Objectives• The drawer-drawee relationship• Forged and altered checks• Check collection and funds

availability• Electronic transfers

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• Two sources of law govern the relationship between the depositor and the drawee bank: the deposit agreement and Articles 3 and 4 of the UCC

Overview

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• The deposit agreement establishes depositor and drawee/payor bank relationship as creditor and debtor so that when a person deposits money into a bank account:– Depositor is a creditor of the bank to the extent of

deposits and the bank becomes his debtor

Deposit Agreement

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• Bank also becomes depositor’s agent for collection of the check

• As agent, bank owes a duty of ordinary care to (a) follow depositor’s reasonable direction about payment of checks and (b) collect checks and other deposits to the account

Bank as Agent of Depositor

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• Bank has a duty to pay a properly drawn and payable check and is liable for actual damages caused by a wrongful dishonor plus consequential damages [4–402]–No duty to pay stale checks (> 6 mo. old)–Duty to pay may be terminated by

depositor’s stop payment order or bankruptcy

Bank’s Duty to Pay

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• Bank has the right to charge any properly payable check to depositor’s account even if an overdraft results

• An altered check or one with a forged signature is not properly payable since bank should be familiar with drawer’s signature– But if drawer negligently contributes to forgery or

alteration or fails to report forgery, drawer’s account may be rightfully be charged

Bank’s Right to Charge

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• Stop-payment order: customer’s request to drawee bank to not pay or certify a check– Bank must receive timely notice and a reasonable

description of the check• While stop-payment order is in effect, bank is

liable to drawer of a check it pays for any loss drawer suffers by reason of bank’s error– Burden of proof for loss placed on drawer– See Seigel v. Merrill Lynch, Pierce, Fenner & Smith, Inc.,

Stop-Payment Order

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• A drawee bank isn’t bound to certify a check, but if it certifies, it substitutes its promise to pay the check for the drawer’s promise and becomes obligated to pay the check– Bank debits customer’s account and transfers

the funds to a special bank account• Adding bank’s signature to the check shows

it accepted primary liability and is essential for certification [3–409] (see page 840)

The Certified Check

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• A cashier’s check is a check on which a bank is both the drawer and the drawee, thus the bank is primarily liable on the cashier’s check

• A teller’s check is similar, but one bank is the drawer and another bank is the drawee– See page 840 for an example

The Cashier’s Check

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• In 2004, Congress enacted a federal law short-titled Check 21 that allows banks to handle more checks electronically and provides a federal overlay statebased law

• Check trunctation means the drawee bank keeps original checks and provides a monthly bank statement bearing images of cancelled checks

Check Collection

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• When a bank takes a check for deposit to a customer’s account, it places a hold on the funds represented by the check until it collects from the drawee bank

• The 1987 Expedited Funds Availability Act set mandatory schedules limiting check holds and stating when depositary banks must make funds available to customers– See Federal Reserve Board Regulation CC

Funds Availability

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• The electronic funds transfer systems (EFTs) for consumers include:

• Automated teller machines • Point-of-sale terminals:

consumers use EFT cards like checks to transfer money from their checking account to the merchant

Electronic Transfers

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• Preauthorized payments, such as automatic deposit of paychecks or bill payment

• Telephone transfers between accounts or authorization to pay specific bills.

Electronic Transfers

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• The Electronic Funds Transfer Act established rights, liabilities, and duties of participants in electronic funds transfer systems and consumer rights and liabilities for unauthorized electronic funds transfers

• Kruser v. Bank of America NT & SA illustrates the provisions that require a customer to timely notify the bank of any unauthorized use of his card to limit liabilty

Electronic Funds Transfer Act

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• For business and financial institutions, wire transfers of funds are commonly used to move large sums of money very quickly across the country or around the world

• At right, bank trading room

Wire Transfers

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• The Federal Reserve operates Fedwire, a domestic wire transfer system and international wire transfers may be made through the New York Clearinghouse Interbank Payments System (CHIPS)–Payments over these systems are more

than one trillion dollars per day–See http://www.frbservices.org/ and

http://www.chips.org/home.php

Wire Transfers

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• UCC Article 4A (Funds Transfers) covers wholesale wire transfers between business and financial institutions–Explicitly excludes

consumer payments covered by Electronic Funds Transfer Act

Wire Transfers

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Test Your Knowledge• True=A, False = B

–A depositor is a creditor of the bank to the extent of deposits; the bank is the debtor.

– A bank has the right to charge any properly payable check to a depositor’s account, but not if an overdraft results.

– Check 21 allows banks to handle more checks electronically and provides that state law apply to business-to-business transfers.

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Test Your Knowledge• True=A, False = B

–The 1987 Expedited Funds Availability Act set mandatory schedules limiting check holds.

–An altered check or one with a forged signature is not properly payable.

–A stale check is over 30 days old.– A bank is an agent and owes a duty of

ordinary care to the depositor.34 - 21

Test Your Knowledge• Multiple Choice

– Lee went to State Bank and gave them cash in return for a check in which State Bank was both drawer and drawee. Lee purchased a: • (a) Cashier’s check• (b) Teller’s check • (c) Special indorsement check • (d) Wire transfer• (e) none of the above

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Test Your Knowledge• Multiple Choice

– A drawee bank isn’t obligated to certify a check, but if it certifies: • (a) it substitutes its promise to pay the check

for the drawer’s promise and becomes obligated to pay the check

• (b) it guarantees that drawer will pay the check upon payee’s presentment

• (c) it merely warrants that the drawer’s signature is authentic and authorized

• (d) none of the above34 - 23

Thought Questions• The increased use of online banking and

electronic transfers has raised concerns about privacy. Are you concerned? How should the banking industry and businesses respond to a customers’ concern about privacy?

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