Checks, Banking and Wire Transfers © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

The Bank – Customer Relationship Creditor – Debtor Relationship Created when a customer deposits money into the bank. The customer is the creditor and the bank is the debtor. © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

The Bank – Customer Relationship (continued) Principal – Agent Relationship Created if the: deposit is a check that the bank must collect for the customer or the customer writes a check against his or her account The customer is the principal and the bank is the agent. © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

The Uniform Commercial Code (UCC) Banking Provisions Revised Article 3 (Negotiable Instruments) Revised Article 3 (Negotiable Instruments) Article 4 (Bank Deposits and Collections) Article 4 (Bank Deposits and Collections) Article 4A (Funds Transfer) Article 4A (Funds Transfer) © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Parties to a Check Drawer - Customer who maintains the checking account and writes checks against the account Drawee - Bank on which the check is drawn Payee - Party to whom the check is written © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Indorsement of a Check Payee may: Demand payment of check Indorse check to another by signing back Payee is indorser The other party is the indorsee © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

Special types of Checks Certified Checks Bank agrees to accept check when presented Pays out of funds set aside in special account Drawer is discharged from liability on check Cashier’s Checks Two party check Bank is both drawer and drawee Holder is payee Traveler’s Checks Issued without named payee Requires purchaser’s signature at issuance and upon use © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Honoring Checks Customer agrees to keep sufficient funds in account to cover checks Bank is under a duty to honor checks and debit account Stale Checks Check outstanding for more than six months Bank has no obligation to honor Incomplete Checks Bank that makes good faith payment may recover from customer Death or incompetence of Drawer Bank will pay until they have actual knowledge of demise © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

Honoring Checks (continued) Postdated Checks Drawer must postdate Drawer must give separate written notice to bank Stop-Payment Orders Order by drawer not to pay Bank must have reasonable opportunity to stop payment Oral order will bind bank for 14 days Written order effective for six months © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

Honoring Checks (continued) Overdrafts Drawer has insufficient funds in account Bank may dishonor check or pay Wrongful Dishonor Bank liable for all damages © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Forged Signatures Bank under duty to verify drawer’s signature. Forged signatures wholly inoperative as signature of drawer. Bank must recredit drawer’s account. Bank can recover from the presenter. © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Altered Checks Payor bank may dishonor altered check. If paid, Bank can: Charge drawer’s account for original tenor, Recover difference between altered amount and original tenor from party who presented check. © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

The Collection Process Metro Bank Drawer Payee City Bank Country Bank © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Collection Process 12 regional Federal reserve Banks Deferred posting rule Provisional credits applied to accounts Final settlement “on us” “on them” Deposit of money into account © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

The “Four Legals” That Prevent Payment of Check Receipt of notice affecting account, e.g., death Receipt of service of a court order (freeze) Stop-Payment Order Notice of a debt the customer owes the bank © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

Duties of Bank and Customer Customer must examine bank statements and promptly notify bank of unauthorized payments Liable for failure to perform duties Bank owes duty of ordinary care in presenting and sending checks for collection Liable for losses caused by its negligence © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

Commercial Wire Transfers Fast Transfers usually completed within one day Inexpensive © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

Fund Transfer Procedures Used to prevent unauthorized electronic payment orders The security procedure must be commercially reasonable Customer must pay even if payment was not authorized, if the security procedures were complied with in the transaction © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman