Chapter 23 Checks and Banking In the Digital Age

Learning Objectives 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 the bank being liable to the customer?  © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Learning Objectives What duties does the Uniform Commercial Code impose on a bank’s customers with regard to forged and altered checks? What are the consequences if a customer is negligent in performing those duties?  © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Learning Objectives What are the four most common types of electronic fund transfers? What laws apply to e-money transactions and online banking services? © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Checks Cashier’s Checks: bank serves as drawer and drawee. Bank assumes responsibility. CASE 23.1 MidAmerica Bank, FSB V. Charter One Bank, FSB (2009). Why did the Illinois Supreme Court reverse the decision and award MidAmerica the amount of the check? © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Checks Traveler’s Checks: must be signed by the drawer again when cashed. Certified Checks: check that has been accepted by the bank in which it is drawn. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

The Bank-Customer Relationship Creditor-Debtor Relationship: Bank owes money to customer and must honor customer’s checks. Agency Relationship: Bank must pay customer’s checks and collect for customer if she deposits checks. Contractual Relationship: between bank and customer. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Bank’s Duty to Honor Checks Banks that wrongfully dishonor customer’s checks are liable for actual damages only. Overdrafts. Bank has two options: dishonor, or pay the check and charge the customer’s account. Overdraft Protection Agreements: wrongful dishonor if bank breaches contract. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

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. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Bank’s Duty to Honor Checks Stop-Payment Orders (cont’d). Oral Stop Payment valid for 14 days. Written SP order valid for 6 months. Bank’s Liability for Wrongful Payment: Must recredit customer’s account. Bank will be liable if subsequent checks bounce.  © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Bank’s Duty to Honor Checks Stop-Payment Orders (cont’d). Customer's Liability for Wrongful Stop Payment Order. Customer must have a valid legal ground, otherwise the holder can sue for nonpayment. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Bank’s Duty to Honor Checks Death or Incompetence. Neither death nor incompetence revokes bank’s authority to pay until it has knowledge, up to 10 days after death. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Bank’s Duty to Honor Checks Checks Bearing Forged Drawers’ Signatures. General Rule: Forged signature on a check has no legal effect as signature of the drawer. If negligent, bank must re-credit customer’s account when it pays on a forged signature.  © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Bank’s Duty to Honor Checks Checks Bearing Forged Drawers’ Signatures (cont’d). Customer Negligence: if customer substantially contributes to loss, bank is not liable. If bank is substantially negligent, it will be liable for loss. CASE 23.2 Auto-Owners Insurance Co. v. Bank One (2008). Why was Bank One not liable for the losses?  © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Bank’s Duty to Honor Checks Checks Bearing Forged Drawers’ Signatures (cont’d). Customer Negligence. Timely Examination of Bank Statements Required. Consequences of Failing to Detect Forgeries: customer must examine statements, and has 30 days from detection of forgery to inform bank.  © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Bank’s Duty to Honor Checks Checks Bearing Forged Drawers’ Signatures (cont’d). When the Bank is Also Negligent. CASE 23.3 Schultz v. Bank of America, N.A. (2010). What is “ordinary care” in commonplace banking transactions? One – Year Time Limit: limits bank’s liability. Other Parties From Whom the Bank May Recover. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Bank’s Duty to Honor Checks 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. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Bank’s Duty to Honor Checks Altered Checks. Bank has implied duty to inspect checks. Customer Negligence: shifts loss to customer if bank pays in good faith without notice. Other Parties From Whom the Bank May Recover. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Bank’s Duty to Accept Deposits Availability Schedule for Deposited Checks.  Interest-Bearing Accounts.  The Collection Process.  © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Bank’s Duty to Accept Deposits Availability Schedule for Deposited Checks. Expedited Funds Availability Act of 1987 and Federal Reserve Board’s Regulation CC. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Bank’s Duty to Accept Deposits Traditional Collection Process. Designations of Banks Involved in the Collections Process. Depository Bank: first bank to receive payment. Payor (Drawee) Bank: bank on which payment is drawn. Collecting Banks: any bank except payor’s bank involved in process.  © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Bank’s Duty to Accept Deposits Traditional Collection Process (cont’d). Designations of Banks (cont’d). Intermediary Banks: any bank except drawee or depositary banks. Check Collection Between Customers of the Same Bank.  © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Bank’s Duty to Accept Deposits Traditional Collection Process (cont’d). Check Collection Between Customers of Different Banks. How the Federal Reserve System Clears Checks. Fed now acts as a clearinghouse where banks exchange checks and drafts drawn on each other. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Bank’s Duty to Accept Deposits Traditional Collection Process (cont’d). Electronic Check Presentment. Before Check 21, banks had to physically receive paper checks. Check 21 now creates substitute checks: Digital reproduction of original check that can replace the original check. Digital check is transmitted to banks in collection process. Banks cannot demand a paper cancelled check. Reduced “Float” Times. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Ex. 23-4 The Check Collection Process © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Electronic Fund Transfers Types of EFT Systems. ATM’s. Point-of-Sale Systems. Direct Deposits and Withdrawals. Internet Payment Systems.  © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Electronic Fund Transfers Consumer Fund Transfers: governed by Electronic Fund Transfer Act of 1978. Disclosure Requirements. Unauthorized Transfers. Violations and Damages. Commercial Fund Transfers: transferred “by wire” between commercial entities. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

E-Money and Online Banking Digital Cash (e-money) in smart cards. Stored Value Cards (magnetic striped, e.g., gift cards). Smart Cards: contain microchips.  © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

E-Money and Online Banking Online Banking Services. Privacy Protection. E-Money Issuer’s Financial Records (Financial Privacy Act of 1978). Consumer Financial Data (Gramm-Leach-Bliley Act of 1999). © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.