P A R T P A R T Commercial Paper Negotiable Instruments Negotiation & Holder in Due Course Liability of Parties Checks and Electronic Transfers 7 McGraw-Hill/Irwin Business Law, 13/e © 2007 The McGraw-Hill Companies, Inc. All rights reserved.

Checks and Electronic Transfers PA E TR HC 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

 The deposit agreement and UCC Articles 3 and 4 govern the relationship between the depositor and the drawee bank  Deposit agreement establishes relationship as creditor and debtor:  Person depositing money into a bank account is a creditor of bank to extent of deposits  Bank becomes the person’s debtor Overview

 Bank is depositor’s agent for check collection  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 is liable for actual and consequential damages from wrongful dishonor [4–402]  Bank may charge properly payable check to depositor’s account even if overdraft results Bank as Agent of Depositor

 When a bank takes a check for deposit to a customer’s account, it places a hold on funds represented by check until it collects from drawee bank  Then funds become available to depositor  Stop-payment order is 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 Depositor & Bank

 Certified check : drawee bank promises to pay the check instead of the drawer [3–409]  Bank debits customer’s account and transfers funds to a special bank account  Cashier’s check : bank is both drawer and drawee, thus the bank is primarily liable Certified & Cashiers Checks

 Federal law, short-titled Check 21, allows banks to handle more checks electronically and is an overlay to state law  Electronic Funds Transfer Act governs the electronic funds transfer systems (EFTs) for consumers: automatic teller machines, point of sale terminals, preauthorized payments, telephone transfers, and wire transfers Check Collection

 Federal Reserve operates Fedwire, a domestic wire transfer system  International wire transfers made through New York Clearinghouse Interbank Payments System (CHIPS)  At right, bank trading room Wire Transfers

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 only to business-to-business transfers

Test Your Knowledge  True=A, False = B  Fedwire is the international wire transfer system.  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

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

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 above

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?