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

2. 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

3. 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

4. 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

5. © 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

6. © 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

7. 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

8. © 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

9. 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

10. 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

11. © 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

12. © 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

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

14. © 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

15. 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

16. 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

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

18. 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