1. Chapter 23 Checks and Banking In the Digital Age

2. 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? 
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3. 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? 
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4. Learning Objectives
What are the four most common types of electronic fund transfers?
What laws apply to e-money transactions and online banking services?
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5. Checks
Cashier’s Checks: bank serves as drawer and drawee. Bank assumes responsibility.
CASE 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?
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6. 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.
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7. 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.
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8. 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.
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9. 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.
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10. 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. 
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11. 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.
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12. 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.
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13. 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. 
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14. 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 Auto-Owners Insurance Co. v. Bank One (2008). Why was Bank One not liable for the losses? 
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15. 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. 
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16. Bank’s Duty to Honor Checks
Checks Bearing Forged Drawers’ Signatures (cont’d).
When the Bank is Also Negligent.
CASE 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.
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17. 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.
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18. 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.
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19. Bank’s Duty to Accept Deposits
Availability Schedule for Deposited Checks. 
Interest-Bearing Accounts. 
The Collection Process. 
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20. Bank’s Duty to Accept Deposits
Availability Schedule for Deposited Checks.
Expedited Funds Availability Act of 1987 and Federal Reserve Board’s Regulation CC.
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21. 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. 
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22. 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. 
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23. 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.
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24. 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.
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25. Ex. 23-4 The Check Collection Process
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26. Electronic Fund Transfers
Types of EFT Systems.
ATM’s.
Point-of-Sale Systems.
Direct Deposits and Withdrawals.
Internet Payment Systems. 
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27. 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.
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28. 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. 
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29. 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).
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