CHAPTER 24 BANK-CUSTOMER RELATIONS/ ELECTRONIC FUNDS TRANSFERS

1. CHAPTER 24BANK-CUSTOMER RELATIONS/ ELECTRONIC FUNDS TRANSFERS DAVIDSON, KNOWLES & FORSYTHE Business Law: Cases and Principles in the Legal Environment (8th Ed.)

2. BASIC CONCEPTS • Nearly every business organization has a checking account. • Checking accounts create several banking relationships between banks and customers. • Checking account is a contract between bank and the customer as evidenced by signature card: • Making bank an agent of the customer. • Depositor is the principal.

3. BASIC CONCEPTS • Customer governed by Article 4 of UCC. • Bank must pay when ordered by customer. • Bank is debtor of the customer as long as funds are in checking account. • Relationship is variable.

4. THE CUSTOMER: RIGHTS AND DUTIES • Main duty of customer is to act with due care and diligence, whether: • Writing check; • Inspecting monthly statement; • Making a deposit; • Indorsing a check; and • Cashing a check.

5. THE CUSTOMER: RIGHTS AND DUTIES • Customers have several rights they may exercise: • Stop payment of previously issued check. • Collect damages from bank if bank errs in handling account to detriment of customer. • Before customer can exercise rights: • Show customer acted properly. • And/or bank acted improperly.

6. THE CUSTOMER: RIGHTS AND DUTIES • Customer has rights to damages should bank wrongfully dishonor check. • Damages covered by UCC include: • Damages due to arrest. • Damages due to prosecution. • Consequential damages which can be proved. • In seeking damages customer, must prove bank’s conduct was proximate cause of the losses suffered by customer.

7. THE CUSTOMER: RIGHTS AND DUTIES • Customer may recover exemplary damages if bank acted with malice or recklessly. • Customer right to issue stop-payment order must be done properly for bank to be liable. • Order can be oral or written. • Valid order to stop-payment must include: • The check number; • Payee’s name and amount of the check; and • Date of check and reason for stop-payment request.

8. THE CUSTOMER: RIGHTS AND DUTIES • Bank must send periodic statements to customer. • Statement provides sufficient information if item described by number, amount, and date of presentment. • Customer has duty to examine and reconcile statements. • Customer must keep adequate and accurate records.

9. THE CUSTOMER: RIGHTS AND DUTIES • Customer must notify bank of any discrepancies promptly in order to retain maximum rights. • Failure to notify bank promptly, customer loses right to assert against bank: • Any unauthorized customer signatures. • Any material alterations of any check. • Any unauthorized signatures or alterations made by same person.

10. THE CUSTOMER: RIGHTS AND DUTIES • Customer must report any discrepancy within 30 days and gets all the money back on unauthorized signature or alterations. • Reporting discrepancies between 30 days to one year allows only recovery for first unauthorized signature or alterations.

11. THE BANK: RIGHTS AND DUTIES • Bank is the agent for the customer, bank has duty to obey any lawful orders of customer. • Duty to obey gives banks very important rights: • Charge to customer’s account items properly payable from customer’s account. • Refusing to honor any stale check. • Must pay on customer’s account until it learns of death or incompetency of customer.

12. THE BANK: RIGHTS AND DUTIES • Banks make mistakes and are protected by subrogation. • Three set of rights through subrogation: • Rights as holder in due course against maker/drawer. • Rights of payee against maker/drawer. • Rights of drawer/maker against payee or other holders.

13. THE BANK: RIGHTS AND DUTIES • Bank has right to enforce terms of contract with customer and impose service charges. • Bank is required to honor terms and conditions of contract. • Bank required to obey rules of agency and to act in good faith in a commercially reasonable manner.

14. SPECIAL PROBLEMS • Certified Checks. • Already been accepted by drawee bank. • Make banks primarily liable. • Require payment of check upon presentment. • Steps if bank agrees to certify: • Charges customer account and credit its own. • Punches a hole in the encoded account number so check will not be paid again. • Stamp made on face of check and terms of certification written.

15. SPECIAL PROBLEMS • Unauthorized Signatures. • Made without authority, expressed or implied, includes forgery. • Wholly inoperative against the person whose name was signed unless later ratified. • Can’t be used to impose liability unless customer was negligent or contributed to unauthorized signature.

16. FUNDS TRANSFERS • Changes in banking laws. • Growth in International business. • Technological breakthroughs. • International trade requires large amounts of money be transferred quickly between nations. • These changes have created the need for several new banking regulations.

17. FUNDS TRANSFERS • Electronic Funds Transfers. • Computerization of checking accounts and more accurate and faster bank transactions. • Electronic Funds Transfer Act (EFTA) governs these methods of bank transactions. • Purpose of (EFTA) is provide a basic framework establishing rights, liabilities, and responsibilities of participants in electronic transfer fund systems.

18. FUNDS TRANSFERS • Electronic Funds Transfers. • Electronic funds transfer are other than a transaction originated by check, draft, or similar paper instrument. • Four methods of EFT: • Point of Sale (POS) Transactions: transfer with debit card. • Debit/ATM Cards: automated teller machine (ATM) transfers with bank card and PIN. • Telephone Transactions: authorize transactions by phone via network. • Preauthorized Transactions: preauthorized payment and direct deposits.

19. FUNDS TRANSFERS • Rights and Duties with EFT’s • Consumer has same type of rights and duties as a consumer with a checking or drafting account in a financial institution. • Protections also exist for consumer using EFTs. • Consumer liability in case of an unauthorized use of an account. • Provided the consumer gives proper and timely notice to the bank.

20. FUNDS TRANSFERS • Article 4A: Funds Transfers. • Type of transferring funds via wire transfers. • Funds transfers used to provide rapid movement of funds from one account to another without use of traditional negotiable instruments. • Provides guidance for receiving banks in carrying transfer funds. • Article 4A specifically excludes coverage of areas already governed by EFTA. • UCC provides state coverage of funds transfers but defers to federal regulation of EFTs.