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Commercial Paper. Negotiable Instruments Negotiation & Holder in Due Course Liability of Parties Checks and Electronic Transfers. Checks and Electronic Transfers. 34. C. H. E. A. P. T. R.

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Commercial Paper

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Commercial paper

Commercial Paper

Negotiable Instruments

Negotiation & Holder in Due Course

Liability of Parties

Checks and Electronic Transfers


Checks and electronic transfers

Checks and Electronic Transfers

34

C

H

E

A

P

T

R

“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

Learning Objectives

The drawer-drawee relationship

Forged and altered checks

Check collection and funds availability

Electronic transfers

34 - 3


Commercial paper

Two sources of law govern the relationship between the depositor and the drawee bank: the deposit agreement and Articles 3 and 4 of the UCC

Overview

34 - 4


Commercial paper

The deposit agreement establishes depositor and drawee/payor bank relationship as creditor and debtor so that when a person deposits money into a bank account:

Depositor is a creditor of the bank to the extent of deposits and the bank becomes his debtor

Deposit Agreement

34 - 5


Commercial paper

Bank also becomes depositor’s agent for collection of the check

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 as Agent of Depositor

34 - 6


Commercial paper

Bank has a duty to pay a properly drawn and payable check and is liable for actual damages caused by a wrongful dishonor plus consequential damages [4–402]

No duty to pay stale checks (> 6 mo. old)

Duty to pay may be terminated by depositor’s stop payment order or bankruptcy

Bank’s Duty to Pay

34 - 7


Commercial paper

Bank has the right to charge any properly payable check to depositor’s account even if an overdraft results

An altered check or one with a forged signature is not properly payable since bank should be familiar with drawer’s signature

But if drawer negligently contributes to forgery or alteration or fails to report forgery, drawer’s account may be rightfully be charged

Bank’s Right to Charge

34 - 8


Commercial paper

Stop-payment order: 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

While stop-payment order is in effect, bank is liable to drawer of a check it pays for any loss drawer suffers by reason of bank’s error

Burden of proof for loss placed on drawer

See Seigel v. Merrill Lynch, Pierce, Fenner & Smith, Inc.,

Stop-Payment Order

34 - 9


Commercial paper

A drawee bank isn’t bound to certify a check, but if it certifies, it substitutes its promise to pay the check for the drawer’s promise and becomes obligated to pay the check

Bank debits customer’s account and transfers the funds to a special bank account

Adding bank’s signature to the check shows it accepted primary liability and is essential for certification [3–409] (see page 840)

The Certified Check

34 - 10


Commercial paper

A cashier’s check is a check on which a bank is both the drawer and the drawee, thus the bank is primarily liable on the cashier’s check

A teller’s check is similar, but one bank is the drawer and another bank is the drawee

See page 840 for an example

The Cashier’s Check

34 - 11


Commercial paper

In 2004, Congress enacted a federal law short-titled Check 21 that allows banks to handle more checks electronically and provides a federal overlay statebased law

Check trunctation means the drawee bank keeps original checks and provides a monthly bank statement bearing images of cancelled checks

Check Collection

34 - 12


Commercial paper

When a bank takes a check for deposit to a customer’s account, it places a hold on the funds represented by the check until it collects from the drawee bank

The 1987 Expedited Funds Availability Act set mandatory schedules limiting check holds and stating when depositary banks must make funds available to customers

See Federal Reserve Board Regulation CC

Funds Availability

34 - 13


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The electronic funds transfer systems (EFTs) for consumers include:

Automated teller machines

Point-of-sale terminals: consumers use EFT cards like checks to transfer money from their checking account to the merchant

Electronic Transfers

34 - 14


Commercial paper

Preauthorized payments, such as automatic deposit of paychecks or bill payment

Telephone transfers between accounts or authorization to pay specific bills.

Electronic Transfers

34 - 15


Commercial paper

The Electronic Funds Transfer Act established rights, liabilities, and duties of participants in electronic funds transfer systems and consumer rights and liabilities for unauthorized electronic funds transfers

Kruser v. Bank of America NT & SAillustrates the provisions that require a customer to timely notify the bank of any unauthorized use of his card to limit liabilty

Electronic Funds Transfer Act

34 - 16


Commercial paper

For business and financial institutions, wire transfers of funds are commonly used to move large sums of money very quickly across the country or around the world

At right, bank trading room

Wire Transfers

34 - 17


Commercial paper

The Federal Reserve operates Fedwire, a domestic wire transfer system and international wire transfers may be made through the New York Clearinghouse Interbank Payments System (CHIPS)

Payments over these systems are more than one trillion dollars per day

See http://www.frbservices.org/ and http://www.chips.org/home.php

Wire Transfers

34 - 18


Commercial paper

UCC Article 4A (Funds Transfers) covers wholesale wire transfers between business and financial institutions

Explicitly excludes consumer payments covered by Electronic Funds Transfer Act

Wire Transfers

34 - 19


Test your knowledge

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 to business-to-business transfers.

34 - 20


Test your knowledge1

Test Your Knowledge

True=A, False = B

The 1987 Expedited Funds Availability Act set mandatory schedules limiting check holds.

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.

34 - 21


Test your knowledge2

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

34 - 22


Test your knowledge3

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

34 - 23


Thought questions

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?

34 - 24


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