Chapter 27 Checks, the Banking System, and E-Money

1. Chapter 27 Checks, the Banking System,and E-Money

2. Introduction • Checks and electronic fund transfers (EFT’s) are governed by Articles 3 and 4 of the UCC. • Article 3: covers all negotiable instruments, including checks. • Article 4: establishes a framework for deposit, EFT’s and checking agreements between banks and customers.

3. §1: Checks • Cashier’s Check: bank serves as drawer and drawee. Bank assumes responsibility. • Traveler’s Check: must be signed by the drawer again when cashed. • Certified Check: bank accepted money and bank will pay check from its own account.

4. Checks [2] • Lost, Destroyed, or Stolen Checks. • Must ask for a refund from bank before the check is paid by bank. • Then wait 90 days - if someone comes within 90 days, bank pays them, if no one comes within 90 days, bank gives refund.

5. §2: Bank-Customer Relationship • Creditor-Debtor: Bank owes money to customer and must honor customer’s checks. • Agency created: Bank must pay customer’s checks and collect for customer if she deposits checks.

6. §3: Honoring Checks • Banks that wrongfully dishonor customer’s checks are liable for actual damages only. • Overdrafts: bank’s choice to honor or not, then hold customer liable for amount. • Case 27.1:Kendall Yacht Co. v. United California Bank (1975). • On a Joint account, customer is only liable if signed overdraft or benefited from it.

7. Honoring Checks [2] • 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. • Death or Incompetence of a Customer: • Bank can pay until it knows and can pay checks drawn before death or incompetence 10 days after it knows - unless notified by a family member or executor.

8. Honoring Checks [3] • Stop-Payment Orders: • Customer can’t stop certified checks and must give bank enough time to act. • Oral S.P.= 14 days, Written = 6 months. • Customer's liability for wrongful stop-payment order = must have a real or personal defense as needed.

9. Honoring Checks [4] • Payment on a Forged Signature of the Drawer. • Bank must re-credit customer’s account - unless customer is negligent before or after the forgery. • Before: leaves big spaces, leaves check-cashing machine unlocked, rubber stamp unlocked, sloppily written. • After: fails to examine statement and notify bank within one year. • Case 27.2: Espresso Roma Corp. v. Bank of America N.A. (2002).

10. Honoring Checks [6] • Bank may not recover from the person it paid, or who was paid in course of business if that person acted in good faith because there was no Breach of Presentment Warranty. • Presenter did not know that the signature or the maker or drawer was forged. Bank can recover from forger because the forger did know.

11. Honoring Checks [7] • Payment on a Forged Indorsement – if not to customer’s order, bank must re-credit unless customer is negligent before or after forgery. • Before forgery: if large gaps or incompleteness. • After forgery: customer must notify bank (i) within 3 days after forged items made available to customer, or (ii) if a series of forgeries, within 30 days of receipt of either the bank statement or canceled checks. • Case 27.3:Halifax Corp. v. First Union National Bank (2001).

12. Honoring Checks [8] • Bank may recover from the person it paid (not cashier, teller, or certified checks) if Warranty. Presenter did not have Good Title because of the forged indorsement. • Altered Checks. • Bank has implied duty to inspect checks. • Customer Negligence shifts loss to customer if bank pays in good faith without notice. • Bank may recover from other parties.

13. §4: Accepting Deposits • Availability Schedule for Deposited Checks. • Interest-Bearing Accounts. • The Collection Process.

14. Availability Schedule for Deposited Checks • Expedited Funds Availability Act of 1987 and Federal Reserve Board’s Regulation CC. • Require that checks deposited into banks must be available for withdrawal by check or cash within a certain number of days from the date of deposit.

15. Regulation CC Availability Requirements • Local checks: one business day from the date of deposit. • Non-local checks: five business days from the date of deposit. • Some deposits must be available the next business day. • Deposits made in non-proprietary ATMs: 5 business days. • Some exceptions for new-customer deposits and large deposits.

16. Interest-Bearing Accounts • Truth-in-Savings Act of 1991 and Regulation DD require banks to: • Pay interest based on the full balance of the customer’s interest-bearing account each day. • Provide customers with certain information concerning balance required, amount of interest on account, fees, charges, penalties, and to supply customer with statement containing certain information on the interest in the account.

17. The Collection Process • Players: • Depository Bank. • Payor Bank. • Intermediary Banks. • Collecting Banks.

18. Check Collection Between Customers of the Same Bank • Bank must present check to be paid on or before midnight of the next day following receipt. • “Deferred posting” bank can set e.g., 2:00 pm as cutoff hour. • Bank can dishonor the check by the opening of the second banking day following its receipt or check is considered paid.

19. Check Collection Between Customers of Different Banks • Each bank in the collection process must pass the check on before midnight of the next banking day following its receipt. • Payor bank must dishonor or return it by midnight on the next banking day following receipt, or the payor bank is accountable for the face amount of the check.

20. How the Federal Reserve System Clears Checks • Electronic Check Presentment. • Much faster in contrast to manual check processing. • Check may not be physically moved, but encoded information sent by computer. • Those parties who encode and notify make the same warranties as if the check were sent physically.

21. §5: Electronic Fund Transfers • Types of EFT Systems. • Consumer Fund Transfers: governed by Electronic Fund Transfer Act of 1978. • Commercial Fund Transfers: governed by Article 4A of the UCC.

22. §6: E-Money and Online Banking • Digital Cash (e-money) in smart cards. • Online Banking Services. • Online contract between bank and customer governs terms. • Regulatory Compliance. • Privacy Protection. • Electronic Communications Privacy Act (1986). • Gramm-Leach-Bliley Act (1999).

23. §7: Uniform Money Services Business Act • Recommended by NCCSL covers: • Traditional Money Services and • Internet-based Money Services. • UMSBA online. • UMSBA may also apply to: • E-money, • Internet scrip, and • Stored-value products (pre-paid cards).

24. Law on the Web • FDIC. • American Banker’s Association. • Security First Network Bank. • E-Money (Digicash). • Netbanker.com (links to e-banks). • Legal Research Exercises on the Web.