Ch 19

Fundamentals of Business Law

Summarized Cases, 8th Ed., and Excerpted Cases, 2nd Ed.

ROGER LeROY MILLER Institute for University Studies Arlington, Texas

GAYLORD A. JENTZ Herbert D. Kelleher Emeritus Professor in Business Law University of Texas at Austin

Learning Objectives • On 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 being liable to the customer? What happens if a bank wrongfully dishonors a customer’s check? Copyright © 2010 South-Western

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Learning Objectives • What duties does the UCC impose on a bank’s customers with regard to forged and altered checks? What are the consequences of a customer’s negligence in performing those duties? • What are the four most common types of EFT’s? • What is e-money? How is e-money stored and used? What laws apply to e-money transactions and online banking services? Copyright © 2010 South-Western

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Checks • Special type of draft by maker (drawer) drawn on a bank (drawee) ordering bank to pay third party (payee). – Cashier’s Check—bank is both drawer and drawee. – Traveler’s Check—payable on demand, payable by a financial institution, designated as a traveler’s check. – Certified Check—accepted in writing by drawee bank. Copyright © 2010 South-Western

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Cashier’s Check

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Traveler’s Check

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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.

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Bank’s Duty to Honor Checks • Drawee (Bank) has a legal duty to honor Drawer’s (Customer) 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.

• Postdated Checks (Notice required). – Bank can pay unless notified in time to act on it.

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Bank’s Duty to Honor Checks • 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. – 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. Copyright © 2010 South-Western

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Bank’s Duty to Honor Checks • 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.

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Bank’s Duty to Honor Checks • Checks With Forged Drawers’ Signatures. – Forged signature has no legal effect. – If bank pays the check it is liable and must recredit 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.

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Bank’s Duty to Honor Checks • Bank may not recover from the person it negligently paid, 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. Copyright © 2010 South-Western

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Checks Bearing Forged Indorsements • Payment on a Forged Indorsement – if not to customer’s order, bank must recredit 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. Copyright © 2010 South-Western

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Checks Bearing Forged Indorsements â&#x20AC;˘ 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.

Copyright ÂŠ 2010 South-Western

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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.

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Poorly Filled-out Check

Copyright ÂŠ 2010 South-Western

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Bank’s Duty to Accept Deposits • Availability Schedule for Deposited Checks.  • Interest-Bearing Accounts.  • The Traditional Collection Process.

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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.

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Traditional Collection Process

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Traditional Collection Process • Designation of Banks in 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. – Intermediary Banks: any bank except drawee or depositary banks.

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The Collection Process • Check Collection Between Customers of the Same Bank. – If not dishonored, bank must pay by second banking day after receipt.

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Federal Reserve ClearingHouse • The “Fed” is a network of twelve district banks. • Fed now acts as a clearinghouse where banks exchange checks and drafts drawn on each other.

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Check 21 • 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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Electronic Fund Transfers • Types of EFT Systems. • Consumer Fund Transfers: governed by Electronic Fund Transfer Act of 1978. – What is an “unauthorized transfer”? • Commercial Fund Transfers: governed by Article 4A of the UCC.

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E-Money and Online Banking • Digital Cash (e-money) in smart cards. • Online Banking Services. – Online contract between bank and customer governs terms.

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