Checks
are the most common type of negotiable instruments and are governed by UCC 3
and UCC 4. Article 3 establishes the requirements
that all negotiable instruments must meet (including checks) and Article 4
establishes the framework for deposit and checking agreements, as well as
relationships between banks- banks and banks to customers.
• Check: A (special kind of) draft drawn by a depositor
(the drawer) ordering a bank or other
financial institution (the drawee)
to pay a sum certain of money on demand to, or to the order
of, a third person (the payee). The
drawer is liable for ensuring that sufficient funds are in his or her account
to cover the check.
Between
the time the check is drawn and reaches the drawee,
something might happen. The drawer might
die, the drawer might order the bank to stop payment on the check, or the
account might go “negative.” To protect against this possible situation, we
have the:
• Cashier’s Check: A check drawn by the bank on itself,
rather than on a drawer’s account, which constitutes the bank’s (i) promise to pay the payee on presentment and (ii)
assumption of liability if the bank fails to pay. A teller’s
check is usually drawn by a bank on another bank.
A
traveler’s check has the qualities of a teller’s check or a cashier’s check, it
is payable on demand, drawn on or payable at a bank, and also designated as a
traveler’s check:
• Traveler’s Check: A check, often used as a substitute
for cash, that is (i) drawn on or payable through a
bank and (ii) payable on demand by the holder. A traveler’s check does not
require the holder to present it to the drawee bank
for payment. Generally, the system is
noted for the purchaser signing on the instrument when it is purchased and when
it is given as payment for an item. The
Drawer and Drawee are American Express, not the
purchaser.
• Certified Check: A check that has been accepted (for
example, my personal check) by the drawee bank prior
to presentment (indeed, often at the time it is issued). By certifying the
check, the bank assumes all liability for failure to pay the check on
presentment. What it actually does is
segregate the amount of the check from my account (i.e., putting a hold on such
funds) until this check is presented and paid.
In other words, the money is in my account but other checks that are to
be paid “don’t have access” to it.
But, what about a lost or stolen or destroyed Cashier, Teller or
Certified Check?
·
The remitter
(purchaser) or the payee of a cashiers check or
tellers check- or the drawer of a certified check-
can get a refund from the bank before the check is paid, with a catch.
The claim becomes enforceable 90 days after
the date of the check. If a person
entitled to enforce the check presents it for payment within 90 days (in other
words, the legitimate person to whom the check is actually written), the bank
is discharged. If after that time, the banks payment to the original party
discharges the bank.
·
In other
words, you wait 90 days before you can get the money back.
BANK’S DUTY TO HONOR CHECKS
The
Central postulate in all of this: to
honor a check, there must be sufficient funds in the drawer’s account in the
first place! But, if there are sufficient funds, and the bank wrongfully fails
to honor the check, it is liable to the customer for damages. Recall there is a business relationship
between the parties, and a debtor-creditor relationship exists between the
customer and the bank. There is also an
agency relationship between the parties.
As you might expect, certain contractual rights and duties exist between
the parties.
• Overdraft: A check written on a checking account in
which there are insufficient funds to cover the check.
• A bank faced with an overdraft has two
options: (1) dishonor the item (i.e., “bounce” the check), or (2) pay the item
and charge the customer’s account, collecting the difference from the next
deposit or from the customer’s savings or other account.
Notice that the holder can later resubmit the check, hoping
sufficient funds are available. But, if
the holder does this, he or she must notify any prior indorsers or they will be
discharged (recall this from the prior chapter?). Notice that a bank can provide overdraft
protection.
• Postdated Check: A check dated for payment at some future date.
• A bank may
charge a postdated check against a customer’s account upon presentment, unless the customer notifies the bank, in a timely
manner that the check is not to be paid until the stated date. In other words, a “stop payment” order type of effect.
• Stale Checks: A check, other than a certified check,
that is presented for payment more than six
months after its date.
• As a general rule, a bank is not
obligated to pay a stale check upon presentment, although it may do so. Usually it calls the drawer to verify whether
it may do so.
Stop-Payment
Order: An order by the drawer to his or her bank not
to pay or certify a certain check.
• The order, if made in a timely and
reasonable manner, must be obeyed.
• A bank making payment over a valid
stop-payment order must re-credit the customer’s account, but only to the
extent of the actual loss suffered by the drawer because of the wrongful
payment.
• A drawer
who wrongfully
issues a stop-payment order will be liable to
the payee both for the amount of the check and for any consequential damages
incurred by the payee as a result of the wrongful stop-payment order. In other words, the drawer MUST have a valid
reason to issue a stop order.
• Except in VERY rare circumstances,
payment cannot be stopped on a cashier’s check or teller’s check (see above
comments on lost or stolen or otherwise checks)
• Death or Incompetence of Drawer: A customer’s death
or incompetence does not affect the bank’s authority to honor a check drawn on the customer’s account until
the bank (i) knows of the death or incompetence, and
(ii) has had a reasonable period of time to act on the information.
• If the bank does not know of the
customer’s death or incompetence at the time a check is issued or presented,
the bank may pay the item.
• Even when a bank knows of the customer’s
death or incompetence, it may still pay or certify checks drawn on or before
the day of death for ten days following the date of death, unless
a valid stop payment order has been issued.
>>>>Notice
this does not apply if there are more than one signature(s) on the
account, such as “Taylor or Sammy:” but it does not apply to “Taylor
AND Sammy”.<<<<
• Forged
Drawer’s Signature -- As a general
rule, when a bank pays a check on which the drawer’s signature is forged, the bank is
liable and must credit the drawer’s account.
• Exception: Customer Negligence -- When a customer’s
negligence substantially contributes to the forgery, the bank will generally
not be obligated to credit the customer’s account.
NOTICE:
Every customer has a duty to examine bank statements (as well as
cancelled checks or photocopies of check, IF included with the statement) promptly
and with reasonable care, and to report any alterations or forged signatures
promptly. If a customer fails in this duty, he or she
is liable for any improperly paid checks. In most cases, you really don’t need the
checks to see if something is up, it is obvious from
the posting that something is amiss. The
move of late is to have front and back copies of the checks available online
the next business day after being posted.
• However, if the customer can prove
that the bank failed to exercise ordinary care in paying the check(s), then the
customer and the bank will share the liability.
• If the bank can establish the identity
of the forger, the bank may recover from the forger and from any person
accepting a forged check with notice of the forgery. (good luck!)
FORGED INDORSEMENTS &
ALTERE
• Forged
Indorsement -- As a general rule,
when a bank pays a check bearing a forged indorsement, the bank is liable and must credit the drawer’s account. However, the loss
will probably fall on the first person or party to take the forged instrument.
Why? They had a chance
to get the proper identification.
• If a customer fails to report a forged
indorsement within three years after the check
has been made available to the customer for inspection, the bank will no longer
be liable to the customer.
• Altered Check -- A bank has a duty to examine each
check before making final payment. If the bank fails to detect an alteration, the bank is liable to its customer for the difference
between the intended amount to be paid and the amount actually paid. For example, changing 11 to
111.
• Exception: Failure to Report -- A customer is
obligated to exercise the same care with respect to alterations as forged drawer’s
signatures.
• Exception: “Blank Check” -- Moreover, a bank is never
liable for paying a check that the customer signed leaving blank (i) the name of the payee and/or (ii) the amount to be paid.
DEPOSITS- When Available??
·
Deposits: If the deposited check is from a Local bank- generally must give credit in one business
day, but that doesn’t mean first thing in the morning! If it is a non-local
bank, you must have it in 5 days. But,
the larger the amount, the longer the delay allowed.
·
If the deposit
is cash, wire transfers, government checks, cashiers checks, certified checks,
the first $100 is available that day, with the rest available the next business
day. NOTE: This is the rule, not necessarily what the bank will actually
do (in other words, many banks will give you full credit the same day).
·
There is a
rule that allows you access to $100 in the next business day after deposit of
any check. Consider, a local check is
deposited in your bank for $500 on Monday after
·
New accounts- they can hold 8 days or even an addition 4
days if the check is over $5000, assuming non cashier checks or government
checks.
·
Moral
to the story: Always open your new
accounts with cashier or government checks.
Expect significant delays with non certified, non-cashier checks, or
nongovernmental checks. (it’s a legal form of getting float by the bank!)
• Suppose that
Bob, who lives in
1. Bob gives Sheila’s a check drawn on
Houston National Bank (“HNB”), the drawee bank.
2. Sheila’s deposits the check in its
account at First
3. FMM sends the check to HNB for
payment, at which point FMM has also become the collecting
bank, because it is handling the collection of Bob’s check.
4. Quite often, one or more other intermediary banks (including but not limited to
Federal Reserve banks) will “handle” Bob’s check between FMM and HNB.
5. Bob’s check is finally presented by FMM or the last intermediary bank
for payment by HNB, which has now become the payor bank.
• Electronic Funds Transfer (EFT): A transfer of funds by means of an electronic
terminal, telephone, computer, Internet or similar media. There are several
types of EFT systems in widespread use, notably:
• Automated Teller
Machines (“ATMs”) may be used by a bank’s customers to make deposits,
withdraw funds from checking and savings accounts, transfer funds between
accounts, make loan and credit line payments, and take cash advances against
credit cards.
·
Point-of-Sale
Systems, including debit cards,
allow consumers to transfer funds from their bank account(s) to merchants
to pay for purchases.
• Direct Deposits
and Withdrawals may be made at the instruction of the bank’s customers,
as a means of making regular, periodic deposits (e.g., pay checks) and/or
payments (e.g., mortgage payments) more easy for the customer.
• Bank-by-Telephone
Systems and Internet transfer systems enable a bank’s customers to check
account balances, deposits, the payment status of checks, transfer funds
between accounts, and direct payment of certain types of obligations.
DRAWBACKS OF EFT
Despite the tremendous convenience of EFT systems,
there are a number of significant drawbacks, notably:
1. It is
more difficult to issue stop payment orders;
2. Fewer
(paper) records are available to document a transaction;
3. The
possibilities of tampering are increased; and.
4. “Float time” -- the time between when a purchase or
payment is made and when the bank deducts the amount of the purchase or payment
from its customer’s account is greatly reduced.
• Unauthorized Transfer: According to the Electronic Funds
Transfer Act of 1978, an unauthorized transfer
(1) is initiated by some person other than the bank’s customer
who has no authority to initiate the transfer,
(2) from which the customer receives no
benefit, and
(3) for which the customer did not give the unauthorized
user means of access to the customer’s account.
REGULATION E
èNOTICE: THIS IS
NOT THE CREDIT CARD RULE- THIS IS THE EFT
RULE!!!
• Pursuant
to the EFTA, the Federal Reserve Board has issued Regulation E, which requires
financial institutions to inform consumers of their rights with respect to EFT
systems, to wit:
(1) If a customer’s EFT card is lost or stolen,
her liability is capped at $50, as long
as she notifies the bank within two days of
discovering the loss; otherwise, she will be liable for the first $500 of unauthorized usage; and, in the event she fails
to notify the bank within 60 days of loss, she may be liable for all
unauthorized usage;
(2) A customer must discover and report any
error on his monthly statement within 60 days of receiving the statement;
(3) A bank must provide receipts for all
non-telephone EFT transactions;
(4) A bank must provide its customers with a
detailed monthly statement for any month in which an EFT transaction occurs;
and
(5) Authorized prepayments for utility
bills and insurance premiums can be stopped three days before the
scheduled transfer.