Checks and Electronic Transfers


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. 







            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 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 2:00 p.m.  $100 is available Tuesday Morning.  The next $400 must be available no later than by 5:00 pm Wednesday. 


·        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 Houston, wants to pay for an item he sees at Sheila’s Antiques, in Minneapolis, by writing a check on his account at Houston National Bank. Assuming that Sheila’s will accept out-of-town checks, here is a sketch of how the check payment and collection process works:


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 Minnesota Mutual (“FMM”), the depository bank.


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.





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.





        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.