978-0077733711 Chapter 34 Lecture Note

Unlock access to all the studying documents.

View Full Document

CHAPTER34

CHECKS AND ELECTRONIC

TRANSFERS

I. OBJECTIVES:

The objective of this chapter is to discuss the Code provisions that govern the

bank-customer

relationship where the customer maintains a checking account.

also discusses some of

the

evolving law concerning electronic fund transfer systems. After reading this chapter and

attending class, a student should be able

to:

1. Recall that the basic duty of a bank is to pay any properly drawn and payable check if

there

are sufficient funds in the

customer’s account.

2. Discuss the rules pertaining to postdated

checks.

3. Explain what is meant by a stop-payment order and discuss the bank’s duties and

potential

liabilities when it is given such an

order.

4. Distinguish certified checks from cashier’s

checks.

5. Discuss the bank’s obligations to its customer when it is presented with forged or

altered

checks.

6. Explain the

customer’s

duty to report forgeries and alterations and the consequences for

the

customer when he does so in a timely

manner.

7. Discuss the implications of Check 21 from the perspective of the customer of a

bank.

8. Discuss the major features of the Electronic Funds Transfer Act as they relate to the

rights,

liabilities, and responsibilities of participants in electronic fund transfer

systems.

II. ANSWER TO

INTRODUCTORY PROBLEM

A. The first question following the hypothetical that appears at the beginning of the

chapter

asks what rights a customer of a bank has against the bank if it fails to pay a check

issued

by the customer despite the fact the customer had sufficient funds on deposit to cover

the

check. In such an instance, the bank is liable for the actual damages caused by

the

wrongful dishonor as well as consequential damages. Actual damages may

include

charges imposed by retailers for returned checks as well as damages for arrest

prosecution of the customer. Consequential damages include injury to the

depositor’s

credit rating that results from the

dishonor.

B. The second question concerns the rights a customer has against a bank if it fails to

honor

a stop payment order she has placed against a specified check. In this instance, the

bank

is liable to the drawer for any loss the drawer suffers by reason of such

payment.

However, the drawer has the burden of establishing the fact and amount of the loss.

do this, the drawer must show that the drawee bank paid a person against whom

the

drawer had a valid defense to

payment.

C. The third question concerns the rights an account holder has against her bank if there

has

been an unauthorized use of her ATM

card-and

what she must do to preserve

those

rights. The customer must provide timely notice of the unauthorized use of his card in

order to limit his liability for such unauthorized use.

Chapter 34 – Checks and Electronic

Transfers

34-1

2016 by McGraw-Hill Education.

This is

proprietary material solely

for

authorized instructor use.

Not

authorized for

sale or

distribution

any

manner. This document may

not be

copied, scanned, duplicated, forwarded, distributed,

posted

on a

website, in whole

part.

D. The fourth question poses the ethical dilemma of whether it is ethical to give a check to

repairman who refuses to release your car unless you pay him for repairs allegedly

made

when you know you intend to stop payment on it as soon as you leave the repair

shop.

This poses a dilemma that students may readily take either side of. One can argue

that

providing the check to the garage owner !mowing that you do not intend to honor it

dishonest; rather you should accept the legal predicament you are in and pursue

your

claim

against the garage owner prior to getting the car back. Others may argue that in

getting your car back you are simply availing yourself of another legally

available

alternative where the garage owner still has an opportunity to have the question of

his

work resolved but he no longer has the advantage of having your car and you no

long

have

the disadvantage of being without

it.

III. SUGGESTIONS FOR LECTURE

PREPARATION:

A. The Bank-Customer

Relationship

1. Generally. List on the chalkboard the bank’s duties to a customer having a

checking

account. The duties can be briefly summarized by stating that the bank has a duty

follow its customer’s reasonable instructions.

should also be noted, however, that

the

customer has certain duties, which if omitted may relieve the bank of liability to

the

customer.

Cyber Law in Action: Account Aggregation (page 928): Discuss the practice known

“account aggregation” and point out the

advantages-and

potential disadvantages–to

customer who has his/her checking account accessible along with other

financial

accounts through a single information

system.

2. The Bank’s Duty to Pay. Explain wrongful dishonor, for which the bank has liability

the drawer even if the bank acted diligently. The following examples will clarify

this

duty and the extent of the

liability:

a. A merchant draws a check for $10,000 for supplies. Although he has $20,000 in

his

account the bank dishonors the check. The supplier refuses to deliver the

supplies.

The merchant buys them elsewhere for $12,000, but because of the late delivery

and

bad publicity surrounding the dishonor the merchant loses about $18,000 in sales

and

$8,000 in

profit

b. Indicate that the bank’s duty is to a customer and not to the payee of the check

unless

the bank has “accepted” (certified) the

check.

3. The Bank‘s Right to Charge the Customer’s Account. Since the check is an order to

the

bank, the bank has no liability if it pays the check. The bank may, if it wishes, pay

the

check although it overdraws the customer’s account. The customer is liable to the

bank

for

the overdraft amount. Remind students, however, that the check must not be altered

have a forged signature or a forged necessary indorsement. If it does, the customer

may

have his account re-credited for the amount of the check or for the excess above

the

original amount of an altered

check.

Examples: Problem Cases #1, 2 and

4. The Bank’s Duty to Obey a Stop Payment Order. Indicate how long a stop payment

order

is effective and explain the liability rules when the stop payment order is disobeyed.

The

following examples will clarify the duty and the

liability:

a. Dan buys a stereo and gives Stereo Store a check for $1,500. The next day

Dan

discovers the stereo is defective, and he issues a stop payment order. The bank

pays

the check to Stereo Store, despite the existence of the stop payment

order.

b. Same as “a” except the

banlc

pays Commercial Factors, a holder in due course

who

bought the check from Stereo

Store.

c. Problem Case

#4.

Seigel v. Merrill Lynch, Pierce, Fenner

Smith, Inc. (page 931). Where the

drawer

stopped payment on a checks issued in connection with the purchase of gambling

chips

that were used to wager at casinos but Merrill Lynch (in the position of a drawee

bank

accident, paid some of the checks on which payment had been stopped and

then

refuse

the drawer’s request to have his account re-credited, the court held that

Merrill

Lynch was not legally obligated

tore-credit

the account. The court noted that the

drawer

had to show he suffered a loss because of the failure to honor the stop payment

orders.

Here, Merrill Lynch stood as a subrogee in the shoes of the casinos to whom the

checks

were payable. To show he had suffered a loss, the drawer had to show that he had

defense that could have been asserted successfully against payment to the

casinos-this

was unable to do as the casinos would have been able to sue him either in New

Jersey

or in Maryland where he had no valid defense against

payment.

Points for Discussion: Note that the drawer might have had a valid defense if the

casinos

had sued him in the District of Columbia; however, because they could have chosen

bring their suits in New Jersey or Maryland where he did not have a good defense

against

payment to them, he was unable to show he had sustained a loss because of the

payment

over his stop payment

order.

Ethics in Action: What is the Ethical Thing to Do? (page 932): This poses a dilemma

that

students may readily take either side of. One can argue that providing the check to

the

garage owner knowing that you do not intend to honor it is dishonest; rather you

should

accept the legal predicament you are in and pursue your claim against the garage

owner

prior to getting the car back. Others may argue that in getting your car back you

are

simply

availing yourself of another legally available alternative where the garage

owner

still has an opportunity to have the question of his work resolved but he no longer has

the

advantage of having your car and you no long have the disadvantage of being without

it.

5. The Bank’s Duty with Regard to Certified and Cashier’s Checks. Point out that a

certified

check is not a cashier’s check. Point out who is liable on a certified check. (Refer to

the

previous chapter where the effect of certification on the liability of the drawer and

the

indorsees is

discussed.

)

6. The Bank’s Right to Charge a Deceased Customer’s Account. Note that this limited

right

is commercially

necessary.

Example: Problem Case

#5.

B. Forged and Altered

Checks

34-3

2013 by McGraw-Hill Education.

This is

proprietary material solely

for

authorized instructor use.

Not

authorized

for

sale

distribution

any

manner. This document may

not be

copied, scam1ed, duplicated, forwarded, distributed,

posted

on a

website,

whole

part.

1. Bank’s Right to Charge the Account. A bank may charge against the account any

item

that is properly payable from that account. An item is properly payable if it is

authorized

and in accordance with any agreement between the customer and the bank.

However,

Section 4-103(a) permits banks and their customers to agree to a different rule,

except

that an agreement between a bank and its customer cannot disclaim the responsibility of

bank for its lack of good faith or failure to exercise ordinary

care.

Cincinnati Insurance Company v. Wachovia Bank National Association (page 934).

agreement providing for a conditional release of a bank’s liability where the

customer

failed to adopt certain options for reducing the likelihood of a forgery or alteration

instruments issued by it was upheld by the court in this

case.

2. The Customer’s Duty to Report Forgeries and Alterations. This duty and the

bank’s

liability when the customer fails to report timely a forgery or an alteration is difficult

for

students to understand. Basically, the rule is that the customer must report the

alteration

or forgery within a reasonable time after the statement and cancelled checks are sent

the customer. If the customer fails to do so, the customer can nevertheless require

the

bank

tore-credit

his account, but only if the bank has not suffered a

loss.

The rule in detail is as

follows:

a. For one-time forgeries or alterations: the customer may have his account

re-credited

unless the bank suffered a loss during the period of unreasonable

delay.

b. For a series of alterations or forgeries by the same

person:

1) Customer may have his account re-credited for any checks in the first

statement

that disclosed the forgery or alteration and any checks paid less than thirty

days

after that first statement was available to the customer, unless the customer

fails

to give the bank notice of the alterations or forgeries on those checks within

reasonable time after the statement was available to him and the

banlc

suffered

loss due to the unreasonable

delay.

2) Customer may have his account re-credited for checks paid after the thirty

day

period has elapsed, unless the customer fails to give the bank notice of the

series

of alterations or forgeries within a reasonable time after the statement that

first

disclosed the alterations or forgeries was available to the

customer.

Examples: Problem Cases #6 and

#7.

Clemente Brothers

Contracting

Corp. v.

Hafner-Milazzo (page

937). The

court

upheld

agreement between

a bank and its

corporate customer

that

shortened the

time

period

fourteen

days that the

customer

had after

receiving

its

monthly

statement

to notify the bank of any items that were not

properly payable.

dissenting

judge

indicated several problems

with the

majority’s decision-

and

whether

could

fairly applied

certain

other

situations involving smaller,

less

sophisticated customers.

Points for Discussion:

Discuss

the

policy considerations behind

the rules

that

require timely notification

to the banlc of any

unauthorized items

in the

account

holder’s account. How

are these

considerations advanced

by the result in

this

case?

What

should Clemente Brothers

have done to

protect themselves?

34-4

2013 by McGraw-Hill Education. This

proprietary material solely

for

authorized instructor use. Not authorized for sale

distribution

any

manner. This document may

not be

copied, scanned, duplicated, forwarded, distributed,

posted

on a

website,

whole

part.

2. Note the one and three year statute of limitations for a customer to report alterations

forgeries.

3. Refer the students to the negligence, imposter, and fictitious payee rules in the

chapter, which preclude a customer from requiring a bank to re-credit his account

even

though the customer gives timely notice of the alteration or

forgery.

C. Check Collection and Funds

Availability

1. Outline the check collection

process.

2. Discuss the risks run by a depository bank in the check collection process and the

initial

response by banks as to how they sought to protect themselves against these

risks.

3. Discuss the major provisions of the Expedited

Funds

Availability

Act.

Valley Bank of Ronan v. Hughes (page 940). A bank receiving checks from depositors

only required to use ordinary care, and in the case of an instrument taken for

processing

for collection by automated means, the bank is not required to manually examine

instrument so long as the bank’s procedures are not violated and they do not

vary

unreasonably from general banking practice and are not disapproved in Articles 3 or 4

the UCC.

Points for Discussion: You might ask whether any

of the

students have themselves

been

the subject of such a scam–whether they know of others who have been

victimized.

4. Outline the major provisions in Check 21 and discuss the ramifications for both

the

banking industry and for its

customers.

D. Electronic

Banking

1. Describe electronic banking as the latest step in the method of payment for goods

and

services. Give examples of types of electronic banking, and explain the rights EFT

users

have under the Electronic Fund Transfer Act. You may want to explore the

social

conditions that have advanced and impeded the substitution of EFT for cash and

paper

instruments.

Kruser v. Bank of America NT

SA (page 945). Where an unauthorized use was

made

a customer’s EFT card in December 1986 but was not reported to the bank in a

timely,

the customer was not able to have the account re-credited for 47 subsequent

withdrawals

totaling more than $9,000 that were made in August and September 1987. The

customer’s

liability is limited to $50 only where he provides notice to the card issuer within 60

days

transmittal to him of the statement showing the initial unauthorized transfer

withdrawal.

Points for Discussion: What is the policy rationale for the rule set forth in section

205.65

of Regulation

Additional Example: Problem case

Cyber Law In Action: E-checks (page 947): Indicate to the students that the

Federal

Reserve Board has decided that the Electronic Funds Transfer

Act-which

governs

ATM

transactions-also

governs “check conversion”

transactions.

2. Discuss the importance of wire transfers to domestic and international business

transactions.

Note the advantages and risks to those involved in using wire transfers including the

sender

of the funds, the recipient of the funds, and the financial institutions who facilitate the

transfer

funds.

The Global Business Environment: International Electronic Funds Transfers (page

948)

Note that the Model Law adopted by the United Nations Commission on International

Trade

is the major international legal document concerning electronic funds

transfers.

IV. RECOMMENDED

REFERENCES:

See the references listed for Chapter 31, Negotiable

Instruments.