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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.
It
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
or
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.
To
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
in
any
manner. This document may
not be
copied, scanned, duplicated, forwarded, distributed,
or
posted
on a
website, in whole
or
part.
D. The fourth question poses the ethical dilemma of whether it is ethical to give a check to
a
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
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.
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
to
follow its customer's reasonable instructions.
It
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
as
"account aggregation" and point out the
advantages-and
potential disadvantages--to
a
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
to
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
s
..
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
or
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
3.
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
),
by
accident, paid some of the checks on which payment had been stopped and
then
refuse
d
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
a
defense that could have been asserted successfully against payment to the
casinos-this
h
e
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
to
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
or
distribution
in
any
manner. This document may
not be
copied, scam1ed, duplicated, forwarded, distributed,
or
posted
on a
website,
in
whole
or
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
a
bank for its lack of good faith or failure to exercise ordinary
care.
Cincinnati Insurance Company v. Wachovia Bank National Association (page 934).
An
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
of
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
to
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
a
reasonable time after the statement was available to him and the
banlc
suffered
a
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
an
agreement between
a bank and its
corporate customer
that
shortened the
time
period
to
fourteen
days that the
customer
had after
receiving
its
monthly
statement
to notify the bank of any items that were not
properly payable.
A
dissenting
judge
indicated several problems
with the
majority's decision-
and
whether
it
could
be
fairly applied
to
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
is
proprietary material solely
for
authorized instructor use. Not authorized for sale
or
distribution
in
any
manner. This document may
not be
copied, scanned, duplicated, forwarded, distributed,
or
posted
on a
website,
in
whole
or
part.
2. Note the one and three year statute of limitations for a customer to report alterations
or
forgeries.
3. Refer the students to the negligence, imposter, and fictitious payee rules in the
previous
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
is
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
an
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
of
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
so
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
of
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
of
transmittal to him of the statement showing the initial unauthorized transfer
or
withdrawal.
Points for Discussion: What is the policy rationale for the rule set forth in section
205.65
of Regulation
E?
Additional Example: Problem case
#8
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
of
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.
