Ch. 15: Checks and Banking in the Digital Age – No. 1
Clarkson et al.’s Business Law: Commercial Law for Accountants (1E)
Check: A 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
drawee prior to presentment (indeed, often at the time it is
Ch. 15: Checks and Banking in the Digital Age – No. 2
Clarkson et al.’s Business Law: Commercial Law for Accountants (1E)
BANK-CUSTOMER RELATIONS
Creditor-Debtor: When a customer deposits funds into her
bank account, she becomes the bank’s creditor, and the bank
becomes her debtor, for the amount of the deposit.
Duty to Honor Checks: A bank must honor (pay) a
customer’s check when properly presented for payment,
unless the bank has a legitimate reason to dishonor it.
Duty to Accept Deposits: A bank must accept a
checks payable or indorsed to its customer, which the
customer deposits into her account.
Contract: The account agreement between a bank and its
customer governs each party’s rights and duties, except when
Ch. 15: Checks and Banking in the Digital Age – No. 3
Clarkson et al.’s Business Law: Commercial Law for Accountants (1E)
HONORING CHECKS
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:
Postdated Check: A check bearing a future date.
A bank may charge a postdated check against a
customer’s account upon presentment, unless the
customer timely instructs the bank to not pay the check
As a general rule, a bank is not obligated to pay a stale
check upon presentment, although it may do so.
Ch. 15: Checks and Banking in the Digital Age – No. 4
Clarkson et al.’s Business Law: Commercial Law for Accountants (1E)
If the drawer orders the bank in a timely and reasonable
manner not to pay a check, the bank must obey.
Wrongful Payment: A bank making payment over
a valid stop-payment order must re-credit the
both for the amount of the check and for any
consequential damages the payee incurs if the
drawee obeys the wrongful stop-payment order.
Except in rare circumstances, payment cannot be
Ch. 15: Checks and Banking in the Digital Age – No. 5
Clarkson et al.’s Business Law: Commercial Law for Accountants (1E)
DRAWER’S DEATH OR INCOMPETENCE
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
If the bank does not know that its customer had died or
been declared incompetent before a check was drawn or
presented, the bank may pay the item.
Even if the bank knows that its customer had died or
Ch. 15: Checks and Banking in the Digital Age – No. 6
Clarkson et al.’s Business Law: Commercial Law for Accountants (1E)
FORGED DRAWER’S SIGNATURE
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.
Customer Negligence: When a customer’s negligence
substantially contributes to the forgery, the bank is
this duty is liable for any improperly paid checks.
If the customer can prove that the bank failed to exercise
ordinary care in paying the check, then the customer
and the bank will share the liability, unless the
forged check in good faith and for value.
Ch. 15: Checks and Banking in the Digital Age – No. 7
Clarkson et al.’s Business Law: Commercial Law for Accountants (1E)
FORGED INDORSEMENTS AND
Exception – Failure to Report: A bank is not liable to a
customer who fails to report a forged indorsement
within three years after the check was made available
to the customer for inspection.
Exception – Failure to Report: A customer must
exercise the same care with respect to alterations and
forged drawer’s signatures.
Clarkson et al.’s Business Law: Commercial Law for Accountants (1E)
MAKING DEPOSITED FUNDS AVAILABLE
Next Day Availability: Funds deposited as cash, a cashier’s
bank (one within the same check-processing region as the
customer’s bank) must be available for the depositing
customer’s use within one business day.
Non-Local Checks: Funds deposited by a check drawn on a
a deposit available for cash withdrawal on the relevant
business day, the next $400 the next business day, and the
balance the next business day.
Banks do not have to make funds deposited at a
Ch. 15: Checks and Banking in the Digital Age – No. 9
Clarkson et al.’s Business Law: Commercial Law for Accountants (1E)
COLLECTING PAYMENT
Suppose that Bob, who lives in Las Vegas, wants to pay for
an item he sees at Nüvō Antiques, in Miami, by writing a
check on his account at Oasis National Bank. Assuming that
Amalgamated of Miami (“FAM”), the depositary bank;
3. FAM sends the check to ONB for payment, at which
point FAM becomes the collecting bank because it is
handling the collection of Bob’s check;
4. Quite often, one or more other intermediary banks
Ch. 15: Checks and Banking in the Digital Age – No. 2
Clarkson et al.’s Business Law: Commercial Law for Accountants (1E)
BANK-CUSTOMER RELATIONS
Creditor-Debtor: When a customer deposits funds into her
bank account, she becomes the bank’s creditor, and the bank
becomes her debtor, for the amount of the deposit.
Duty to Honor Checks: A bank must honor (pay) a
customer’s check when properly presented for payment,
unless the bank has a legitimate reason to dishonor it.
Duty to Accept Deposits: A bank must accept a
checks payable or indorsed to its customer, which the
customer deposits into her account.
Contract: The account agreement between a bank and its
customer governs each party’s rights and duties, except when
Ch. 15: Checks and Banking in the Digital Age – No. 3
Clarkson et al.’s Business Law: Commercial Law for Accountants (1E)
HONORING CHECKS
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:
Postdated Check: A check bearing a future date.
A bank may charge a postdated check against a
customer’s account upon presentment, unless the
customer timely instructs the bank to not pay the check
As a general rule, a bank is not obligated to pay a stale
check upon presentment, although it may do so.
Ch. 15: Checks and Banking in the Digital Age – No. 4
Clarkson et al.’s Business Law: Commercial Law for Accountants (1E)
If the drawer orders the bank in a timely and reasonable
manner not to pay a check, the bank must obey.
Wrongful Payment: A bank making payment over
a valid stop-payment order must re-credit the
both for the amount of the check and for any
consequential damages the payee incurs if the
drawee obeys the wrongful stop-payment order.
Except in rare circumstances, payment cannot be
Ch. 15: Checks and Banking in the Digital Age – No. 5
Clarkson et al.’s Business Law: Commercial Law for Accountants (1E)
DRAWER’S DEATH OR INCOMPETENCE
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
If the bank does not know that its customer had died or
been declared incompetent before a check was drawn or
presented, the bank may pay the item.
Even if the bank knows that its customer had died or
Ch. 15: Checks and Banking in the Digital Age – No. 6
Clarkson et al.’s Business Law: Commercial Law for Accountants (1E)
FORGED DRAWER’S SIGNATURE
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.
Customer Negligence: When a customer’s negligence
substantially contributes to the forgery, the bank is
this duty is liable for any improperly paid checks.
If the customer can prove that the bank failed to exercise
ordinary care in paying the check, then the customer
and the bank will share the liability, unless the
forged check in good faith and for value.
Ch. 15: Checks and Banking in the Digital Age – No. 7
Clarkson et al.’s Business Law: Commercial Law for Accountants (1E)
FORGED INDORSEMENTS AND
Exception – Failure to Report: A bank is not liable to a
customer who fails to report a forged indorsement
within three years after the check was made available
to the customer for inspection.
Exception – Failure to Report: A customer must
exercise the same care with respect to alterations and
forged drawer’s signatures.
Clarkson et al.’s Business Law: Commercial Law for Accountants (1E)
MAKING DEPOSITED FUNDS AVAILABLE
Next Day Availability: Funds deposited as cash, a cashier’s
bank (one within the same check-processing region as the
customer’s bank) must be available for the depositing
customer’s use within one business day.
Non-Local Checks: Funds deposited by a check drawn on a
a deposit available for cash withdrawal on the relevant
business day, the next $400 the next business day, and the
balance the next business day.
Banks do not have to make funds deposited at a
Ch. 15: Checks and Banking in the Digital Age – No. 9
Clarkson et al.’s Business Law: Commercial Law for Accountants (1E)
COLLECTING PAYMENT
Suppose that Bob, who lives in Las Vegas, wants to pay for
an item he sees at Nüvō Antiques, in Miami, by writing a
check on his account at Oasis National Bank. Assuming that
Amalgamated of Miami (“FAM”), the depositary bank;
3. FAM sends the check to ONB for payment, at which
point FAM becomes the collecting bank because it is
handling the collection of Bob’s check;
4. Quite often, one or more other intermediary banks