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1
whole or in part.
Banking in the Digital Age
relationship of banks with one another as they process checks for payment, and it establishes a framework for deposit
and checking agreements between a bank and its customers. A check can therefore fall within the scope of Article 3
and yet be subject to the provisions of Article 4 while it is in the course of collection. In the case of a conflict between
Articles 3 and 4, Article 4 controls [UCC 4–102(1)].
2 INSTRUCTOR’S MANUAL FOR BUSINESS LAW: COMMERCIAL LAW FOR ACCOUNTANTS
[UCC 3–104(h)].
B. TRAVELER’S CHECK
A traveler’s check is a check on which a financial institution is both drawer and drawee. The buyer must
sign it twice (buying it and using it) [UCC 3–104(i)].
II. The Bank-Customer Relationship
A. CREDITOR-DEBTOR RELATIONSHIP
A creditor-debtor relationship is created between a customer and a bank when, for instance, the customer
deposits cash in a checking account or when final payment is received for checks drawn on other banks.
transaction.
III. The Bank’s Duty to Honor Checks
When a drawee bank wrongfully fails to honor a check, it is liable to its customer for damages resulting from
the refusal [UCC 4–402]. But the bank’s duty is not absolute—if the bank properly dishonors a check for
Bank of America (BOA) issued a check for $300 to Ama Afiriyie, a BOA customer. On attempting to cash
the check at a BOA branch office in a Pathmark Supermarket in South Orange, New Jersey, Afiriyie was
erroneously accused of criminal conduct—the branch manager told the police that the check was fraudulent—
and was briefly arrested. Afiriyie filed a suit in a New Jersey state court against BOA, alleging wrongful
CHAPTER 15: BANKING IN THE DIGITAL AGE 3
What options might the branch manager have used to avoid the dispute in this case? When a teller
at a branch office of Bank of America perceived a problem with the check that Afiriyie presented for payment,
branch manager Diane Lowe did not ask Afiriyie whether she was a customer of the bank but only asked her
where she had gotten the check. Afiriyie told Lowe that the bank had issued it to her, and Lowe responded
that the bank did not issue checks like that. Unable to immediately verify the validity of the check, Lowe told
And arguably, Lowe did not exercise ordinary care—nor did she likely act consistent with generally
accepted banking principles and practices—in dealing with Afiriyie. Ordinary care would not have dictated
calling the police when Lowe did. Instead, ordinary care could have been shown if Lowe had returned the
check to Afiriyie and asked her to return to the bank the next day, by which time the check’s validity might
ANSWERS TO LEGAL REASONING
QUESTIONS AT THE END OF CASE 15.1
1. Why did the bank argue that UCC 4–402 did not apply in this case? What did the court decide on
this issue? UCC 4–402 concerns a drawee bank’s wrongful dishonor of checks payable from a customer's
The court determined that “in light of this correspondence from the bank, it is reasonable to regard the
refund check in this case * * * as the functional equivalent of funds coming from plaintiff's own account. * * *
We conclude that the distinctive circumstances of this matter can support plaintiff's statutory claim for
wrongful dishonor.”
Bank of America’s actions between the time that Afiriyie presented the check for payment and the bank’s
4 INSTRUCTOR’S MANUAL FOR BUSINESS LAW: COMMERCIAL LAW FOR ACCOUNTANTS
pass a fraudulent check, and, on the other hand, claim that they never dishonored that check. * * * In sum, the
trial court did not err in declining to grant summary judgment dismissing [Afiriyie’s] claim of wrongful
dishonor.”
3. During the trial, Lowe admitted that she made a mistake when she did not ask Afiriyie whether she
If Lowe had asked Afiriyie whether she was a bank customer, as of course she was, Lowe could have
simply had her deposit the check into her account at that time, so it could be verified in the normal course of
the bank collection procedure. This step would likely have avoided the subsequent events that formed the
basis for this suit.
check was fraudulent. According to generally accepted banking principles and practices, it does not seem
likely that there would have been a call to the police.
Arguably, Lowe did not exercise ordinary care in dealing with Afiriyie. Ordinary care could have been
shown if Lowe had returned the check to Afiriyie and asked her to return to the bank the next day, by which
A. OVERDRAFTS
A bank may dishonor a check that, if it were cashed, would create an overdraft in the customer’s
account, or the bank may charge the customer’s account for the amount of the check (providing that the
customer has agreed in advance) [UCC 4–401(a)]. When a check bounces, the holder can resubmit it
4–401(c)].
CHAPTER 15: BANKING IN THE DIGITAL AGE 5
In a bank-customer relationship, the basic interaction occurs when a customer presents an instrument (a
check, for instance) to the right bank in a timely manner, so that the instrument can be paid and all parties’
accounts can be adjusted appropriately.
more than one person can draw, however, the bank cannot hold a joint-account customer liable for payment
of an overdraft unless the customer has signed the item or has benefited from the proceeds of the item [UCC
4–401(b)]
stopped, although there are time limits [UCC 4–403(a)].
1. Customer Must Have Legitimate Reason
The customer must have a valid legal ground for ordering a stop payment, or the holder can sue the
drawer for the amount of the check and consequential damages.
3. Bank’s Liability for Wrongful Payment
If the bank pays the check over the customer’s order, the bank is liable to the customer for the
amount of any actual loss [UCC 4–403(c)].
E. INCOMPETENCE OR DEATH OF A CUSTOMER
whole or in part.
For a variety of reasons, a drawer should not misuse stop-payment orders. We look at some of those
reasons here.
MONETARY COSTS AND RISKS
payee or holder cashes the check in the drive-in facility next door. In addition, even if a bank pays over your
proper stop-payment order, the bank is liable to the drawer-customer only for the amount of loss the drawer
suffers from the improper payment.
WHEN YOU CAN STOP PAYMENT
wrongful stop order subjects the drawer to liability to the payee or a holder, and this liability may include
special damages that resulted from the order. When all is considered, it may be unwise to order a stop
payment hastily on a check because of a minor dispute with the payee.
CHECKLIST FOR STOP-PAYMENT ORDERS
3. Make sure that you have a legal reason for issuing the stop-payment order.
F. FORGED DRAWERS’ SIGNATURES
whole or in part.
The customer’s liability may be reduced by any loss caused by negligence on the part of a person
paying the instrument or taking it for value (if the negligence substantially contributed to the loss)
[UCC 3-406(b)].
a. Timely Examination of Bank Statements Required
To recover for a series of forgeries of the same signature by the same wrongdoer, a customer
must report the first item to the bank within thirty calendar days of receipt of the bank
statement [UCC 4–406(d)(2)].
c. Negligence and the Bank’s Duty of Care
statement was available for inspection loses the right to have the bank recredit his or her
account [UCC 4–406(f)].
3. Other Parties from Whom the Bank May Recover
• The bank may not recover from “a person who took the instrument in good faith and for value
or who in good faith changed position in reliance on the payment or acceptance” [UCC 3–
418(c)].
G. CHECKS BEARING FORGED INDORSEMENTS
8 INSTRUCTOR’S MANUAL FOR BUSINESS LAW: COMMERCIAL LAW FOR ACCOUNTANTS
whole or in part.
The Michigan Basic Property Insurance Association (MBP) issued a check for $69,559.06 on its account
with Fifth Third Bank to Joyce Washington, Countrywide Home Loans, and T&C Federal Credit Union as co-
payees. Washington indorsed the check by signing all the payees’ names but did not share the proceeds.
Fifth Third notified MBP of the payment through daily and monthly account statements. MBP did not object
duties by contract. Here, the account agreement obligated MBP to review its statements and notify Fifth Third
of any problems within thirty days. Without such notice, MBP was liable for any forged indorsements.
..................................................................................................................................................
Would the situation have been different if MBP had handled its account electronically rather than
manually? Electronic banking would have made no difference in the outcome in this instance. The liability
rules are essentially the same.
discovering instances of fraud? Which party is in a better position to detect any irregularities? Why?
It probably does make sense for customers to bear primary responsibility for discovering fraud. Banking has
become increasingly complex, and banks handle a quickly growing volume of checks and transactions. As a
practical matter, banks cannot employ people to review every indorsement for the possibility of fraud.
Customers should be much more familiar with their own checks and are therefore in a better position to detect
whole or in part.
ANSWER TO “THE SOCIAL DIMENSION”
more closely scrutinized its account statements within the prescribed time limits to spot the item with the
forged indorsements.
H. ALTERED CHECKS
2. Other Parties from Whom the Bank May Recover
The bank can recover from the transferor for breach of warranty (unless the bank is the drawer and
the transferor is an HDC) [UCC 3–417(a)(2), 4–208(a)(2)].
• Any local check must be cleared within one business day from the date of deposit.
• Nonlocal checks must be cleared within five business days.
• Wire transfers and government checks must be cleared before the next business day.
• The first $100 of any deposit must be available on the opening of the next business day.
• Exceptions include deposits at nonproprietary ATMs and new accounts.
keep funds without releasing them to their customers, the more interest the banks earn for themselves. Thus,
the shorter the time between when funds are deposited and when they become available, the greater the
earnings of banks and other deposit-accepting financial institutions.
whole or in part.
ADDITIONAL BACKGROUND—
Regulation CC
SUBCHAPTER A—BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
PART 229—AVAILABILITY OF FUNDS AND COLLECTION OF CHECKS
SUBPART B—AVAILABILITY OF FUNDS AND DISCLOSURE OF FUNDS AVAILABILITY POLICIES
§ 229.12 Permanent availability schedule.
the second business day following the banking day on which funds are deposited, in the case of—
(1) A local check;
(2) A check drawn on the Treasury of the United States that is not governed by the availability requirements of
of general local government; or a cashier’s, certified, or teller’s check; if any check referred to in this
paragraph (b)(4) is a local check that is not governed by the availability requirements of § 229.10(c).
(c) Nonlocal checks—1) In general. Except as provided in paragraphs (d), (e), and (f) of this section, a de-
positary bank shall make funds deposited in an account by a check available for withdrawal not later than the
depositary bank and drawn on the same or another branch of the same bank, if any check referred to in this
paragraph (c)(1)(ii) is a nonlocal check that is not governed by the availability requirements of § 229.10(c).
(2) Nonlocal checks specified in Appendix B-2 to this part must be made available for withdrawal not later than
the times prescribed in that Appendix.
