Chapter 30
CHECKS AND FUNDS TRANSFERS
RESTATEMENT
A check is a draft that is payable on demand and drawn on a bank. The delivery of a check is not an assignment and
does not automatically entitle the holder of the check to funds from the bank. Most checks are customers’ checks but
there are also cashier’s checks (check is drawn by the bank on itself) and certified checks (bank agrees to pay check
regardless of status of customer’s account at time of presentment).
When a check is presented, the bank may dishonor it if payment creates an overdraft in the customer ’s account. If
the bank pays the check and an overdraft is created, the overdraft is a loan from the bank that must be repaid.
The bank-customer relationship requires the bank to preserve the customer’s privacy and information about the
customer’s account cannot be revealed unless the bank is required to do so through law enforcement processes. A
bank need not pay a stale check (longer than 6 months since issue), but can continue to pay checks for 10 days after
a customer’s death unless told otherwise.
A customer can stop payment on a check and the bank must withhold payment once a stop order is issued. There
can be no stop payment order on a certified check. The drawer, not the bank, is liable if a stop payment order is
wrongfully issued.
A check must be presented for payment in a timely fashion. There are various time limits for presentment that result
in the protection of rights and include 30 days for attaching the liability of an indorser, 30 days for attaching the liability
of the drawer and 90 days to prevent a check from being overdue.
A bank is liable for the damages a drawer sustains if a check is wrongfully dishonored. However, the bank has no
liability to the holder for a wrongful dishonor. Banks are also liable for encoding accuracy, payment over a stop
payment order and payment over a forged drawer’s signature. However, banks are not liable for premature payment
of a postdated check. Missing or forged indorsements and alterations have special liability rules for banks.
The Electronic Fund Transfer Act governs electronic fund transfers (EFTs) by consumers and covers ATMs,
pay-by-phone systems, direct deposits and withdrawals and point-of-sale terminals. The EFTA carries maximum
liability provisions to protect consumers against loss or theft. With timely notification, a consumer’s maximum liability
for use by a thief is $50.
Fund transfers made by businesses are governed by the UCC and Federal Reserve regulations. Article 4A governs
fund transfers. Fund transfers are communications of instructions or requests to pay specific sums of money or to the
credit of a specified account or person. A funds transfer does not involve the physical transfer of money. Originators
start the funds transfer and beneficiaries receive them. The payment order is the directions for transfer and parties
using them are assumed to have adequate security provisions. When there are errors in fund transfers, the bank
committing the error will absorb the loss.
STUDENT LEARNING OUTCOMES
LO.1: List and explain the duties of the drawee bank.
LO.2: Explain the methods for, and legal effect of, stopping payment.
LO.3: Describe the liability of a bank for improper payment and collection.
LO.4: Discuss the legal effect of forgeries and material alterations.
LO.5: Specify the time limitations for reporting forgeries and alterations.
LO.6: Describe the electronic transfer of funds and laws governing it.
INSTRUCTOR’S INSIGHTS
Break the chapter down into four components – related Learning Outcomes are indicated in ( ):
1. What are checks and what are the rights of the parties with respect to checks?
Explain certified checks
Discuss the liability of a drawer on a check (LO.1)
2. What is the liability of a bank with respect to checks?
Cover stop payment orders and liability (LO.2)
Discuss postdated checks
3. What are consumers’ rights in funds transfers?
Describe the types of electronic fund transfers
4. What are the rights and liabilities of parties on fund transfers?
Discuss the applicable law (LO.6)
Describe the characteristics and patterns of fund transfers (LO.6)
CHAPTER OUTLINE
I. What are Checks and What are the Rights of the Parties With Respect to Checks?
A. Nature of check (See Figure 30-1 in text)
1. Drawee – the drawee is always a bank
2. Sufficient funds on deposit – drawer’s responsibility
3. Demand paper – checks are in this form
a. Discuss the exception – postdated checks
b. Explain why people postdate checks. Inform the students that a postdated check is freely
4. Check can be in any form, but banks can contractually require the use of certain forms
5. Delivery not assignment
DISCUSSION POINTS: E-Commerce & Cyberlaw
The Nigerian “I Need Your Help” E-Mails
Emphasize that there is no remedy under Articles 3 or 4 for those who fall victim to the Nigerian e-mail fraud schemes
because you are doing it voluntarily and are simply duped. There is a remedy for fraud, but the international nature
and difficulty of locating the scamsters make that a near impossibility. The checks are valid.
B. Certified checks
1. Certified checks are drawn on the request of the holder or the drawer
2. Discuss the difference between a certified check and a cashier’s check. The general rule is that
payment cannot be stopped on a certified or cashier’s check. Inform the students that in the real world,
whether a bank will stop payment on a certified or cashier’s check depends on a simple allocation of
risk for the bank. For example, customer A at the bank issues a certified or cashier’s check to B as part
of a business transaction. A discovers fraud on the part of B and asks the bank to stop payment on (not
honor) the check. Most likely, A will be informed by the bank that it cannot stop payment on a certified or
CASE BRIEF: State Bank v. Smith
85 UCC Rep. Serv. 2d 260, 2014 WL 6088513 (Mich. App. 2014)
FACTS: On March 26, 2012, Dale M. Smith (defendant/counter-plaintiff), presented a cashier’s check for
$294,500.99 for deposit in his account with State Bank (plaintiff). The check appeared to be a
cashier’s check drawn on Chase Bank. State Bank accepted the check for deposit. The following
day, March 27, 2012, Smith requested that plaintiff wire approximately $275,000 from his account
to an account in Japan. Before performing this transfer, State Bank contacted a local Chase branch
and spoke to a representative. A Chase representative “confirmed the check number, the account
number, verified the amount in the check and represented there were no stop-payment orders
placed on the item.” State Bank then processed Smith’s wire transfer request.
On March 28, 2012, Chase returned the check to State Bank with the notation “refer to maker.”
State Bank then presented the check to Chase for payment a second time, and Chase again
returned the check to State Bank. Elizabeth Roush, a Vice President and Reconciliation Manager
for Chase, explained that the cashier’s check was “different from the form of official cashier’s
checks issued by Chase.” The check number had an incorrect number of digits, did not include “a
printed audit number to indicate its validity[,]” did not have the proper signature, and was missing a
security symbol. At her deposition, Roush explained that only one authorized signature exists for all
cashier’s checks drawn on the account number printed on the cashier’s check. This signature is
electronically printed on all checks issued by Chase retail branches. Roush was immediately able
to identify that the check was not issued by Chase because the signature was not an authorized
signature for that account. Roush did not know who signed the check.
On May 16, 2012, State Bank filed suit against Smith and Chase. State Bank alleged that Chase
wrongfully dishonored the check. The trial court granted summary judgment for Chase and State
Bank appealed.
ISSUE: Can there be a holder in due course of a check that does not have an authorized signature?
REASONING: The court held for Chase because the cashier’s check did not have an authorized signature. An
instrument is not valid unless it has a proper signature and no one is required to pay an instrument
unless there is a valid signature. State Bank could not be an HDC of an instrument without a
proper signature. And even if State Bank thought it was an HDC, the lack of an authorized
refuse payment because of a missing, authorized signature.
C. Presentment for obtaining payment on a check
1. Requirements
2. Time for presentment
a. 90 days in order to attach secondary liability to drawer
b. 30 days after indorsement to attach liability of indorser
D. Dishonor of a check
1. Bank refuses to pay
2. Bank has right to refuse to pay
3. Time for dishonor
4. Overdraft
DISCUSSION POINTS: Ethics & the Law
Getting Hit For SOOO Many Overdraft Fees
The case was dismissed because the court held that the bank had the contractual right to act as it did. The court also
held that the bank was not unjustly enriched beyond what its contract rights provided. However, there was a different
decision in the Florida class action in which the court held that because the customers lacked bargaining power that
the clauses were unconscionable and unenforceable. In addition, a trial court decision in 2011 out of the 9th circuit in
which Wells Fargo was required to pay its customers on this same overdraft issue because the court found it to be
unfair and that there was insufficient notice of the bank’s practices on overdraft fees. There was an earlier decision
that held that it was not conversion to charge overdraft fees in whatever order. Gutierrez v. Wells Fargo & Co., 622 F.
Supp. 2d 946 (N.D. Cal. 2009). The issue is one of fairness and disclosure, and, perhaps, allowing customers to
choose which checks should be honored first. Some customers want their mortgage paid before any others so that
that payment is cleared. Other customers want the order to minimize overdraft fees. Full, fair, and upfront disclosure
is the key to avoiding the customer backlash.
E. The customer-bank relationship
1. Privacy
Often, when a local merchant takes a large check from a customer, the merchant phones the bank to
see whether there are sufficient funds in the customer’s account to pay the check. Discuss a customer’s
2. Payment
a. Stale checks
b. Payment after depositor’s death
i. Can pay until actual knowledge of death
ii. Can pay for 10 days after death; even with knowledge
F. Stopping payment of check
1. Payment cannot be stopped on a certified or cashier’s check
2. With regard to stop payment orders, remind the students that if a bank stops payment on a check, a
holder in due course can hold the drawer responsible for the amount of the check if the reason for
stopping payment was a limited defense. Problems also arise when the drawee bank pays the check in
3. Form of stop payment order
4. Liability to holder for stopping payment
G. Wrongful dishonor of check
1. Bank’s liability to drawer of check
H. Agency status of collecting bank
Frequently, checks that are returned for insufficient funds are automatically returned to the drawee bank by
the depository bank for payment on the theory that if there weren’t enough funds in the account the first time
through, perhaps it was a mere oversight, and there will be funds when the check is presented a second
time. If there are insufficient funds the second time through, the drawee bank may punch out the magnetic
I. A bank’s duty of care
1. Ordinary care
2. If bank uses automation not required to make physical exam
CASE BRIEF: Greenberg, Trager & Herbst, LLP v. HSBC Bank USA
934 N.Y. S. 2d 43, 75 UCC Rep. Serv. 2d 775 (Sup. Ct. 2011)
FACTS: Greenberg, Trager & Herbst, LLP (GTH), is a law firm specializing in construction litigation law. In
September 2007, a partner at GTH received an e-mail from a representative of Northlink Industrial
Limited, a Hong Kong company. Northlink was looking for legal representation to assist it in the
collection of debts owed by its North American customers. Through a series of e-mails GTH agreed
to represent Northlink and requested a $10,000 retainer. GTH then received a Citibank check for
$197,750 from a Northlink customer and was told that it could take its retainer from those funds. On
Friday, September 21, 2007, GTH deposited the check into its account at HSBC.
The next business day, Monday, September 24th, HSBC processed the check through the Federal
Reserve Bank of Philadelphia (FRBP) and because of the federal funds availability law
provisionally credited GTH’s account for $197,750. FRBP presented an image replacement
document (IRD) of the check to Citibank that same day.
Because the routing number was not recognized by Citi’s processing system, the automated sorting
system directed the IRD to the reject pocket.
HSBC received the IRD with the notation “sent wrong” the next day, September 25, 2007. Because
the check was marked “sent wrong,” HSBC assumed that there was a problem with the routing
number that required sending the check to a different Federal Reserve Bank. On September 26,
2007, HSBC sent the check to the Federal Reserve Bank, San Francisco (FRBS). HSBC never
informed GTH of the “administrative return” of the check.
On September 27, 2007, a GTH partner called HSBC to determine whether the check had “cleared”
and if the funds were available for disbursement. GTH was informed that the funds were available.
Later that day, GTH wired $187,750 from its account to Hong Kong as Northlink instructed.
On October 2, 2007, HSBC received Citibank’s notice that the check was being dishonored as
“RTM [return to maker] Suspect Counterfeit.” HSBC contacted GTH to inform them that the check
had been dishonored. HSBC then revoked its provisional settlement and charged back GTH’s
account.
GTH filed suit against HSBC and Citibank for failure to inform GTH that the check had been
returned and dishonored on September 25th, and for informing GTH over the phone that the funds
had “cleared” and were available for disbursement. HSBC and Citibank moved for summary
judgment.
The trial court found that HSBC had no duty under the UCC to inform GTH that the check had been
returned “sent wrong” on September 25th, but rather that the dishonor actually took place when
HSBC discovered the check was “Suspect Counterfeit” and dismissed the complaint.
ISSUE: Does a bank breach a duty when it offers oral confirmation of a check’s clearance?
HOLDING AND
REASONING: (1) payor bank did not owe duty to plaintiff to have effective procedures in place to detect
(2) alleged oral statement by depository bank’s representative that check had “cleared” and the
(3) depository bank fulfilled its duty to exercise “ordinary care” in handling check; and
(4) neither bank breached any duty owed to plaintiff, so as to support equitable estoppel claim.
The dishonor did not occur until after the second processing because the first rejection was not a
The dissenting judge feels that there are issues of negligence with regard to the processing of
Never write checks on a deposited item until you are sure the check is valid and really has moved
II. What is the Liability of a Bank With Respect to Checks?
A. Premature payment of postdated check – bank not liable unless drawee gives bank prior notice of postdate