What type of check does a bank agree in advance to accept when the check is presented for payment? What type of check does a bank agree in advance to

• What type of check does a bank agree What type of check does a bank agree in advance to accept when the check is in advance to accept when the check is presented for payment?presented for payment?• When may a bank properly dishonor a When may a bank properly dishonor a

customer’s check without the bank customer’s check without the bank being liable to the customer? being liable to the customer?

© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 2

• What duties does the Uniform What duties does the Uniform Commercial Code impose on a bank’s Commercial Code impose on a bank’s customers with regard to forged and customers with regard to forged and altered checks? What are the altered checks? What are the consequences if a customer is consequences if a customer is negligent in performing those duties? negligent in performing those duties?


• What are the four most common types What are the four most common types of electronic fund transfers?of electronic fund transfers?• What laws apply to e-money What laws apply to e-money

transactions and online banking transactions and online banking services?services?


• Cashier’s ChecksCashier’s Checks: : bank serves as bank serves as drawer and drawee. Bank assumes drawer and drawee. Bank assumes responsibility.responsibility.–CASE 23.1 MidAmerica Bank, FSB V. MidAmerica Bank, FSB V.

Charter One Bank, FSBCharter One Bank, FSB (2009). Why did the Illinois Supreme Court reverse the decision and award MidAmerica the amount of the check?


• Traveler’s ChecksTraveler’s Checks: : must be signed by must be signed by the drawer again when cashed.the drawer again when cashed.• Certified ChecksCertified Checks: : check that has been check that has been

accepted by the bank in which it is accepted by the bank in which it is drawn.drawn.

© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

• Creditor-Debtor Relationship: Creditor-Debtor Relationship: Bank Bank owes money to customer and must owes money to customer and must honor customer’s checks. honor customer’s checks. • Agency Relationship: Agency Relationship: Bank must pay Bank must pay

customer’s checks and collect for customer’s checks and collect for customer if she deposits checks.customer if she deposits checks.• Contractual Relationship: Contractual Relationship: between between

bank and customer.bank and customer.© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 7

• Banks that wrongfully dishonor Banks that wrongfully dishonor customer’s checks are liable for customer’s checks are liable for actual damages only.actual damages only.• OverdraftsOverdrafts. . Bank has two options: Bank has two options:

dishonor, dishonor, oror pay the check and charge pay the check and charge the customer’s account.the customer’s account.–Overdraft Protection Agreements: wrongful

dishonor if bank breaches contract.© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 8

• Postdated ChecksPostdated Checks: : Bank can pay unless Bank can pay unless notified in time to act on it.notified in time to act on it.• Stale ChecksStale Checks: : after 6 months, it is bank’s after 6 months, it is bank’s

choice whether to honor or not.choice whether to honor or not.• Stop-PaymentStop-Payment Orders: Orders: –Customer can’t stop certified checks

and must give bank enough time to act.


• Stop-PaymentStop-Payment Orders (cont’d). Orders (cont’d).–Oral Stop Payment valid for 14 days.

Written SP order valid for 6 months. –Bank’s Liability for Wrongful Payment:•Must recredit customer’s account.• Bank will be liable if subsequent checks

bounce.


• Stop-PaymentStop-Payment Orders (cont’d). Orders (cont’d).–Customer's Liability for Wrongful Stop

Payment Order.• Customer must have a valid legal ground,

otherwise the holder can sue for nonpayment.


• Death or IncompetenceDeath or Incompetence..–Neither death nor incompetence revokes

bank’s authority to pay until it has knowledge, up to 10 days after death.


• Checks Bearing Forged Drawers’ Checks Bearing Forged Drawers’ Signatures.Signatures.–General Rule: Forged signature on a

check has no legal effect as signature of the drawer. • If negligent, bank must re-credit customer’s

account when it pays on a forged signature.


• Checks Bearing Forged Drawers’ Checks Bearing Forged Drawers’ Signatures Signatures (cont’d).(cont’d).–Customer Negligence: if customer

substantially contributes to loss, bank is not liable. If bank is substantially negligent, it will be liable for loss.• CASE 23.2 Auto-Owners Insurance Co. v. Auto-Owners Insurance Co. v.

Bank One Bank One (2008). Why was Bank One not liable for the losses?


• Checks Bearing Forged Drawers’ Checks Bearing Forged Drawers’ Signatures Signatures (cont’d).(cont’d).–Customer Negligence.• Timely Examination of Bank Statements

Required.• Consequences of Failing to Detect

Forgeries: customer must examine statements, and has 30 days from detection of forgery to inform bank.


• Checks Bearing Forged Drawers’ Checks Bearing Forged Drawers’ Signatures Signatures (cont’d).(cont’d).–When the Bank is Also Negligent.• CASE 23.3 Schultz v. Bank of America, N.A. Schultz v. Bank of America, N.A.

(2010). What is “ordinary care” in commonplace banking transactions?• One – Year Time Limit: limits bank’s liability.• Other Parties From Whom the Bank May

Recover.© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 16

• Checks Bearing Forged Indorsements.Checks Bearing Forged Indorsements.–Payment on a Forged Indorsement – if

not to customer’s order, bank must re-credit unless customer is negligent before or after forgery.


• Altered Checks.Altered Checks.–Bank has implied duty to inspect checks.–Customer Negligence: shifts loss to

customer if bank pays in good faith without notice.–Other Parties From Whom the Bank

May Recover.


• Availability Schedule for Deposited Availability Schedule for Deposited Checks. Checks. • Interest-Bearing Accounts. Interest-Bearing Accounts. • The Collection Process. The Collection Process.


• Availability Schedule for Deposited Availability Schedule for Deposited Checks. Checks. –Expedited Funds Availability Act of 1987

and Federal Reserve Board’s Regulation CC.


• Traditional Collection Process.Traditional Collection Process.–Designations of Banks Involved in the

Collections Process.• Depository Bank: first bank to receive

payment.• Payor (Drawee) Bank: bank on which

payment is drawn.• Collecting Banks: any bank except payor’s

bank involved in process. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 21

• Traditional Collection Process (cont’d).Traditional Collection Process (cont’d).–Designations of Banks (cont’d).• Intermediary Banks: any bank except

drawee or depositary banks.–Check Collection Between Customers of

the Same Bank.


• Traditional Collection Process Traditional Collection Process (cont’d).(cont’d).–Check Collection Between Customers of

Different Banks.–How the Federal Reserve System Clears

Checks.• Fed now acts as a clearinghouse where

banks exchange checks and drafts drawn on each other.


• Traditional Collection Process Traditional Collection Process (cont’d).(cont’d).–Electronic Check Presentment.• Before Check 21, banks had to physically receive

paper checks. Check 21 now creates substitute checks: –Digital reproduction of original check that can

replace the original check.–Digital check is transmitted to banks in

collection process.–Banks cannot demand a paper cancelled check.–Reduced “Float” Times.



• Types of EFT Systems.Types of EFT Systems.–ATM’s.–Point-of-Sale Systems.–Direct Deposits and Withdrawals.–Internet Payment Systems.


• Consumer Fund Transfers: Consumer Fund Transfers: governed by governed by Electronic Fund Transfer Act of 1978.Electronic Fund Transfer Act of 1978.–Disclosure Requirements.–Unauthorized Transfers.–Violations and Damages.

• Commercial Fund Transfers: Commercial Fund Transfers: transferred “by wire” between transferred “by wire” between commercial entities. commercial entities.


• Digital Cash (e-money) in smart Digital Cash (e-money) in smart cards.cards.• Stored Value Cards (magnetic Stored Value Cards (magnetic

striped, e.g., gift cards).striped, e.g., gift cards).• Smart Cards: contain microchips. Smart Cards: contain microchips.


• Online Banking ServicesOnline Banking Services..• Privacy ProtectionPrivacy Protection..–E-Money Issuer’s Financial Records

(Financial Privacy Act of 1978).–Consumer Financial Data (Gramm-

Leach-Bliley Act of 1999).


Documents

What type of check does a bank agree in advance to accept when the check is presented for payment? What type of check does a bank agree in advance to