Business Law CH28: Banking

Altered Checks

*Bank Duty to Examine Checks*: the bank has an implicit duty to examine checks before making final payments. if it fails to detect an alteration, it is liable to its customer for loss because it did not pay as the customer ordered - the bank's loss is the difference between the original amount of the check and amount actually paid - *a customer's negligence*: can shift the loss when payment is made on altered check (unless the bank was also negligent, then the loss does not shift) *The bank can recover from the transferor who presented if he HDC presents in good faith a cashier's check or certified check for payment*

Forged Drawer's Signature: Part Two

*Duty to Inspect and Report*: the customer has a duty to promptly examine bank statements with reasonable care and report any alterations or forged signatures within 30 days of available statement, or you're liable *Bank Negligence*: a customer can escape liability, in part, for failing to timely notify the bank if the customer can prove that the bank was also negligent. Then loss is allocated between the bank and the customer for comparative negligence *UCC One-year limit*: If you fail to report, then you lose all legal rights. Agreements with the banks can provide for less time, but not more

Article 4

- Establishes a framework for deposit and checking agreements between a bank and its customers - Governs the relationship of banks with one another as they process checks for payment - If a conflict arises between Article 3 and 4, *Article 4 controls*

Postdated Check

A bank may charge a postdated check against a customer's account unless the customer notifies the bank, in a timely manner, not to pay the check until the stated date - banks typically ignore the date on checks, treat as demand instrument - bank will accept a check if someone immediately tries to cash

Checks Bearing Forged Indorsements: Bank Duty

A bank pays a customer's check bearing a forged indorsement must re-credit the customer's account or be liable to the customer for breach of contract

Cashier's Check

A check drawn by a bank on itself - with a cashier's check, the bak serves as the both the drawer *and* the drawee - the bank assumes responsibility for paying the cashier's check, thus making it more readily acceptable as a substitute for cash Why: check won't bounce

Certified Checks

A check that has been accepted by the bank on which it is drawn - by certifying the check, the bank promises to pay the check at the time the check is presented - if it bounces, then they'll be responsible - any drawer and any prior indorsers are completely discharged from liability on a check - bank not *required* to certify, but doesn't dishonor

Traveler's Check

A check that is payable on demand, drawn on or payable through a bank, and designated as a traveler's check - a safe substitute for cash when a person is traveling - each check is issued for a fixed amount - most major banks purchase and issue American Express traveler's checks for their customers

Stale Check

A check, other than a certified check, that is presented for payment more than six months after its date - a bank is *not obligated* to pay an uncertified check presented more than six months from its date but can choose to do so

Incompetence or Death of a Customer

A customer's mental incompetence or death does *not* automatically revoke a bank's authority to accept, pay, or collect an item - the bank's authority becomes ineffective only after the bank is notified and has reasonable time to act - even when a bank knows of the death of its customer for *ten days* after the date of death it can pay or certify checks drawn on or before the date of death

Check

A draft drawn by a drawer ordering the drawee bank or financial institution to pay a certain amount of money to the holder (payee) on demand - *Article 4* defines a bank as "a person engaged in the business of banking, including a savings bank, savings and loan association, credit union or trust company

Substitute Check

A negotiable instrument htat is a paper reproduction and digital image of the front and back of an original check containing the same information required on checks for automated processing -Results: maximum time that a bank can hold funds from deposited checks was reduced meaning account holders have faster access and less "float time"

Agency Relationship

Arises when the customer: - writes a check on their account: bank is the agent and is obligated to honor the customer's request: writing a check - deposits a check into their account: the bank, is obligated to collect payment on the check from the bank on which the check was drawn

Creditor-Debtor Relationship

Created between a customer and a bank when the customer makes cash deposits into a checking account - customer: creditor - bank: debtor

Forged Drawer's Signature: Part One

Generally, the bank suffers the loss and re-credits the customer's account - a bank may be able to avoid liability or obtain recovery from: - the forger - the holder who presented the check - the customer is the customer's negligence substantially contributed to the forgery

Stop Payment Orders

Order by a bank customer to their bank not to pay or certify a certain check 1) must be a customer 2) can't stop payment on a check already certified or accepted by a bank 3) must have valid legal ground for issuing a stop-payment order, or the payee/ holder can sue the customer-drawer payment 4) must issue the stop-payment order within a reasonable time and in a reasonable manner to permit the bank to act on it 5) if the bank pays the check despite an order, then the bank is liable

Check Clearing and the Check 21 Act

Purpose: to streamline the costly and time-consuming traditional method of check collection - substitute check

The Bank's Duty to Accept Deposits: Truth in Savings Act

Regulates: 1) banks paying interest on customer's interest-bearing account 2) information new potential customers must receive before opening a deposit account 3) information that must be disclosed in customers monthly statements

Article 3

Sets forth the requirement for all negotiable instruments, including checks

Overdrafts

The bank can either: 1) Dishonor the item 2) The bank can subtract the difference (plus a service charge) from the customer's next deposit because the check carries with an enforceable implied promise to reimburse the bank - with a *joint account*, the bank cannot hold any joint-account liable for payment of the overdraft *unless that customer signed the check or benefitted from its proceeds* - a bank can expressly agree with a customer to accept overdrafts through an "overdraft protection agreement"

Check Bearing Forged Indorsement: Customer Duty

The customer has a duty to report forged indorsements promptly - *Three-year limit*: the bank is relieved of liability if the customer fails to report the forged indorsements within three years of receiving the bank statement that contained the forged items

Duty to Honor Checks: Customer Duties

The customer's agreement with the bank includes a general obligation to keep sufficient funds on deposit to cover all checks written -the customer is liable to the payee or the holder of a check in a civil suit if a check is dishonored for insufficient funds - when the bank *properly dishonors* a check for insufficient funds, it has *no liability* to the customer

Duty to Honor Checks: Banks Duties

When a bank provides checking services, it agrees to honor the checks written by its customers, with the *usual stipulation that sufficient funds are available* - when the drawee bank *wrongfully fails to honor* a check it is *strictly liable* to its customer for damages resulting from its refusal to pay

Contractual Relationship

When a bank-customer relationship is established, certain *contractual rights and duties arise* - depends on the nature of the transaction