BLAW Chapter 28

Check Clearing and the Check 21 Act

- A Federal law that applies to all financial institutions, other businesses, and individuals in the United States - Allows banks to present a "substitute check" in place of original check - This practice facilitated the use of electronic check processing -makes processing faster

Contractual relationship

-depend on situations: The Bank's duty to honor checks, The Bank's duty to accept deposits

Bank-Customer Relationship

The bank-customer relationship begins when the customer opens a checking account and deposits funds

A bank may be able to avoid recredit and/or obtain recovery from

holder, customer, forger

An agency relationship

writes or deposits a check

Certified check

-A check for which the bank assures that the drawer has sufficient funds to make payment. -By certifying (accepting) the check, the bank promises to pay the check at the time the check is presented -•Once a check is certified, the drawer and any prior indorsers are completely discharged from liability on the check. -bank is NOT required to certify checks

Cashier's Check

-a check drawn by a bank on its own funds and signed by an officer of the bank -secures that the payee will get paid bc obviously the bank has $$ to pay

three types of relationships

1.Creditor-debtor 2.Agency Contractual

•When a customer's checking account contains insufficient funds to cover a check, the bank can either:

1.Dishonor the item 2.Pay the item and charge the customer's account, thus creating an "overdraft."

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

The bank can recover the amount of loss and expenses from the transferor who presented the altered check for payment, except if

An HDC presents in good faith either (1) a cashier's check or (2) certified check for payment

Stop payment order

An order by a bank customer to their bank not to pay or certify a certain check.

Bank's Duty to Accept Deposits

The bank must make the funds available within certain time frames (or notify customer if holding longer)

Forger

if can be found

Holder

if they knew the signature was forged

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 dates on checks - treat as demand instrument.

Bank Duty

•A bank that pays a customer's check bearing a forged indorsement must recredit the customer's account or be liable to the customer (drawer) for breach of contract.

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 on vacation or traveling. •Each check is issued for a fixed amount, such as $20, $50, or $100.

Overdraft

•A check written on a checking account in which there are insufficient funds to cover the amount of the check. •The bank can subtract the difference (plus a service charge) from the customer's next deposit because the check carries with it an enforceable implied promise to reimburse the bank. •With a joint account, the bank cannot hold any joint-account owner liable for payment of the overdraft unless that customer signed the check or benefitted from its proceeds.

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/Death of 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 of the customer's incompetence or death and •has reasonable time to act on the notice. 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

Federal Reserve System

•A network of twelve central banks, located throughout the United States. It acts as a clearinghouse where banks exchange checks and drafts drawn on each other and settle daily balances. •Most banks in the United States have Federal Reserve accounts.

The Truth-in-Savings Act (T I S A) regulates

•Banks paying interest on customer's interest-bearing account •Information new potential customers must receive before opening a deposit account •Information that must be disclosed in customers monthly statements

Customer

•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, otherwise liable for loss. •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 allocated between bank and customer for comparative negligence. •UCC One- year limit - a customer who fails to report a forged signature within one year loses the legal right to have the bank recredit their account. Agreements with banks can provide for less time, but not more.

Stop payment order requirements

•Must be a customer (or a person authorized to draw on the account) •Can't stop payment on a check already certified (or accepted) by a bank. •Must have valid legal ground for issuing a stop-payment order, or the payee/holder can sue the customer-drawer for payment. •Must issue the stop-payment order within a reasonable time and in a reasonable manner to permit the bank to act on it. •If the bank pays the check in spite of a stop-payment order, the bank will be obligated/liable to recredit the customer's account.

Altered 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 the loss because it did not pay as the customer ordered. -exception: negligence

Deposits a check

•The bank, as the customer's agent, is obligated to collect payment on the check from the bank on which the check was drawn. •When checking account funds are transferred among different banks, each bank acts as the collection agent for its customers.

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.

Customer's 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 to 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.

Forged Drawer's Signature

•When a bank pays a check on which the drawer's signature is forged, generally the bank suffers the loss and recredits the customer's account.

Bank's duties

•When a bank provides checking services, it agrees to honor the checks written by its customers, with the usual stipulation that sufficient funds must be available in the account. When a drawee bank wrongfully fails to honor a check, it is strictly liable to its customer for damages resulting from its refusal to pay

creditor-debtor relationship

•created between a customer and a bank when the customer makes cash deposits into a checking account. When a customer makes a deposit, the customer becomes a creditor, and the bank a debtor, for the amount deposited

Writes a check

•customer is ordering the bank to pay the amount specified on the check to the holder when the holder presents the check to the bank for payment. •The bank becomes the customer's agent and is obligated to honor the customer's request.