4 Paying with Paper (Checks)

Question 1

What are the key terms to remember when analyzing issues surrounding a transaction involving a paper check?

Answer 1

(1) Drawer / Issuer (UCC 3-103(a)(3), 3-105(c))– person who writes check;
(2) Drawee / Payor Bank (UCC UCC 3-103(a)(2), 4-104(a)(8), 4-105(3))– bank that holds Drawer’s account;
(3) Payee / Issued (UCC 3-105) – person to whom check is written;
(4) Depositary bank (UCC 4-105(2)) – bank where payee deposits the check;
(5) Intermediary bank (4-105(4)) – banks that handle check between the depositary bank and the payor bank

Question 2

What does it mean for a check to be properly payable?

Answer 2

UCC § 4-401(a) – the bank may charge the customer for any item which is properly payable even if it causes an overdraft.

Question 3

What are five situations where a check is NOT properly payable?

Answer 3

• During a stop-payment period (proper and timely stop order)
• Forged drawer’s signature
• Forged endorsement
• Unauthorized charge (alteration)
• Proper post-date notice

Question 4

(a) Why is postdating a check a problematic?
(b) How do you avoid the problem above in (a)?
(c) What happens if you do (b) above and you still encounter the problem mentioned in (a) above?

Answer 4

(a) Absent a post-date notice, a bank may honor a post-dated check before that date.
(b) Proper notice: must be received in such time and manner to afford the bank a reasonable opportunity to act on the notice.
(c) If a bank honors a check despite post-date notice, the bank is liable for losses that result—including damages from resulting dishonor of subsequent items

Question 5

(a) What is a stop payment order?

(b) What are the limitations?

Answer 5

(a) A payor may stop payment of a check before their bank charges their account for it.

(b) 3 Limitations:
• Payor must provide notice which is received in a time and manner giving the bank the opportunity to respond accordingly;
• Stop payment orders are valid for 6 months, but can be renewed;
• Upon dishonor, the payee has the legal right to enforce the check, and the right to pursue the checkwriter on the underlying transaction.

Question 6

When does a bank no longer have an obligation to pay a check?

What if the bank pays a check that it has no obligation to pay?

Answer 6

OLD CHECKS -

A bank has no obligation to pay a check 6 months after its date.

A bank MAY charge its customers account for a payment made in good faith on a check 6 months past its date.

• Objective good faith – bank follows reasonable commercial standards of fair dealing; AND
o [NOTE: Paying an old check without first consulting the payor is likely a breach of this duty]

• Subjective good faith – bank reasonably believe customer wants check paid.

Question 7

What is subrogation?

Offensive and defensive subrogation?

Answer 7

Subrogation is where the bank takes on the rights of a party related to an underlying transaction where a customer paid with a check.

Defensive Subrogation: defense against a demand to recredit, assert payees right to payment

Offensive Subrogation: takes on the rights of the payor against the payee after recrediting to the payor

• Ex. When goods are defective and worthless, bank recredits to payor and sues payee for money under payors right to a refund

Question 8

(a) What happens to a party’s right to collect on underlying obligations when the party accepts a personal check?
(b) What happens if the check is dishonored? Honored?

Answer 8

(a)
When a party accepts a personal check for an underlying obligation, that party’s rights to enforce the underlying obligation are suspended. UCC §3-310(b).

(b)
• If the check is dishonored, under 3-310(b)(3), the party’s rights are revived. Now, the party can sue either on the underlying obligation or on the instrument.
• OR, If the personal check is paid, the seller’s rights are discharged. 3-310(b)(1), because they’ve gotten their cash.

Question 9

How do you analyze Expedited Funds Availability Act (EFAA) problems?

Answer 9

First, figure out what the standard availability rules are.
Then, think about low risk items or high risk items and how those change the schedules.

• Withdraw by check:
o $100 available on first business day after banking day of deposit (Day 1)
o Remainder made available on Day 2.

•Customer wants cash:
o$100 available on Day 1
o $400 on Day 2
o remainder on Day 3

• Low risk items: usually a bank or government standing behind the check (e.g. Treasury check)
o Day 1 availability in full

• High risk items:
o most important is the large check exception (amounts over $5000 will be delayed beyond the standard schedule by 5 business days)