Chapter 20 Notes Flashcards
1
Q
The most common type of negotiable instruments regulated by the Uniform Commercial Code.
A
Checks
2
Q
Concerns bank deposits and collection as well as bank-customer relationships. Also regulates the realtionships of banks with one another as they process checks for payment, and it establishes a framework for deposit and checking agreements between a bank and it customers.
A
UCC Article 4
3
Q
A special type of draft that is drawn on a bank, ordering the bank to pay a fixed amount of funds on demand.
A
Check
4
Q
A person engaged in the business of banking, including a savings bank, savings loan association, credit union or trust company.
- If a brokerage firm (other institution) handle a check for payment or for collection, the check is not covered by Article 4.
A
Bank
5
Q
A person who writes a check. A depositor in the bank on which the check is drawn.
A
Drawer
6
Q
The person to whom the check is payable.
A
Payee
7
Q
The bank or financial institution on which the check is drawn.
A
Drawee
8
Q
- Cashier’s check
- Traveler’s check
- Certified check
A
Special Types of Checks
9
Q
A check drawn by a bank on itself.
- The bank is both the drawer and the drawee
- Is a negotiable instrument the moment it is issued
- Normally indicates a specific payee
- The bank assumes responsibility for paying the check, making the check more readily acceptable as a substitute for cash.
A
Cashier’s Check
10
Q
Except in very limited circumstances, the issuing bank must honor its cashier’s checks when they are presented for payment,
- If wrongfully dishonored- holder can recover from the bank all expenses incurred, interest, and consequential damages.
A
Dishonoring Cashier’s Checks
11
Q
A check that is payable on demand, drawn on or payable through a financial institution, and designated as a traveler’s check.
- Issuing institution is directly obligated to accept and pay according to the check’s terms.
- Designed to be a safe subsitute for cash for people who are on vacation.
- Issued in fixed amounts.
- Must be signed by purchaser at the time it is bought and again at the time it is used.
A
Traveler’s Checks
12
Q
A check that has been accepted in writing by the bank on which it is drawn. By certifying (accepting) the check, the bank promises to pay the check at the time it is presented.
- Immediately charges the drawer’s account and tranfers funds to own certified check account.
- Prevents the bank from denying liability
- Bank writes or stamps “certified” on face of check
- Drawer and prior indorers discharged from liability immediately
- Only certifying bank is required to pay the instrument.
- Drawer or holder can request certification
- Drawee bank is not required to certify the check and this refusal is not a dishonor of the check.
A
Certified Check
13
Q
- Creditor-Debtor Relationship
- Agency Relationship
- Contractual Relationship
A
3 Types of Bank-Customer Relationships
14
Q
Created between the customer and the bank when, for example, 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.
A
Creditor-Debtor Relationship
15
Q
Arises between a customer and the bank when the customer writes a check on his or her account.
- Customer is order the bank to pay the amount specified on the check to the holder when the holder presents the check to the bank for payment.- bank becomes agent and is obligated to honor the customer’s request.
- Obligated to collect payment on deposits from the bank from which the check was drawn.
- Tranfering checking accounts from different banks- each bank acts as the agent of collection for its customer.
A
Agency Relationship
16
Q
When a bank-customer relationship is established, certain contractual rights and duties arise. The contractual rights and duties of the bank and its customer depend on the nature of the transaction.
A
Contractual Relationship
17
Q
Agrees to honor the checks written by its customers, with the usual stipulation that the account must have sufficient funds available to pay each check.
A
Bank’s Duty to Honor Checks
18
Q
It is liable to its customer for damages resulting form its refusal to pay. The customer does not have to prove that the bank breached its contractual committment or was negligent.
A
When a Drawee Bank Wrongfully Fails to Honor a Check
19
Q
Includes a general obligation to keep sufficient funds on deposit to cover all checks written.
- 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.
- If intent to defraud can be proved, the customer can also be subject to criminal prosecution for writing a bad check.
A
Customer’s Agreement with the Bank
20
Q
It has no liability to the customer. The bank may rightfully refuse payment ona customer’s check in other circumstances as well.
- Overdrafts
- Postdated checks
- Stale checks
- Stop-payment orders
- Death of incompetence of a customer
- Checks with forged drawers’ signatures
- Checks bearing forged indorsements
- Altered checks
A
When a Bank Properly Dishonors a Check for Insufficient Funds
21
Q
A check that is paid by a bank when the checking account on which the check is written contains insufficient funds to cover the check.
- Bank can subtract the amount of this plus a service charge from customer’s next deposit or other customer funds, because the check carries with it enforceable implied promise to reimburse the bank.
A
Overdraft
22
Q
A bank can expressly agree with a customer to accept overdrafts through this. If such an agreement is formed, any failure of the bank to honor a check because it would create an overdraft breaches this agreement and is treated as a wrongful dishonor.
A
Overdraft Protection Agreement
23
Q
A bank may charge this against a customer’s account, unless the customer notifies the bank, in a timely manner, not to pay the check until the stated date.
- Notice must be a given time to allow the bank to act on the notice before it pays the check.
- If bank fails to act on customer’s notice and charges the customer’s account before the date on this check, the bank may be liable fo rany damages incurred by the customer.
A
Postdated Checks
24
Q
A check, other than a certified check, that is presented for payment more than 6 months after its date.
- Bank has option of paying or not paying
- May consult customer before paying
- If the bank pays in good faith without consulting the customer, the bank has the right to charge the customer’s account for the amount of the check.
A
Stale Checks
25
An order by a bank customer to his or her bank not to pay or certify a certain check.
* Only the customer or person authorized to draw on the account can order a bank not to pay the check when it is presented for payment.
* Customer has no right to stop a check that has been certified or accepted by a bank.
* Customer must have valid legal ground, or the holder can sue the customer-drawer for payment.
Stop-Payment Orders
26
* Must be issued within a reasonable time and manner for the bank to act on it.
* Most banks allow stop-payment orders to be submitted electronically via the bank's website.
* Written or electronic stop-payment order is effective for six months, at which time it may be renewed.
* Can be done orally over the phone, but is binding on the bank for only 14 calendar days unless confirmed in writing (or record).
Reasonable Time and Manner- Stop-Payment Order
27
If the bank pays the check in spite of stop-payment order, the bank will be obligated to recredit the customer's account.
* If bank's payment causes subsequent checks to bouce, the bank will be liable for the resultant costs the drawer incurs.
* The bank is only liable for the amount of actual damages suffered by the drawer.
Bank's Liability for Wrongful Payment- Stop-Payment Orders
28
Neither of these revokes a bank's authority to pay an item until the bank is informed of the situation and has had a reasonable amount of time to act on the notice.
* If bank is unaware- can pay the item without ircurring liability.
* Even if a bank knows about the death of its customer, for 10 days after the ddate of death, it can pay or certify checks drawn on or before the date of death.
* Exception: If a person claiming interest on the account, such as an heir, orders the bank to stop payment.
Death of Incompetence of a Customer
29
Generally the bank is liable.
* Bank may be able to recover at least some of the loss of the customer if the customer's negligence contributed to the making of the forgery.
* If he or she can be found, bank can obtain partial recovery from the forger of the check or the holder who presented the check for payment (if the holder knew the signature was forged).
Checks with Forged Drawer's Signatures
30
A forged signature has no legal effect as the signature of a customer-drawer.
* Banks require a signature card from each customer who opens a checking account. (banks today check validity of signatures on checks $2,500 or higher.)
* The bank must recredit the customer's account when it pays a check with a forged signature.
* Bank may shift to the customer the risk of forged checks created electronically or by nonmanual means.
Checks with Forged Drawer's Signatures- The General Rule
31
When the customer's negligence substantially contributed to the forgery, the bank normally will not be obligated to recredit the customer's account for the amount of the check.
* Customer's liability may be reduced by the amount of loss caused by negligence on the part of the bank (or other person) paying the instrument or taking it for value if the negligence substantially contributed to the loss.
Checks with Forged Drawer's Signatures- Customer Negligence
32
The banks send statements that detail the activity in the customer's checking acounts (check number, amount, date of payment). This allows them to reasonably identify the checks that the bank has paid.
* Customer has a duty to examine bank statements (and canceled check copies) and report any alterations or forged signatures. Includes forged singatures of indorsers, if discovered.
* Customer will be liable for the loss the bank suffers as a result of the customer's failure to perform this duty.
Timely Examination Required - Customer Negligence
33
The bank used to include these in their statements sent to customers. Today the banks do retain them, and it must keep the checks or legible copies for seven years.
Canceled Checks
34
Sometimes the same wrongdoer has forged a customer's signature on a series of checks. To recover for all the forged items, the customer must discover and report the first forged check to the bank within 30 calendar days of the receipt of the bank statement.
* Failure to notify in 30 days- discharges the bank's liability for all of the forged checks that it pays prior to notification.
Consequences for Failing to Detect Forgeries
35
If a customer who has been negligent can prove that the bank was also negligent, the bank will also be liable.
* Loss will be allocated between the bank and the customer on the basis of comparative negligence.
* The bank may have to recredit the customer's account for a portion of the loss if the bank also failed to exercise ordinary care.
When the Bank is Also Negligent
36
The observance of reasonable banking standards prevailing in the relevant geographical area.
Ordinary Care
37
Regardless of the degree of care exercised by the customer or the bank, the UCC places and absolute time limit on the liability of a bank for paying a check with a forged customer signature.
* A customer who fails to report a forged signature within one year from the date of the bank's statement loses the legal right to have the bank recredit his or her account.
* Parties can agree to a lower time period in their contract.
One-Year Time Limit
38
The person who forged the signature is liable. When a bank pays a check on which the drawer's signature is forged, the bank has a right to recover from the party who forged the signature (if he or she can be found).
Other Parties from Whom the Bank may Recover
39
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.
* Eventually, the loss usually falls on the first party to take the instrument bearing the forged indorsement because a forged indorsement does not transfer title. (taker cannot become a holder)
Checks Bearing Forged Indorsements
40
The customer, in any event, has a duty to report forged indorsements promptly. Failure to do so within a three-year period after the forged items have been made available to the customer relieves the bank of liability.
Reporting Forged Indorsements
41
The bank has a duty to examine each check before making final payment. If the bank fails to detect an alteration, normally it is liable to its customer for the loss because it did not pay as the customer ordered.
* The banks loss is the difference between the original amount of the check and the amount actually paid.
Altered Checks
42
A customer's negligence can shift the loss when payment is made on an altered check (unless the bank was also negligent).
* Carelessly leaving large gaps
* Leaving the dollar amount blank- barred from protesting when bank unknowinly and in good faith pays the amount on the check.
* If the bank can trace its loss on successive altered checks on the customer's failure it discover the initial alteration, the bank can reduce its liability for reimbursing the customer's account.
* Can be used as a defense only if the bank has exercised ordinary care.
Customer Negligence- Altered Checks
43
The bank is entitled to recover the amount of loss from the transferor who presented the check for payment. A transferor, by presenting a check for payment, warrants that the check has not been altered.
Other Parties From Which the Bank can Recover
44
1. If the bank is also the drawer, it cannot recover from the presenting party if the party is a holder in due course (HDC) acting in good faith. The intrument's drawer is in a better position than an HDC to know whether the instrument has been altered.
2. An HDC who presents a certified check for payment in good faith will not be held liable under warranty principles if the check was altered before the HDC acquired it.
Two Exceptions to Bank Recovering Loss from Transferor
45
When checks are deposited, the bank must make the funds represented by those checks available within certain time frames.
* Also has a duty to collect payment on any checks payable or indorsed to its customers and deposited by them into their accounts.
* Cash deposits made in US currency are received into customer's accounts without being subject to further collection procedures.
The Bank's Duty to Accept Deposits
46
* The expedited funds availability act and reguation establish when funds from deposited checks must be made available to the customer.
* Nonproprietary automatic teller machines (ATMS). These are not owned or operated by the bank receiving the deposits. 5 day hold is permitted on all deposits, including cash deposits.
* Bank has 8 days to make funds available in new accounts.
* A bank that places a longer hold on deposited checks than that specified by the rules must notify the customer.
Availability Schedule for Deposited Checks
47
1. Local Checks
2. Nonlocal checks
3. Check clearing in the 21st century act
4. Cash deposit, wire transfers, government checks
5. First $100 of any deposit
The Expedited Funds Availability Act and Reguation (the regulation implementing the act)
48
Any local check (drawn on bank in the same area) deposited must be available for withdrawal by check or as cash within one business day from the date of deposit.
Local Checks
49
The funds must be available for withdrawl within not more than five business days.
Nonlocal Checks
50
Under this act, a bank must credit a customer's account as soon as the bank receives the funds.
Check Clearing in the 21st Century Act (Check 21)
51
Funds must be available on the next business day.
Cash Deposits, Wire Transfers, Government Checks
52
Must be available for cash withdrawal on the opening of the next business day after deposit.
The First $100 of any Deposit
53
* Designations of banks
* Check collection between customers of the same bank
* Check collection between customers of different banks
* How the federal reserve system clears checks
* Electronic check presentment
The Traditional Collection Process
54
* Depositary bank
* Payor bank
* Collecting bank
* Intermediary bank
* During the collection process, any bank can take on one or more of the various roles of these.
Designations of Banks
55
The first bank to receive a check for payment.
Depositary Bank
56
The bank on which a check is drawn (the drawee bank)
Payor Bank
57
Any bank handling an item for collection, except the payor bank.
Collecting Bank
58
Any bank to which an item is transferred in the course of collection, except the depositary or payor bank.
Intermediary Bank
59
An item that is payable by he same bank that receives it is called an "on-us" term. Usually, the bank issues a "provisional credit" for on-us items within the same day. If the bank does not dishonor the check by the opening of the seond banking day following its receipt, the check is considered paid.
Check Collection Between Customers of the Same Bank
60
* Depository bank
* Deferred posting
* Payor bank
Check Collection Between Cutomers of Different Banks
61
Once this bank receives a check payable to another bank, it must arrange to present the check, either directly or through intermediary banks, to the appropriate payor bank.
* Each bank on the collection chain must pass the check on before midnight of the next banking day following its recepit.
Different Banks- Depositary Bank
62
Any part of the day that the bank is open to carry on substially all of its banking functions.
Banking Day
63
A bank may fix an afternoon hour of 2:00pm or later as a cutoff hour for the handling of money and items and the making of entries on its books. Any checks received after that hour may be treated as being received at the opening of the next business day. (Which means the bank's deadline would be midnight the next day).
Deffered Posting
64
When the check reaches this bank, this bank is liable for the faace amount of the check, unless it dishonors the check or returns it by midnight on the next banking day following receipt.
Payor Bank- Different Banks
65
A network of twelve distinct banks and related braches located around the country and headed by the Federal Reserve Board of Governors. Most banks in the United States have Federal Reserve Accounts.
* Acts as a clearinghouse
Federal Reserve System
66
A system or place where banks exchange checks and drafts drawn on each other and settle daily balances.
Clearinghouse
67
Can be done on the day of deposit. Check information is encoded, transmitted electronically, and processed by other bank's computers. After encoding a check, a bank may retain it and present only its image or description for payment under electronic presentment agreement.
* Bank that encodes- warrants any subsequent bank or payor that encoded information is correct
* Bank that retains a check- warrants that the image or description is accurage.
Electronic Check Presentment
68
Deals with the availability of deposited funds, provides that a returned check must be encoded with the routing number of the depositary bank, the amount of the check, and other information.
* States that a check must still be returned within the deadlines required by the UCC.
Regulation CC
69
A transfer of funds through the use of an electronic terminal, a telephone, a computer, or magnetic tape.
* Consumer fund transfers- governed by Electronic Fund Transfer Act (EFTA).
* Commercial fund transfers- Governed by Article 4 of UCC.
* Difficult to issue stop-payment orders
* Fewer records are available to prove or disprove that a transaction took place.
* Tampering with private banking information is increased.
Electronic Funds Transfer (EFT)
70
* Automated Teller Machines (ATMs)
* Point-of-sale systems
* Direct deposits and withdrawals
* Online payment systems
Types of EFT Systems
71
The machines are connected online to the bank's computers. A customer inserts a plastic card (debit card) issued by the bank and keys in a personal identification number (PIN) to access his or her accounts and conduct banking transactions.
Automated Teller Machines (ATMs)
72
Online terminals allow consumers to transfer funds to merchants to pay for purchases using a debit card.
Point-of-Sales Systems
73
Customers can authorize the bank to allow another party- such as the government or the employer- to make direct deposits into their accounts. Similarily, customers can request the bank to make automatic payments to a third party at regular, recurrent intervals from the customer's funds (insurance premiums or loan payments, for instance).
Direct Deposits and Withdrawals
74
Many financial institutions permit their customers to access the institution's computer system via the Internet and direct a transfer of funds between accounts to pay a particular bill. Payments can be made on a one-time or a recurring basis.
Online Payment Systems
75
The electronic fund transfer act (EFTA) provides a basic framework fro the rights, liabilities, and responsibilities of users of EFT systems. The act gave the Federal Reserve Board authority to issue rules and regulations to help implement the act's provisions (Regulation E). Governs financial institutions that offer electronic fund transfers involving consumer accounts.
Consumer Fund Transfers
76
* Checking accounts
* Saving accounts
* Any other asset established for personal, family, or household purposes.
Types of Accounts Covered by The Electronic Fund Transfer Act (EFTA)
77
A set of rules issued by the Federal Reserve System's Board of Governors to protect users of electronic fund transfer systems.
Regulation E
78
The EFTA is essentially a disclosure law benefiting consumers. The act requires financial institutions to inform consumers of their rights and responsibilities with respect to EFT systems.
1. Monthly Statements
2. Lost or Stolen Debit Cards
3. Consumer Discovering Errors
4. Receipts
Disclosure Requirements- Consumer Fund Transfers
79
The bank must provide a monthly statement for every month in which there is an electronic transfer of funds. The statement must show the amount and date of the transfer, the names of the retailers or other third parties involved, the location or identification of the terminal, and the fees.
Monthly Statements
80
If a customer's debit card is lost or stolen and used without his or her permission, the customer will be required to pay no more than $50 if he or she notifies the bank of the loss or theft within two days of learning about it.
* Otherwise, liability increases to more than $500 if they fail to report within 60 days after it appears on the customer's statement.
* Protections do not apply if customer voluntarily gives card to a person who uses it improperly.
Lost of Stolen Debit Cards
81
The customer must discover any error on the monthly statement within 60 days and notify the bank. The bank then has 10 days to investigate and must report its conclusions to the customer in writing.
* If bank takes longer than 10 days- must return disputed amount to customer's account until it finds the error.
* If no error- customer must return disputed funds to the bank.
Customer Discovering Errors
82
The bank must provide receipts for transactions made through computer terminals, but it is not obligated to do so for telephone transfers.
Receipts
83
Unauthorized access to an EFT system constitutes a federal felony, and those convicted may be fined up to $10,000 and sentenced to as long as ten years in prison.
* Banks must strictly comply with the terms of the EFTA and are liable for any failure to adhere to its provisions.
Violations and Damages- Unauthorized Access
84
For a bank's violation of the EFTA, a consumer may recover both actual damages (including attorney's fees and costs) and punitive damages of not less than $100 and not more than $1,000. Even when a consumer has sustained no actual damage, the bank may be liable for legal costs and punitive damages if it fails to follow the proper procedures outlined by the EFTA in regard to error resolution.
Violations and Damages- Bank's Violations
85
Transfering funds "by wire" between commercial parties. The two major wire payment systems are the Federal Reserve's wire transfer network (Fedwire) and the New York Clearing House Interbank Payments System (CHIPS).
* Governed by Article 4A of the UCC, which has been adopted by most states.- uses the term funds transfers rather than wire transfer to describe overall payment transaction.
Commercial Fund Transfers
