Joined: 31 Jan 2005
|Posted: Thu May 15, 2014 7:18 am Post subject: Banking Lecture
|This contains what you will be responsible for on your exam next Thursday regarding the subject matter of banking. It is the outline of my upcoming lecture/game on 5/15/14.
For the banking lecture/game we will use ALL the hypotheticals in Chapter 25 as teaching devices to learn about additional facts. Please read ALL of Ch. 25's hypotheticals as well as the one additional hypothetical which I've posted at the end of this posting.
My lecture outline:
INTRODUCTION TO: BANKING PROCEDURES AND THE BANK/ CUSTOMER RELATIONSHIP
Recall that a check is a special type of draft: drawn on bank and payable on demand. Most purposes: treated like any other draft under UCC Article 3. However, if questions arise concerning processing of: checks/bank or customer relationship. The solution is governed by Article 4 of the UCC and its section is given priority. It would be a rarity, however, for there to be a conflict.
The Purposes of Article 4: The same as rest of UCC: To render a fair results to individual parties as well as assisting the overall goal of efficient commerce.
CONTRACTUAL RELATIONSHIP BETWEEN BANK AND CUSTOMER
X deposits money in his/her checking account This means the BANK acquires title to this deposited money; Therefore the ACCOUNT-HOLDER is the bank's creditor, and the BANK is the account-holder's debtor. If BANK becomes insolvent, the customer becomes only a general creditor, not a secured creditor. This usually does not matter because in most cases account is insured by Federal Deposit Insurance Corporation. (FDIC)
Because BANK owes money to CUSTOMER, the money is subject to GARNISHMENT by customer's creditors. All a customer can do is order BANK to make payment by writing a check: "Pay to the order of ..., AND THIS IS NOT an immediate "assignment," because the customer may die, issue stop-payment order, or otherwise undermine the order before it takes effect; and, unless check is CERTIFIED, HOLDER has no recourse against nonpaying bank. (Holder would instead sue the drawer and/or indorsers.)
BANK/S DUTY TO THE CUSTOMER
A. PRIMARY DUTY
HONOR CHECKS WHEN CUSTOMER HAS SUFFICIENT FUNDS ON DEPOSIT Bank is liable to customers for wrongful dishonor. If a mistake (i.e., not intentional), customer's recovery limited to ACTUAL DAMAGES, however these are liberally defined as including harm to credit or reputation, arrest for writing bad checks, or other proved, consequential damages.
****Note: dishonor must be wrongful. Banks not liable for refusing to pay on insufficient funds or improper or missing indorsements.
B. SECOND DUTY
Maintain customer signature cards and be familiar w/ depositor's authorized signature, so forgeries can be detected before payment made.
Rules under Federal Expedited Funds Availability Act limit maximum length of holds financial institution may place on funds from local and non-local checks deposited at institution. Also requires disclosure of hold policies and specific hold placed on a deposit
CUSTOMER'S DUTY TO BANK
A. FIRST DUTY
Maintain sufficient funds to cover checks expects to write.
B. SECOND IMPORTANT DUTY.
Maintain customer signature cards so can be able verify authenticity of customer's signature, whether as drawer or indorser. Practically enormously high volume of checks frequently renders it impossible for busy bank to examine authenticity every check every account. While drawee bank charged with knowing drawer's signature and otherwise avoiding payment on altered or forged instruments or indorsements, customer also expected to do part in preventing or correcting E.g.: requires customer promptly inspect bank statements and other documents (e.g., canceled checks) sent by bank. Generally, if failure to do so results in not discovering and reporting alteration or unauthorized signature, customer precluded from asserting claim against bank in following situations:
1. Bank suffered loss because of customer's failure to discover and report.
2. Bank paid in good faith w/o notice of type of problem
(i.e.: fraud by the same wrongdoer) that customer should have discovered by time payment was made.
EXAMPLE: Failure of Customer to Review Bank Statement
Carol Customer reviewed her bank statements and could have told Bank about check forged by Fanny Fraud. Carol precluded from having her account re-credited if prompt reporting to Bank would have spared Bank a loss (item 1 above).
If Fanny Fraud continues to practice her deceit, Carol barred from asserting against Bank later forgeries because Carol's diligence could have prevented later problems because she would have put Bank on notice. (item 2 above)
Customers who review statements and are not otherwise negligent are entitled to have their accounts re-credited not only for checks bearing forged signatures, but also checks containing other persons' forged indorsements.
EXAMPLE: BANK CUSTOMER RIGHTS
A writes $700 check: "to the order of Tim." Chris forges Tim's indorsement & cashes the check. So long as Agnes not precluded by her own failure to inspect or other negligence (infra), she’s entitled to have bank re-credit her account for $700. Bank failed to carry out Agnes's order to pay "to the order of Tim."
Besides going after Chris, Agnes's bank can recover loss from bank that cashed check; Cashing bank breached warranty: on forged indorsements. (Warranties were discussed last lecture) For forged drawer's signature drawee bank can recover only from forger unless others negligent or actually knew signature unauthorized. Again, drawee bank charged w/ knowing drawer's signature.
RULES GOVERNING THE PAYMENT OF CHECKS
Drawer's bank is primary agent in collection process, the sequence of events through which check goes before final settlement is set out in the UCC specific rules governing payment of checks:
A. Bank need not (but may) pay overdrafts checks for more than amount in the customer's account). If bank has specifically agreed pay overdrafts, must do so. Bank can charge customer's account full amount paid on overdraft.
B. Bank can refuse to pay stale checks (uncertified checks drawn
more than 6 months before presentation for payment).
C. Bank may supply necessary indorsements for customer, except when missing indorsement is that of the payee and check expressly requires payee sign.
D. Customer dies/adjudged (declared by a court) incompetent: Bank may continue to honor checks until it receives notice of death/incompetence and had reasonable opportunity to respond. Even w/notice, bank may pay or accept checks during first 10 days after death (unless receives stop-payment order from someone claiming interest in the decedent's account.)
E. Customer can order bank not pay a particular check, provided bank has enough time to act on order. Can be either oral which is effective for 14 days or written orders (including written confirmation of oral orders) which last 6 months. Written order can be renewed for additional 6-month periods if customer, in writing, requests. If bank fails comply w/stop-payment order, liable to customer for actual losses.
These rules, as well as other Article 4 requirements, not absolute. Bank and customer may, by contract make alterations. BUT THESE TERMS ARE UNCHANGEABLE: Bank's responsibility for lack of good faith or ordinary care (dishonesty or negligence), and the measure of damages resulting from such lack of good faith or ordinary care. Indeed, so long as terms not plainly unreasonable, bank and its customer may even state agreement standards by which bank responsibility is to be decided.
CERTIFICATION OF CHECKS
Initially, check only as good as credit of drawer. To ensure payment, a payee or subsequent holder should/if possible have check certified (accepted). Certification prevents drawee bank from denying liability; Certified check bank's guarantee sufficient funds (presumably from drawer's account) set aside to cover.
Drawee bank not required to certify a check. Refusal to certify does not mean it's been dishonored; bank merely refuses to agree in advance to cover a check.
Once certified, drawer and all indorsers prior to certification are released from liability on the check. Furthermore, bank can never revoke certification against someone with HIDC rights or any other good-faith holder who changed position in reliance on certification. Therefore, it’s easy to see why banks generally are very cautious about certifying checks because certification releases drawer from liability on check and makes drawee (the Bank) responsible for payment.
As is the case for cashier's checks (where the account-holder has bank issue check to particular payee, the bank being both drawer and drawee), when Certifying checks banks tend to subtract the amount of the check from customer's account immediately.
If drawer was negligent (e.g., left unreasonably large spaces in writing the check), then UCC rules may completely bar bank liability for payment if check was altered (generally, the amount was increased). If drawer was not negligent, however, these are the general rules:
1. Bank bears a loss to the extent of the raised amount.
2. Bank may charge the drawer's account for the original amount of check.
3. Bank may recover from person who presented check for
payment (warranty liability).
For certified checks: crucial question on alterations is "when was it altered" Alterations before certification deemed to have been accepted by certifying bank, whereas alterations after certification could not, of course, have been accepted by the bank when it certified the check. Therefore, unless drawee bank negligently goes ahead and pays altered amount, drawee bank ordinarily liable only for check as it stood when certified unless there is a HIDC subsequent to alteration. To avoid such a scenario-having to pay the HIDC the altered (i.e.: raised) amount-accepting banks can, while certifying a check, state the amount certified; that limits acceptor's liability to stated amount, no matter what happens thereafter.
UCC ARTICLE 4 RULES (REVIEW CHECK LIST)
CHARGE AGAINST ACCOUNT
Bank may charge customer for every properly payable item even if an overdraft.
Bank is liable to customer for wrongful dishonor. Unless more than just a bank "mistake/' damages are limited to damages actually proved, but can include consequential damages (e.g., loss of credit, arrest and prosecution).
Bank is liable for payment over a timely stop payment order. Oral orders bind for 14 days, but can be confirmed (and extended) by putting the order in writing. Written orders last for 6 months and are renewable.
Bank has no duty to pay uncertified checks more than 6 months old, but may in good faith pay them.
DEATH OR INCOMPETENCE
Bank may pay checks as long as it does not know of customer's death or incompetence. Despite knowledge, bank can honor or certify checks in first 10 days after customer's death (unless a stop-payment order is issued by a person claiming an interest in the dead customer's account).
ADDITIONAL UCC ARTICLE 4 RULES
CUSTOMER'S DUTY TO EXAMINE BANK STATEMENTS TIMELINE
CUSTOMER MUST EXAMINE ACCOUNT STATEMENTS AND NOTIFY BANK OF UNAUTHORIZED SIGNATURES OR ALTERATIONS. BANK EXERCISING REASONABLE CARE IS NOT LIABLE TO CUSTOMER IF (A) CUSTOMER'S FAILURE TO EXAMINE AND REPORT RESULTS IN BANKS LOSS OR (B) CUSTOMER FAILS TO EXAMINE AND REPORT WITHIN A REASONABLE TIME PERIOD (NO MORE THAN 30 DAYS) AFTER RECEIVING THE BANK STATEMENT AND THERE WERE CONTINUING UNAUTHORIZED SIGNATURES OR ALTERATIONS BY THE SAME WRONGDOER.
STATUTE OF LIMITATIONS
MORE THAN ONE YEAR AFTER RECEIVING RELEVANT BANK STATEMENT, CUSTOMER IS PRECLUDED FROM ASSERTING AGAINST BANK UNAUTHORIZED CUSTOMER SIGNATURES OR ALTERATIONS. THE STATUTE BARS CLAIMS AGAINST EVEN A NEGLIGENT BANK.
ELECTRONIC FUNDS TRANSFER ACT
Most banks have sought to substitute, when possible, electronic communications for time and paper consuming check collection process.
Electronic funds transfer (EFT) is practically instantaneous. No checks needed, payment being by electronic signal. Most common EFT are: Automated teller machines, paycheck direct deposits/withdrawals, pay-by-phone systems, and point-of-sale terminals (e.g., direct transfers from consumers' accounts to store accounts).
Between 1990 and 1996, every state adopted a new UCC Article, 4A: This article governs fund transfers between bank accounts of large, highly sophisticated businesses.
Much more comprehensive in scope (covering consumer EFT) and applicable in all states, is Federal Electronic Funds Transfer Act of 1978. This act includes the following provisions:
Limits are placed on customer liability for charges on lost or stolen bank card (e.g., a "debit card" used to transfer funds directly from customer's bank account to account of a merchant from whom customer makes a purchase). The limits, though, increase or even disappear entirely if customer fails to tell the bank about the loss or theft.
Banks must furnish receipts for computer terminal transactions, but not telephone transfers.
Banks must furnish statement for each month electronic funds transfer occurs. Have to show amounts, dates, names of retailers, locations of terminals used, and any fees. An address and telephone number for customer inquiries and error notices must also be included.
Customer must discover any errors on monthly statement and NOTIFY BANK W/IN 60 DAYS. IF BANK TAKES LONGER THAN 10 DAYS TO INVESTIGATE, IT MUST, FOR TIME BEING, CREDIT DISPUTED AMOUNT TO CUSTOMER'S ACCOUNT. (Obviously, if there was no error, the bank gets this money back.)
Information about rights and duties under act must be given to customers opening an EFT account.
Several federal agencies empowered to enforce the Electronic Funds Transfer Act. Customers can sue for violations of the act. They may recover their actual damages as well as statutory penalties. There are also criminal provisions.
The additional hypothetical:
Dr. Quick received a check in the amount of $6,571.25 from Northwest Feed in pay¬ment for three loads of corn. The check was drawn on a checking account at Bank. Quick also maintained an account at the bank. On Friday, January 17, 2005, Quick indorsed the check and gave it to an associate to deposit to Quick!s account at the bank. When the associate arrived at the bank around 3:00 P.M., he discovered the bank!s doors were locked. After gaining the attention of a bank employee, the associate was allowed into the bank, where he gave the check and deposit slip to a teller. Because the bank's computer had shut down at 3:00 P.M., the teller put the check aside. The associate testified that several bank employees were working at their desks as he left the bank. The bank was not open on Saturday, or Sunday. On Monday, January 20,2005, the bank dishonored the check due to insufficient funds. Quick sued to recover the amount of the check from the bank. Who wins?