Bank Deposits, Collections, and Electronic Funds Transfers: An Overview, Study notes of Business and Labour Law

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Chapter 28 BANK DEPOSITS, COLLECTIONS, AND FUNDS TRANSFERS I. Bank Deposits and Collections A. Collection of Items 1. Collecting Banks a. Duty of Care b. Duty to Act Timely c. Indorsements d. Warranties e. Final Payment 2. Payor Banks B. Relationship Between Payor Bank and Its Customer 1. Payment of an Item 2. Substitute Check 3. Stop Payment Orders 4. Bank's Right to Subrogation on Improper Payment 5. Disclosure Requirements 6. Customer's Death or Incompetence 7. Customer's Duties II. Electronic Funds Transfers A. Types of Electronic Funds Transfers 1. Automated Teller Machines 2. Point-of-Sale Systems 3. Direct Deposits and Withdrawals 4. Pay-By-Phone Systems 5. Wholesale Electronic Funds Transfers B. Consumer Funds Transfers 1. Disclosure 2. Documentation and Periodic Statements 3. Preauthorized Transfers 4. Error Resolution 5. Consumer Liability 6. Liability of Financial Institution C. Wholesale Funds Transfers 1. Scope of Article a. Payment Order b. Parties c. Excluded Transactions 2. Acceptance 3. Erroneous Execution of Payment Orders 4. Unauthorized Payment Orders q NOTES © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
BANK DEPOSITS, COLLECTIONS, AND FUNDS TRANSFERS CHAPTER 28 Credit cards, charge accounts, and various deferred payment plans have made cash sales increasingly __rare___. Credit sales are usually settled by check rather than cash. Generally, the buyer’s check must journey from the seller-payee’s bank, where the check is deposited by the seller for credit to his account, to the buyer-drawer’s bank for payment. In the collection process, checks can also pass through one or more ___banks___ so that it may be collected and the appropriate entries recorded. I. BANK DEPOSITS AND COLLECTIONS The principal rules governing the bank collection process are in Article 4 of the UCC, but some parts are covered by Article 3, “Commercial Paper,” and to a lesser extent by Article 8, “Investment Securities.” A. COLLECTION OF ITEMS When a check is deposited (in the depositary bank), the bank credits the account for that amount. This is __provisional credit__ and, normally, a bank does not permit a customer to draw funds against a provisional credit. If the bank does permit its customer to draw against the provisional credit, it has given value and may qualify to be a __holder in due course__. Under the customer’s contract with her bank, the bank must make a reasonable effort to obtain payment of all checks deposited for collection. When the amount of the check has been collected from the payor bank (the drawee), the credit becomes final. Where the depositary and payor banks are different, a check must pass from one bank to the other, either through one or more __intermediary__ banks or through a clearinghouse — an association, composed of banks or other payors, whose purpose is to settle its members’ accounts on a daily basis. Collecting Banks A collecting bank is one that handles an instrument for ___payment___ excluding the payor bank. Typically, the ___depository___ bank gives a provisional credit to its customer and © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. CHAPTER 28 BANK DEPOSITS, COLLECTIONS, AND FUNDS TRANSFERS
The parties may by agreement, however, determine the standards by which such responsibility is to be measured, as long as these standards are not clearly unreasonable. Payment of an Item A payor bank owes a duty to its customer, the drawer, to pay checks ___promptly___ drawn by the customer on an account that has funds sufficient to cover the items, although the holder of a check has no right to require the drawee bank to pay it. However, if an item which is less than ___six___ months old is presented to a payor bank and the bank improperly refuses payment, it will incur a liability to the customer from whose account the item should have been paid. Checks over six months old are considered ___stale___ but may be paid at the bank’s option if done in good faith. When a payor bank receives an item properly payable from a customer’s account, but the funds in the account are insufficient to pay it, the bank may: (1) dishonor the item and ___return___ it, or (2) pay the item and charge its customer’s account, even though an __overdraft___ results. The customer may be liable to the bank to pay a __service___ charge for the bank’s handling of the overdraft or may be liable to pay __interest___ on the amount of the overdraft. Substitute Check The Check Clearing for the 21st Century Act (also called Check 21 or the Check Truncation Act), which went into effect in late 2004, permits banks to remove an original paper check from the check collection or return process and sending (1) a __substitute___ check or, (2) by agreement, information relating to the original check (including data taken from the MICR line of the original check or an electronic image of the original check). The substitute check is the legal equivalent of an __original__ check for all purposes, if the substitute check: (1) accurately represents all of the ___information__ on the front and back of the original check as of the time the original check was truncated; and (2) bears the legend: “This is a __legal__ copy of your check. You can use it the same way you would use the original check.” A substitute check is a paper reproduction of the original check that: (1) contains an __image__ of the front and back of the original; © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
BANK DEPOSITS, COLLECTIONS, AND FUNDS TRANSFERS CHAPTER 28 (2) bears a MICR (magnetic ink character recognition line) containing all the information appearing on the MICR line of the original check; (3) conforms, in paper stock, dimension, and otherwise, with generally applicable ___industry___ standards for substitute checks; and (4) is suitable for __automated___ processing in the same manner as the original check. The law does not require banks to accept checks in __electronic___ form nor does it require banks to use the new authority granted by the act to create substitute checks. On the other hand, parties cannot refuse to accept a substitute check that meets the Act’s requirements. The ultimate objective of the Act is to make the ___collection___ process more efficient and much faster (transferring digital files within seconds rather than days) and to enhance ___fraud___ detection by accelerating return of dishonored checks. Stop Payment Orders A customer may revoke the order to pay a sum of money (as contained in a check) with a __stop payment__ order. If the order does not come too late, the bank is bound by it. Bank’s Right to Subrogation on Improper Payment If a payor bank pays an item over a stop payment order, after an account has been closed, or otherwise in violation of its contract with the drawer or maker, the payor bank is subrogated to (obtains) the rights of: (1) any __holder in due course__ on the item against the drawer or maker; (2) the payee or any other holder against the drawer or maker; and (3) the drawer or maker against the payee or any other holder. Disclosure Requirements The Truth in Savings Act, passed in 1992, requires all depositary institutions to disclose details of customers’ accounts, including fees, interest rates, and regulations. Customer's Death or Incompetence Death or incompetence revokes all __agency__ agreements. Adjudication of incompetency by a court is regarded as notice to the world of that fact. __Actual__ notice is not required. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. CHAPTER 28 BANK DEPOSITS, COLLECTIONS, AND FUNDS TRANSFERS
Customer's Duties A bank customer must exercise __reasonable___ promptness in examining account statements and canceled checks to detect unauthorized signatures or alterations. Failure to notify the bank of any false __signatures___ within the maximum of thirty days (less in some cases) will render the drawer liable for any checks subsequently forged by the same person if the bank has been using reasonable care in the collection process. Even if the bank doesn't use reasonable care, the customer must notify the bank within __one__ year. II. ELECTRONIC FUNDS TRANSFERS The use of commercial paper for payment has already made the United States a virtually cashless society; technological advances of computers may bring about a virtually checkless society through __electronic fund transfer systems___. An electronic funds transfer has been defined as “any transfer of funds, other than a transaction originated by check, draft, or similar paper instrument, which is initiated through an ___electronic____ terminal, telephonic instrument, or computer or magnetic tape so as to order, instruct, or ___authorize___ a financial institution to debit or credit an account.” To address the legal issues of EFTs, Congress enacted the Electronic Fund Transfer Act in 1978, and the Permanent Editorial Board of the Uniform Commercial Code has promulgated Article 4A—Funds Transfers. A. TYPES OF ELECTRONIC FUNDS TRANSFERS Automated Teller Machines (ATM) Permit customers to conduct various banking transactions through the use of electronic terminals. After activating an ATM with a plastic identification card and a __personal identification number (PIN)__ a customer can deposit and withdraw funds from her account, transfer funds between accounts, obtain cash advances from bank credit card accounts, and make payments on loans. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
BANK DEPOSITS, COLLECTIONS, AND FUNDS TRANSFERS CHAPTER 28 Liability of Financial Institution The financial institution is liable for damages proximately caused by a failure to make an EFT within the terms of the customer's account contract. There is NO__ liability if the consumer's account has insufficient funds, the funds are subject to legal process, the transfer would exceed an established __CREDIT LIMIT___, the terminal has insufficient case, or circumstances beyond the control of the institution to prevent the transfer. C. WHOLESALE FUNDS TRANSFERS Article 4A, Funds Transfers is designed to provide a statutory framework for an electric payment system that is not covered by existing U.C.C. provisions or the Electronic Fund Transfer Act; provides that the rights and obligations of the parties to a funds transfer covered by the article are subject to the contrary agreement of the parties or the funds transfer system rules governing banks. Scope of Article Article 4A covers the transfers of credit that move from an originator to a beneficiary through the banking system. However, if any step is governed by the Electronic Fund Transfer Act, the entire transaction is excluded from Article 4A coverage. __Payment___ order — A sender’s instruction to a receiving bank to pay, or to cause another bank to pay, a fixed or determinable amount of money to a beneficiary; may be communicated orally, electronically, or in writing. Parties — These include the originator, sender, receiving bank, originator's bank, beneficiary's bank, beneficiary, and intermediary bank. Excluded Transactions — Article 4A provides that if any part of a funds transfer is governed by the Electronic Fund Transfer Act, the transfer is excluded from Article 4A coverage. NOTE: See Figure 28-2. Acceptance © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. CHAPTER 28 BANK DEPOSITS, COLLECTIONS, AND FUNDS TRANSFERS
If the beneficiary's bank accepts a payment order, the bank is __obligated___ to pay the beneficiary the amount of the order. Erroneous Execution of Payment Orders If a receiving bank mistakenly executes a payment order for an amount greater than that authorized by the sender, the bank is only entitled to the correct ordered amount. Unauthorized Payment Orders If a bank establishes commercially reasonable security precautions, its customer may have to pay the payment order even if it proved to be ___unauthorized____. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.