1 Business Law 4510 Chapter 19 Notes Checks and Banking in the Digital Age I Checks a Check special type of draft that is drawn on a bank ordering the bank to pay a fixed amount of money on demand i Bank a person engaged in the business of banking including a savings bank savings and loan association credit union or trust company as covered by Article 4 ii Drawer the person who writes a check a depositor in the bank on which the check is drawn iii Payee the person to whom the check is payable to iv Drawee the bank or financial institution on which the check is drawn b Cashier s Checks i When a bank draws a check on itself 1 Bank serves as both drawer and drawee with a specific payee indicated on the check ii Bank assumes responsibility for paying the check thus making it more readily acceptable in place of cash If bank dishonors a check holder can recover all expenses interest and damages from the bank 1 iii Tellers check a check drawn by a bank on another bank or when drawn on a nonbank payable at or through a bank Traveler s Checks c and designated as a traveler s check 1 d Certified Checks i An instrument that is payable on demand drawn on or payable at or through a financial institution bank Safe substitute for cash for vacationers and travelers that are issued for a fixed amount i A check that has been accepted in writing by the bank on which it is drawn 1 Once bank certifies accepts a check it immediately charges the drawer s account with the amount of the check and transfers those funds to its own certified check account 2 a Bank is not required to certify a check Not doing so is not a dishonor of the check Prevents bank from denying liability It is a promise that sufficient funds are on deposit and have been set aside to cover the check when it is presented for payment II The Bank Customer Relationship Creditor Debtor Relationship a b Agency Relationship i Created with customer creditor and bank debtor when customer makes deposit into checking account i Arises between customer principle and bank agent when customer writes check on their account 1 Customer is ordering bank to pay amount on the check to the holder when the holder presents c Contractual Relationship the check to the bank for payment i Certain rights and duties arise whenever a bank customer relationship is established III Bank s Duty to Honor Checks a When a bank wrongfully fails to honor a check it s liable to its customer for damages from its refusal to pay b Overdrafts If customers checking account lacks insufficient funds to cover the amount of the check the bank can i 1 Dishonor the item 2 Pay the item and charge the customer s account creating an overdraft providing that the customer has authorized payment and payment does not violate any bank customer agreement ii Overdraft protection agreement when a bank agrees with a customer to accept overdrafts 1 If they do not they breach and the act is treated as a wrongful dishonor of the check If a check bounces the holder can try again at a later date to see if the funds became available iii 1 Holder must notify indorsers on check of first dishonor or they will be discharged from liability c Postdated Checks i Unless a customer notifies the bank not to pay a postdated check until the stated date a bank can hold the customer accountable for postdated check charges 1 Customer must give bank advance notice 2 If bank fails to act on the notice they may be liable for damages incurred by the customer d Stale Checks e Stop Payment Orders i A check that is presented for payment more than six months from its date 1 Bank has option to either pay or not pay the check 2 i An order by a customer to their bank not to pay or certify a certain check 1 Cannot stop payment on a check that has already been accepted by a bank ii Unless confirmed in writing stop payment order is only binding for 14 days A written one is binding for 6 months before renewal iii Bank s Liability for Wrongful Payment 1 If bank pays check in spite of a stop payment order they will be obligated to re credit the customer s account and will be held liable for all resultant costs to the drawer iv Customer s Liability for Wrongful Stop Payment Order 1 Customer drawer must have a valid legal ground for issuing a stop payment order a Defenses sufficient to refuse payment against a payee may not be valid grounds to prevent payment against a subsequent holder in due course b A person who wrongfully stops payment on a check is liable to the payee for the amount of the check and can be liable for consequential damages incurred by the payee f Death or Incompetence of a Customer reasonable time to act on the notice i Does not revoke a bank s authority to pay an item until the bank is informed of the situation and has had 1 Can pay or certify checks drawn on or before the date of death for 10 days after the death a Exception if a person claiming an interest in that account heir orders the bank to stop payment g Checks Bearing Forged Drawer s Signatures i The General Rule ii Customer Negligence Forged signature has no legal effect as signature of a drawer 1 2 Bank liable when pay a check on which drawer s signature is forged must re credit account a If customers negligence contributed to forgery bank may be able to recover some loss i May also be able to recover from forger or from holder if they knew it was a forged signature b Banks require signature cards from every customer with a checking account to allow them to verify if the signature on a check is genuine 1 Bank not obligated to re credit account if customer s negligence substantially contributed 2 Auto Owners Insurance Co v Bank One a Issue did the bank s failure to request proof from Wulf that he was authorized to deposit checks made out to Auto Owners substantially contribute to the loss b No Bank One s conduct did not substantially contribute to the losses The bank has no specific responsibilities when opening an account for a new customer 3 Timely Examination of Bank Statements Required a Monthly statements detailing account activity include info on checks such as number amount and date of payment i Customer has duty to promptly examine bank statements with reasonable care 1 Must report any alterations or forged signatures a Failure to do so will result in customer liability for loss 4 Consequences of Failing to Detect Forgeries a Banks liability discharged if customer fails to report forgery within 30 days 5 When the Bank is also Negligent a If