Commercial Paper

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Commercial Paper

• Negotiable Instruments
• Negotiation Holder in Due Course
• Liability of Parties
• Checks and Electronic Transfers

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Checks and Electronic Transfers
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Whether we like it or not mankind now has a
completely integrated international financial and
informational marketplace capable of moving money
and ideas to any place on this planet in
minutes. Walter Wriston in a speech to the
International Monetary Conference, London (June
11, 1979)
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Learning Objectives

• The drawer-drawee relationship
• Forged and altered checks
• Check collection and funds availability
• Electronic transfers

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Overview

• Two sources of law govern the relationship
  between the depositor and the drawee bank the
  deposit agreement and Articles 3 and 4 of the UCC

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Deposit Agreement

• The deposit agreement establishes depositor and
  drawee/payor bank relationship as creditor and
  debtor so that when a person deposits money into
  a bank account
• Depositor is a creditor of the bank to the extent
  of deposits and the bank becomes his debtor

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Bank as Agent of Depositor

• Bank also becomes depositors agent for
  collection of the check
• As agent, bank owes a duty of ordinary care to
  (a) follow depositors reasonable direction about
  payment of checks and (b) collect checks and
  other deposits to the account

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Banks Duty to Pay

• Bank has a duty to pay a properly drawn and
  payable check and is liable for actual damages
  caused by a wrongful dishonor plus consequential
  damages 4402
• No duty to pay stale checks (gt 6 mo. old)
• Duty to pay may be terminated by depositors stop
  payment order or bankruptcy

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Banks Right to Charge

• Bank has the right to charge any properly payable
  check to depositors account even if an overdraft
  results
• An altered check or one with a forged signature
  is not properly payable since bank should be
  familiar with drawers signature
• But if drawer negligently contributes to forgery
  or alteration or fails to report forgery,
  drawers account may be rightfully be charged

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Stop-Payment Order

• Stop-payment order customers request to drawee
  bank to not pay or certify a check
• Bank must receive timely notice and a reasonable
  description of the check
• While stop-payment order is in effect, bank is
  liable to drawer of a check it pays for any loss
  drawer suffers by reason of banks error
• Burden of proof for loss placed on drawer
• See Seigel v. Merrill Lynch, Pierce, Fenner
  Smith, Inc.,

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The Certified Check

• A drawee bank isnt bound to certify a check, but
  if it certifies, it substitutes its promise to
  pay the check for the drawers promise and
  becomes obligated to pay the check
• Bank debits customers account and transfers the
  funds to a special bank account
• Adding banks signature to the check shows it
  accepted primary liability and is essential for
  certification 3409 (see page 840)

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The Cashiers Check

• A cashiers check is a check on which a bank is
  both the drawer and the drawee, thus the bank is
  primarily liable on the cashiers check
• A tellers check is similar, but one bank is the
  drawer and another bank is the drawee
• See page 840 for an example

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Check Collection

• In 2004, Congress enacted a federal law
  short-titled Check 21 that allows banks to handle
  more checks electronically and provides a federal
  overlay statebased law
• Check trunctation means the drawee bank keeps
  original checks and provides a monthly bank
  statement bearing images of cancelled checks

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Funds Availability

• When a bank takes a check for deposit to a
  customers account, it places a hold on the funds
  represented by the check until it collects from
  the drawee bank
• The 1987 Expedited Funds Availability Act set
  mandatory schedules limiting check holds and
  stating when depositary banks must make funds
  available to customers
• See Federal Reserve Board Regulation CC

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Electronic Transfers

• The electronic funds transfer systems (EFTs) for
  consumers include
• Automated teller machines
• Point-of-sale terminals consumers use EFT cards
  like checks to transfer money from their checking
  account to the merchant

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Electronic Transfers

• Preauthorized payments, such as automatic deposit
  of paychecks or bill payment
• Telephone transfers between accounts or
  authorization to pay specific bills.

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Electronic Funds Transfer Act

• The Electronic Funds Transfer Act established
  rights, liabilities, and duties of participants
  in electronic funds transfer systems and consumer
  rights and liabilities for unauthorized
  electronic funds transfers
• Kruser v. Bank of America NT SA illustrates the
  provisions that require a customer to timely
  notify the bank of any unauthorized use of his
  card to limit liabilty

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Wire Transfers

• For business and financial institutions, wire
  transfers of funds are commonly used to move
  large sums of money very quickly across the
  country or around the world
• At right, bank trading room

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Wire Transfers

• The Federal Reserve operates Fedwire, a domestic
  wire transfer system and international wire
  transfers may be made through the New York
  Clearinghouse Interbank Payments System (CHIPS)
• Payments over these systems are more than one
  trillion dollars per day
• See http//www.frbservices.org/ and
  http//www.chips.org/home.php

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Wire Transfers

• UCC Article 4A (Funds Transfers) covers wholesale
  wire transfers between business and financial
  institutions
• Explicitly excludes consumer payments covered by
  Electronic Funds Transfer Act

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Test Your Knowledge

• TrueA, False B
• A depositor is a creditor of the bank to the
  extent of deposits the bank is the debtor.
• A bank has the right to charge any properly
  payable check to a depositors account, but not
  if an overdraft results.
• Check 21 allows banks to handle more checks
  electronically and provides that state law apply
  to business-to-business transfers.

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Test Your Knowledge

• TrueA, False B
• The 1987 Expedited Funds Availability Act set
  mandatory schedules limiting check holds.
• An altered check or one with a forged signature
  is not properly payable.
• A stale check is over 30 days old.
• A bank is an agent and owes a duty of ordinary
  care to the depositor.

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Test Your Knowledge

• Multiple Choice
• Lee went to State Bank and gave them cash in
  return for a check in which State Bank was both
  drawer and drawee. Lee purchased a
• (a) Cashiers check
• (b) Tellers check
• (c) Special indorsement check
• (d) Wire transfer
• (e) none of the above

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Test Your Knowledge

• Multiple Choice
• A drawee bank isnt obligated to certify a check,
  but if it certifies
• (a) it substitutes its promise to pay the check
  for the drawers promise and becomes obligated to
  pay the check
• (b) it guarantees that drawer will pay the check
  upon payees presentment
• (c) it merely warrants that the drawers
  signature is authentic and authorized
• (d) none of the above

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Thought Questions

• The increased use of online banking and
  electronic transfers has raised concerns about
  privacy. Are you concerned? How should the
  banking industry and businesses respond to a
  customers concern about privacy?

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