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Payment Systems
South Texas College of Law Houston
East, W. David

Payment Systems

Fall, 2012

I. The Basic Checking Relationship and the Bank’s Right to Pay Checks

A. Demand Deposit Account (DDA) – Basic Checking Account (Basic Relationship #1)

a. This is different from a savings account, where the bank does not have to give back all of your money on demand – most of them will, but they don’t have to do so.

b. Under this account, the customer is the creditor and the bank is the debtor.

i. Bank must repay the customer on demand.

ii. The money deposited actually becomes the bank’s money – but they are still in a debtor’s position.

c. A check acts as the customer’s order to the bank to repay the customer indirectly by making a payment to the payee of the check.

d. The creditor is also known as the:

i. Depositor

ii. Customer: means a person having an account with a bank or for whom a bank has agreed to collect items, including a bank that maintains an account at another bank. §4.104(5)

B. The Bank (Basic Relationship #2) – Customer Relationship is defined and regulated by:

a. the deposit agreement between the bank and the customer, and thus the common law of contracts (state law),

b. The Uniform Commercial Code (UCC), (state law); and

c. Federal law – statutes and regulations.

C. The Bank’s Right to Pay

a. The bank may charge against a customer’s account if an item is properly payable from the account even though the charge creates an overdraft.

i. properly payable means the items is authorized by the customer and is in accordance with the agreement between the customer and the bank (See 4-401(a) & 4-401 comment 1)

ii. Forged signatures or forged indorsements are NOT properly payable (See commentary – Overdrafts Generally, §4.401)

b. Joint Checking Accounts and Customer Liability

i. A customer is not liable for the amount of an overdraft if the customer neither signed the item nor benefited from the proceeds of the item (See §4.401(b))

ii. However, under 4.103(a) the agreement between the bank and the account holder(s) can vary from the code.

1. Meaning: if the agreement between the bank and account holders states that both parties to the JA are liable, then it is valid and both are liable.

iii. The bank cannot disclaim its responsibility for its lack of good faith or failure to exercise ordinary care, or limit the measure of damages for the lack of failure.

c. Post Dated checks

i. §3.113 (Date of Instrument)

1. (a) An instrument may be antedated or postdated. The date stated determines the time of payment if the instrument is payable at a fixed period after date. Except as provided in §4.401(c), an instrument payable on demand is not payable before the date of the instrument.

2. (b) If an instrument is undated, its date is the date of its issue or, in the case of an unissued instrument, the date it first comes into possession of a holder.

ii. §4.401(c) requires the customer to give notice of the postdated check, otherwise, the bank can freely process a postdated check before the date on the check.

iii. The bank’s use of an “Agreement” governing your actions w/ your checking account and writing checks is overriding when compared to the code, to the extent that a bank does not try to disclaim its responsibility for its lack of good faith or failure to exercise ordinary care or limit the measure of damages for lack or failure. – See §4.103(a)

1. Essentially, the parties can determine the standards as long as those standards are not manifestly unreasonable.

d. Stop Payment Requests

i. §4.403. Customer’s Right to Stop Payment

1. (a) A customer or any person authorized to draw on the account if there is more than one person may stop payment of any item drawn on the customer’s account or close the account by an order to the bank describing the item or account with reasonable certainty received at a time and in a manner that affords the bank a reasonable opportunity to act on it before any action by the bank with respect to the item described in §4.303.

2. (b) [Texas non-uniform version]

a. A stop payment order is effective for six months and is binding on the bank only if it is in a dated, authenticated record that describes the item with certainty. A stop payment order may be renewed for an additional six month periods by an authenticated record given to the bank within a period during which the stop payment order is effective.

3. (b) [Uniform Version]

a. A stop-payment order is effective for six months, but lapses after 14 calendar days if the original order was oral and was not confirmed in writing within that period. A stop payment order may be renewed for additional six months periods by a writing given to the bank within a period during which the stop payment order is effective.

4. Comment 6 Note:

a. Even though the comment here says the oral order is fine, the Texas statute (non-uniform version) does not allow it. Keep in mind the comments were written for the uniform statute. For exam purposes, we need to go by the Texas code.

b. Whatever a comment says, is not the statute and therefore is not the law.

ii. Rights of the Payee

1. §3.310(b) Unless otherwise agreed and except as provided in Subsection (a), if a note or an uncertified check is taken for an obligation, the obligation is suspended to the same extent the obligation would be discharged if an amount of money equal to the amount of the instrument were taken, and the following rules apply:

a. (1) In the case of an uncertified check, suspension of the obligation continues until dishonor of the check or until it is paid or certified. Payment or certification of the check results in discharge of the obligation to the extent of the amount of the check.

b. Note: If the check is If the check is dishonored, the suspension is lifted.

i. See §3.310(b)(3) “Except as provided in Subdivision (4), if the check or note is dishonored and the oblige of the obligation for which the instrument was taken is the person entitled to enforce the instrument, the oblige may enforce either the instrument or the obligation.

2. Example Fact Scenario

a. Applies to cases in which an uncertified check or note is taken for an obligation. buyer pays for goods or services by giving the seller the buyer’s personal check, or in which the buyer signs a note for the purchase price.

b. From Prob. 1.4 (pg. 24) Carol would be the person able to recover the price of the goods she sold to Buyer, and she is therefore the obligee of the obligation. She is also the person entitled to enforce.

3. “Taken for an Obligation”

a. Requires more than simply delivery to the oblige and may involve questions of fact not only concerning receipt of the instrument by the oblige, but also the intent of the oblige (determined objectively) in retaining the instrument.

4. Obligation of the Drawer – §3.414(b)

a. If an unaccepted draft is dishonored, the drawer is obliged to pay the draft (i) according to its terms at the time it was issued, or if not issued, at the time it first came into possession of the holder; or (ii) if the drawer signed an incomplete instrument, according to its terms when completed.

5. §3.104(f) – A check is considered a draft.

iii. Fees for Transactions – Stop Payment Requests

1. §4.401 cmt 3 states that the Act does not regulate fees, but rather courts will review fees under the principle of unconscionability or good faith and fair dealing.

2. Banks can charge a reasonable fee and calculate for a profit in their business of providing a service.

3. §4.403 cmt 1 states that the service of stop payments or closing accounts is a service which depositors expect and the expense of such service should be borne by the bank.

a. This doesn’t say that banks cannot charge fees, but rather it says that certain services are expected and a customer cannot be charged for this specific transaction(s); the answer for the banks is to charge fees or higher fees for our checking accounts, etc.

II. The Bank’s Obligation (to the drawer) to pay checks

A. When are funds available for payment?

a. A bank has the option to pay any item that is properly payable from the customer’s account. When the account has funds “available” to cover the item, however, the bank has an affirmative obligation to pay the item.

b. 1) Time of Evaluation

i. Under UCC §4-402(c), the bank is free to determine whether the account has sufficient funds “at any time between the time the item is received by the payor bank and the time that the payor bank returns the item.”

1. However, as (c) further explains “If, at the election of the payor bank, a subsequent balance determination is made for the purpose of reevaluating the bank’s decision to dishonor the item, the account balance at that time is determinative of whether a dishonor for i

e wrong, including emotional distress w/ physical injuries. The bank would not be liable for the emotional distress damages to that individual because the partnership itself is the CUSTOMER of the bank, not the individual. The bank would only be liable for damages suffered by the partnership.

1. However, there is a small amount of cases that have held that if the customer is a closely held corporation, that a plaintiff other than the customer, may sue. i.e., the president and CEO of a closely held corporation can sue in the place of the corporation.

2. One case in Alabama has held that such a person, not a customer, injured by the wrongful conduct, can sue the bank, if it can prove negligent conduct. *Remember, this is different from what the statute says about a normal customer, who doesn’t need to prove negligence at all.

c. 2.4: Banks decision to dishonor checks – using automated system that will dishonor checks in there are insufficient funds in the account at the close of the banking day on the date the check was presented.

i. §4.402(c) A payor bank’s determination of the customer’s account balance on which a decision to dishonor for insufficiency of available funds is based may be made at any time between the time the item is received by the payor bank and the time that the payor bank returns the item or gives notice in lieu of return, and no more than one determination need be made. If, at the election of the payor bank, a subsequent balance determination is made for the purpose of reevaluating the bank’s decision to dishonor the item, the account balance at that time is determinative of whether a dishonor for insufficiency of available funds is wrongful.

1. Also, see comment 4

ii. Regulation CC, § 229.10 Next-day availability

1. (a) Cash deposits

a. (1) A bank shall make funds deposited in an account by cash available for withdrawal not later than the business day after the banking day on which the cash is deposited, if the deposit is made in person to an employee of the depositary bank.

d. Reg. CC Discussion

i. Establishes a framework of deadlines within which a depository bank must release funds that its customers deposit the check.

ii. Banking day in Reg CC is different than in the UCC (4.104(a)(3)).

1. Reg CC does not incude Sat or Sun, but UCC simply considers Banking Day as one in which the bank is open for business.

iii. Sub-Part A has definitions

iv. Sub-Part B is good for customers

1. Sub-Part C is primarily geared for the benefit of the banks.

e. Reg. CC – §229.13 Exceptions

i. new accounts (part a)

ii. Large Deposits (part B)

iii. Repeated Overdrafts (Part C)

iv. Reasonable Cause to Doubt Collectability (Part E)

v. Note: Regarding the facts in problem 2.5 concerning the extension of holds to six business days, Prof. East said “You can’t apply the ‘six day’ extension on a global or across the board basis because the exceptions have to be applied to an individual circumstance, therefore the bank has to ask on each occasion, ‘do we want to apply an exception to the rule in 229.10 or 229.12?’”

vi. Note from Problem 2.6:

1. If you use an exception, you have to provide written notice to the customer that they funds are being held longer than normal per the Reg CC exceptions.

a. This notice must be given at the time the depositor deposits the funds, unless it is an ATM deposit. If not made upon deposit (because the customer was not in person) then they can mail or deliver it to the customer as soon as it is practicable.