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Payment Systems
Stanford University School of Law
Daines, Robert M.

Payment Systems

1) Introduction: Payment Systems Generally
a) Payments systems transfer value without using cash payments between buyers and sellers
b) The law of payment systems is a risk allocation device
c) Common characteristics of all payment systems
i) Underlying transaction between buyer and seller
ii) Buyer creates a claim based on the law of contracts with a third party payor (usually the buyer’s bank) by opening up a checking account or using a credit card
iii) Buyer transfers the claim to the seller by using a check or credit card to make payment
iv) Seller collects payment from the buyer’s bank through the check collection system or the credit card system
d) Payment Systems
i) Checks
ii) Credit Cards
iii) Debit Cards
iv) Wire Transfers
v) Promissory Notes
vi) Negotiable Instruments
vii) Letters of Credit

2) Checks
a) Payor Bank’s Obligation to Pay Checks UCC § 4-401
i) When the Bank May Debit the Customer’s Account
(1) Bank may debit the customer’s account when it pays any item that is properly payable even if it creates an overdraft
(a) McGuire v. Bank One
(i) Bank paid an overdraft on the customer’s account.
(ii) Bank is presumed to exercise ordinary care b/c it complied w/ § 4-401.
(iii) A check creating an unusually large overdraft is still properly payable.
(2) “Properly payable” means authorized by the customer and in accordance with any bank/customer agreement
(a) Authorized
(i) Authorized means signed by the customer(s)
(ii) If two or more customers can draw on the account, the non-signing party is not liable for an overdraft unless that party benefits from proceeds of the check
(b) Agreement UCC § 4-103
(i) General Rule: Article 4 can be varied by agreement
(ii) Exception: bank cannot contract away its duty of good faith or its duty to exercise reasonable care
(iii) Duties: Parties can determine the standards of good faith and ordinary care so long as such standards are not manifestly unreasonable
(3) Post-Dated Checks UCC § 4-401
(a) General Rule: A bank may debit the account of a customer before the payment date of the check if it is otherwise properly payable (Rationale—MICR Line processing—no humans)
(b) Exception: Bank receives notice from the customer describing the check with reasonable certainty and within a reasonable time for the bank to act
(c) If customer notifies bank about post-dating and bank still pays before the date, bank is liable for all damages and for subsequent damages resulting from other wrongful dishonors
(4) Stale Checks UCC § 4-404
(a) General Rule: Bank has no obligation to debit the customer’s account to pay a check that is six months old
(b) Exception: Bank may debit a customer’s account to pay a check that is six months old if the bank acts in good faith (Rationale—bank might know if customer wants it paid) UCC § 4-104
(i) Honesty in fact
(ii) Observance of reasonable commercial standards of fair dealing
1. Common banking practice is to consult with the banking customer Comments
2. Depends on the location of the bank and the local standards in that area
ii) When the Bank Must Debit The Customer’s Account
(1) Bank must debit customer’s account when the check is properly payable and there are sufficient funds in the account
(2) Time for determining sufficient funds UCC § 4-402
(a) Bank has to determine if there are sufficient funds only once between the time it receives the check and the time the check bounces
(b) If bank makes second determination, that determination controls whether sufficient funds exist
(3) NOTE: Bank can pay checks in any order it wishes UCC § 4-303
iii) Stop Payment Orders: Bank Must Not Debit Customer’s Account UCC § 4-403
(1) Any customer on an account (if more than one) has the right to stop payment. (e.g., if George and Kristen have a joint account and George writes and signs a check, Kristen can stop payment on that check even though she did not write or sign it).
(2) Requirements
(a) Written or oral notice
(i) Written notice is effective for six months
(ii) Oral notice is effective for 14 days
(b) Describing the check with reasonable certainty
(c) Given within a reasonable time so that the bank can act
(3) Stop payment orders can be renewed after they expire
(4) Once totally expired, bank may debit the customer’s account and pay if done in good faith
iv) Banks Right of Subrogation UCC § 4-407
(1) General Rule: Article 4 remedy for wrongfully paying an item the bank should not have is to recredit the customer’s account
(2) When bank pays an item it should not have (e.g., over a valid stop payment order; after account is closed, etc.) and unjust enrichment results (e.g., customer gets the goods for free; payee gets the money from customer without giving customer the goods or giving the customer defective goods), the bank is subrogated to the rights of the party who was unjustly enriched
(3) Example: Customer pays Merchant $1,000 for a TV. The TV is defective and co

k withdrawn by cash: $400 after the $100 available on the second day; balance available on the third day
4. Nonlocal state or local government check: balance after $100 available on the fifth day
(b) Second-Day Availability: Low Risk Items
(i) Local checks
(ii) Local third party cashier’s check
(iii) U.S. Treasury check and state/local government checks signed over to 3rd person
(iv) ATM deposits at ATM owned or controlled by depositary bank
(c) Five-Day Availability: Higher Risk Items
(i) Funds from a deposit of a nonlocal check must be made available on the fifth business day following the banking day of the deposit
(ii) Nonlocal third party cashier’s check
(iii) ATM deposits at ATM not owned or controlled by depositary bank
(4) Extension of Availability Schedule for Highly Risky Items: Exceptions
(a) New Account Deposits (open for 30 days or less)
(b) Amounts over $5000 (UCC § 4-215 applies for amounts over $5000)
(c) Redeposited Checks
(d) Deposits into “repeatedly overdrawn” account
(e) Deposits where there is “reasonable cause to doubt collectibility” (case-by-case determination)
b) Check Collection System
i) Introduction
(1) Forward Collection
(a) Presentment process where the check is turned into cash
(b) All checks go through this process
(c) Governed by UCC Art. 4
(2) Return Process
(a) Process whereby dishonored checks are returned
(b) Only dishonored checks go through this process
(c) Governed by UCC Art. 4; EFAA; Regs. CC and J
ii) Definitions UCC 4-105
(1) Payor Bank: bank that is the drawee of a draft
(2) Depositary Bank: first bank in the chain even if it is also the payor bank unless item is presented for payment over the counter by the payor bank
(3) Collecting Bank: bank that handles an item for collection except the payor bank. Depository bank that is not the payor bank is a collecting bank
(4) Intermediary Bank: bank where an item is transferred during the collection process except the depository and payor bank