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 ban
k 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
