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Banking Law
University of Toledo School of Law
Uram, Seth D.

Payment Systems
Professor Uram
Spring, 2008
 
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)    

Thus, Bank is subrogated to the rights of Customer against Merchant for the $400 cost to repair the defect. In effect, subrogation means that bank need not recredit account at all if unjust enrichment results.
(4)     McIntyre v. Harris Bank
(a)     Bennett gave McIntyre a $2,000 check to pay for roofing materials to fix her roof.
(b)     McIntyre gave Bennett a $2,000 check and told her to cash it if he didn’t fix her roof.
(c)     McIntyre cashed Bennett’s check and stopped payment on his check.
(d)    McIntyre never fixed Bennett’s roof and she cashed his check over the stop payment order.
(e)     Although normally McIntyre would be entitled to have the bank refund his account, the Bank was allowed to keep the $2,000 to prevent unjust enrichment.
v)       Wrongful Dishonor UCC § 4-402
(1)     A bank wrongfully dishonors a check if the check was properly payable and there were sufficient funds to cover the amount of the check
(2)     Bank does not wrongfully dishonor a check if it dishonors a check that creates an overdraft
(3)     Bank is liable for proximately caused damages, actual damages proved, and consequential damages
vi)     Funds Availability for Deposited Checks Expedited Funds Availability Act (EFAA); Reg. CC, Art. 4
(1)     Introduction
(a)     General UCC Rule: Bank does not have to make funds available until bank receives payment for the item (settlement)