Payment Systems Outline
Prof. Pridgen
Spring 2012
Assignment 1- the basic checking relationship and the bank’s right to pay checks
When a bank may charge customer’s acct (4-401(a))
– (a)Properly payable even if charge creates an overdraft.
o An item is Properly payable when authorized by customer and is in accordance w/ any agreement b/t customer and bank
§ Item (4-402(a))- instrument or promise or order to pay money handled by a bank for collection or payment
Bank’s liability to customer for wrongful dishonor (4-402(a))
– a payor bank wrongfully dishonors an item if it dishonors an item that is properly payable
– but, a bank may dishonor an item that would create an overdraft unless it has agreed to pay the overdraft
o overdraft protection- for a fee, banks agree in advance that they will honor checks up to a present limit even if the checks are drawn against insufficient funds
Postdating (4-401(c))
– if properly payable, may charge acct of a customer, even though payment was made b/f date of the check, unless customer gave notice to bank of the postdating describing the check w/ reasonable certainty.
o Notice- must be received at such time and in such manner as to afford the bank a reasonable opportunity to act on it b/f bank takes any action w/ respect to the check
Customer’s rt to stop payment (4-403(a) & (b))
– (a) May stop payment by an order to the bank describing the item w/ reasonable certainty that affords bank a reasonable opportunity to act on it b/f any action by the bank w/ respect to an item
o Comment 7- a payment in violation of an effective direction to stop payment is an improper payment, even though it is made by mistake or inadvertence
§ Minimum remedy- credit acct
– (b) stop payment order is effective for 6 months (or 14 days if oral) and is renewable
Payee’s rts under 3-310
– (b) if note or uncertified check is taken for an obligation, the obligation is suspended
o (1) suspension of obligation continues until dishonor of check or until it paid or certified
o (3) if check is dishonored, oblige may enforce either the instrument or the obligation
Bank is liable for damages proximately caused by wrongful dishonor (4-402(b))
– A payor bank is liable to its customer for damages proximately caused by the wrongful dishonor of an item. Liability is limited to actual damages proved and may include damages for an arrest or prosecution of the customer or other consequential damages. Whether consequential damages are proximately caused by the wrongful dishonor is a question of fact to be determined in each case.
– Mental anguish
o Maryott v. First National Bank
§ Determined he could not get damages for emotional stress- did not establish the elements
§ Elements of intentional infliction of emotional distress
· Act by D amounting to extreme and outrageous conduct
· Intent on the part of D to cause P server emotional distress
· D’s conduct was the cause in fact of P’s distress
· The P suffered an extreme disabling emotional response to D’s conduct
· (further, in some jurisdictions, only allowed when accompanied by actual physical injury)
§ Dissent- if you can prove damages under 4-402, should not have to go through that tort
o UCC statute does not specifically address emotional damages, so fell back on common law
§ Some states view 4-402 on its own and if you can prove emotional damages were proximately caused by wrongful dishonor, will be ok
Rt to subrogation on improper payment (4-407)
– If a payor bank has paid an item over the order of the drawer to stop payment or otherwise under circumstances giving a basis for objection by the drawer to make, to prevent unjust enrichment and only to the extent necessary to prevent loss to the bank by reason of its payment of the item, the payor bank is subrogated to the rts
o (2) of the payee or any other holder of the item against the drawer or maker either on the item or under the transaction out of which the item arose
o (3) of the drawer or maker against the payee or any other holder of the item w/ respect to the transaction out of which it arose
– Not used often in small banks, bank will probably swallow loss and loss will be spread out over all customers through fees etc.
P. 1.3 Bud wrote check to Carol, stopped payment. Bank cashed the check.
-properly payable? Yes originally, but once a customer gives a valid stop payment order, it is not properly payable
– described w/ reasonable certainty? Yes, all info requested by bank
– notice given in timely matter? Yes, came in b/f she presented check
– now that check has been dishonored, carol has rt to enforce check itself or obligation
– bank has the right to recredit bud
– if Bud has a defense, can stand in shoes of bud and assert bud’s rights
P. 1.4 if bank had complied w/ bud’s stop order and refused to honor bud’s check, could carol force bud to pay for the equip?
– a) yes (assuming he does not have a valid defense)
– Fact that check was properly dishonored by the bank doesn’t change underlying transaction in which Carol sold Bud some
equipment that he hasn’t paid for. So she has rights under 3-310 (b) to enforce either the instrument or the obligation.
P. 1.5 Would it be lawful for country bank to raise monthly acct charges and NSF and stop payment fees?
a) yes (assuming the increase is not unconscionable)
Review
• Bank may charge customer’s acct. for any check that is “properly payable, i.e., “authorized.” 4-401(a)
• Bank may honor check creating overdraft and customer is liable; bank may also choose not to honor check creating overdraft unless covered by prior agreement. 4-401(a) & 4-402(a)
• Bank may honor check prior to date written on check unless customer has given notice in accordance with statute. 4-401(c)
• Customer may stop payment on a check if they give detailed & timely notice to the bank. 4-403
• Bank that improperly pays a check may be subrogated to the rights of the payee or drawer. 4-407
• Payee of check that has been dishonored has right to enforce either the instrument or the underlying obligation. 3-310(b)
Assignment 2- the bank’s obligation to pay checks
P. 2.1 bank honors check more than six months old w/o first consulting w/ customer. Can bank legally do this?
– yes if they act in good faith
stale checks -UCC 4-404
– A bank is under no obligation to pay a check, other than a certified check, which is presented more than six months after its date, but it may charge its customer’s acct for a payment made thereafter in good faith.
o Good faith under 3-103(a)(6) means honesty in fact and the observance of reasonable commercial standards of fair dealing
o The time limit is set at six months b/c banking and commercial practice regards a check outstanding for longer than that period is stale, and a bank will normally not pay such a check w/o consulting the drawer.
P. 2.1 bank honors check more than six months old w/o first consulting w/ customer. Can bank legally do this?
yes if they act in good faith
Timing 4-402(c) ( determination to dishonor)
– A payor bank’s determination of customer’s acct balance to dishonor may be made at any time b/t time it is received and time payor bank returns the item. May make the evaluation at any time. No more than one determination is necessary. But, 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.
When funds become available for withdrawal 4-215(e)
– Credit given by a bank for an item in a customer’s acct becomes available for withdrawal as of right:
o (1) if the bank has received a provisional settlement for the item, when the settlement becomes final and the bank has had a reasonable time to receive return of the item and the item has not be received w/in that time;
o (2) if the bank is both the depositary bank and the payor bank and the item is finally paid, at the opening of the bank’s second banking day following receipt of the item.
Factors influencing funds availability Reg CC 229.10-13
– Low risk/high risk items
– Method of deposit (in person v. ATM)
– Cash or check withdrawals
– Local v. non local bank (n/a after 2010)
– Reg CC deadlines
o Are no later than limits, banks can make funds available earlier, most do
Doesn’t pre-empt UCC 4-215(e) which may be earlier in some cases
– .13 exceptions may apply
Banking day and business day
– 229.2(f) banking day means that part of any business day on which an office of a bank is open to the public for carrying on substantially all of its banking functions
– 229.2(g) business days is a calendar day other than Saturday or Sunday or a federal holiday.
– 229.10(a) cash deposits- bank shall make funds deposited in an acct by cash available for withdrawal no later than the business day after the banking day on which the cash is deposited
Funds Availability Deadlines under Reg. CC, 229.10 to .13
– Are any next day availability deadlines under 229.10 applicable?
o Cash, electronic or low risk checks?
o Deposited in person or by ATM?
o Deposited in account of pay
rser liability can be enforced against a) against each endorser b) by any person entitled to enforce the instrument and by an subsequent endorser obligated to pay on its own endorsement 3-415(a)
Banks right of charge back
– 4-214- if collecting bank has made provisional settlement w/ its customer for an item and fails by reason of dishonor, .. to receive settlement… the bank may revoke the settlement given by it, charge back the amt of any credit given for the item to its customer’s acct…
o 4-105(5) collecting bank means bank handling an item for collection except the payor bank
Payee’s rights if check is dishonored
– 3-310(b)- enforce either instrument or obligation
– 3-414(b)- if an unaccepted draft is dishonored, the drawer is obliged to pay the draft 1) according to its terms… the obligation is owed to a person entitled to enforce the draft or to an endorser who paid the draft under 3-415
Limits on indorser liability 3-415(e)
– check must be presented for payment or given to depositary bank for collection w/in thirty days of endorsement or liability of endorser will be discharged
– Under 3-425(b) if an endorsement states that it is made “w/o recourse”… the endorse is not liable under subsection a) to pay the instrument
Problem- In the scenario of the dishonored paycheck indorsed by employee to grocer, the depositary bank can sue the following parties under 3-415, indorser liability:
– the grocer or the employee. Depositary bank who is subsequent transferee to whom check was indorsed by grocer, can sue either grocer or employee. It can’t sue drawer under endorsement liability of 3-415, because drawer is not an endorser. But possibly depositary bank could sue drawer under 3-414, obligation of drawer.
Problem- In the scenario of the paycheck indorsed by employee to grocer, if check was honored by the payor bank but employer had insufficient funds in account, the payor bank can sue the following parties under 3-415, endorser liability:
– No one. Payor bank has not received an endorsement so it is not entitled to enforce the endorser liability provision. Payor bank in that situation has other remedies, such as charging back its customer who wrote check with insufficient funds.
Presentment warranties 4-208 and 3-417 (only apply if forged endorsement)
– A) if an unaccepted draft is presented to the drawee for payment or acceptance and the drawee pays or accepts the draft,
o i) the person obtaining payment or acceptance, at the time of presentment, and
o ii) a previous transferor of the draft, at the time of transfer, warrant to the drawee that pays or accepts the draft in good faith that:
§ 1) the warrantor is, or was, as the time the warrantor transferred the draft, a person entitled to enforce the draft…
– Warrantor is … a person entitled to enforce the draft … [comment 2 to 3-417 says this “in effect is a warranty that there are no unauthorized or missing endorsements”]
– The draft has not been altered;
– Warrantor has no knowledge that the signature of the purported drawer of the draft is unauthorized; (actual knowledge)
– w/respect to remotely-created consumer item, that person on whose account the item is drawn authorized [it] ….
– Lament terms:
o A person who presents an instrument makes presentments warranties to the drawee being asked to pay or accept the instrument. §3-417(a); §4-408(a).
o Only the drawee can be a plaintiff while anyone in the chain can be a defendant.
o The payee warrants to the drawee that the warrantor that they are entitled to enforce the draft, the draft has not been altered and that they have no knowledge that the signature of the drawer of the draft is unauthourized.
o A drawer has no cause of action under a warranty theory
