1. C H A P T
Checks and
E R
34
Electronic Transfers
Whether we like it or not mankind now has a completely
integrated international financial and informational
marketplace capable of moving money and ideas to any
place on this planet in minutes.
Walter Wriston in a speech to the International
Monetary Conference, London (June 11, 1979)
34-1

2. Learning Objectives
• Recall that bank must pay any
properly drawn & payable check
• Explain bank’s obligation to customer
when presented with stop-payment
order, certified check, cashier’s
check, or a forged or altered check
• Discuss major features of Electronic
Funds Transfer Act
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3. Overview
• Two sources of law govern the relationship
between the depositor and the drawee
bank: the deposit agreement and Articles
3 and 4 of the UCC
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4. Deposit Agreement
• The deposit agreement establishes depositor
and drawee/payor bank relationship as
creditor and debtor so that when a person
deposits money into a bank account:
– Depositor is a creditor of the bank to extent of
deposits and the bank becomes the debtor
34-4

5. Bank as Agent of Depositor
• Bank is a depositor’s agent for check
collection
• As agent, bank owes duty
of ordinary care to follow
depositor’s reasonable
direction about payment
of checks and collect
checks and other deposits
to the account
34-5

6. Bank’s Duty to Pay
• Bank has a duty to pay a properly drawn
and payable check and is liable for actual
damages caused by a wrongful dishonor
plus consequential damages [4–402]
– No duty to pay stale checks (> 6 mo. old)
– Duty to pay may be terminated by
depositor’s stop payment order or
bankruptcy
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7. Bank’s Right to Charge
• Bank has the right to charge any properly
payable check to depositor’s account
even if an overdraft results
• An altered check or one with a forged
signature is not properly payable since
bank should be familiar with drawer’s
signature
– But if drawer negligently contributes to forgery or
alteration or fails to report forgery, drawer’s
account may be rightfully be charged
34-7

8. Stop-Payment Order
• Stop-payment order is a customer’s
request to drawee bank to not pay or
certify a check
– Bank must receive timely notice and a
reasonable description of the check
• While stop-payment order is in effect, bank is
liable to drawer of a check it pays for any loss
drawer suffers by reason of bank’s error
– Burden of proof for loss placed on drawer
34-8

9. Seigel v. Merrill Lynch, Pierce,
Fenner & Smith, Inc.
• Seigel wrote checks on his Merrill
Lynch account with sufficient funds
• On advice of Merrill Lynch, Seigel
placed stop-payment orders on all
checks and closed account, but
Merrill Lynch paid several checks and
debited Seigel’s margin account
• Seigel not entitled to have account
recredited for checks paid over the
order because he was unable to
show he suffered any loss
34-9

10. The Certified Check
• A drawee bank isn’t bound to certify a
check, but if it certifies, it substitutes its
promise to pay the check for the drawer’s
promise and becomes obligated to pay
the check
– Bank debits customer’s account and transfers
the funds to a special bank account
• Adding the bank’s signature to the check
shows it accepted primary liability and is
essential for certification [3–409]
34-10

11. The Cashier’s Check
• A cashier’s check is a check on which
a bank is both the drawer and drawee,
thus the bank is primarily liable on the
cashier’s check
• A teller’s check is similar, but one bank
is the drawer and another bank is the
drawee
34-11

12. Forged and Altered Checks
• Forged check not properly payable from
the customer’s account and bank must
exercise ordinary care in processing
instruments, but customer must avoid
being negligent, too
Customer has duty to
report forgeries and
alterations
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13. Relevant Cases
• Cincinnati Insurance Company v. Wachovia Bank
: Bank defeated claim by customer’s
insurance company because customer failed
repeatedly to implement automated check
matching service (fraud detection) and later
suffered a significant check fraud loss
• Union Planters Bank, N.A. v. Rogers: customer
didn’t report forgeries in timely manner, thus
precluded from having account recredited
34-13

14. Check Collection
• In 2004, Congress enacted a federal
law short-titled Check 21 that allows
banks to handle more checks
electronically and provides a federal
overlay state-based law
• Check 21 allows check trunctation,
which means drawee bank keeps
original checks and provides a monthly
bank statement bearing images of
cancelled checks
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15. Funds Availability
• When a bank takes a check for deposit to
a customer’s account, it places a hold on
the funds represented by the check until it
collects from the drawee bank
• The 1987 Expedited Funds Availability Act
set mandatory schedules limiting check
holds and stating when depositary banks
must make funds available to customers
– See Federal Reserve Board Regulation CC
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16. Electronic Funds Transfers
• Electronic funds transfer systems (EFTs)
for consumers include:
– Automated teller machines
– Point-of-sale terminals: consumers use EFT
cards like checks to transfer money from their
checking account to the merchant
– Telephone transfers between accounts or
authorization to pay specific bills.
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17. Electronic Funds Transfers
• Preauthorized
payments, such
as automatic
deposit of
paychecks or bill
payment
– Example: online
banking
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18. Electronic Funds Transfer Act
• The EFT Act established rights, liabilities,
and duties of participants in electronic
funds transfer systems and consumer
rights and liabilities for unauthorized
electronic funds transfers
• Kruser v. Bank of America NT & SA illustrates
EFTA provisions that require a customer to
timely notify the bank of any unauthorized
use of his card to limit liability
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19. Wire Transfers
• For business and
financial institutions,
wire transfers of funds
are commonly used to
move large sums of
money very quickly
across the country or
around the world
– At right, bank trading
room
34-19

20. Wire Transfers
• The Federal Reserve operates Fedwire, a
domestic wire transfer system and
international wire transfers may be made
through the New York Clearinghouse
Interbank Payments System (CHIPS)
– Payments over these systems are more
than one trillion dollars per day
– See http://www.frbservices.org/ and
http://www.chips.org/home.php
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21. Wire Transfers
• UCC Article 4A (Funds
Transfers) covers
wholesale wire
transfers between
business and financial
institutions
– Explicitly excludes
consumer payments
covered by Electronic
Funds Transfer Act
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22. Test Your Knowledge
• True=A, False = B
– A depositor is a creditor of the bank to the
extent of deposits; the bank is the debtor.
– A bank has the right to charge any
properly payable check to a depositor’s
account, but not if an overdraft results.
– Check 21 allows banks to handle more
checks electronically and provides that
state law apply to business-to-business
transfers.
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23. Test Your Knowledge
• True=A, False = B
– The 1987 Expedited Funds Availability Act
set mandatory schedules limiting check
holds.
– An altered check or one with a forged
signature is not properly payable.
– A stale check is over 30 days old.
– A bank is an agent and owes a duty of
ordinary care to the depositor.
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24. Test Your Knowledge
• Multiple Choice
– Lee went to State Bank and gave them
cash in return for a check in which State
Bank was both drawer and drawee. Lee
purchased a:
a) Cashier’s check
b) Teller’s check
c) Special indorsement check
d) Wire transfer
e) none of the above
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25. Test Your Knowledge
• Multiple Choice
– A drawee bank isn’t obligated to certify a
check, but if it certifies:
a) it substitutes its promise to pay the check for
the drawer’s promise and becomes
obligated to pay the check
b) it guarantees that drawer will pay the check
upon payee’s presentment
c) it merely warrants that the drawer’s signature
is authentic and authorized
d) none of the above
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26. Thought Questions
• The increased use of online banking and
electronic transfers has raised concerns
about privacy. Are you concerned? How
should the banking industry and businesses
respond to a customers’ concern about
privacy?
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