1. Negotiable Instruments
Negotiation and Holder in Due Course
Liability of Parties
Checks and Electronic Transfers
© 2010 The McGraw-Hill Companies, Inc. All rights reserved.

2. Checks and 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)
© 2010 The McGraw-Hill Companies, Inc. All rights reserved.

3. Learning Objectives
 The drawer-drawee relationship
 Forged and altered checks
 Check collection and funds availability
 Electronic transfers
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4. 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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5. 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 the extent of
deposits and the bank becomes his debtor
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6. Bank as Agent of Depositor
 Bank is depositor’s agent for collection of
the check
 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
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7. 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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8. 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
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9. Stop-Payment Order
 Stop-payment order: 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
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10. 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
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11. 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 bank’s signature to the check shows
it accepted primary liability and is essential
for certification [3–409] (see page 876)
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12. The Cashier’s Check
 A cashier’s check is a check on which a bank
is both the drawer and the 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
 See page 876 for an example
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13. 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
 Union Planters Bank, N.A. v. Rogers: customer
didn’t report forgeries in timely manner, thus
precluded from having account recredited
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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 Electronic Funds Transfer 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 the provisions that require a
customer to timely notify the bank of any
unauthorized use of his card to limit liabilty
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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
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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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