TYPES OF CHECKS

Check: A draft drawn by a depositor (the drawer) ordering

a bank or other financial institution (the drawee) to pay a
sum certain of money on demand to, or to the order of, a
third person (the payee). The drawer is liable for ensuring
that sufficient funds are in his account to cover the check.
Cashiers Check: A check drawn by the bank on itself,
rather than on a drawers account, which constitutes the
banks (1) promise to pay the payee on presentment and
() assumption of liability if the bank fails to pay.
Travelers Check: A check, often used as a substitute for
cash, that is (1) drawn on or payable through a bank and
() payable on demand by the holder. A travelers check
does not re!uire the holder to present it to the drawee bank
for payment.
Certified Check: A check that has been accepted by the
drawee bank prior to presentment (indeed, often at the time
it is issued). "y certifying the check, the bank assumes all
liability for failure to pay the check on presentment.
#h. $% &egotiable 'nstruments% #hecks, the "anking (ystem, and )*+oney * &o. 1
,ests "usiness -aw (.th ed.)
BANK-CUSTOE! !E"AT#ONS
Credit$r-%e&t$r: ,hen a customer deposits cash into a
bank account, she becomes a creditor of the bank, and the
bank becomes her debtor, for the amount of the deposit.
A'e(c): ,hen a customer writes a check on her bank
account, the bank acts as her agent for payment. -ikewise,
when a customer deposits a check into her bank account,
the bank acts as her agent for collection.
#h. $% &egotiable 'nstruments% #hecks, the "anking (ystem, and )*+oney * &o.
,ests "usiness -aw (.th ed.)
BANKS %UTY TO HONO! CHECKS
Overdraft: A check written on a checking account in
which there are insufficient funds to cover the check.
A bank faced with an overdraft has two options%
(1) dish$($r the item (i.e., /bounce0 the check), or
() pay the item and charge the customers account,
collecting the difference from the ne1t deposit or from
the customers savings or other account.
P$stdated Check: A check dated for payment at some
future date.
A bank may charge a postdated check against a
customers account upon presentment, unless the
customer notifies the bank, in a timely manner, that
the check is not to be paid until the stated date.
Stale Checks: A check, other than a certified check, that is
presented for payment *$re tha( si+ *$(ths after its date.
As a general rule, a bank is not obligated to pay a stale
check upon presentment, although it may do so.
#h. $% &egotiable 'nstruments% #hecks, the "anking (ystem, and )*+oney * &o. 2
,ests "usiness -aw (.th ed.)
%!A,E!S %EATH O! #NCOPETENCE
A customers death or incompetence does not affect the
banks authority to honor a check drawn on the customers
account until the bank
(1) k($-s of the death or incompetence, and
() has had a reas$(a&le .eri$d $f ti*e to act on the
information.
#f the &a(k d$es ($t k($- of the customers death or
incompetence at the time a check is issued or
presented, the bank may pay the item.
Eve( -he( a &a(k k($-s of the customers death, it
may still pay or certify checks drawn on or before the
day of death for ten days following the date of death,
unless a valid stop payment order has been issued.
#h. $% &egotiable 'nstruments% #hecks, the "anking (ystem, and )*+oney * &o. 3
,ests "usiness -aw (.th ed.)
STOP-PAYENT O!%E!S
St$.-Pa)*e(t Order: An order by the drawer to his bank
not to pay or certify a certain check.
The order, if made in a ti*el) and reas$(a&le
manner, must be obeyed.
A bank making payment over a valid stop*payment
order must re*credit the customers account, but only
to the e1tent of the actual loss suffered by the drawer
because of the wrongful payment.
A drawer who -r$('f/ll) issues a stop*payment order
will be liable to the payee both for the amount of the
check and for any conse!uential damages incurred by
the payee as a result of the wrongful stop*payment
order.
)1cept in rare circumstances, payment cannot be
stopped on a cashiers check or certified check.
#h. $% &egotiable 'nstruments% #hecks, the "anking (ystem, and )*+oney * &o. 4
,ests "usiness -aw (.th ed.)
FO!0E% %!A,E!S S#0NATU!E
As a general rule, when a bank pays a check on which the
drawers signature is forged, the &a(k is lia&le and must
credit the drawers account.
C/st$*er Ne'li'e(ce: 5owever, when a customers
negligence s/&sta(tiall) c$(tri&/tes to the forgery,
the bank will generally not be obligated to credit the
customers account.
)very customer has a d/t) t$ e+a*i(e bank
statements (as well as cancelled checks or
photocopies of check, if included with the
statement) .r$*.tl) and with reas$(a&le care,
and to re.$rt any alterations or forged signatures
promptly. 'f a customer fails in this duty, he is
lia&le f$r a() i*.r$.erl) .aid checks.
'f the customer can prove that the bank failed to
e1ercise ordinary care in paying the check, then
the c/st$*er a(d the &a(k -ill share the
lia&ilit).
'f the bank can establish the identity of the forger,
it *a) rec$ver fr$* the f$r'er and from any
#h. $% &egotiable 'nstruments% #hecks, the "anking (ystem, and )*+oney * &o. 6
,ests "usiness -aw (.th ed.)
person accepting a forged check with notice of
the forgery.
#h. $% &egotiable 'nstruments% #hecks, the "anking (ystem, and )*+oney * &o. $
,ests "usiness -aw (.th ed.)
FO!0E% #N%O!SEENTS AN%
A"TE!E% CHECKS
F$r'ed #(d$rse*e(t: As a general rule, when a bank pays
a check bearing a forged indorsement, the bank is liable
and must credit the drawers account.
'f a customer fails to report a forged indorsement
-ithi( three )ears after the check has been made
available to the customer for inspection, the bank will
no longer be liable to the customer.
Altered Check: A bank has a duty to e1amine each check
before making final payment. 'f the bank fails t$ detect an
alteration, it is liable to its customer for the difference
between the intended amount to be paid and the amount
actually paid.
E+ce.ti$(: Fail/re t$ !e.$rt 7 A customer is
obligated to e1ercise the same care with respect to
alterations as forged drawers signatures.
E+ce.ti$(: 1Bla(k Check2 7 +oreover, a bank is
(ever liable for paying a check that the c/st$*er
si'(ed leavi(' &la(k (1) the name of the payee or
() the amount to be paid.
#h. $% &egotiable 'nstruments% #hecks, the "anking (ystem, and )*+oney * &o. 8
,ests "usiness -aw (.th ed.)
ACCEPT#N0 %EPOS#TS
%/t) t$ Acce.t %e.$sits: A bank must accept its
customers deposits of cash and checks and must make the
deposited funds available for the customers use.
"$cal Checks: The funds represented by a check
drawn on a local bank (i.e., one within the same
check*processing region as the customers bank) must
be available for the depositing customers use within
$(e &/si(ess da) from the date of deposit.
N$(-"$cal Checks: The funds represented by a check
drawn on a non*local bank must be available for the
depositing customers use within five &/si(ess da)s,
provided that at least the first 91:: of the deposit be
available the ne1t business day.
Cash: The funds represented by a cash deposit must
be available for the depositing customers use on the
(e+t &/si(ess da).
%/t) t$ C$llect: A bank must also collect payment on any
checks payable to or indorsed to its customer and deposited
by the customer into her account.
#h. $% &egotiable 'nstruments% #hecks, the "anking (ystem, and )*+oney * &o. .
,ests "usiness -aw (.th ed.)
THE CO""ECT#ON P!OCESS #""UST!ATE%
(uppose that "ob, who lives in -as ;egas, wants to pay for
an item he sees at (heilas Anti!ues, in +inneapolis, by
writing a check on his account at <asis &ational "ank.
Assuming that (heilas will accept out*of*town checks,
here is a sketch of how the check payment and collection
process works%
1. "ob gives (heilas a check dra-( $( <asis &ational
"ank (/<&"0), the drawee bank=
. (heilas de.$sits the check in its account at >irst
+innesota +utual (/>++0), the depositary bank=
2. >++ se(ds the check to <&" for payment, at which
point >++ has also become the collecting bank,
because it is handling the collection of "obs check=
3. ?uite often, one or more other intermediary banks
(including but not limited to >ederal @eserve banks)
will /handle0 "obs check between >++ and <&"=
and
4. "obs check is finally presented by >++ or the last
intermediary bank for .a)*e(t by <&", which has
now become the payor bank.
#h. $% &egotiable 'nstruments% #hecks, the "anking (ystem, and )*+oney * &o. 1:
,ests "usiness -aw (.th ed.)
E"ECT!ON#C FUN% T!ANSFE!S
Electr$(ic F/(ds Tra(sfer 3EFT4% A transfer of funds by
means of an electronic terminal, telephone, computer, or
similar media. There are several types of )>T systems in
widespread use, notably%
A/t$*ated Teller achi(es 3ATs4 may be used by
a banks customers to make deposits, withdraw funds
from checking and savings accounts, transfer funds
between accounts, make loan and credit line
payments, and take cash advances against credit cards.
P$i(t-$f-Sale systems, including debit cards, allow
consumers to transfer funds from their bank accounts
to merchants to pay for purchases.
%irect de.$sits a(d -ithdra-als may be made at the
instruction of the banks customers, as a means of
making regular, periodic deposits (e.g., paychecks) or
payments (e.g., mortgage payments) easier for the
customer.
Ba(k-&)-Tele.h$(e systems enable customers to
check account balances, deposits, and the payment
status of checks, to transfer funds between accounts,
and to direct payment of certain types of obligations.
#h. $% &egotiable 'nstruments% #hecks, the "anking (ystem, and )*+oney * &o. 11
,ests "usiness -aw (.th ed.)
!E0U"AT#ON E
Aursuant to the Electr$(ic F/(ds Tra(sfer Act $f 5678
3EFTA4, the >ederal @eserve "oard has issued !e'/lati$(
E, which re!uires financial institutions to inform
consumers of their rights with respect to )>T systems, to
wit%
(1) 'f a customers )>T card is lost or stolen, her liability
is capped at 94:, as long as she notifies the bank
within two days of discovering the loss= otherwise, she
will be liable for the first 94:: of unauthoriBed usage=
and, in the event she fails to notify the bank within 6:
days of loss, she may be liable for all unauthoriBed
usage=
() A customer must discover and report any error on his
monthly statement within 6: days of receiving the
statement=
(2) A bank must provide receipts for all non*telephone
)>T transactions=
(3) A bank must provide its customers with a detailed
monthly statement for any month in which an )>T
transaction occurs= and
#h. $% &egotiable 'nstruments% #hecks, the "anking (ystem, and )*+oney * &o. 1
,ests "usiness -aw (.th ed.)
(4) AuthoriBed prepayments for utility bills and insurance
premiums can be stopped up to three days before the
scheduled transfer.
#h. $% &egotiable 'nstruments% #hecks, the "anking (ystem, and )*+oney * &o. 12
,ests "usiness -aw (.th ed.)
UNAUTHO!#9E% E"ECT!ON#C FUN%S
T!ANSFE!S
According to the )>TA, an unauthoriBed transfer
(1) is i(itiated by some person other than the banks
customer who has ($ a/th$rit) to initiate the transfer,
() from which the customer receives ($ &e(efit, and
(2) for which the customer did not give the unauthoriBed
user *ea(s $f access to the customers account.
#h. $% &egotiable 'nstruments% #hecks, the "anking (ystem, and )*+oney * &o. 13
,ests "usiness -aw (.th ed.)
E-ONEY
'n recent years, a number of electronic alternatives to
traditional means of payment have debuted, including%
%i'ital Cash: >unds stored on microchips and other
computer devices=
Card-Based $(e), either in the form of
(1) a 1st$red-val/e card,2 with a magnetic stripe
that records the cardholders balance of funds and
signals a computer to debit the account when the
card is used, or
() a 1s*art card2 with an embedded
microprocessor chip that can be encrypted and
can simultaneously function as a credit card,
debit card, and stored*value card= and
Electr$(ic Checki(', which both facilitates and
records the details of every transaction, much like a
traditional checking account statement.
#h. $% &egotiable 'nstruments% #hecks, the "anking (ystem, and )*+oney * &o. 14
,ests "usiness -aw (.th ed.)
ON"#NE BANK#N0 SE!:#CES
+ost online bank customers use three kinds of services%
(1) consolidating and paying &ills=
() tra(sferri(' f/(ds among their accounts= and
(2) applying for a l$a(.
Two important banking activities that are 'e(erall)
/(availa&le online at present are
(1) making de.$sits (other than by wire transfer), and
() making cash -ithdra-als.
#h. $% &egotiable 'nstruments% #hecks, the "anking (ystem, and )*+oney * &o. 16
,ests "usiness -aw (.th ed.)
P!#:ACY #SSUES
E-$(e) Pa)*e(t #(f$r*ati$(: The >ederal @eserve has
yet to impose @egulation ) on e*money transactions.
5owever, other federal laws prohibiting unauthoriBed
access to electronic communications (e.g., the )lectronic
#ommunications Arivacy Act) should protect the privacy of
persons using e*money.
E-$(e) #ss/ers Fi(a(cial !ec$rds: )*money issuers
are likely to be subCect to the same restraints on divulging
users personal financial information as currently apply to
traditional financial institutions under the @ight to
>inancial Arivacy Act.
C$(s/*er Fi(a(cial %ata: The 1... Dramm*-each*
"liley Act re!uires financial institutions to safeguard
consumer data and privacy and prohibit disclosure of that
information in all but statutorily delineated situations.
#h. $% &egotiable 'nstruments% #hecks, the "anking (ystem, and )*+oney * &o. 1$
,ests "usiness -aw (.th ed.)
UN#FO! ONEY SE!:#CES BUS#NESS ACT
$(e) Services B/si(esses: )ntities that generally do not
accept deposits, but do cash checks= issue money orders,
travelers checks, and stored*value cards= and e1change
foreign currency.
The U(if$r* $(e) Services B/si(ess Act 3USBA4
re!uires money services businesses involved in funds
transmission, check cashing, or currency e1change to
(1) be lice(sed by a state,
() be e+a*i(ed by state officials,
(2) re.$rt on their activities to the state,
(3) comply with certain rec$rd-kee.i(' re!uirements,
(4) conform to certain i(vest*e(t restricti$(s, and
(6) comply with /safet) a(d s$/(d(ess r/les,0 re!uiring
the posting of a bond and annual auditing of their
books.
#h. $% &egotiable 'nstruments% #hecks, the "anking (ystem, and )*+oney * &o. 18
,ests "usiness -aw (.th ed.)
The E+("A appears to subCect 'nternet*based and other e*
money services businesses to the same regulations as
traditional money services businesses.
#h. $% &egotiable 'nstruments% #hecks, the "anking (ystem, and )*+oney * &o. 1.
,ests "usiness -aw (.th ed.)