PowerPoint Slides to Accompany
BUSINESS LAW
E-Commerce and Digital Law
International Law and Ethics
5th Edition
by Henry R. Cheeseman
Chapter 25
Checks and Digital
Banking
Slides developed by
Les Wiletzky
Wiletzky and Associates, Puyallup, WA
Copyright © 2004 by Prentice-Hall. All rights reserved.
The Bank – Customer Relationship


Creditor – Debtor
Relationship
Created when a
customer deposits
money into the bank.
The customer is the
creditor and the bank is
the debtor.

Principal – Agent
Relationship
Created if the:



deposit is a check that
the bank must collect
for the customer or the
customer writes a
check against his or
her account
The customer is the
principal and the bank
is the agent.
Copyright © 2004 by Prentice-Hall. All rights reserved.
25 - 2
The Uniform Commercial Code (UCC)
Banking Provisions
Revised Article 3
(Negotiable Instruments)
Article 4 (Bank Deposits
and Collections)
Article 4A (Funds Transfer)
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25 - 3
Ordinary Checks
Article 4 of the UCC – establishes the rules
and principles that regulate bank deposit and
collection procedures.
 Check – an order by the drawer to the
drawee bank to pay a specified sum of
money from the drawer’s checking account
to the named payee (or holder).

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25 - 4
Parties to a Check
Drawer – The customer who maintains the
checking account and writes (draws) checks
against the account.
 Drawee – The bank on which the check is
drawn.
 Payee – The party to whom the check is
written.

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Indorsement of a Check
Occurs when a payee indorses a check to
another party by signing the back of the
check.
 Indorser – The payee who indorses a check
to another party.
 Indorsee – The party to whom a check is
indorsed.

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25 - 6
Special Types of Checks

Bank Checks – Checks for which the bank
is solely or primarily liable.

Certified Check

Cashier’s Check

Traveler’s Check
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25 - 7
Electronic Fund Transfer Systems
Automated
Teller Machines
Direct Deposits
& Withdrawals
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Point-of-Sale
Terminals
Pay-by-Internet
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Bank Debit Cards

Electronic Fund Transfer Act and
Regulation E – regulate consumer electronic
fund transfers and establish consumer rights
in the following areas:
Unsolicited cards
 Lost or stolen debit cards
 Evidence of transaction
 Bank statements

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25 - 9
Honoring Checks

Payment of a drawer’s properly drawn check
by the drawee bank.
Stale Checks
 Incomplete Checks
 Death or Incompetence of a Drawer
 Stop-Payment Orders
 Overdrafts
 Wrongful Dishonor

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25 - 10
Federal Currency Reporting Law

Federal currency reporting laws require
financial institutions and other entities to file
a Currency Transaction Report (CTR) with
the Internal Revenue Service (IRS) for:
The receipt of a single transaction or a series of related
transactions of cash in an amount greater than $10,000.
 Suspected criminal activity by bank customers involving
a financial transaction of $1,000 or more in funds.

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25 - 11
Forged Signature of the Drawer
Forged Instrument – A check with a forged
drawer’s signature on it.
 The ultimate loss for the payment of a check
over the forged signature of the drawer
usually falls on the bank that paid the check.
 The payor bank may recover from the forger,
if he or she can be found.

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25 - 12
Altered Checks

A check that has been altered without
authorization that modifies the legal
obligation of a party.
Original Tenor
 Presentment Warranty


If the payor bank pays the altered check, it
can charge the drawer’s account the original
tenor (amount) of the check but not the
altered amount.
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25 - 13
The Collection Process
A bank is under duty to accept deposits into
a customer’s account.
 This includes collecting checks that are
drawn on other banks and made payable or
indorsed to the depositor.
 UCC Article 4 regulates the collection
process.

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25 - 14
The Collection Process (continued)
Payor Bank – The bank where the drawer has
a checking account and on which the check is
drawn.
 Depository Bank – The bank where the payee
or holder has an account.
 Collecting Bank – The depository bank and
other banks in the collection process.
 Intermediary Bank – A bank in the collection
process that is not the depository or payor bank.

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25 - 15
The Check Collection Process
Drawer issues a check
to Payee drawn on
Country Bank
DRAWER
PAYEE
Drawer has a
checking account at
Country Bank
Payee deposits the
check in her account at
Metro Bank
Metro Bank sends the
check to City Bank for
collection
METRO
BANK
(Depository and
collecting bank)
COUNTRY
BANK
CITY
BANK
(Intermediary and
collecting bank)
City Bank sends the
check to Country Bank
for collection
(Drawee and
payor bank)
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25 - 16
The Check Collection Process (continued)
The Federal
Reserve System
Final Settlement
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Deferred
Posting
Provisional
Credits
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The “Four Legals” That Prevent Payment
of a Check
1. Receipt of a notice affecting the account,
such as a notice of the customer’s death,
adjudgment of incompetence, or
bankruptcy.
2. Receipt of service of a court order or other
legal processes that “freezes” the customer
account (e.g., a writ of garnishment).
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25 - 18
The “Four Legals” That Prevent Payment
of a Check (continued)
3. Receipt of a stop-payment order from the
drawer.
4. The payor bank’s exercise of its right of
setoff against the customer’s account.
If one of these four legals is received before
the payor bank has finished its process of
posting, the check cannot be paid contrary
to the legal notice or action.
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25 - 19
Failure to Examine Bank Statements in a
Timely Manner
The customer owes a duty to examine the
statements (and canceled checks if received)
promptly and with reasonable care to
determine if any payment was not authorized
because of alteration of a check or a forged
signature.
 The customer must promptly notify the bank
of unauthorized payments.

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25 - 20
Duty of Ordinary Care
Collecting banks are required to exercise
ordinary care in presenting and sending
checks for collection.
 Failure to do so constitutes negligence.
 A collecting bank that takes proper action on
a check prior to its midnight deadline is
deemed to have exercised ordinary care.
 A bank is liable only for loses caused by its
own negligence.

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25 - 21
Commercial Wire Transfers

UCC Article 4A – Fund Transfers governs
wholesale wire transfers.
Applies only to commercial electronic fund
transfers.
 Consumer fund transfers subject to the
Electronic Fund Transfer Act are not subject
to Article 4A.

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25 - 22
Commercial Wire Transfers (continued)

UCC Article 4A (continued)
Governs the rights and obligations between
parties to a fund transfer unless they have
entered into a contrary agreement.
 If a receiving bank mistakenly pays a greater
amount to the beneficiary than ordered, the
originator is liable for only the amount he or
she instructed to be paid.

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