Chapter 1: Legal Ethics
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Learning Objectives
1. What type of check does a bank agree in
advance to accept when the check is
presented for payment?
2. When may a bank properly dishonor a
customer’s check without being liable to
the customer?
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Learning Objectives
3. What duties does the UCC impose on a
bank’s customers with regard to forged and
altered checks? What are the consequences
of a customer is negligent in performing
those duties?
4. What are the four most common types of
electronic fund transfers?
5. What laws apply to e-money transactions
and online banking?
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Introduction
 Checks and electronic fund transfers
(EFT’s) are governed by Articles 3 and
4 of the UCC.
– Article 3: covers all negotiable
instruments, including checks.
– Article 4: establishes a framework for
deposit, EFT’s and checking agreements
between banks and customers.
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Checks
 Cashier’s Checks: bank serves as drawer
and drawee. Bank assumes responsibility.
–CASE 17.1 MIDAMERICA BANK, FSB V.
CHARTER ONE BANK, FSB (2009). Why did
the Illinois Supreme Court reverse the
decision and award MidAmerica the amount
of the check? 
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Checks
 Traveler’s Checks.
–Must be signed by the drawer again
when cashed.
 Certified Checks.
–Check that has been accepted by the
bank in which it is drawn.
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The Bank-Customer Relationship
 Creditor-Debtor Relationship.
– Bank owes money to customer and must
honor customer’s checks.
 Agency Relationship.
– Bank must pay customer’s checks and
collect for customer if she deposits checks.
 Contractual Relationship.
– Between bank and customer.
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Bank’s Duty to Honor Checks
 Banks that wrongfully dishonor
customer’s checks are liable for actual
damages only.
 Overdrafts. Bank has two options:
dishonor, or pay the check and charge
the customer’s account.
– Overdraft Protection Agreements: wrongful
dishonor if bank breaches contract.
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Bank’s Duty to Honor Checks
 Postdated Checks.
–Bank can pay unless notified in time to
act on it.
 Stale Checks.
–After 6 months, it is bank’s choice
whether to honor or not. 
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Bank’s Duty to Honor Checks
 Stop-Payment Orders:
–Customer can’t stop certified checks and
must give bank enough time to act.
–Oral S.P.= 14 days, Written = 6 months.
–Customer's liability for wrongful stoppayment order = must have a real or
personal defense as needed.
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Bank’s Duty to Honor Checks
 Stop-Payment Orders:
–Customer can’t stop certified checks and
must give bank enough time to act. Oral
S.P.= 14 days, Written = 6 months.
–Bank’s Liability for Wrongful Payment:
must recredit customer’s account. 
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Bank’s Duty to Honor Checks
 Stop-Payment Orders (cont’d):
–Bank’s Liability for Wrongful Payment:
And bank will be liable if subsequent
checks bounce.
–Customer's Liability for Wrongful StopPayment Order: customer must have a
valid legal defense, otherwise the
holder can sue for nonpayment.
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Bank’s Duty to Honor Checks
 Death or Incompetence of Customer.
– Neither death nor incompetence revokes
bank’s authority to pay until it has
knowledge, up to 10 days after death.
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Bank’s Duty to Honor Checks
 Checks Bearing Forged Drawers’
Signatures.
–General Rule: Forged signature on a
check has no legal effect as signature of
the drawer.
• If negligent, bank must re-credit
customer’s account when it pays on a
forged signature. 
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Bank’s Duty to Honor Checks
 Checks Bearing Forged Drawers’
Signatures.
–Customer Negligence: if customer
substantially contributes to loss, bank is not
liable. If bank is substantially negligent, it
will be liable for loss.
• CASE 17.2 AUTO-OWNERS INSURANCE CO. V.
BANK ONE (2008). Why was Bank One not
liable for the losses? 
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Bank’s Duty to Honor Checks
 Checks Bearing Forged Drawers’
Signatures.
–Customer Negligence.
• Timely Examination of Bank Statements
Required.
• Consequences of Failure to Detect
Forgeries: customer must examine
statements, and has 30 days from
detection of forgery to inform bank. 
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Bank’s Duty to Honor Checks
 Checks Bearing Forged Drawers’
Signatures.
–Customer Negligence.
• Negligence and the Bank’s Duty of
Care. One – Year Time Limit: limits bank’s
liability.
• Other Parties From Whom the Bank
May Recover.
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Bank’s Duty to Honor Checks
 Checks Bearing Forged Indorsements.
–Bank that pays a customer’s forged
check must recredit the account, or be
liable to the customer-drawer for breach
of contract.
 Altered Checks.
–Bank has a duty to inspect each check.

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Bank’s Duty to Honor Checks
 Altered Checks.
–Customer Negligence: may shift the loss
when payment is made on an altered
check (unless bank is negligent).
–Bank must always follow reasonable
commercial standards of care in paying
checks. 
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Bank’s Duty to Honor Checks
 Altered Checks.
–Other Parties from Whom the Bank may
Recover.
• Bank is entitled to recover the amount of
loss from the transferor who warrants that
the check has not been materially altered.
• Two exceptions: if the bank is the drawer
cannot recover from HDC, and if HDC
presents in good faith.
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Bank’s Duty to Accept Deposits
 Availability Schedule for Deposited
Checks. 
 Interest-Bearing Accounts. 
 The Collection Process. 
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Bank’s Duty to Accept Deposits
 Availability Schedule for Deposited
Checks.
– Expedited Funds Availability Act of 1987 and
Federal Reserve Board’s Regulation CC.
– Require that checks deposited into banks
must be available for withdrawal by check
or cash within a certain number of days
from the date of deposit. 
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Bank’s Duty to Accept Deposits
 Availability Schedule for Deposited
Checks.
–Local checks: one business day from the
date of deposit.
–Non-local checks: five business days
from the date of deposit.
–Some deposits must be available the
next business day.
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Bank’s Duty to Accept Deposits
 Availability Schedule for Deposited
Checks.
–Deposits made in non-proprietary ATMs:
5 business days.
–Some exceptions for new-customer
deposits and large deposits.
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Bank’s Duty to Accept Deposits
 The Traditional Collection Process.
–Designation of Banks Involved in the
Collection Process:
• Depository Bank.
• Payor Bank.
• Intermediary Banks.
• Collecting Banks.
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Ex. 17-4 The Check
Collection Process
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Bank’s Duty to Accept Deposits
 The Traditional Collection Process.
 Check Collection Between Customers
of the Same Bank. 
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Bank’s Duty to Accept Deposits
 Check Collection Between Customers
of Different Banks.
–Depositary bank must present check to
next intermediary or payor bank before
midnight of the next banking day
following receipt. 
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Bank’s Duty to Accept Deposits
 Check Collection Between Customers
of Different Banks (cont’d).
–UCC permits “deferred posting” bank
can set a particular time (e.g. 2:00 pm)
as cutoff hour. After that hour, items
are posted for the next business day.
–CASE 17.3 Cumis Mutual Insurance
Society, Inc. v. Rosol (2011).
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Bank’s Duty to Accept Deposits
 How the Federal Reserve System
Clears Checks.
–Fed serves as “clearinghouse” where
checks and drafts are exchanged, and
drawn on each other’s accounts.
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Bank’s Duty to Accept Deposits
 Check Clearing and the Check 21 Act.
–Creates a new negotiable instrument
called a substitute check (original is
destroyed).
–What is a Substitute Check? A paper
reproduction of the front and back of an
original check. 
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Electronic Fund Transfers
 Types of EFT Systems.
–ATM’s.
–Point-of-Sale Systems.
–Direct Deposits and Withdrawals.
–Internet Payment Systems. 
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Electronic Fund Transfers
 Consumer Fund Transfers: governed by
Electronic Fund Transfer Act of 1978.
–Disclosure Requirements.
–Unauthorized Transfers.
–Violations and Damages. 
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Electronic Fund Transfers
 Consumer Fund Transfers: transferred
“by wire” between commercial
entities.
–Disclosure Requirements.
–Unauthorized Electronic Fund Transfers.
–Violations and Damages.
 Commercial Transfers.
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E-Money and Online Banking
 Digital Cash (e-money) in smart cards.
 Stored Value Cards (magnetic striped,
e.g., gift cards).
 Smart Cards: contain microchips. 
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E-Money and Online Banking
 Online Banking Services.
 Privacy Protection.
–E-Money Issuer’s Financial Records
(Financial Privacy Act of 1978).
–Consumer Financial Data (GrammLeach-Bliley Act of 1999).
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E-Money and Online Banking
 E-Money Issuers’ Financial Records.
–Right to Financial Privacy Act (1978).
 Consumer Financial Data.
–Financial Services Modernization Act
(1999).
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