Liability for Negotiable

1
CHAPTER 25
Liability for Negotiable Instruments Banks
and Their Customers
2
Banks Duty to Provide Information

• A bank is not required to provide a monthly
  statement, but most do.
• A statement (if provided) must disclose
• Interest rate paid
• Amount of interest earned
• Fees imposed by the bank
• The number of days covered by the statement

3
The Banks Duty to Pay

• A bank must pay a check if the check is
  authorized by the customer and complies with the
  terms of the checking account agreement.
• A bank is not required to pay a check on an
  overdrawn account, but may choose to do so. It
  is then allowed to either repay itself out of the
  next deposit or demand immediate payment of the
  overdraft.

4
Wrongful Dishonor

• If a bank violates its duty and wrongfully
  dishonors an authorized check, it is liable to
  the customer for all actual and consequential
  damages.

5
Difficult Situations for a Bank

• The Death of a Customer
• Bank may continue to pay checks for ten days
  after it learns of the death, unless it receives
  a stop payment order from someone claiming an
  interest.
• Incompetent Customers
• Once notified that a court has found a customer
  to be incompetent, the bank is liable if it pays
  the customers checks.

6
Invalid Instruments

• Forgery
• If a bank pays when the issuers name is forged,
  it must recredit the issuers account.
• Alteration
• If a check has been altered, the customer is
  liable only for the original terms of the check,
  and the bank is liable for the rest.
• Completion
• If an incomplete check is later filled in by
  someone other than the original issuer, the bank
  is not liable unless it was on notice that the
  completion was improper.

7
Dating on Checks

• Stale Checks
• A bank is not required to pay checks that are
  presented more than six months after their date,
  but it is not liable if it does pay.
• Post-dated Checks
• A bank is not liable for paying a post-dated
  check unless the customer has notified the bank
  in advance that a post-dated check is coming.

8
Stop Payment Orders

• As a general rule, if a bank pays a check over a
  stop payment order, it is liable to the customer
  for the loss he suffers.
• A stop payment order is only valid if it
  describes the check with reasonable certainty.
• An oral stop payment order is valid for 14 days
  a written one for 6 months.

9
Withdrawing Money by Check

• A bank may not allow funds to be withdrawn for
  several days after a deposit is made.

10
Withdrawing Cash

• Because a bank is at greater risk of loss when a
  customer withdraws cash, he generally must wait
  about a day longer to withdraw cash against a
  deposit than the time period for writing a check.

11
Provisions of the Electronic Fund Transfer Act of
1978

• Employers may require all employees to accept
  payment by electronic transfer (direct deposit),
  but may not require that it go to a particular
  bank.
• Electronic fund transfer cards (ATM, debit, etc.)
  sent without a customers request must be invalid
  until the consumer activates it.

12
Debit, Credit and ATM Cards

• Some cards are both debit and ATM cards. If used
  at an ATM, the card withdraws cash from the
  users account. If used at merchants
  point-of-sale terminal, the purchase amount is
  deducted from the users account.
• Credit cards do not deduct money from the users
  account. The user gets a monthly bill detailing
  the amount owed.
• Debit cards are typically more widely accepted
  than checks.

13
Electronic Fund Transfer Act (contd)

• Documentation of electronic transfers must be
  provided both at the ATM and in monthly or
  quarterly statements.
• If reported within 60 days, a bank must
  investigate an error within the next 10 days or
  provisionally credit the account until the
  investigation can take place.

14
Electronic Fund Transfer Act (contd)

• Consumer Liability for Unauthorized Transactions
  (stolen ATM card)
• If reported within 2 days of theft consumer
  liable for 50, bank liable for the rest.
• If more than 2 days, but within 60 days of theft
  consumer liable for up to 500.
• If not reported within 60 days, consumer is
  liable for the full amount of loss.

15
Privacy

• The Gramm-Leach-Bililey Act of 1999 requires that
  banks and other financial institutions must
  disclose to consumers any non-public information
  they wish to reveal to third parties. The
  consumer then has the option to opt-out or deny
  the institution permission to disclose that
  information.

16
This area of law is important because virtually
everyone has written a check or used an ATM and
because the law regarding these transactions is
changing rapidly.
17
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