Consumer Banking and Payments Law: 4.1a Common Issues with Deposits and Payments to Consumers
Issues that can arise with respect to payments to—or deposits by—consumers include:
Issues that can arise with respect to payments to—or deposits by—consumers include:
Consumers and other payees are increasingly depositing checks electronically through a process called “remote deposit capture.”162 Typically, the consumer takes a picture of their check with a mobile device and uploads the image through an app provided by their bank or a non-bank banking app.
There is broad agreement that federal law does not preempt claims that banks made affirmative misrepresentations about the operation of their overdraft programs.202 As the Ninth Circuit has stated, “[s]tate laws of general application, which merely require all businesses (including national banks) to refrain from fraudulent, unfair, or illegal behavior, do not necessarily impair a bank’s ability to exercise its . . . powers.”203
A number of courts have held that federal law does not preempt a claim that a bank violated the duty of good faith and fair dealing by measures such as manipulation of posting order.204 Since the duty of good faith and fair dealing is uniformly imposed on all parties as an element of contract law, courts have recognized that compliance with that duty has no more than an incidental effect on a bank’s exercise of its deposit-taking powers, so it falls within the savings clause of the preemption regulation.2
A consumer can be liable for an unauthorized funds transfer if the consumer authorized the payment order or if the consumer is otherwise bound by the payment order under applicable laws of agency.458 However, it is highly unlikely that a bank would be able to assert that a consumer is bound under the applicable laws of agency. As the First Circuit explained, “ ‘in a very large percentage of cases covered by Article 4A, . . .
Article 4A provides a second way for a bank to shift liability to the consumer for unauthorized funds transfers.460 A funds transfer is deemed authorized by the consumer if the bank verified the authenticity of the instruction with a security procedure agreed to by the consumer.461 The bank must verify the authenticity of the payment order in good faith using a commercially reasonable security procedure t
To shift the liability of an unauthorized transfer to a consumer, the security procedure used by the bank must be one “established by agreement of a customer and a receiving bank.”464 The term does not apply to “procedures that the receiving bank may follow unilaterally in processing payment orders.”465 The consumer must agree to a specific security procedure, not merely the fact that the bank will use so
Even when a security procedure is deemed to be commercially reasonable, a bank may avoid liability only if it acted in “good faith” in compliance with the security procedure.485 “Good faith” means honesty in fact and observance of reasonable commercial standards of fair dealing.486 The good faith standard is both subjective and objective.487
Although an unauthorized funds transfer may be deemed authorized because the consumer’s bank verified the authenticity of the instruction with a security procedure agreed to by the consumer—i.e., the bank validated the funds transfer—Article 4A does provide a mechanism for limiting or eliminating the consumer’s liability.494
Errors in the wire transfer chain committed by parties other than the originator typically include sending duplicate payment orders, sending a smaller amount than ordered, sending the correct amount to the wrong party, failing to send the order in a timely way, or failing to execute the payment order when required to do so by express agreement.
Article 4A describes how originating banks and beneficiary banks should handle payment orders when the beneficiary may be misdescribed.509
Sometimes an originator may realize there was an error in the payment order and seek to cancel or correct the order. This is especially important for consumers who are fraudulently induced or scammed into making a wire transfer, assuming the consumer is fortunate enough to recognize the scam early.524
The Official Comments to U.C.C.
Article 4A is not the “exclusive means by which a plaintiff can seek to redress an alleged harm arising from a funds transfer.”568 A plaintiff may assert a common law claim based upon a funds transfer if the claim “(1) arises from circumstances not contemplated in Article 4A or (2) represents rights and obligations not contrary to those set forth in Article 4A.”569 As the First Circuit put it, “courts hav
Regulation J applies to checks collected by Federal Reserve banks, wire transfers conducted over Fedwire, and electronic funds transfers conducted over FedNow.582 Subpart A of Regulation J applies to the collection of checks and other items by federal reserve banks;583 Subpart B applies to Fedwire;584 and Subpart C applies to
This appendix reprints those selected provisions of the Uniform Commercial Code (UCC) Articles 1, 3, 4, and 4A and their official comments that are most often consulted in consumer cases involving checks and wires. Every state has adopted these four UCC Articles, but not every state has adopted the same version.
Article 1 was revised in 2001 and every state has adopted those amendments.
(a) [The Uniform Commercial Code] must be liberally construed and applied to promote its underlying purposes and policies, which are:
(1) to simplify, clarify, and modernize the law governing commercial transactions;
(2) to permit the continued expansion of commercial practices through custom, usage, and agreement of the parties; and
(3) to make uniform the law among the various jurisdictions.
[The Uniform Commercial Code] being a general act intended as a unified coverage of its subject matter, no part of it shall be deemed to be impliedly repealed by subsequent legislation if such construction can reasonably be avoided.
Official Comments
Source: Former Section 1-104.
Changes from former law: Except for changing the form of reference to the Uniform Commercial Code, this section is identical to former Section 1-104.
(a) Unless the context otherwise requires, words or phrases defined in this section, or in the additional definitions contained in other articles of [the Uniform Commercial Code] that apply to particular articles or parts thereof, have the meanings stated.
(b) Subject to definitions contained in other articles of [the Uniform Commercial Code] that apply to particular articles or parts thereof:
* * *
(2) “Aggrieved party” means a party entitled to pursue a remedy.
(a) Subject to subsection (f), a person has “notice” of a fact if the person:
(1) has actual knowledge of it;
(2) has received a notice or notification of it; or
(3) from all the facts and circumstances known to the person at the time in question, has reason to know that it exists.
(b) “Knowledge” means actual knowledge. “Knows” has a corresponding meaning.
(a) Whether a time for taking an action required by [the Uniform Commercial Code] is reasonable depends on the nature, purpose, and circumstances of the action.
(b) An action is taken seasonably if it is taken at or within the time agreed or, if no time is agreed, at or within a reasonable time.
Official Comments
Source: Former Section 1-204(2)-(3).
(a) Except as otherwise provided in subsection (b) or elsewhere in [the Uniform Commercial Code], the effect of provisions of [the Uniform Commercial Code] may be varied by agreement.
Every contract or duty within [the Uniform Commercial Code] imposes an obligation of good faith in its performance and enforcement.
Official Comments
Source: Former Section 1-203.
Changes from former law: Except for changing the form of reference to the Uniform Commercial Code, this section is identical to former Section 1-203.