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Consumer Banking and Payments Law: 3.2.1.2 The Features of a Printed Check

The ordinary check contains several features that are crucial to the nature of this payment device and the way the check collection process operates. Preprinted checks contain computer-readable numbers that are encoded using a process known as magnetic ink character recognition (MICR). These numbers on the bottom of the check represent the drawee bank, the bank’s branch, and the customer account number.

Consumer Banking and Payments Law: 3.2.3 Keeping Track of Who Is Who in the Life of a Check

It is sometimes helpful to keep track of the parties to a check using a standard diagram, as rights and liabilities on the check are based on the role and order of the parties in the life of the check. Standard practice is to place the non-bank parties on the top line, and the bank parties on the bottom line, since rights and liabilities may be different for banks.

The diagrams use the symbol Π to indicate the plaintiff and the symbol Δ to indicate defendant. A diagram in which the payee takes the check directly to the drawee bank for payment looks like this:

Consumer Banking and Payments Law: 3.3.1 Forgery of the Drawer’s Name

A forgery of the drawer’s signature may occur if the drawer’s checkbook is stolen or an identity thief or someone else creates phony checks that look like the drawer’s checks. A drawer’s signature might also be made by someone falsely claiming to have authority to sign on behalf of the drawer.

Consumer Banking and Payments Law: 3.3.2 Remotely Created Checks/Telechecks and Remotely Created Payment Orders

Remotely created checks, which go by a number of names, are checks that are created by an entity other than the drawee bank and do not bear a purported or actual written signature of the drawer. They are typically authorized in an agreement and then later created by the payee or the payee’s agent.

Remotely created checks are checks governed by the UCC and other check rules. However, they present a number of special issues and have some special rules.

Consumer Banking and Payments Law: 3.3.4.1 When Drawee Bank Obeys Drawer’s Directions

Drawers have the right to stop payment on checks written on their checking account and to close their checking account. A drawer is likely to do a stop payment order if the drawer is defrauded into writing the check or has other claims or defenses arising out of the transaction that was paid for by check. If payment on a check is stopped, or the account is closed before the check is paid, the drawer may still be liable to pay the check.

Consumer Banking and Payments Law: 3.3.7 Check and Mystery Shopper Scams

Consumers may fall victim to check scams, sometimes called mystery shopper scams, involving two different checks. The victim is sent a bogus personal or certified check drawn on a non-existent account at a bank. The victim deposits the check into his or her account and, thinking it has cleared, writes another check or wires money to the scam artist. The first check later bounces and the bank recoups the funds.

Consumer Banking and Payments Law: 3.4.1 Paper Checks, Check Images, and Electronic Check Conversions

When a drawer writes a check to pay for something, there are three basic ways that the check can make its way through the check collection system. How the check is handled determines what rules apply. If, however, the debit to the consumer’s bank account was not made or initiated by a paper check or a remotely created draft, Articles 3 and 4 of the UCC do not apply; instead, the EFTA may apply.33

First, the check may remain a paper check from start to finish. In this case, the rules described in this chapter apply.

Consumer Banking and Payments Law: 3.4.6 The UCC Statute of Limitations

A lawsuit to enforce the obligation of a party to an uncertified check has to be brought “within three years after dishonor of the draft or [ten] years after the date of the draft, whichever period expires first.”121 An action under Article 4 of the UCC must be brought “within three years after the cause of action accrues.”122 This would include lawsuits over whether a check is properly payable,123 wrongful dishonor,

Consumer Banking and Payments Law: 3.5.1 Introduction

The rules of UCC Articles 3 and 4 dictate the rights and liabilities of the parties that handle a check based on whether and how each party signs the check and whether each party is a holder in due course. This section explains how “ownership” of a check is passed forward (called “negotiation”), how an owner of a check becomes a “holder in due course,” and what rights a holder in due course has. The next section discusses what constitutes a signature on a check and what liabilities a party takes on by signing a check.

Consumer Banking and Payments Law: 3.5.2.1 Tracing Good Title to the Check—Issuance and Negotiation

The liability rules on checks are different for checks that have been handled by parties with “good title” to the check and checks to which “good title” is disrupted by theft of the check or a forgery of a name other than the drawer’s name. This section describes how good title to a check drawn by the drawer is passed from party to party, and how one becomes entitled to enforce a check.

Consumer Banking and Payments Law: 3.5.3.1 Introduction

If a party to a check can establish that it is a holder in due course or that it has the rights of a holder in due course under the shelter rule,164 that party is immune from most defenses to payment and claims in recoupment that could be raised by an obligor on a check.165