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Consumer Banking and Payments Law: 3.8.3.2 Transfer
Every movement of the check, except for its issuance (from drawer to payee) and its presentment (from the last party with the check, before the drawee bank, to the drawee bank) is a transfer.457 Checks travel many different paths in the banking system before being presented to the drawee bank for payment.
Consumer Banking and Payments Law: 3.8.3.3 Presentment
Eventually, the check will be “presented” to the drawee bank for payment or dishonor. This is a demand on the drawee to pay or dishonor the check by someone who is or on behalf of someone who is a person entitled to enforce the check.460 Presentment of a check can be made any time since it is a demand instrument, but delayed presentment of a check does have consequences.
Consumer Banking and Payments Law: 3.8.4.1 Timing and Method of Final Payment: The Midnight Deadline
Once the check is presented to the drawee bank (called the payor bank under Article 4),465 the drawee bank has to decide whether to pay or dishonor (bounce) the check. The drawee bank will have a limited time in which to make this decision. After this limited time, the drawee bank will be deemed to have made “final payment” on the check, which cannot be undone except in the rarest of circumstance.466 Once final payment has occurred, the drawee bank becomes liable on the check.
Consumer Banking and Payments Law: 3.8.4.2 The Effect of Final Payment
After final payment, it is too late to stop payment on a check.476 Funds represented by the check that was finally paid are not available for garnishment or setoff.477 A drawer’s obligation and underlying obligation are discharged at final payment.478 This is when the money comes out of the drawer’s account with the drawee bank.
Consumer Banking and Payments Law: 3.8.4.3 The Effect of Dishonor/Nonpayment
Once a check is dishonored, the obligations of the drawer and any indorsers are brought into play.479 Essentially, the check will be passed backwards. Typically, the drawee bank will return the check to the depository bank or another bank that handled the check during the forward collection process.
Consumer Banking and Payments Law: 3.8.4.4 When Must Drawee Bank Determine If the Account Contains Sufficient Funds
A drawee bank is only required to consider an item for payment once between the time it is presented and the time for return of the item is reached.484 If the account does not have enough money to cover the check at the time the bank checks the balance, the bank can bounce the check, even if the account would have had enough money to pay the check a few hours later.485 However, if the drawee bank takes a later look at the balance to determine if there is enough money to cover the check, the bala
Consumer Banking and Payments Law: 3.8.4.5 Rules Governing Which Checks Will Bounce for Insufficient Funds
In the course of processing final payment, the drawee bank must decide which, if any, checks will be dishonored for insufficient funds. There are several rules relevant to this question.
Consumer Banking and Payments Law: 3.8.4.6 An Example of Check Return After the Check Is Dishonored
Consider a check that is drawn by Joe from his account at Circle National Bank, made payable to Jane. Jane specially indorses the check to “ABC check cashing company.” ABC cashes the check for Jane and then deposits the check in its bank, Orange National Bank. Orange National then presents the check for payment to Circle National, which bounces the check. This would be diagrammed like this:
Consumer Banking and Payments Law: 3.8.5 Re-Presentment of Bounced Checks and Collection of Bounced Check Fees
Sometimes after a check is dishonored, a party to whom it is returned will present the check again for payment rather than treating the check as dishonored and exercising rights on a dishonored check. This is most likely to occur when a depository bank gets a check returned as unpaid, and then gets permission or instruction from its depositor to re-present the check in hopes that the check will be paid.
Consumer Banking and Payments Law: 3.9.1 Subrogation
When a drawee bank pays a check that is not properly payable from a depositor’s account, the drawee bank has to re-credit the depositor’s account.
Consumer Banking and Payments Law: 3.9.2 Undoing Final Payment
On rare occasions, the drawee bank is permitted to literally undo final payment. This is essentially a dishonor of the check long after any of the relevant deadlines have passed.536
Consumer Banking and Payments Law: 3.9.3 Presentment Warranties
Under the UCC, the party presenting a check to the drawee for payment and previous transferors of the check make three warranties to the drawee bank. If any of these warranties is breached, the drawee bank can pass the loss associated with improperly paying a check back to a prior holder of the check. Since these warranties are only made by the presenter and transferors, they are not made by the drawer, who merely issues the check.
The three presentment warranties made to the drawee bank are:
Consumer Banking and Payments Law: 3.10.1.2 The Bank’s Duty If It Provides the Customer with a Bank Statement
Except in Massachusetts and New York, if the bank does make a bank statement available to its customers, the bank must either return the “items” (checks) to the customer or give the customer information “sufficient to allow the customer reasonably to identify the items paid.”557 Even if the bank sends a bank statement, it is not required to return copies of the checks with the bank statement,558 although the bank is free to obligate itself to send copies of checks to a particular custom
Consumer Banking and Payments Law: 3.10.1.3.1 General
Once the bank has made a bank statement available to its customer, the customer has a duty to examine “with reasonable promptness” the bank statement and items returned by the bank for unauthorized drawers signatures and alterations.577 If the statement is sent to the bank customer, not held by the bank, this duty commences when the statement is sent, not when it is received.578
Consumer Banking and Payments Law: 3.10.1.3.2 Rules for single forgeries or alterations or for first forgeries or alterations in a series
One set of rules applies when there is a single forgery or alteration and to the first and second group of checks forged or altered by the same wrong-doer.
Consumer Banking and Payments Law: 3.10.1.3.3 Rules concerning multiple forged or altered checks
When a single actor repeatedly forges the drawer’s signature or alters the drawer’s checks, the checks can be divided into three groups. The first group of forged or altered checks shows up on the bank statement with the first forgery or alteration.
Consumer Banking and Payments Law: 3.10.1.3.4 Variations of bank statement rule by the account agreement
Courts have generally upheld provisions in bank deposit contracts that shorten the time periods contained in the bank statement rule, sometimes requiring that the shortened periods not be manifestly unreasonable.598 Bank account agreements also may require the customer to notify the bank of errors in writing—by contrast, the UCC obligates the customer to “notify” the bank without specifying the method599—or expand the scope of the custom
Consumer Banking and Payments Law: 3.10.1.4 Effect on Result If Bank Does Not Observe Ordinary Care or Good Faith
If the customer does not abide by his or her duties under the bank statement rule, the customer is precluded from requiring that the bank re-credit his or her account unless the customer can prove that the drawee bank did not exercise ordinary care601 and “that failure substantially contributed to loss.”602 If the drawee bank failed to exercise ordinary care that substantially contributed to loss, the loss will be allocated by using comparative negligence.60
Consumer Banking and Payments Law: 3.10.1.5 Issue Preclusion If No Notice by Bank Customer in One Year
Ordinarily, a customer loses all rights in regard to the payment of a check with a forged drawer’s signature or alteration if the customer does not give the bank notice of the forgery or alteration within one year from the date on which the statement was made available to the customer.612 A few courts have ruled that U.C.C. § 4-406(f) does not distinguish between single or multiple incidents of forgery and, as a result, the statute of repose runs from each successive forgery.613
Consumer Banking and Payments Law: 3.10.1.6 Duty to Examine the Bank Statement for Other Inaccuracies
The bank statement rule governs the depositor’s duty to examine the bank statement for forgeries of the drawer’s name and alterations. Several courts have held that customers also have a duty to examine the bank statement for other errors, such as whether the amount of the check was encoded properly, using reasonable care.622 Although this duty exists, it cannot be properly folded into the bank statement rule through the customer agreement.623
Consumer Banking and Payments Law: 3.10.3 The Imposter Rule
In general, if a payee or special indorsee’s signature is forged, the check is not properly payable out of the drawer’s bank account unless and until the proper parties indorse the check.651 The drawer also has no drawer’s liability, because the check is not presented and dishonored.652 The drawer also has no liability on the underlying obligation, which is not revived until there is presentment and dishonor.653
Consumer Banking and Payments Law: 3.10.4 Common Law Ratification of a Forged Signature
If the drawer’s signature is forged, the victim of the forgery can validate the forgery through the ratification doctrine.663 This ratification may occur after a forgery by conduct as well as express statements.664 The comment explains that ratification may be found, for example, “from the retention of benefits received in the transaction with knowledge of the unauthorized signature.”665 The UCC incorporates the common law principles that apply to
