During the next month I will be
doing Continuing Legal Education presentations in Alabama, Ohio, and Oklahoma.
I will be camping in between presentations and working on my new book—Camping and the UCC. I will not be doing the type of posts done up
to this point—essentially linear in nature. Rather, I will be posting excerpts
from The Uniform Commercial Code Made
Easy which will continue with the progression of Article 3 and the
introduction of Article 4.
This post will start with Article 4
which deals with Bank Deposits and Collections. On the way to the discovery of
forgeries, altered instruments and other irregularities in checks, they must be
processed through the banking system.
Some of the key provisions and operations of Article 4 will be
introduced and then other sections of Article 3 will be presented, the latter
having the context of the banking system and customer’s responsibilities to
examine statements and report irregularities.
The style of these explanations is quite a bit
different that the regular posts. In the
latter situation, all explanation is stated in linear terms. The book presents
many sections through concrete factual settings which have a combination of
linear explanation and inferential reasoning by the reader. The sequence of sections permits higher level
learning with repetition.
The scenario below will provide the basis for
discussing a much larger, and wider range, of Code sections than the posts up
to this point in time.
The
Facts
Jerry Zamanski is a salesman at
Stephen’s boats. On December 21, 2005 Stephen’s Boats issued an $850 commission
check to Jerry. Jerry wrote ‘for deposit only’ on the back of the check and
placed it in his desk drawer. Jerry’s identical twin brother Harold stole the
check & raised it from $850 to $8,500. Harold took the altered check to
East Dade Bank, where Jerry had his account.
Harold explained to the teller, that
he had changed his mind on depositing the check and wanted cash for an upcoming
vacation.The teller knew Jerry very well, and had done business with him for
many years and, believing Harold to be Jerry, allowed him to cross out ‘for
deposit only’ followed by his initials. Harold then signed Jerry’s name and was
given $8,500 in cash. Two weeks later, the theft, alteration and forgery were
discovered.
Stephen’s bank, South Dade, has
charged his account $8,500. Jerry has asked Stephen to give him another
commission check. Stephen would like an analysis of this situation.Particularly,
Stephen wants to know whether he is responsible for the charge to his account,
and whether he must reissue the commission check to Jerry.
I would appreciate it very much if
you would review these facts in light of the relevant law contained in the Uniform
Commercial Code.
I would like a memorandum on the
subject, but I am anxious to have some information as soon as possible
tomorrow. If a memorandum is impractical given the time situation, please see
me first thing tomorrow morning so that we can discuss this.
Incidentally, Doug, if you do write a
memorandum, please describe the transaction and law completely so that when I
show it to Stephen, he’ll be impressed with your work.
Doug returned
from Court, exhausted, at 4:30 p.m. When he read the memorandum from Alan he
was furious. In the first place, it was obvious to Doug that Alan wanted this
in writing tomorrow. ‘If a memorandum is impractical...’ ‘Incidentally, Doug, please describe the
transaction and law completely so that when I show it to Stephen, he’ll be
impressed . . .’ What a bunch of bull, Doug thought to himself. Who does he
think he’s kidding? And if that wasn’t
bad enough, Alan was making so much more money than Doug. It just wasn’t fair,
he thought. Some day I’ll rectify these gross inequities. For now, though, he
knew he would just have to do his work and wait until later on the money
question. He wrote the following memorandum to Alan:
MEMORANDUM
TO: Stephen Seller,
President of Stephen Boats
FROM: Alan Lawyer, Esq.
Doug Houstrant, Esq.
REF: Check #: 1214949
DATE: February 3, 2006
Introduction
In order to put the Article 3
[Commercial Paper] aspects in context, some discussion of Article 4 is
necessary. Article 4 of the Uniform Commercial Code deals with Bank Deposits and
Collections. It contains the rules surrounding the movement of checks from the
time the check is first issued until the check is paid or dishonored by the
drawer’s bank. In addition, it provides for certain duties on the part of a
bank customer, and states when a bank may charge its customer’s account. [a customer
in part means any person having an account with a
bank. Section 4-104(a)(5).] A discussion of all of Article 4 is beyond
the scope of this memorandum. I have, however, included what I consider to be
essential in order to understand the present case in context.
Overview: Part I
(A)
Characterization of Banks Involved;
(B)
Activities of Depository-Collecting Bank;
(C)
Activities of Payor Bank;
(D)
Rights of Revocation and Chargeback;
(E)
Loss of Chargeback Rights: Final Payment
ARTICLE 4 AND BANK
COLLECTIONS
A.
Characterization of the Banks Involved
At the outset it
is important to distinguish the manner in which a particular bank is
characterized for Article 4 purposes, for oftentimes different duties and
liabilities will attend this classification. In fact, Article 4 is roughly
broken down into various subparts based upon such classifications. In the
instant case, East Dade Bank was a depository, collecting, and presenting bank;
depository
since it was the first bank to which the check was taken for collection;[1] collecting
since it was a bank handling the item for collection (and was not the payor
bank),[2] and
finally as a presenting bank since it
presented the item for payment and was not the payor bank.[3] South Dade Bank, as the drawee, was the payor
bank.[4]
B. Activities of
the Depository-Collecting Bank
1. Provisional
credits
2. Cash
Withdrawals
3. Timely
Action
Generally, when
a depository-collecting bank receives an item for collection, it will not advance
cash for the item. An Item means an instrument or promise to pay
money handled by a bank for collection or payment…. Section 4-104(a)(9). It will usually wait until final
payment by the payor bank before allowing any cash to be withdrawn on the
strength of the item. In order to reflect the transaction on its books, it will
make a provisional entry into its customer’s account [discussed more below].
TO: Stephen Seller,
President of Stephen Boats
FROM: Alan Lawyer, Esq.
Doug Houstrant, Esq.
REF: Check #: 1214949
DATE: February 3, 2006
Introduction
In order to put the Article 3
[Commercial Paper] aspects in context, some discussion of Article 4 is
necessary. Article 4 of the Uniform Commercial Code deals with Bank Deposits and
Collections. It contains the rules surrounding the movement of checks from the
time the check is first issued until the check is paid or dishonored by the
drawer’s bank. In addition, it provides for certain duties on the part of a
bank customer, and states when a bank may charge its customer’s account. [a customer
in part means any person having an account with a
bank. Section 4-104(a)(5).] A discussion of all of Article 4 is beyond
the scope of this memorandum. I have, however, included what I consider to be
essential in order to understand the present case in context.
Overview: Part I
(A)
Characterization of Banks Involved;
(B)
Activities of Depository-Collecting Bank;
(C)
Activities of Payor Bank;
(D)
Rights of Revocation and Chargeback;
(E)
Loss of Chargeback Rights: Final Payment
ARTICLE 4 AND BANK
COLLECTIONS
A.
Characterization of the Banks Involved
At the outset it
is important to distinguish the manner in which a particular bank is
characterized for Article 4 purposes, for oftentimes different duties and
liabilities will attend this classification. In fact, Article 4 is roughly
broken down into various subparts based upon such classifications. In the
instant case, East Dade Bank was a depository, collecting, and presenting bank;
depository
since it was the first bank to which the check was taken for collection;[1] collecting
since it was a bank handling the item for collection (and was not the payor
bank),[2] and
finally as a presenting bank since it
presented the item for payment and was not the payor bank.[3] South Dade Bank, as the drawee, was the payor
bank.[4]
B. Activities of
the Depository-Collecting Bank
1. Provisional
credits
2. Cash
Withdrawals
3. Timely
Action
Generally, when
a depository-collecting bank receives an item for collection, it will not advance
cash for the item. An Item means an instrument or promise to pay
money handled by a bank for collection or payment…. Section 4-104(a)(9). It will usually wait until final
payment by the payor bank before allowing any cash to be withdrawn on the
strength of the item. In order to reflect the transaction on its books, it will
make a provisional entry into its customer’s account [discussed more below].
Some banks will
however, allow customers to draw cash in this type of situation, but that is
usually because there is enough money in the account to offset the check if it
doesn’t clear, or the customer and the bank have an established relationship in
which such advances are normal. Regardless of whether or not cash is taken
back, the bank will reflect the transaction by making the noted entry in its
customer’s account. The presumption is that this entry is “provisional” in
nature:
Unless a contrary intent clearly appears...a
collecting bank ...is an agent or sub-agent of the owner of the item and any settlement given for it is
provisional Section 4-201(a).
The fact that
cash was given for the item prior to receiving payment from the payor bank as in the instant case
does not change the provisional nature of the credit given.[5] After the
depository-collecting bank provisionally credits its customer’s account, it
will initiate collection of the item. In performing this duty:
A collecting bank shall send items by
reasonably prompt method taking into consideration relevant instructions, the
nature of the item, the number of those items on hand, and the cost of
collection involved and the method generally used by it or others to present
such items. Section
4-204(a).
(C) Activities of the Payor Bank
1. Provisional
settlement
2. Decision
to Pay or Decline
Upon receipt of
an item from a presenting bank, the payor bank will typically give a
provisional credit to the account of the presenting bank. Thus, in the instant
situation, South Dade would have provisionally credited the account East Dade
has with it. After the provisional credit has been given, the payor will decide
whether to pay the item based upon whatever commercially reasonable systems are
in place which make that determination. If it pays the item, it will charge the
customer’s account [Stephen’s Boats].
The next post will begin with a discussion of the Rights of Revocation
and Chargeback.
[1]
“Depository bank” means the first bank to take an item even
though it is also the payor bank, unless the item is presented for immediate
payment over the counter. Section 4-105(2).
[2]
“Collecting bank” means a bank handling
the item for collection except the payor bank. Section 4-105(5).
[3]
“Presenting bank” means a bank presenting an item except the
payor bank. Section 4-105(6).
[4]
“Payor bank” means a bank that is the drawee of the
draft. Section 4-105(3).
[5]
The second sentence to Section 4-201(a) states in part as follows:
This provision [regarding the provisional nature of a
credit noted above] applies regardless of the form of endorsement or lack of
endorsement and even though credit given for the item is subject to immediate
withdrawal as of right or is in fact
withdrawn. (emphasis added).
[6]
Section 4-204(b)(1) says:
(1) A collecting bank
may send
(a) any item direct to the payor bank….
[7]
A collecting bank must exercise ordinary care in:
(1) presenting an item or sending it for
presentment…
Section 4-202(a)(1).
A collecting bank exercises ordinary care under
subsection (a) by taking proper action before its midnight deadline following
receipt of an item, notice or settlement. Taking proper action within a
reasonably longer time may constitute the exercise of ordinary care, but the
bank has the burden of establishing timeliness. Section
4-202(b).
For the purpose of allowing time to process items,
prove balances, and make the necessary entries on its books to determine its
position for the day, a bank may fix an afternoon hour of 2:00 p.m. or later as
a cutoff for the handling of money and items and the making of entries on its
books.
An item or deposit of money received on any day after
a cutoff hour so fixed or after close of the banking day may be treated as
being received at the opening of the next banking day. Section 4-108(a)(b).
[1]
“Depository bank” means the first bank to take an item even
though it is also the payor bank, unless the item is presented for immediate
payment over the counter. Section 4-105(2).
[2]
“Collecting bank” means a bank handling
the item for collection except the payor bank. Section 4-105(5).
[3]
“Presenting bank” means a bank presenting an item except the
payor bank. Section 4-105(6).
[4]
“Payor bank” means a bank that is the drawee of the
draft. Section 4-105(3).
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