To Pay or Not to Pay

At this point in the check collecting process, the payor bank has issued a provisional credit to the presenting bank. The payor bank has a finite amount of time to decide whether or not to pay the item.  An earlier version of Article 4 had a section with dealt with ‘posting’ of items.  This was the stated manner in which bank’s made their decision whether or not to pay.  That section has been eliminated, with banks operating by their own internal systems for making the decision to pay or decline payment.

As you review the material, bear in mind that most of the process now takes place electronically.  The impetus for the shift from paper to images came from Check Clearing for the 21st Century Act, commonly referred to as Check 21, which became law in October of 2004.

      

     The discussion below is predicated upon the facts contained in the past post.  At this point, East Dade Bank has presented the altered, forged check to South Dade.  South Dade has given a provisional credit to East Dade, and is now going through its internal procedures to determine whether to pay the check or dishonor.

(D)    Rights of Revocation and Charge-Back

1.         Payor Bank and the Presenting Bank

2.         Collecting Bank and Its Customer

3.         Timely Action & Final Payment

If the payor bank decides not to pay the item, which it could do for many reasons (such as insufficient funds or what it thought to be a forged drawer’s signature), it will return the item to the presenting bank. If South Dade took proper action in a timely manner, it could revoke the provisional settlement it gave East Dade:

If a payor bank settles for a demand item [the check]...presented otherwise than for immediate payment over the counter before midnight of the banking day of receipt, the payor bank may revoke the settlement and recover the settlement if before it has made final payment...and before its midnight deadline it

1.    returns the item; or

2.    returns an image of the item, if the party to which the return is made has entered into an agreement to accept an image as a return of the item and the image is returned in accordance with that agreement; or

3.    sends a record providing notice of dishonor or nonpayment if the item is unavailable for return. Section 4-301(a)(1)(2)(3).  

As noted in Section 4-301, the payor bank must take proper action before its midnight deadline. Midnight deadline is defined under Section 4-104(a)(10) as follows:

Midnight deadline with respect to a bank is midnight on its next banking day following the banking day on which it receives the relevant item or notice or from which the time for taking action commences to run, whichever is later....

In the event that South Dade revoked the provisional settlement it gave East Dade, that bank would have revoked any provisional settlement it gave Jerry’s account:

If a collecting bank [East Dade] has made provisional settlement with its customer for an item and itself fails by reason of dishonor...to receive settlement for the item which is or becomes final, it may revoke the settlement given by it.... Section 4-214(a).

(E)   Loss of Chargeback Rights: Final Payment

...These rights to revoke, charge back and obtain refund terminate if and when a settlement received by the bank is or becomes final. Section 4-214(a).

As the foregoing states, the determinative question regarding the right to revoke, charge back and obtain refund, is whether or not there had been final settlement [final payment] of the item. If that occurred, it is clear that the rights of chargeback would be gone.

On the facts as stated, two weeks passed from the issue of the check to the realization as to what had occurred. Therefore, any action taken by the Bank would have been taken many days after its ‘midnight deadline’ with respect to this check, which would have resulted in final payment:

An item is finally paid by a payor bank when it has ...:

(1) paid the item in cash;

(2) settled for the item without having a right to revoke the settlement under statute, clearing-house rule or agreement;

(3) made a provisional settlement for the item and failed to revoke in the time and manner permitted by statute, clearing house rule or agreement.

Section 4-215(a)(1)(2)(3).

South Dade had made a provisional settlement with East Dade, and subsequently did not revoke the settlement within the timeframe ‘permitted by statute’, i.e., by its midnight deadline. Therefore, South Dade will be deemed to have finally paid the item. As a result, East Dade received “final settlement” for the item.[1]  As previously noted, once final payment was made, East Dade lost any rights it had to charge back Jerry’s account.

The failure to charge back does not, however, affect the other rights of the bank against the customer or any other party. Section 4-214(e). In other words, East Dade still has all causes of action it may have against Jerry and certainly against Harold.

The next post will discuss the Article 3 issues in the context of the Article 4 introduction.

 

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[1] If a provisional settlement for an item between the presenting and payor banks is made ... by debits or credits in an account between them, then to the extent that provisional debits or credits for the item are entered in accounts between the presenting and payor banks or between the presenting and successive prior collecting banks seriatim they become final upon final payment of the item by the payor bank. Section 4-215(c).