Your financial institution gives next day availability on all deposits. Alvin Cantread was in your office today, depositing a check for $13,000 payable to himself drawn on an out-of-state bank on the account of Dream Publishers of America, Inc. That night, as you were watching the TV news, you discovered that Dream Publishers had been shut down by the IRS, its doors closed, its CEO criminally charged, and all its records confiscated. Can you protect your financial institution?
What do you do?
Section 4-214: Yes, you can protect your financial institution. When you get to the office the next day you either put an extended eleven day hold on the deposit and send a notice to your customer telling him you are putting the hold on due to doubt of collectability, or - to be sure the funds are still there when the check is returned to you, you may want to charge the account the $13,000 and hold it in your general ledger account until the returned item is received. This latter action will assure that there will be no override on your hold. This action is covered by
§4-214 - "Right of charge-back or refund: (a) If a collecting bank has made provisional settlement with its customer for an item and fails by reason of dishonor, suspension of payments by a bank, or otherwise to receive settlement for the item which is or becomes final, the bank may revoke the settlement given by it, charge back the amount of any credit given for the item to the account of its customer, or obtain refund from its customer, whether or not it is able to return the item, if by its midnight deadline or within a longer reasonable time after it learns the facts it returns the item or sends notification of the facts. If the return or notice is delayed beyond the bank's midnight deadline or a longer reasonable time after it learns the facts, the bank may revoke the settlement, charge back the credit or obtain refund from its customer, but is liable for any loss resulting from the delay.
One of the reasons to insist on deposit is in the next sentence of this section. If you cash the check, it is considered to be final payment of the item. This is also covered by §4-214, which states: These rights to revoke, charge-back and obtain refund terminate if and when a settlement for the item received by the bank is or becomes final.
Your customer comes in with a check from his statement payable to a vitamin company for $94.00. He tells you he gave the numbers off the bottom of his check to the vitamin company over the phone, but later changed his mind. He doesn't want the vitamins, and now he wants his $94 back for the check (draft) that has been charged against his account. He says he didn't sign the check.
Do you give him his $94 back?
Section 4-401(a): No, you are not obliged to return his $94. §4-401 says, in part: When bank may charge account of customer. (A) General rule. - A bank may charge against the account of a customer an item that is properly payable…An item is properly payable if it is authorized by the customer and is in accordance with any agreement between the customer and the bank. The check is, in fact, authorized by the customer when he or she gives out the number, giving permission (authorization) to charge the account. The same holds true when you receive drafts from casinos when one of your customers has been gambling and gives the casino permission to debit his/her account for payment. The draft/check that comes to you does not have to have the signature of your customer on it.
Your customer is really angry. He contracted with a builder to erect a shed, postdated an $8,500 check for two weeks from the day they signed the agreement as the date the shed was supposed to be finished. Then your customer went on a two week cruise. He came back to find the shed half-way finished, and the contractor long gone. To make matters worse, he found the contractor had deposited the check in his bank, and you paid it against his account a whole week before the date on the check. He wants his $8,500 back from you, because you paid the check before the date. He says you paid an unnegotiable item because the date was in the future.
Section 4-401(c): Unfortunately, your customer is out of luck. §4-401(c) says: Postdated checks. - A bank may charge against the account of a customer a check that is otherwise properly payable from the account, even though payment was made before the date of the check, unless the customer has given notice to the bank of the postdating describing the check with reasonable certainty. The notice is effective for the period stated in section 4-303 (relating to right of customer to stop payment; burden of proof of loss) for stop-payment orders and must be received at such time and in such manner as to afford the bank a reasonable opportunity to act on it…
The Uniform Commercial Code recognizes the fact that the financial industry uses bulk filing. Therefore, when a check comes in through the work drawn on the account of your customer, you don't examine the check before it is charged against your customer's account and filed with his other checks. You would not have the opportunity to examine the check and notice that it was postdated. This is not to assume that you can disclaim responsibility for examining a check when accepting it over the counter. If a check is presented bearing a date in the future, it is in essence not a negotiable item. To cash such a check or accept it for deposit might be construed to be negligent on the part of the financial institution. If noticed, such checks should not be accepted.
Using such reasoning, your customer who is out the $8,500, might be able to charge negligence against the financial institution where the contractor deposited the check.
Editor's Note: We are running a series of training pages to address some of the confusion that sometimes occurs when trying to apply the Uniform Commercial Code to claims. For complete UCC text for your state, please go to www.BankersOnline.com, click on "Launch Pad", once on that screen click on UCC on the list on the top of the page, then on Article 4. Once on that site, click on "state rules". Only relevant part of sections will be included in these pages.
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