Part 7- Credit, Chapter 34: Checks and Electronic Transfers, Doc 2

University:
Indiana University Bloomington
Course:
Financial and Managerial Accounting: Information for Decisions - John J. Wild
Academic year:

2024
Views:

143

Pages:

2
Author:

bratrochanter

Key Points on Stop-Payment Orders, Certified Checks, Cashier’s Checks, and Bank Liability 1. Stop-Payment Orders and Bank Liability: o Customer Rights: A customer may issue a stop-payment order to prevent a check from being paid. This request can be made orally but lasts only 14 days unless confirmed in writing; a written stop-payment is valid for six months and can be renewed. o Bank's Liability: If the bank pays a check despite a valid stoppayment order, it may be liable to the customer for any losses resulting from the unauthorized payment. However, the customer must prove that they suffered an actual financial loss, such as having a valid defense against payment (e.g., defective goods or services). o Subrogation Rights: If the bank recredits the customer’s account after improperly paying a check, it acquires the customer's rights against the payee. This allows the bank to pursue claims the customer had, as in cases of fraud or misrepresentation. 2. Certified Checks: o Definition and Liability: A certified check is a regular check that a bank guarantees by certifying it. The bank debits the customer's account at the time of certification and becomes primarily liable for payment. Certification transfers the responsibility for payment from the drawer to the bank. o Effect on Drawer and Indorsers: Once a check is certified, the drawer and prior indorsers are discharged from liability. This means the holder of the certified check can only claim payment from the certifying bank, not the drawer or indorsers. 3. Cashier’s Checks: o Definition and Bank Liability: A cashier’s check is a check issued by the bank itself, where the bank is both the drawer and drawee, making the bank primarily liable for payment. Cashier's checks are often used in transactions requiring a high level of payment security. o Teller’s Checks: Similar to cashier’s checks, a teller’s check involves one bank as the drawer and another bank as the drawee, adding an additional layer of security and ease in transactions involving multiple banks. 4. Limitations of Bank Disclaimers: o Good Faith and Ordinary Care: Banks may request customers to sign disclaimers limiting bank liability, particularly concerning stoppayment orders. However, under the UCC, banks cannot disclaim liability for failing to act in good faith or for not exercising ordinary care in stopping payment on checks. 5. Case Example - Seigel v. Merrill Lynch: o Issue of Actual Loss: In Seigel’s case, although Merrill Lynch erroneously paid checks despite a stop-payment order, Seigel could not show an actual loss because the casinos had enforceable claims on the checks under New Jersey law, making the gambling debts valid. Seigel’s inability to establish that he was legally entitled to keep the funds meant that he could not recover from Merrill Lynch, illustrating the requirement for customers to prove actual loss to succeed in stoppayment disputes. This section highlights the importance of stop-payment orders and certified and cashier’s checks in managing bank liabilities and protecting customer rights in commercial transactions. It demonstrates the conditions under which banks are held liable for paying checks despite stop-payment orders and the protective function of certified and cashier’s checks in transactions requiring secure payment assurances.