IWU Overdraft Fees Paper

Samuel owns A-1 Tropical Fish Aquariums. He and fellow businessman, Tito, bank at Money bank. At the beginning of the year, Samuel purchased supplies from Tito using a postdated check (a check written with a future date). He included a message in the note section of the check stating, “Tito will deposit this no earlier than January 10th.” Tito agreed not to deposit the check until that date, but his office manager accidentally deposited the check on January 5th. As a result, Samuel’s checking account was overdrawn and he incurred bounced check fees.

Samuel argued with the bank teller about the bounced check fees. He felt that the bank should have followed the clear instructions written on the face of the check. The teller told Samuel that the tellers process so many checks each day that they cannot catch every note. Ultimately, it was up to Tito to deposit the check per Samuel’s instructions. Does Samuel have any recourse against the bank for cashing the check?

Unfortunately, Samuel is out of luck. Under the UCC section 3-104(2), the bank was within its rights to process the postdated check because, once Samuel gave Tito the endorsed check, it became legal tender. Samuel’s check was a draft drawn on a bank and it was payable on demand.

It is also important to note that banks have their internal policies regarding postdated checks. With the advent of check processing technology, it is often impossible to catch handwritten notes on checks. So many banks make it clear that they cannot be responsible for postdated checks that are processed early. To be safe, Samuel should have first reached out to his bank to ascertain its postdated check policy and whether or not it would process a check early despite being postdated.

Upon successful completion of the course material, you will be able to:

Explain the applicability of the Uniform Commercial Code (UCC) to bank transactions.

Resources

Media: Negotiable Instruments

Background Information

Commercial paper acts as a substitute for money. Two kinds of negotiable commercial paper are drafts and notes. A draft is an order to pay money, whereas a note is a promise to pay money.

To be negotiable (transferable), an instrument must:

be in writing

be signed by the maker or drawer

contain an unconditional promise or order to pay

state a definite amount of money

be payable on demand or at a definite time

be payable to order or the bearer

Order paper is a negotiable instrument payable to a specific person or assignee. Bearer paper differs from order paper in that it is payable to any person who comes into possession of it. Order paper is negotiated through endorsement and delivery. Bearer paper is negotiated through delivery alone.

Instructions

Review the rubric to make sure you understand the criteria for earning your grade.

In your textbook, The Legal Environment of Business, review Chapter 13, “Negotiable Instruments, Credit and Bankruptcy.”

Consider the following scenario:

Three weeks ago, you deposited a $1,000 payroll check at your bank after signing your name to the back of the check and writing the words “For Deposit Only—Account Number 7852837” immediately above your signature (Account Number 7852837 is your checking account). Since then, you discovered that the bank did not deposit the check into your checking account, but instead deposited the check into your other account at the bank, a “money market” account. As a result, you have bounced three checks totaling $583 and incurred $75 in bounced check fees.