Relationship Between Payor Bank And Its Customer - - CA Commercial Law

Section § 4401

A bank can withdraw money from a customer's account for items like checks, even if it causes an overdraft, as long as the transaction is authorized and follows any agreements with the customer. If a customer didn't sign a check or benefit from it, they aren't responsible for the overdraft amount. Banks can cash postdated checks unless the customer has informed them not to in advance. If the bank acts on a postdated check before it's supposed to, it could be responsible for any resulting losses. Finally, even if a check has been altered or completed improperly, a bank can still honor it unless they know about the issue beforehand.

(a) A bank may charge against the account of a customer an item that is properly payable from that account even though the charge creates an overdraft. An item is properly payable if it is authorized by the customer and is in accordance with any agreement between the customer and bank.

(b) A customer is not liable for the amount of an overdraft if the customer neither signed the item nor benefited from the proceeds of the item.

(c) 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 subdivision (b) of Section 4403 for stop-payment orders, and shall be received at such time and in such manner as to afford the bank a reasonable opportunity to act on it before the bank takes any action with respect to the check described in Section 4303. If a bank charges against the account of a customer a check before the date stated in the notice of postdating, the bank is liable for damages for the loss resulting from its act. The loss may include damages for dishonor of subsequent items under Section 4402.

(d) A bank that in good faith makes payment to a holder may charge the indicated account of its customer according to either:

(1) The original terms of the altered item.

(2) The terms of the completed item, even though the bank knows the item has been completed unless the bank has notice that the completion was improper.

overdraft charges customer authorization postdated checks check dishonor stop-payment notice bank liability unauthorized checks check alteration improper check completion bank agreements reasonable certainty loss damages holder payment good faith payment account charges

(Amended by Stats. 1992, Ch. 914, Sec. 40. Effective January 1, 1993.)

Section § 4402

This law explains when a bank can be considered to have wrongfully refused to pay a check or other item. A bank messes up when it doesn't pay a check that should be paid, but it doesn't have to pay if doing so would create an overdraft—unless the bank had previously agreed to cover overdrafts. If the bank does wrongfully refuse payment, it might owe the customer for any direct damages, like certain costs or even legal trouble the customer faces because of this refusal. The bank decides if there are enough funds to cover the item any time after they get it until they return it. If they check the account again later and decide to refuse payment, only the balance at that time matters to determine if their decision was right or wrong.

(a) Except as otherwise provided in this division, a payor bank wrongfully dishonors an item if it dishonors an item that is properly payable, but a bank may dishonor an item that would create an overdraft unless it has agreed to pay the overdraft.

(b) A payor bank is liable to its customer for damages proximately caused by the wrongful dishonor of an item. Liability is limited to actual damages proved and may include damages for an arrest or prosecution of the customer or other consequential damages. Whether any consequential damages are proximately caused by the wrongful dishonor is a question of fact to be determined in each case.

(c) A payor bank’s determination of the customer’s account balance on which a decision to dishonor for insufficiency of available funds is based may be made at any time between the time the item is received by the payor bank and the time that the payor bank returns the item or gives notice in lieu of return, and no more than one determination need be made. If, at the election of the payor bank, a subsequent balance determination is made for the purpose of reevaluating the bank’s decision to dishonor the item, the account balance at that time is determinative of whether a dishonor for insufficiency of available funds is wrongful.

wrongful dishonor payor bank overdraft agreement account balance proximately caused damages consequential damages item dishonor insufficient funds decision actual damages customer liability balance determination damages for arrest subsequent balance check reevaluation of decision determinative account balance

(Amended by Stats. 1992, Ch. 914, Sec. 41. Effective January 1, 1993.)

Section § 4403

This law allows a bank account holder or someone else authorized to use the account to request the bank to stop a payment on a check or to close the account, as long as they provide enough details for the bank to act before it processes the payment. If more than one signature is required for these actions, any authorized person can make the request. A stop-payment order remains valid for six months but will expire after 14 days if it's made orally and not put in writing within that time. The halt on payment can be renewed every six months if confirmed in writing. If a payment goes through despite a stop-payment request, it's up to the customer to prove the financial loss, and this loss might include additional charges from checks bouncing afterwards.

(a) A customer or any person authorized to draw on the account if there is more than one person may stop payment of any item drawn on the customer’s account or close the account by an order to the bank describing the item or account with reasonable certainty received at a time and in a manner that affords the bank a reasonable opportunity to act on it before any action by the bank with respect to the item described in Section 4303. If the signature of more than one person is required to draw on an account, any of these persons may stop payment or close the account.

(b) A stop-payment order is effective for six months, but it lapses after 14 calendar days if the original order was oral and was not confirmed in writing within that period. A stop-payment order may be renewed for additional six-month periods by a writing given to the bank within a period during which the stop-payment order is effective.

(c) The burden of establishing the fact and amount of loss resulting from the payment of an item contrary to a stop-payment order or order to close an account is on the customer. The loss from payment of an item contrary to a stop-payment order may include damages for dishonor of subsequent items under Section 4402.

stop-payment order oral confirmation account closure reasonable certainty renewal of stop-payment bank's opportunity to act multiple signatures loss from payment dishonor of items writing confirmation customer's burden of proof exceeding six months oral and written orders effective period

(Amended by Stats. 1992, Ch. 914, Sec. 42. Effective January 1, 1993.)

Section § 4404

This law states that banks aren't required to pay checks that are over six months old, unless those checks are certified. However, if a bank does pay such an old check, they can take the money from the customer's account if it's done honestly and in good faith.

A bank is under no obligation to a customer having a checking account to pay a check, other than a certified check, which is presented more than six months after its date, but it may charge its customer’s account for a payment made thereafter in good faith.

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(Amended by Stats. 1992, Ch. 914, Sec. 43. Effective January 1, 1993.)

Section § 4405

This law says that a bank can continue to process checks and other transactions as usual if they don't know that a customer has been declared incompetent or has died. If the bank does find out about a customer's death or incompetence, they still have time to act on that information. Specifically, after learning of a customer's death, a bank can still pay checks written before the death for up to ten days unless someone with an interest in the account asks them to stop.

(a) A payor or collecting bank’s authority to accept, pay, or collect an item or to account for proceeds of its collection, if otherwise effective, is not rendered ineffective by incompetence of a customer of either bank existing at the time the item is issued or its collection is undertaken if the bank does not know of an adjudication of incompetence. Neither death nor incompetence of a customer revokes the authority to accept, pay, collect, or account until the bank knows of the fact of death or of an adjudication of incompetence and has reasonable opportunity to act on it.

(b) Even with knowledge, a bank may, for 10 days after the date of death, pay or certify checks drawn on or before that date unless ordered to stop payment by a person claiming an interest in the account.

payor collecting bank incompetence customer death adjudication of incompetence proceeds of collection authority to pay authority to accept stop payment checks drawn date of death reasonable opportunity payment after death customer authority account interest

(Amended by Stats. 1992, Ch. 914, Sec. 44. Effective January 1, 1993.)

Section § 4406

This law explains how banks must handle account statements and paid checks for their customers. Banks need to send a statement showing what has been paid or provide enough detail about the transactions. If a bank doesn't return the actual checks, it must give customers a way to request them or copies. The bank has to keep records for seven years, trying to meet customer requests reasonably. Customers, in turn, must check their statements for any unauthorized payments and inform the bank quickly. If they don't, they might lose the right to claim against the bank for unauthorized transactions. However, if the bank didn't exercise proper care, it might share the responsibility for any losses. Customers have up to a year to report unauthorized signatures or alterations, or they can't claim against the bank for these mistakes. Lastly, the law defines a 'substitute check' based on federal regulations.

(a) A bank that sends or makes available to a customer a statement of account showing payment of items for the account shall either return or make available to the customer the items paid or provide information in the statement of account sufficient to allow the customer to reasonably identify the items paid. The statement of account provides sufficient information if the item is described by item number, amount, and date of payment. If the bank does not return the items, it shall provide in the statement of account the telephone number that the customer may call to request an item, a substitute check, or a legible copy thereof pursuant to subdivision (b).

(b) If the items are not returned to the customer, the person retaining the items shall either retain the items or, if the items are destroyed, maintain the capacity to furnish legible copies of the items until the expiration of seven years after receipt of the items. A customer may request an item from the bank that paid the item, and that bank shall provide in a reasonable time either the item or, if the item has been destroyed or is not otherwise obtainable, a legible copy of the item. If the paid item requested by a customer was presented as a substitute check, the bank shall provide, in a reasonable time, either the substitute check or, if the substitute check has been destroyed or is not otherwise obtainable, a legible copy of the substitute check. A bank shall provide, upon request, and without charge to the customer, at least two items, substitute checks, or legible copies thereof, with respect to each statement of account sent to the customer.

(c) If a bank sends or makes available a statement of account or items pursuant to subdivision (a), the customer shall exercise reasonable promptness in examining the statement or the items to determine whether any payment was not authorized because of an alteration of an item or because a purported signature by or on behalf of the customer was not authorized. If, based on the statement or items provided, the customer should reasonably have discovered the unauthorized payment, the customer shall promptly notify the bank of the relevant facts.

(d) If the bank proves that the customer failed, with respect to an item, to comply with the duties imposed on the customer by subdivision (c), the customer is precluded from asserting any of the following against the bank:

(1) The customer’s unauthorized signature or any alteration on the item if the bank also proves that it suffered a loss by reason of the failure.

(2) The customer’s unauthorized signature or alteration by the same wrongdoer on any other item paid in good faith by the bank if the payment was made before the bank received notice from the customer of the unauthorized signature or alteration and after the customer had been afforded a reasonable period of time, not exceeding 30 days, in which to examine the item or statement of account and notify the bank.

(e) If subdivision (d) applies and the customer proves that the bank failed to exercise ordinary care in paying the item and that the failure contributed to loss, the loss is allocated between the customer precluded and the bank asserting the preclusion according to the extent to which the failure of the customer to comply with subdivision (c) and the failure of the bank to exercise ordinary care contributed to the loss. If the customer proves that the bank did not pay the item in good faith, the preclusion under subdivision (d) does not apply.

(f) Without regard to care or lack of care of either the customer or the bank, a customer who does not within one year after the statement or items are made available to the customer (subdivision (a)) discover and report the customer’s unauthorized signature on or any alteration on the item is precluded from asserting against the bank the unauthorized signature or alteration. If there is a preclusion under this subdivision, the payer bank may not recover for breach of warranty under Section 4208 with respect to the unauthorized signature or alteration to which the preclusion applies.

(g) As used in this section, “substitute check” shall have the same meaning as used in Section 229.2 of Title 12 of the Code of Federal Regulations.

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(Amended by Stats. 2016, Ch. 277, Sec. 3. (AB 2907) Effective January 1, 2017.)

Section § 4407

This section explains that if a bank mistakenly pays a check that it should not have, for example because the account was closed or payment was stopped, the bank can step into the shoes of others involved in the check transaction to recover its losses. Specifically, the bank can assert the rights of the rightful holder of the check, the person who was supposed to receive the payment, or the original payer against anyone involved in the transaction where the money was paid by mistake.

If a payor bank has paid an item over the order of the drawer or maker to stop payment, or after an account has been closed, or otherwise under circumstances giving a basis for objection by the drawer or maker, to prevent unjust enrichment and only to the extent necessary to prevent loss to the bank by reason of its payment of the item, the payor bank is subrogated to the rights of all of the following:

(a) Of any holder in due course on the item against the drawer or maker.

(b) Of the payee or any other holder of the item against the drawer or maker either on the item or under the transaction out of which the item arose.

(c) Of the drawer or maker against the payee or any other holder of the item with respect to the transaction out of which the item arose.

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(Amended by Stats. 1992, Ch. 914, Sec. 46. Effective January 1, 1993.)