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Bank Deposits and Collections (Maryland)

Last Reviewed December, 2021

This topic covers UCC Article 4 Banks and Collections and Maryland Article - Commercial Law: Uniform Commercial Code -- Bank Deposits and Collections

For DC credit unions, see Check and Share Draft Laws/UCC Articles 3 and 4 (DC).

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Bank Deposits and Collections (Maryland): Summary

Uniform Commercial Code (UCC) Articles 3 and 4 are closely related and often intertwined. Where Article 3 covers Negotiable Instruments and relationships between the various parties in a transaction, Article 4 covers liability of financial institutions (all encompassed under the term “Bank” in the UCC) for “action or non-action with respect to an item handled by it for purposes of presentment, payment, or collection” and clearly states that these actions or inactions are “governed by the law of the place where the bank is located. In the case of action or non-action by or at a branch or separate office of a bank, its liability is governed by the law of the place where the branch or separate office is located.”[UCC §4-102] The states have all adopted UCC Article 4 and while some have made amendments over time, the state laws tend to be almost identical to the UCC. When issues arise, it is important to consult the UCC and State or Territorial law.

Article 4 is structured into five Parts:

Part 1: General provisions and definitions;

Part 2: Collection of items: depositary and collecting banks;

Part 3: Collection of items: payor banks;

Part 4: Relationship between payor bank and its customer, and

Part 5: Collection of documentary drafts.

As a preliminary matter, it is important to know that “the effect of the provisions of this Article may be varied by agreement, but the parties to the agreement cannot disclaim a bank's responsibility for its lack of good faith or failure to exercise ordinary care or limit the measure of damages for the lack or failure. However, the parties may determine by agreement the standards by which the bank's responsibility is to be measured if those standards are not manifestly unreasonable.”[UCC §4-103] In short, read and understand your contracts and make sure understand the liability provisions.

The following definitions are important to know:

  1. “Bank” - means a person engaged in the business of banking, including a saving bank, saving and loan association, credit union, or trust company.[UCC §9-102(8)/UCC §4-105(1)]
  2. “Depositary bank” - means the first bank to take an item even though it is also the payor bank, unless the item is presented for immediate payment over the counter.[UCC §4-105(2)]
  3. “Payor bank” - means a bank that is the drawee of a draft.[UCC §4-105(3)]
  4. “Intermediary bank” - means a bank to which an item is transferred in course of collection except the depositary or payor bank. [UCC §4-105(4)]
  5. “Collecting bank” - means a bank handling the item for collection except the payor bank.[UCC §4-105(5)]
  6. “Presenting bank” - means a bank presenting an item except a payor bank.[UCC §4-105(6)]
  7. “Separate Office of Bank” - A branch or separate office of a bank is a separate bank for the purpose of computing the time within which and determining the place at or to which action may be taken or notice or orders must be given under this Article and under Article 3.[UCC §4-107]

While these definitions may seem confusing because legal jargon is not intuitive, you probably already understand the roles of these banks from your experience working in a Credit Union.

The UCC Article 4 basics:

A collecting bank must exercise ordinary care1 in:

  1. presenting an item or sending it for presentment;
  2. sending notice of dishonor or nonpayment or returning an item other than a documentary draft to the bank's transferor after learning that the item has not been paid or accepted, as the case may be;
  3. settling for an item when the bank receives final settlement; and
  4. notifying its transferor of any loss or delay in transit within a reasonable time after discovery thereof.[UCC §4-202(a)]

Most of these principles are also imposed through various compliance related statutes which should be thoroughly understood by credit union employees. As a general principal, a financial institution should take care throughout every transaction and make sure the member knows the status of the transaction. Similarly, a financial institution should know where to send an item (i.e. to the Payor Bank) and in what timeframe (the UCC refers to this as “reasonably prompt”) and who should be informed of the process.[UCC §4-204]

Article 4 also discusses liability for the involved parties in the process and these principles should be understood by credit union employees.[UCC §4-207(a)] The basic warranties that a “customer or collecting bank that transfers an item and receives a settlement or other consideration” are:

  1. the warrantor is a person entitled to enforce the item;
  2. all signatures on the item are authentic and authorized;
  3. the item has not been altered;
  4. the item is not subject to a defense or claim in recoupment (Section 3-305(a)) of any party that can be asserted against the warrantor; and
  5. the warrantor has no knowledge of any insolvency proceeding commenced with respect to the maker or acceptor or, in the case of an unaccepted draft, the drawer; and
  6. with respect to any remotely-created consumer item, that the person on whose account the item is drawn authorized the issuance of the item in the amount for which the item is drawn.[UCC §4-207(a)]

This list is not exhaustive and does not include “presentment warranties”[UCC §4-208] but provides basic details that should be understood.

Payor banks have a similar but much less detailed list of rules to follow under the UCC. This section, UCC Article 4 – Part 3 – Collection of Items: Payor Banks, details the rights and responsibilities of payor banks with regards to recovery of payment, dishonor, late returns, stop-payments[See UCC §4-403], legal service and a few other items.

What may be most important to credit union employees is to understand UCC Article 4 – Part 4 – Relationship Between Payor Bank and its Customer. Credit Unions put members first and knowledge of the intricacies of consumer interaction from a legal standpoint is vital.

When can a member’s account be charged?[UCC §4-401]

  1. 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.
  2. 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. (i.e. a share draft that was not authorized)
  3. 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. (details of stop-payment orders are also located in this section).
  4. A bank that in good faith makes payment to a holder may charge the indicated account of its customer according to:
    1. the original terms of the altered item; or
    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.

If a Credit Union wrongfully dishonors an item, it may be held responsible for the “proximate”2 damages caused by the wrongful dishonor.[UCC §4-402(a)] The determination of damages is fact based and will vary case-by-case. A Credit Union may, but is not obligated to, pay a share draft (UCC refers to this as a “check”) other than a certified check that is more than 6 months old.[UCC §4-404] If a credit union makes periodic account statements available, a consumer has the duty to exercise reasonable caution to determine whether or not an unauthorized payment was made on an item due to fraud (unauthorized signature etc.).[UCC §4-406(c)] The credit unions liability is limited if the member fails to discover fraudulent activity within a specified period of time (generally 30 days, but make sure to check for changes to State law).[UCC §4-406(d)]

1A collecting bank exercises ordinary care under subsection (a) by taking proper action before its midnight deadline following receipt of an item, notice, or settlement. Taking proper action within a reasonably longer time may constitute the exercise of ordinary care, but the bank has the burden of establishing timeliness. UCC §4-202(b)

2An actual cause that is also legally sufficient to support liability.

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