♪ [music playing] >> all rise, please. pardon one of the orange county court is now in session. the honorable russell a. bs is the judge presiding. >> your honor, we feel that the plaintiff in this case has utterly failed to establish the necessary grounds on which it would be entitled to judgement. we think there are two basic reasons for this. first of all-- >> counsel, do you have any other witnesses or evidence you wish to produce at this time? ♪ [music playing] >> you honor, i'd like to make a motion at this time. >> all right, why don't you-- >> --the whole truth and nothing but the truth, so help you god? >> i do. >> you may be seated. please state your full name, spelling your last name for the record. ♪ [music playing]

[typewriter] >> jackie would you mind taking this to the front office for me? >> at one time commercial transactions took place by means of barter. in other words, one piece of merchandise was traded for another. in modern times, of course, money is the primary medium of exchange. whenever goods or services change hands, so does money. the transfer of money links each of us

to the financial community and ultimately to the banking system. our most common link is usually a checking account. when a bank customer, business or individual, opens a checking account by signing a signature card and depositing money, that customer automatically enters into a sometimes complex web of legal relationships with the bank. these include a contractual relationship, an agency relationship, and a debtor-creditor relationship. these relationships are governed by articles three and four of the uniform commercial code. what may appear to be policies created by individual banks are actually legal requirements prescribed by the code. each of these relationships is a formal prescription with consequences for both the bank and the customer if either side fails to perform its duties.

[narrator] >> when a customer opens a checking account and deposits money, both bank and customer have certain rights and duties that are contractual in nature. for example, the contract covers service charges that the bank can make on the account, minimum balance requirements, as well as technical terms and conditions. the contract also may establish the manner in which funds in a joint account are distributed when one party dies. another relationship that's created when a checking account is opened is called an agency relationship. this is a relationship in which one person, known as the agent, has the power and authorization to represent another person known as the principal. in a bank customer agency relationship the agent is the bank and the principal is the customer. this relationship is the cornerstone of the check collection process. the key here is that an agent is required to obey any lawful order of the principal that deals

with the agency function. the third type of bank customer relationship is created when the customer deposits money in the account. whenever the customer has a positive balance in the account the customer is a creditor of the bank and the bank is a debtor of the customer. if the customer overdraws the account and the bank pays an overdraft, then the account has a negative balance and the roles are reversed. the bank becomes the creditor and the customer is in debt to the bk. along with these three formal relationships between the bank and the customer a group of interrelated rights and duties also exists. the customer has two basic duties. first, to act with care and diligence in transacting bank business whether writing checks, endorsing checks, or inspecting a monthly statement for the account. the customer's second main duty is to examine

and reconcile bank statements. in the process of doing this, the customer is obligated to promptly report any unauthorized signatures, any check that has been materially altered, or any repetition of unauthorized signatures or alterations made by the same person. in return, the customer also has specific rights. these include the right to collect damages from the bank if the bank makes a mistake in handling the account, and the right to issue a stop payment order on a check. like the customer, the bank also has specific duties it must honor the terms and conditions of its contract by providing the services the contract calls for and by charging the rates that it agreed upon for those services. under the contractual relationship the bank must also provide the customer with statements of the checking account. the bank's second basic duty is to obey the rules

of the agency relationship. since the bank is the customer's agent it must pay any properly drawn and payable check it receives. these could include any checks that create an overdraft if the bank has previously agreed to provide that type of coverage. and finally the bank has the duty to act in good faith in a commercially reasonable manner. this means that the bank must process the customer's account and complete any stop payment requests within a reasonable time period. along with these duties, the bank also has certain rights. it can charge to the customer's account any check that is properly payable from that account. it can pay a check even if paying that check will create an overdraft. the bank can also pay a check that was not completely filled out when it was issued and then was completed by some later check holder. it can refuse to honor stale checks--checks that are more

than six months old and not certified. the bank is fully authorized to pay the checks of a customer who has died or become incompetent until it learns of the occurrence and has sufficient time to react to the news. in fact, the bank is even authorized to pay for a short time thereafter if checks were used to pay bills in the ordinary course of business transactions and no heir or executor has requested that payments be stopped. if a bank makes a mistake in processing an account, it is entitled to subrogation and finally a bank has the right to enforce the terms of its contract with the customer. these include service charges and minimum balances. because the code is so thorough in spelling out the rights and duties of banks and customers, misunderstandings might seemnlikely, but as we're about to see that's not always the case. >> can i help you?

>> yes. [narrator] >> walt anticone built his hardwa store from a small struggling venture into a thriving business because of two things: hard work and business savvy. despite his success, anticone rarely has a great deal of liquid funds in his commercial checking account. normally this is not a problem; he always seems to have enough money in his account to cover his checks. although there have been times when he's cut things pretty close. one such time came when he wrote a $2,400 check to a supplier to cover the cost of some much needed merchandise. knowing that he had $2,900 in his account, anticone assumed the check would clear without incident. what he didn't know was that the check he'd written for the merchandise would come back to his bank on a friday. apparently overwhelmed by the sheer volume that day, the clerk handling the trsaction confused anticone's account with that of another customer, one who's balance was considerably less than $2,900.

as a result the bank refused payment on the check because of insufficient funds. under most circumstances this kind of mix up would cause inimal difficulty d could be easily medied fortunately, the financial operions manager at the supply company had just recently joined the firm and was anxious to make a name for himself. unaware of the bank clerk's mistake he went to the local prosecutor and signed a complaint against anticone for writing a bad check. this resulted in anticone's arrest. in time of course, the truth of what happened came out and walt anticone was vindicated. but the question is what are the rights and duties of the bank and customer in this situation? >> if a bank wrongfully dishonors a customer's check, the customer's entitled to any and all damages proximately caused by the bank's failure. now this would include service charges imposed by the bank.

it would include check collection fees or service charges imposed by the payee, the person whom the customer wrote the check. it might very well include lost wages. it might include posting bond, attorney's fees because there could be criminal charges connected for writing a bad check. the problem that the customer faces is that the customer has to prove that the dishonor is the bank's fault and that the customer did not contribute to the loss. >> for example, if the bank bounces a check that's a payment on some obligation that you're already six months behind on, the fact that there's a foreclosure is not going to be the bank's fault. it's clear that there was a problem that you started and the bank just finished it for you. [narrator] >> in the matter concerning walt anticone and the returned check, anticone did not contribute to the loss; the bank was clearly at fault.

so anticone is in a strong position to recover any handling fees, late charges, interest, or penalties charged the supplier. he also has a good chance of recovering any damages related to his arrest, such as attorney's fees. the bank, on the other hand, will wind up taking all the losses. the anticone episode is a good example of the kind of problem that can occasionally arise between a bank and its customers. but is certainly not the only such example. after years of service from his trusty typewriter, technical writer max murphy finally decided to join the computer age. his exhaustive research finally lead him to econolux computers where he purchased a demonstration model said to be the most sophisticated personal computer available at that time. he paid for the computer with a check drawn on his account. the check was dated april sixth written on the check as four six and made payable to the order of

econolux computers. after returning home with his new acquisition, murphy became concerned about the wisdom of purchasing a computer that was so technical. so he called his bank with an order to stop payment on the check. following that conversation he confirmed the stop payment order in writing. he informed the bank that the check was not numbered, that it was dated june fifth written on the check as six five, that is was in the amount of $3,100 and that the stop payment order was based on the fact that the computer was far more complicated to use than the salesman had led him to believe. after taking these steps, murphy assumed the matter would be cleared up, so when he found out the bank had paid the check when it was presented for payment, he was not pleased. murphy demanded that uptown savings and loan re-credit his account for the $3,100, claiming that the bank had paid the check despite a valid stop payment order.

obviously there was a difference of opinion between murphy and his bank over how this matter should have been settled. the question is; what rights and duties do max murphy and his bank actually have? >> the bank customer relationship among other things is a principal-agent relationship. the customer is the principal. the bank is the agent. and as in any principal-agent relationship the agent is required to obey any lawful orders the principal gives. well, occasionally one of the lawful orders that a principal customer would like to give the bank is an order to not pay the check. it's called a stop payment order. >> the bank has to have sufficient time and sufficient notice to stop payment on a check. in other words, you have to get the notice to them with enough time for them to distribute it to their branches and their employees so that they are aware that there's been this stop payment and the bank employees have to know what instrument they're looking for,

so the customer stop payment order has to be specific. what was the check number? who was the payee? and what was the amount, the date of the check, the signature on the check. >> you need to give the reason for the stop payment and this reason will become of extreme importance if the bank for some reason doesn't honor this or doesn't obey this customer's orders. the bank will then examine checks as they come in and any check that fits the description of the stop payment will be kicked out and hand processed. if it's not the check the payment is supposed to be stopped on the check will be paid. stop payment order is good for 14 days if it's oral. it's good for six months if it's in writing. [narrator] >> when the bank receives the stop payment order, if it is properly made, the bank has a duty to stop payment on the check, but that doesn't always happen.

>> when the bank gets the stop payment order, if the bank ignores that stop payment order, the bank only has to refund the money to the customer if the customer would not have had to pay the presenter. the person who goes to the bank and presents the check, if the person could have collected, the bank doesn't have to give the customer his money back. if the person could not have collected from the drawer then the bank has to give the money back. [narrator] >> as it turned out, max murphy did not receive a $3,100 credit to his checking account. the court determined that the information murphy supplied to his bank was not accurate enough to give the bank a reasonable opportunity to act. since murphy's check was not numbered, the description he gave the bank involved only four elements. these were the amount of the check, the payee,

the date, and the reason for stopping payment. of these four elements only the amount of the check and the reason for stopping payment were correct. the other two pieces of information murphy provided were inaccurate, murphy mistakenly identified the payee as compulux computers when the actual name was econolux. and he listed the date as june fifth, six-five of that year instead of the correct date as april sixth or four-six. murphy contends that the bank should have been able to figure out that he had accidentally switched the first two numbers and had reported the date as june fourth written on the check as six-four of that year. but the fact is the date he actually gave the bank was six-five of that year so his mistake was more than just a case of switching the first two digits of the date. when all was said and done, the court determined that these mistakes in murphy's stop payment order, no matter that they were unintentional, were enough

to release the bank for any liability for paying the check over the customer's order and murphy was indeed liable and had to pay. of course, some problems between banks and their customers don't occur as a result of careless errors as rick blacklidge, textsmart's senior accountant can attest. blacklidge has been a part of textsmart's accounting department for 10 years. he's seen it grow from a strictly manual paper and pencil operation to a model of high-tech efficiency. but even with the presence of computers to do much of the drudge work, blacklidge has managed to maintain his sharp eye and attention to detail. so one day while reviewing and reconciling the firm's bank statements he spotted an unexpected item: a check for $5,000 made payable to the company's former payroll chief. when blacklidge dug a little deeper, he found that this former employee had taken advantage of the company's automatic check writing machine

to write himself a check and forge the authorized signature. even more disturbing was the fact that the firm's bank had honored the check having already paid the forger the $5,000 he had no business getting. blacklidge immediately got on the phone and asked the bank to re-credit the $5,000 to the company's account since the bank had incorrectly paid a forged check. the question is, from a legal perspective, what are the rights and duties of the bank and its customer in this case? >> a customer has an obligation to examine monthly bank statements and although the customer is given up to a year to determine whether or not there are alterations of the instrument or whether or not there are--his or her signature

has been forged on the instrument. >> the bank has a responsibility of verifying customers' signatures. unfortunately what happens that so many instruments are processed, a forged instrument can sneak through the process and nobody really realizes it until the customer brings it to the attention of the bank. because the bank is supposed to know its customers' signature if a forgery does occur the bank will have liability unless the customer fails to notify the bank once those statements have been furnished to the customer indicating that there was a check that was written or paid that the customer did not write. [narrator] >> in the case of the accountant who fraudulently wrote himself a check for $5,000, rick blacklidge did review the corporation's bank statement and reported the forgery within a reasonable time period. since the forger was the former chief payroll clerk, he was responsible for payroll and had regular access to the check writing machine. had the forger been someone outside the department or even outside the company, textsmart might have been

considered negligent for failing to provide adequate security. since this was not the case the court ruled in favor of textsrt and the bank had to credit their account for the missing $5,000. another case in which the normally routine relationship between a bank and its customer was disturbed involved a private art collection. it all began when gloria regetty, a serious collector of ancient indian art, went to see the collection. regetty had a house full of indian paintings and carvings, but unfortunately these were only replicas of museum pieces. so when the collection owner assured regetty that the figurine she was looking at was authentic, regetty was more than a little skeptical. the sales pitch was so convincing however and the price tag so high that regetty concluded that the tiny indian statue was real, so she wrote a check for $900 and happily added the piece

to her collection. however, when she did some research in one of her many books on the subject of ancient artifacts, she quickly determined that the piece she had purchased couldn't possibly be an original. so she called the bank to inquire about whether she uld stop payment on the check. she was assured that she could but the person that she spoke to suggested that due to the late hour she'd have to wait until the next day to file the stop payment order. gloria regetty arrived at the bank early the next morning. for some unexplained reason, however, instead of stopping payment she withdrew just enough money from her account that less than $900, the amount she wrote the check for, remained in the account. she simply assumed that the bank would not honor the check if the account lacked sufficient funds to cover it. much to regetty's surprise, however, the bank paid the check creating an overdraft in her name. after her appeal to the bank was rejected, gloria regetty decided that her only choice was to sue the bank

to recover the overdraft. the question is, given this set of facts can she get satisfaction? what are the rights and duties of the bank and its customer in this instance? >> a bank can choose to pay an instrument even though it creates an overdraft in the customers account, they can choose to dishonor that instrument because there aren't' sufficient funds but they can also choose to create an overdraft. if that is the case and they do honor the instrument then the bank has the right to go to the customer and collect whatever funds are missing because of the overdraft. [narrator] >> in the case of gloria regetty and the indian statue, the court's decision went against regetty. the court determined that her bank could legally pay any properly written check and charge it to a customer's account even if doing that created an overdraft. the court's line of reasoning was that a check authorizes payment of money from a customer's account. the check also carries an implied promise

that the customer will reimburse the bank if there are not sufficient funds in the account to cover the check. so the net result was that gloria regetty owed her bank the amount of the overdraft. one additional case in which there were major problems between a bank and its customer involved a clothing store owned by celeste moriarty. because of the company's ongoing financial problems, moriarty was forced to pay her staff as little as possible in order to keep the company afloat. kenny danton, moriarty's quietly efficient bookkeeper, decided that the best way to instantly elevate his financial station in life was by forging moriarty's signature on company checks. danton began by forging three checks in february. at the end of the month moriarty received a bank statement containing the three checks, but she was so busy with other things that she put it aside without so much as a glance. that was all the encouragement danton needed.

during the next month he forged two more checks and was enjoying his posh new lifestyle when on the first of april his game was uncovered. after three weeks of further research and careful checking of both statements, moriarty decided on april 20th that she had enough evidence to go to the bank and report all five forgeries. leaving aside the question of what happens to the forger in a case like this, the question is what are the rights of the bank and the customer in such a situation? >> as i understand the facts, an employee, danton, forged three checks in february and two checks in march. his employer, ms. moriarty discovered the forgeries on april first but did not notify her bank until three weeks had passed. the question is whether ms. moriarty must pay for these losses or whether the bank has to pay her back.

>> when one person forges a series of checks the general rule is that the bank is only responsible when the customer reports the forgeries within 14 days of receiving the bank statement that contained the forgeries. if the customer reports the forgeries after that 14-day period, but within a year, the bank is responsible only for the first in the series of forged checks. and when the customer doesn't report the forgeries until a year has passed, then the bank is not responsible for any of the forgeries. >> these rules recognize that there are responsibilities on both sides of the bank-customer relationship. banks are responsible for checking signatures on checks against their signature cards on file. customers are responsible for inspecting their statements and reporting any unauthorized charges to banks within 14 days. in this case it appears both parties breached their responsibilities. the bank did not check its signature card and ms. moriarty did not report the charges to the bank

until after 14 days had passed. >> and both parties must bear their share of the loss. since ms. moriarty did not report the forgeries within the 14-day period she cannot make the bank pay for all of the forged checks. however, since she did report the forgeries within a year the bank will have to pay for the first of the forged checks, and she will bear the loss for the remainder. >> the relationship between the bank and customer entails considerably more than the customer simply selecting the style of checks and the bank mailing a statement at the end of the month. once a customer sets up an account, signs a signature card, and deposits funds, a number of things happen. first and foremost, a contract is created between the parties. second, the opening of an account initiates an agency-principal set of duties and finally it establishes a debtor-creditor series of interactions.

the interrelationship between bank and customer is prescribed by legal statute rather than by anything the parties themselves may say or do. because of the legal implications of the relationship, both individuals and businesses need to be aware of their duties as well as the consequences, if these duties are not performed. with everything a business must deal with in its normal pursuit of revenue--personnel decisions, inroads by the competition, keeping up with advances in technology--the last thing a firm needs to do is lose money by overlooking something in it's relationship with the one institution it needs to be able to bank on. ♪ [music playing]