Check the Cheque Trivia Quiz

Answer: An order to pay

The UCC provides two broad categories of negotiable instruments: notes and drafts. Put simply, a note is a promise to pay, while a draft is an order to pay. These definitions can be found in sections 3-103 and 3-104. A common type of note is the promissory note, which is essentially a piece of paper where one promises to pay at a certain future date.

Differently, a check is a type of draft that is an order to pay, meaning that the check represents an instruction, authorized by someone, to pay someone else.

Answer: Counterfeit check

Section 3-104 of the UCC, titled "Negotiable Instruments", provides definitions that are crucial to understanding the rest of the code's provisions. Having categorized checks as "drafts", this part of the UCC further expands on the different types of drafts that can be negotiated. Remember that the key to negotiability is that instruments should resemble cash as much as possible so that they can act as an adequate cash substitute when needed. If you think about it, checks (now being phased out by electronic modes of payment) are a more efficient and safer way to transact without carrying around too much cash.

Answer: The bank's credit risk replaces the person's credit risk

All negotiable instruments are in some form a risk allocation tool. This is especially applicable to checks, since as cash substitutes, they are already lessening the risk of carrying around great amounts of paper money. A cashier's check is an instrument issued by a bank that acts both as a drawer and drawee. In essence, that means that the bank issues the check (as it does with regular personal checks) but the draft is also drawn on the bank's funds.

Because banks will almost always have more funds than individual accountholders, having the bank directly backing the check provides more security to whomever the recipient of that draft is. Therefore, by requiring payment with a cashier's check, a payee reduces the risk of the check "bouncing".

Answer: Pay to Mr. Will Smith

According to UCC section 3-109, a negotiable instrument can either be payable to bearer or to order. The "payable to order" part is relatively easy to understand: the instrument is payable to the order of an identifiable person. This means that if a check says "Pay to Mr. Will Smith", then only Mr. Will Smith is entitled to cash it.

Differently, holding a bearer instrument is very powerful because it automatically entitles whoever is in possession to payment. There are several ways to create bearer paper: using the words "pay to bearer", "bearer", "pay to cash", or "pay to the order of cash" are examples of how to create bearer paper. Similarly, an instrument that does not state a payee is also considered "payable to bearer" by the UCC.

Answer: Authorized

UCC section 4-401, aptly titled "When bank may charge customer's account", explains that banks can charge a check against their customer's account if the item is "properly payable". For an item to be "properly payable", it must be both authorized by the customer and conform to the account agreement between the customer and the bank (which is usually a long contract of adhesion, since it is rare that the customer has any chance to negotiate its terms). Per the UCC, banks are allowed to charge an account even if it would create an overdraft. Read differently, this rule permits the inference that a bank may not charge a customer's account with an item that is not properly payable (for instance, a check with a forged signature).

Answer: 6 months

Section 4-404 is perhaps one of the clearer ones in the UCC, which is quite a complicated text! In essence, a check that is more than 6 months old is considered a "stale check," and as a result, a bank is not obligated to pay a stale check. Note that the bank MAY pay a stale check, and will usually not be liable to the customer for doing so if the bank acts in good faith.

In other words, a bank may still honor a stale check, but it is not required to do so. There are a few exceptions to this rule, such as certified checks or government checks, which typically may be cashed within a year.

Answer: Wrongful dishonor

A bank may dishonor a check, but that may not necessarily expose the bank to liability. The institution may be sued, however, if it wrongfully dishonors a properly payable item. Section 4-402 of the UCC provides that banks are liable for "damages proximately caused by the wrongful dishonor of the item".

In summary, this means that the customer can sue and recover any funds that were lost as a result of the bank's mistake, even if they exceed the value of the check. Common scenarios where banks wrongfully dishonor checks include when a teller makes a clerical mistake, or when a bank improperly deducts money from an account, and that wrongful deduction causes consequential damages.

Answer: Magnetic Ink Character Recognition

If you have ever seen a check, you most likely recall seeing a long sequence of numbers at the bottom of the check. Collectively, this part of the instrument is known as the MICR line, which stands for Magnetic Ink Character Recognition. The MICR line has important pieces of information embedded into it, such as the account number, the payor bank's routing number, and the check number.

This field becomes crucial when banks process checks every day, since checks are run through machines that use the characters in the MICR line to automatically sort checks. UCC section 4-401, which deals with postdated checks, allows for undated checks or a check issued for a future date to be paid immediately, because the date is not one of the components of the MICR line and therefore the machines never know the date written on the check.

Answer: Funds Availability

When Congress passed the Expedited Funds Availability Act in 1987, one of the main concerns that lawmakers had in mind was the amount of time that banks were taking to pay checks, especially those in larger amounts. Among other provisions, some of the most important parts of Regulation CC unsurprisingly concern funds availability so depositors can get the funds as soon as possible, but banks can wait a reasonable time to ensure that the check won't "bounce".

In general, items that have very little risk (such as government-issued checks or certified checks) must be made available the next day. Ordinary checks follow a staggered model, where banks may limit the amount of funds they make available as long as the entirety of the funds is made available within 3 business days. Special rules apply to larger checks, but a bank would have the burden to show good cause why it has not made available a check's funds after 5 business days.

Answer: Check 21

The Check 21 Act, of which its full name is the Check Clearing for the 21st Century Act, is a federal law that was enacted in order to expedite the check payment process and reduce costs involved with this activity. This law allows (but does not require) banks to accept digital images of a check instead of the physical check.

As long as the check is properly indorsed, banks can use images taken by their customer and send them to other banks, therefore expediting the process of making funds available. Under Check 21, the digital image becomes a substitute check, and therefore has the exact same legal equivalence as the physical instrument.