A guide to new rules of checks and checking.

Although banking is being transformed by electronic payments and paperless commerce, the old-fashioned system of payments by check is bigger than ever. And it's still growing. The future may belong to the electron, but for now and the near future North Carolina businesses and their banks remain tied to the centuries-old system of negotiable instruments.

Two years ago, the legislature rewrote the North Carolina law of checks and checking. It made a number of nuts-and-bolts changes to the system. Here are some of the new rules most likely to make a practical difference to North Carolina businesses.

The "full-payment" check

In years past, North Carolina courts have been kept busy deciding who wins when one party writes a check and labels it "full and final payment" or words to that effect, then the payee crosses out those words and negotiates the check. This is now the subject of a special statute.

Under the new law, a full-payment check is enforceable if tendered in good faith in full satisfaction of a claim that is unliquidated or subject to a bona fide dispute, if either the check or an accompanying writing contains a conspicuous statement that the check is tendered in full payment of the claim. When that happens and the payee negotiates the check, there is a final payment even if the payee marks out the offending words.

This procedure could be a source of trouble for companies engaged in sizable collections activities. Must creditors scan every check to ensure that the debtor isn't trying to slip a full-payment check through the system? The statute anticipates this problem. Corporations and other organizations may establish separate addresses to which all full-payment checks must be sent. If that's not done, "full-payment checks" can be mailed to the general address, and the new rules will apply.

The postdated check 

Under the old law, if a bank accepted a postdated check before the prescribed date, the customer might complain that the bank was not authorized to pay the check. That is, banks were liable for damages that resulted from paying a postdated check too soon.

That has been changed. Now, banks are not liable for paying postdated checks unless customers give advance notice to the bank. Banks can be expected to make an appropriate charge for this service. If no notice is given, the fact that a check is postdated will have no significance as far as the bank is concerned.

Does a bank have to read a check?

From its beginnings, the law of bank checks was structured on the assumptions that a check was a handwritten instruction from a depositor to his bank directing payment of funds and that the bank received the customer's instruction, read it, compared the signature to a file specimen and responded. Technology has long since made the old assumptions irrelevant. Today, check processing is a mass, automated operation. Rarely do banks scrutinize signatures or endorsements.

The new laws recognize this reality. Banks that process checks by automated means are not required to examine each instrument, except to the extent that commercial standards in the region require (large items may still be examined by real people). Bank customers planning their internal controls should understand these limits.

Does a customer have to sign it?

Just as banks no longer scrutinize every check presented for payment, neither do customers. The so-called "telecheck" is a phenomenon of recent years.

Telechecks are prepared by merchants and others who contact their customers by telephone (often in connection with television marketing programs). If a customer agrees to buy whatever is offered, the telemarketer asks for bank-account data and authority to withdraw funds. With that, the merchant prints a bank draft, encodes it with the depositor's account information, signs the check with a legend such as "payment authorized" and sends it off for payment.

Many bank depositors are surprised to learn that this can be done legally. The law requires only that a check must have been actually authorized by the bank customer. There is no more requirement for an original, wet-ink signature from the customer than there is for the bank to scrutinize the signature before it pays the check.

The phenomenon of telemarketing and the potential for consumer abuse from telechecks were the subject of hearings and special federal legislation in 1994. The upshot was new regulation of telemarketers, but no changes were made to the negotiable-instruments laws. To the contrary, the Federal Trade Commission characterized telechecks as an "emerging payment alternative" and "an increasingly popular payment method."

Embezzlements, dishonest employees

In the past, the law placed a burden on banks to assist in detecting and preventing check-based embezzlement schemes carried out by employees of bank customers. It was assumed that banks and their customers dealt with each other face-to-face in modest numbers of transactions and that banks could detect and stop check schemes. The new rules establish a new legal process. The liability for loss now falls on the party that could best have prevented the scheme in the exercise of due care. As a result, claims in the future will generally be decided in the courts according to the concept of comparative negligence. Where banks and their customers disagree about who should bear losses caused by dishonest employees, courts will allocate damages between them according to the court's assessment of who caused what portion of the loss.

Businesses designing internal financial systems and controls should take these changes into account. Although some changes were made to favor depositors and others favored banks, an assumption underlying the new rules is that when a company employee turns bad, the company is more likely to have been able to guard against that than the bank.

Forgery, returned checks, statements

Probably the one rule that determines the outcome of more forged-check disputes between customers and their banks than any other is the one that says that customers must examine their account statements and report check alterations and forgeries of their own signatures promptly. These rules have also been rewritten.

The key question is: How soon must a customer report an alteration or a forgery? Under the new law, this is left to account agreements between banks and their customers. If the agreement does not impose an earlier deadline, then errors must be reported within a year. Businesses with sizable checking accounts should know this term of their agreements and plan their affairs accordingly.

The new statute recognizes the growing practice of check imaging. This is when banks return digital images with account statements rather than original cancelled checks. Banks have the option of simply providing itemized account statements without images of any kind. Banks that do not return checks to their customers must maintain the ability to produce legible copies for seven years.

Official, cashier's and certified checks

Checks drawn by banks are different from checks drawn by bank customers. The new law enhances the status of bank instruments as near-cash equivalents. It recognizes that bank instruments are issued and circulate in the marketplace where payees want to eliminate the risk of nonpayment by customers. In all but exceptional circumstances, banks are obliged to honor bank instruments, and failure to pay can result in extraordinary remedies against the bank.

Now and in the future, payees on bank instruments such as official checks can be assured that the customers who procured the instruments have no right to stop payment on them and banks can refuse to pay them in only very unusual circumstances.

Conclusion

These are some of the recent amendments to the negotiable-instruments laws. They are not revolutionary, but many of them can have a practical impact on routine business affairs.

Ed Winslow

Edward C. Winslow III is a partner with Brooks, Pierce, McLendon, Humphrey & Leonard LLP in Greensboro, practicing banking and corporate law, property, sales and use taxation and commercial litigation. He graduated with high honors from the University of North Carolina School of Law, where he was in the Order of the Coif and a member of the North Carolina Law Review. A past chairman of the Business Law Section and Financial Institutions Committee of the North Carolina Bar Association, he frequently speaks and writes on banking law and the other areas he practices.