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socrateaser, Attorney
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Experience:  Retired (mostly)
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This question relates to Division 4 of the UCC Bank Deposits

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This question relates to Division 4 of the UCC "Bank Deposits And Collections". My conpany had an ACH credit payment relationship with a local bank: direct deposit payments for payroll, vendors etc. The ACH mandates that an ACH credit is completed on the Settlement Date upon acceptance by the Receiving Bank. Settlement betwen the Originator (my co.) and the Originating Bank (my bank)is by Agreement, per the ACH Rules, which was that that we make "funds availble" to settle ACH credits. They then retularly debited our checking account with them to settle ACH credits. All aspects of thes tranactions were electronic in nature. My question is: Would the payments made by my company to our bank to settle ACH (electronic) credits (not the ACH transactions themselves) be subject to Section 4110 of the UCC "Electronic presentment"? In theory, I could have settled the ACH credits by check, but the bank simply acted on its electronic notice of the completed ACH credits, then debited our act.
Submitted: 7 years ago.
Category: Business Law
Expert:  TJ, Esq. replied 7 years ago.

Hello and thank you for allowing me the opportunity to assist you.

The electronic payments would be subject to Section 4110 of the UCC if the payments were made by either describing a check, or by giving information from a check (the word “item” in the statute basically means “check”). If an image of a check or the information from a check was not used to make the payments, then Section 4110 does not apply. The botXXXXX XXXXXne is that it depends what kind of information was used to make the electronic payments.

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Customer: replied 7 years ago.

"Item means an instrument or a promise or order to pay money handled by a bank for collection or payment." - California Commercial Code 4104(a)(9).

"Since Article 4 applies to items that may not fall within the definition of instrument, the term is defined here to include an item that is a written order to pay money, even though the item may not qualify as an instrument."--Official Comment #6, 4-104.

"Agreement for electronic presentment" means an agreement, clearing house rule, or Federal Reserve regulation or operating circular, providing that presentment of an item may be made by transmission of an image of an item or information describing the item ("presentment notice") rather than delivery of the item itself. The agreement may provide for procedures governing retention, presentment, payment, dishonor, and other matters concerning items subject to the agreement. (b) Presentment of an item pursuant to an agreement for presentment is made when the presentment notice is received. (c) If presentment is made by presentment notice, a reference to "item" or "check" in this division means the presentment notice unless the context otherwise indicates. -California Commercial Code 4110. (emphasis supplied)


The official comments of 4110 seem to specifically say that the electronic description of an "item" is, in fact an item, and that an "item" is not limited to just a conventional "check", but rather includes , a "promise or order to pay money". In my case, my Agreement with the Bank was such a promise, and the Bank routinely acted on the electronic description of an "item", as understood by UCC4 to debit our account. In summary, the bank received electronic notice of the settlement of an ACH (electronic payment), which included all the informaton included in a traditinal "check" - who paid to, amount, date etc. The y acted on this electronic notice an debited my account for the settlement amount, just as if I had written them a (paper) check for to settle the same. Another way to answer this question is: if this is not "an item of electronic presentment", then what is it? There is nothing in UCC 4 "Bank Deposits and Collections" that addresses this, and that is the only UCC section that deals with such transactions. This has to do with the fact that the Bank did not identify these paymens on our bank statements. Rather, they simply provided a lump sum not identifiable to any settlement, which induced our bookeeper to commit embezzlement, as opposed to identifying each payment (which would have prevented it). Your opinion?

Expert:  TJ, Esq. replied 7 years ago.
Hi again. I'm going to be logging off soon, so I'll open this question up to all attorneys so you get an answer ASAP.
Expert:  socrateaser replied 7 years ago.

I like to think I'm pretty good at understanding legal issues, but frankly, I cannot follow your question, for all the legal jargon you've inserted.


As a matter of law the UCC must be interpreted in conjunction with a host of Federal Reserve Regulations, and there is a lot of disagreement about what the state of the law really is, because the UCC is written in language that is exceptionally broad, and the Federal Reserve Regulations (E, CC, etc.) are written very precisely.


If you really want to have a useful dialog about this issue, may I suggest that you describe a single transaction, and then ask yourself, "How am I damaged by this transaction?"


If your answer is "I'm not," then you don't actually have a legal issue. This is not meant to be offensive, but, sometimes in the pursuit of a legal answer, we get wound up in irrelevancies, and without damages, no court will consider the issue, no matter how fascinating in may be in the abstract.


That said, if you can find some damage, and describe it, then maybe we can discuss how the various laws ma interact to either support or oppose your position.


Or, you can tell me to get lost and someone else will probably be happy to jump into your hypothetical. I just prefer real controversies.


Let me know, if you want to proceed.


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Customer: replied 7 years ago.

Here is the jist, sans legal jargon:

I suffered an embezzlement by an employee because the bank, in charging my checking account for charges to settle ACH direct deposit advances, did not identify the individual settlement items. Instead, they listed a lump sum item entitled "ACH Offset" on the bank statement, which may have comprised as many as a dozen separate settlements. The essence of Divison 4 of the UCC is that a bank must identify "items" paid on the bank statments of a customer, at minimum, by item#, date and amount. The bank can choose not to do this, but by doing so, they release their customer from their obligation to "promptly object" to unauthorized payments (one year statute of limitation) and relinquish their "safe harbor" protection here. My position was that they relinquised this (per UCC 4-406), because they did not identify the items they paid (which is why the embezzlement took place). I will be the first to admit that this is arcane stuff. If you or other experts have had enough, let me know, but I would really like a (second) opinion here.


Expert:  socrateaser replied 7 years ago.

Here's how I see it:


You suffered an embezzlement, because your employee stole from you. The bank is not liable for your employee's actions, and no amount of dancing with the UCC is going to change that fact.


The bank has a duty of ordinary care, under Cal. Com. Code 4202(a), 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.
(4) Notifying its transferor of any loss or delay in transit within a reasonable time after discovery thereof.
(b) A collecting bank exercises ordinary care under subdivision (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.
(c) Subject to paragraph (1) of subdivision (a), a bank is not liable for the insolvency, neglect, misconduct, mistake, or default of another bank or person or for loss or destruction of an item in the possession of others or in transit.


Nothing in the above suggests that by consolidating ACH transactions, that the bank violates its duty of ordinary care to the account holder.


Also, embezzlement is a criminal charge, so if you allege embezzlement, then call the police/sheriff and make a report.


The civil equivalent is "conversion," and that's what you would sue for. But, I don't see any action against the bank, because it is not reasonably foreseeable that an account holder would be injured by the consolidation of ACH transactions.

Customer: replied 7 years ago.

I've found your answer useful, but not in the way you might imagine. This case has now been going on for 6 years, amazingly enough, and now is in malpractice against the attorney(s) that failed to understand the laws relating to electronic commerce and how the UCC relates to them (he failed to retain an expert to advise him and simply "winged it", wrongly).


You are right in that the laws are interactive and complex. But where you have helped me is to verify how difficult it is to separate the two transaction types in question. The first was the actual direct deposit electronic funds transfers. The second is the settlement payments between the my company and the bank. The key issue is that, though the bank was legally permitted to lump several settlement "electronic presentment items" together and not identify them, as they did, but doing so, they relinquished their "safe harbor" under UCC 4110 which required me to object to the unauthorized settlements within one year's time (or sooner). Beyond this, there was much negligence in the ACH department of the bank, but that is another story.


The key issue, and this is where the prior attorney got it wrong, in my opinion, is that the settlment payments were transactions separate from the funds transfers they settled. The funds transfers went to the account of a consumer via the ACH and direct deposit, so they were subject to the Electronic Funds Transfer Act (Regulation E). The settlement payments, were "items of electronic presentment" and subject to the Division 4 of the UCC. My prior attorney was never able to make that distinction (because he didn't get the advice of of a professional in this area), nor was he able to even determine the proper body of EFT law.


If you'd like to add a comment, I appreciate it, but either way I'll give you a positive reference and an "Accept".


Thank you.


Expert:  socrateaser replied 7 years ago.

The law in this area is so complex as to be deemed undecipherable. Attorneys frequently pretend to understand laws when they don't, and when confronted with a judge and opposing counsel who also do not understand, the room becomes a flurry of pure BS -- with the judge hoping that the parties will settle.


You can probably make out any case you want here, because of the complexities in the law, and at some point, the bank may just cave in. But, you can never be certain.


This is the sort of case that only an appellate panel can really unravel, because they're the only ones who have multiple law clerks to spend the time to try to carve out a rational legal analysis that consolidates both federal and state law.


I think that your argument has some merit, but the counterargument is that since no one including the bank really understands the complexities of this law, it's pretty difficult to hold the bank liable for a breach of the duty of care.


You may want to look at some treatises on commercial paper. Even if they create more confusing, reference to something that looks like a legal authority, can frequently win a case -- when nothing better is available.

socrateaser, Attorney
Category: Business Law
Satisfied Customers: 39028
Experience: Retired (mostly)
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Customer: replied 7 years ago.
Thank you. I can corroborate what you say, because in this situation my two attorneys (I fired the first, and the second continued his screw ups), and NEITHER of the judges hearing the case knew the law. This permitted the bank's specialist attorney to pull a fast one on all of them, arguing the case was covered by UCC 4A, which are "wholesale wire transfers"....for a case that all parties were ageed revolved around the unauthorized direct deposit payments to the account of a consumer (which immediately would have removed the case from UCC 4A, had my attorney read the 2 sentences of UCC 4-108, which, amazingly, he did not). The result was that the bank got off the hook, since 4A absolved them of all common law causes of action, including a level of negligence that was literally "60 Minutes" material on the part of the bank (An ACH department with no training by their own admission an no security procedures, by their own admission, not to mention no authorizations on file for my company, which is why my employee was able to sweet talk them into believing she was authorized)>
Expert:  socrateaser replied 7 years ago.

It seem as though at this point your case is already over and you've lost. Maybe you should be suing your lawyer for malpractice. Tough call.