Relationship Between Banks and Its Customers

In the California Commercial Code, Division 4, Chapter 4, there are statutory provisions related to the relationship between a payor bank and its customers.

Section 4401 authorizes a bank to charge against the account of a customer an item that is properly payable from that account even though the charge creates an overdraft. An item is properly payable if it is authorized by the customer and is in accordance with any agreement between the customer and bank. However, 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.

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. A bank that in good faith makes payment to a holder may charge the indicated account of its customer according to either the original terms of the altered item, or the terms of the completed item.

Section 4402 provides that a payor bank wrongfully dishonors an item if it dishonors an item that is properly payable, but a bank may dishonor an item that would create an overdraft unless it has agreed to pay the overdraft. And, a payor bank is liable to its customer for damages proximately caused by the wrongful dishonor of an item. Liability is limited to actual damages proved and may include damages for an arrest or prosecution of the customer or other consequential damages.

Section 4403 states that a customer or any person authorized to draw on the account if there is more than one person may stop payment of any item drawn on the customer’s account or close the account by an order to the bank describing the item or account with reasonable certainty received at a time and in a manner that affords the bank a reasonable opportunity to act on it before any action by the bank with respect to the item described.

A stop-payment order is effective for six months, but it lapses after 14 calendar days if the original order was oral and was not confirmed in writing within that period. A stop-payment order may be renewed for additional six-month periods by a writing given to the bank within a period during which the stop-payment order is effective.

Section 4404 provides that a bank is under no obligation to a customer having a checking account to pay a check, other than a certified check, which is presented more than six months after its date, but it may charge its customer’s account for a payment made thereafter in good faith.

Section 4405 states that a payor or collecting bank’s authority to accept, pay, or collect an item or to account for proceeds of its collection, if otherwise effective, is not rendered ineffective by incompetence of a customer of either bank existing at the time the item is issued or its collection is undertaken if the bank does not know of an adjudication of incompetence.

Section 4406 specifies that a bank that sends or makes available to a customer a statement of account showing payment of items for the account is required to either return or make available to the customer the items paid or provide information in the statement of account sufficient to allow the customer to reasonably identify the items paid. 

If the items are not returned to the customer, the person retaining the items must either retain the items or, if the items are destroyed, maintain the capacity to furnish legible copies of the items until the expiration of seven years after receipt of the items. A customer may request an item from the bank that paid the item, and that bank is required to provide in a reasonable time either the item or, if the item has been destroyed or is not otherwise obtainable, a legible copy of the item.

If the bank proves that the customer failed to comply with the duties imposed on the customer, then the customer is precluded from asserting any of the specified claims against the bank. If the customer proves that the bank failed to exercise ordinary care in paying the item and that the failure contributed to loss, the loss is allocated between the customer precluded and the bank asserting the preclusion according to the extent to which the failure of the customer to comply and the failure of the bank to exercise ordinary care contributed to the loss.

Section 4407 provides that, if a payor bank has paid an item over the order of the drawer or maker to stop payment, or after an account has been closed, or otherwise under circumstances giving a basis for objection by the drawer or maker, to prevent unjust enrichment and only to the extent necessary to prevent loss to the bank by reason of its payment of the item, the payor bank is subrogated to the rights of all of the three specified.