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4000 - Advisory Opinions

Treatment of Electronic Debits Arising from Use of Automated Teller Machine Network and/or Debit Card (Point of Sale) Network When a Participating Bank Closes Prior to Final Settlement


July 7, 1987

Pamela E. F. LeCren, Senior Attorney

The FDIC's Legal Division has studied the questions put to us on behalf of your client concerning the manner in which the FDIC would treat electronic debits arising in connection with the use of an automated teller machine ("ATM") network and/or a debit card (point of sale) network in the event one of the banks in the network is closed prior to final settlement as between the banks. We must advise you at the outset that it is extremely difficult to give you a definitive answer in a vacuum, i.e., without specfic facts as to settlement procedures, etc. and without review of the particular contracts under which the ATM or debit card network operates. In addition to these variables, the state in which any system operates may have enacted an electronic funds transfer statute which could affect the outcome. Factors such as the unauthorized use of an ATM or debit card or an attempted cancellation of a transaction could further cloud the resolution of the issue. There is some general information, however, that we can convey to you. Please keep in mind that the receiver's treatment of electronically recorded debits arising from an ATM or debt card network could conceivably vary depending upon the contracts, state law, the nature of the particular system, (i.e., is it "on line" or does it generate paper drafts) and other relevant circumstances. The following information is therefore intended to only provide general guidance.

Generally speaking, as receiver of a closed FDIC insured bank, the FDIC typically returns checks to the forwarding bank that are presented for payment after the payor bank is closed. Checks received by the payor bank prior to closing which the bank is obligated to pay will be processed by the receiver. Whether the bank is obligated to pay a check presented for payment is governed by Article 4 of the Uniform Commercial Code ("UCC"). If final payment for the purposes of Article 4 has occurred, the bank is obligated to pay out on the check and the receiver will debit the appropriate account. The owner of the check is recognized as the depositor and the forwarding bank is recognized as the owner's agent for the presentation of the claim and receipt of the insurance payment.

Determining when a bank is obligated to pay out on an account pursuant to an electronically recorded debit is not a simple question. Complicating the issue is the fact that Article 4 of the UCC does not cover electronic funds transactions. Evra Corporation v. Swiss Bank Corporation, 673 F.2d 951 (7th Cir. 1982); Delbrueck and Co. v. Manufacturers Hanover Trust Company, 609 F.2d 1047 (2nd Cir. 1979); Walker v. Texas Commerce Bank, N.A., 635 F. Supp. 678 (S.D. Texas 1986). The parties to any given contract may determine, however, that the ATM or debit card transactions in question will be governed by Article 4 of the UCC by analogy. Additionally, some states in adopting the UCC modified Article 4 so as to specifically cover electronic funds transactions. In either instance, Article 4 would govern the issue of when final payment has occurred and thus when a bank has become obligated to pay out from an account pursuant to an electronic instruction.

Section 4-213 of the UCC provides that "final payment" has occurred whenever one of the following occurs. The bank has:

(1)  paid the item in cash;

(2)  settled for the item without reserving a right to revoke the settlement and without having such right under statute, clearing house rule or agreement;

(3)  completed the process of posting the item to the indicated account of the drawer, maker or other person to be charged therewith, or;

(4)  made a provisional settlement for the item and failed to revoke the settlement in the time and manner permitted by statute, clearing house rule or agreement.

Section 4-109 of the UCC defines the "process of posting" as the usual procedures followed by a payor bank in determining to pay an item and in recording the payment. The section provides that one or more of the following constitutes the process of posting:

(1)  verification of any signature;

(2)  ascertaining that sufficient funds are available;

(3)  affixing a "paid" or other stamp;

(4)  entering a charge or entry to a customer's account; or

(5)  correcting or reversing an entry or erroneous action with respect to the item.

When an FDIC insured bank fails which is a member of an ATM network that is not "on line", it is the practice of the FDIC's liquidators to obtain the magnetic tape which reflects the "memo post items" for the day and run the tape to the accounts. The correspondent bank which clears for the network is contacted and authorized to settle the accounts between the banks in the network. In brief, under present practice, electronically generated debit instructions are treated as finally paid when initially entered onto the magnetic tape in conjunction with the customer's use of the ATM card, i.e., the process of posting is treated as complete as a charge has been entered to the customer's account.

Inasmuch as it has been the practice of the FDIC as receiver in closing out the books of a failed bank to process (i.e., honor) electornic debt instructions provided that the instructions were entered onto a magnetic tape prior to the closing of the bank, we need not address the question of who, if anyone, is the successor in interest for the purposes of federal deposit insurance to the funds in the account against which an electronic debit has been recorded.

In view of the above, the FDIC is prepared to continue its present practice of treating the entry of an electronic debit instruction onto a magnetic tape as final payment in the absence of: (1) a bank or network representative or some other individual coming forward and establishing that the agreement of the parties requires otherwise, (2) state law to the contrary, or (3) some other complication such as an alleged unauthorized use of an ATM or debit card.


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