A. Payment with a Debit Card

1. Establishing the Debit-Card Relationship
2. Transferring Funds with a Debit Card
3. Collection by the Payee

(a) PIN-Based Debit Cards
(b) PIN-Less Debit Cards

B. Error and Fraud in Debit-Card Transactions

1. Erroneous Transactions
2. Fraudulent Transactions

Hospicomm, Inc. v. Fleet Bank, N.A.
Heritage Bank v. Lovett

Problem Set 9

Problem Set 9

9.1. The ever forgetful Cliff Janeway (your bookseller friend, most recently from Problem 8.1) calls you one afternoon from the airport in Albuquerque, where he just got off a plane to visit some local booksellers. He is frantic because he left his checkbook on the seat next to him when he left the plane. He is pretty sure that his debit card was stuffed inside the checkbook, and he is sure that his personal identification number is written on the inside cover of the checkbook. His account has about $12,000 in it, because he planned to purchase several expensive books while in Albuquerque. He wants to know what he should do? Does he have anything to worry about? EFTA §§ 908, 909.

9.2. Joe Willie (“Bill”) Robertson is a long-time friend of yours who operates a chain of independent grocery stores in Houston, Texas. His bank has just come to him with a proposal that he start accepting debit cards under a PIN-based system at his stores. The bank tells Bill that his account will be credited with funds much more rapidly on debit-card transactions than it is on traditional checking transactions, which should bring him additional interest income on an annual basis of about $160,000. Bill also hopes that it will save him a substantial amount on bad-check expenses; he currently has to write off about 1.5 percent of all receipts that come in the form of checks, either because the checks are uncollectible or because of the litigation expenses of collecting them. Those cost savings far exceed the cost of the equipment that Bill would have to buy to implement the debit-card system, even taking account of the 15- to 35-cent discount Bill will have to pay his bank on each transaction.

Notwithstanding those possible benefits, Bill is skeptical about the bank’s proposal for two reasons. He doubts the reliability of the computer technology, and he has a policy of always worrying when his banker claims to be doing something for his benefit. Bill asks you whether he faces any significant risks of loss if he starts accepting the cards. What if people present forged cards? What if they use stolen cards? What if the system malfunctions and lets him sell things to people whose accounts are empty? Can you think of anything else that he is missing?

9.3. Archie Moon comes by this morning and insists that he has to see you without an appointment. He tells you that about a month ago he purchased a new printing press. As it happens, he is completely dissatisfied with the printing press, because it does not perform nearly as well as the salesperson promised him. Accordingly, he decided that he wanted to withhold payment. Remembering some advice you gave him several years ago, he did not write a check for the press; instead he paid for it with his bank card. When he called his bank officer last week to tell her that he did not wish to pay for the press and identified the transaction, his bank officer told Archie that Archie could not challenge the transaction because he had purchased the press with a debit card.

Archie has looked at the card in his wallet and the information from his bank and tells you that the card contains two features, a conventional credit-card feature (a MasterCard, as it happens), and a debit-card feature. He believes that the clerk at the press shop erroneously processed the transaction as a debit-card transaction rather than a credit-card transaction. Putting aside any right that Archie might have against the merchant, and assuming that Archie is right about what happened (and that he can prove it), can Archie force the bank to refund the money to him? EFTA §§ 903(11), 909, TILA § 170(a), Regulation E, 12 CFR §§ 205.2(m), 205.6(a), Regulation Z, § 226.12(c)(1).

9.4. Luck being what it is, Archie calls you a few weeks later to report that in the course of reviewing his bank statements in connection with the transaction discussed in Problem 9.3 he noticed quite a number of unauthorized transactions. The transactions go back over a year and total $3,000. {The thief did not get greedy, but took only $250 each month.} Archie remembers ordering a new card about a year ago, and has just remembered that the card was taken from him in a mugging about a year ago. Trying to put the mugging out of his mind, he entirely forgot to do anything about the lost card. For how much of the $3,000 is Archie responsible? {For purposes of the problem, assume that the theft occurred on March 1, that the bank mails a statement on the first day of each month that includes all of the previous transactions, and that the thefts occurred in a single $250 transaction on the 15th of each month.} EFTA §§ 909(a); Regulation E, § 205.6(b), 205.12(a).

9.5. Just after you get off the phone with Archie, you discover that Cliff Janeway is waiting to see you. He explains that in response to the advice that you gave him in Problem 9.1, he promptly went to his bank to report the unauthorized transactions. That visit occurred on Monday March 1, the same day that he learned that the card had been lost. Based on a review of charges that had been posted to his account at that time, he reported a total of $1,000 of unauthorized charges, all of which apparently were used to purchase beer and wine at a nearby liquor store that accepts debit cards. Assuming that the problem had been dealt with, Cliff went about his business.

Much to his surprise, ten days later on March 11, Cliff got a telecopy from one of his suppliers advising Cliff that the supplier was canceling its contract with Cliff because Cliff ’s bank had bounced the check Archie had written to that supplier on March 6. On inquiry, Cliff discovered that the bank bounced the check on the morning of March 9 because it had not yet determined how to respond to Archie’s claim that the beer-and-wine debit-card transactions were unauthorized. Does Cliff have a right to complain about the bank’s dishonor of his check? UCC § 4-402; EFTA § 908(c); Regulation E, 12 CFR § 205.11(c).

9.6. Would your answer to Problem 9.5 be different if Cliff ’s card was a MasterMoney debit card?

9.7. Jodi Kay calls you in response to a newspaper article that she just read about the staggering frequency with which criminal enterprises forge credit cards. Because she knows from prior conversations with you that her employer, CountryBank, bears most of the risk of loss from unauthorized debit-card transactions, Jodi is worried that her bank could lose a lot of money from transactions made with forged debit cards. Does the frequency of forged credit cards justify her in worrying about forged debit cards? What does she have to fear? Does it matter if she uses a PIN-based system or a PIN-less system? EFTA § 909.

Assignment Update