disease. Dow Corning soon became a DEFENDANT in a worldwide PRODUCT LIABILITY CLASS ACTION suit as well as at least 19,000 individual lawsuits. Citing an inability to contribute $2 billion to a $4.2 billion settlement fund and pay for the defense of thousands of individual lawsuits, Dow Corning filed for Chapter 11 bankruptcy protection in May 1995. The bankruptcy move halted new lawsuits and enabled the company to consolidate existing claims while preserving business operations. As a result of the filing, Dow Corning stalled its obligation to contribute to the settlement fund. The Dow Corning strategy was similar to that employed in the mid-1980s by A. H. Robins Company, distributor of the Dalkon Shield intrauterine device for BIRTH CONTROL. Like Dow Corning, A. H. Robins faced financial ruin owing to thousands of product LIABILITY lawsuits filed at the same time. Also like Dow Corning, A. H. Robins sought relief under Chapter 11 of the Bankruptcy Code, which allowed the company time to formulate a plan to pay the many outstanding claims. A reorga- nization plan approved by the courts involved the MERGER of A. H. Robins with American Home Products Corporation, which agreed to establish a $2.5 billion trust fund to pay outstanding product liability claims (In re A.H. Robins Co., 880 F.2d 694 [4th Cir. 1989]). On May 22, 1995, Dow Corning filed a request to stay all LITIGATION against its parent companies, Dow Chemical Company and Corning Incorporated, so that company lawyers could concentrate on the bankruptcy reorgani- zation. That move further threatened the chance of recovery for the plaintiffs seeking compensation for injury. Family Farmers and Chapter 12 In 1986, responding to an economic farm crisis in the United States, Congress designed Chapter 12 to apply to family farmers whose aggregate debts did not exceed $1.5 million. Congress passed the law to help farmers attain a financial fresh start through reorganization rather than liqui- dation. Before Chapter 12 existed, family farm- ers found it difficult to meet the prerequisites of bankruptcy reorganization under Chapters 11 or 13, often because they were unable to demonstrate sufficient income to make a reorganization plan feasible. Chapter 12 eased some requirements for qualifying farmers. Congress created Chapter 12 as an experi- ment, and scheduled its automatic repeal for 1993. Determining that additional time was necessary to evaluate the effectiveness of the law, Congress in 1993 voted to extend it until 1998. Thereafter Chapter 12 was extended several times. It expired in 2004, and the Senate voted for it to be extended. As of 2005, Chapter 12 became a permanent part of the Bankruptcy Code. Federal Bankruptcy Jurisdiction and Procedure Regardless of the type of bankrup tcy and the parties involved, basic key jurisdictional and procedural issues affect every bankruptcy case. Procedural uniformity makes bankruptcies more consistent, predictable, efficient, and fair. Judges and Trustees Pursuant to federal statute, U.S. COURTS OF APPEALS appoint bankruptcy judges to preside over bankruptcy cases (28 U.S.C. § 152). Bankruptcy judges make up a unit of the federal district courts called bankruptcy court. Actual jurisdiction over bankruptcy mat- ters lies with the district court judges, who then refer the matters to the bankruptcy court unit and to the bankruptcy judges. A trustee is appointed to conduct an impartial administration of the bankrupt’snonexempt assets, known as the bankruptcy estate. The trustee represents the bankruptcy estate, which upon the filing of bankruptcy becomes a legal entity separate from the debtor. The trustee may sue or be sued on behalf of the estate. Other trustee powers vary depending on the type of bankruptcy and can include challenging transfers of estate assets, selling or liquidating assets, objecting to the claims of creditors, and objecting to the discharge of debts. All bankruptcy cases except Chapter 11 cases require trustees, who are most commonly private citizens elected by creditors or appointed by the U.S. trustee. The Office of the U.S. Trustee, permanently established in 1986, is responsible for overseeing the administration of bankruptcy cases. The U.S. attorney general appoints a U.S. trustee to each bankruptcy region. It is the job of the U.S. trustee in some cases to appoint trustees and in all cases to ensure that trustees administer bankruptcy estates compete ntly and honestly. U.S. trustees also monitor and report debtor abuse and FRAUD, and oversee certain debtor activity such as the filing of fees and reports. GALE ENCYCLOPEDIA OF AMERICAN LAW, 3RD E DITION 498 BANKRUPTCY Procedures As of the early 2000s, debtors file the vast majority of bankruptcy cases. A bank- ruptcy filing by a debtor is known as voluntary bankruptcy. The mere filing of a voluntary PETITION for bankruptcy operates as a judicial order for relief and allows the debtor immediate protection from creditors without the necessity of a hearing or other formal adjudication. Chapters 7 and 11 of the Bankruptcy Code allow creditors the option of filing fo r relief against the debtor, also known as involuntary bankruptcy. The law requires that before a debtor can be subjected to involuntary bank- ruptcy, there must be a minimum number of creditors or a minimum amount of debt. Further protecting the debtor is the right to file a response, or answer, to the allegations in the creditors’ petition for involuntary bankruptcy. Unlike voluntary bankruptcies, which allow relief immediately upon the filing of the petition, involuntary bankruptcies do not pro- vide creditors with relief until the debtor has had an opportunity to respond and the court has determined that relief is appropriate. When the debtor timely responds to an involuntary bankruptcy filing, the court will grant relief to the creditors and formally place the debtor in bankruptcy only under certain circumstances, such as when the debtor gener- ally is failing to pay debts on time. When, after litigation, the court dismisses an involuntary bankruptcy filing, it may order the creditors to pay the debtor’s ATTORNEY fees, compensatory damages for loss of property or loss of business, or PUNITIVE DAMAGES. This possibility reduces the likelihood that creditors will file involuntary bankruptcy petitions frivolously or abusively. One of the most important rights that a debtor in bankruptcy receives is the automatic stay. The automatic stay essentially freezes all debt-collection activity, forcing creditors and other interested parties to wait for the bank- ruptcy court to resolve the case equitably and evenhandedly. The relief is automatic, taking effect as soon as a party files a bankruptcy petition. In a voluntary Chapter 7 case, the automatic stay gives the trustee time to collect and then distribute to creditors, property in the bankruptcy estate. In voluntary Cha pter 11 and Chapter 13 cases, the autom atic stay gives the debtor time to establish a plan of financial reorganization. In involuntary bankruptcy cases, the automatic stay gives the debtor time to respond to the petition. The automatic stay terminates once the bankruptcy court dismisses, discharges, or otherwise terminates the bank- ruptcy case, but a party in interest (a party with a valid claim against the bankruptcy estate) may petition the court for relief from the autom atic stay by showing GOOD CAUSE. The Bankruptcy Code allows bankruptcy judges to dismiss bankruptcy cases when certain conditions exist. The debtor, the creditor, or another interested party may ask the court to dismiss the case. Petitioners—debtors in a voluntary case or creditors in an involuntary case—may seek to withdraw their petitions. In some types of bankruptcy cases, a petitioner’s right to dismissal is absolute; other types of bankruptcy cases require a hearing and judicial approval before the case is dismissed. Particu- larly with voluntary bankruptcies, creditors, the court (or the U.S. trustee) has the power to terminate bankruptcy cases when the debtor engages in dilatory or uncooperative behavior or when the debtor substantially abuses the rights granted under bankruptcy laws. Recent Developments in Federal Bankruptcy Law Brought about by a surge in bankruptcy filings and public concern over inequities in the system, the Bankruptcy Reform Act of 1994 is one illustration of Congress ’s continuing effort to protect the rights of debtors and creditors. Consistent with Congress’s goal of promoting reorganization over liquidation, the legislation made it easier for individual debtors to qualify for Chapter 13 reorganization. Previously, indi- viduals with more than $450,000 in debt were not eligible to file under Chapter 13 and instead were forced to reorganize under the more complex and expensive Chapter 11 or to liquidate under Chapter 7. The 1994 amendments allow debtors with up to $1 million in outstanding financial obligations to reorganize under Chapter 13. The new law helps creditors by prohibiting the discharg e of credit card debts used to pay federal taxes or those exceeding $1,000 incurred within 60 days before the bankruptcy filing. In this way, the law deters debtors from shopping sprees and other abuses just before filing for bankruptcy. Creditors also benefit from new provisions that set forth additional grounds for obtaining relief from the automatic stay and require speedier adjudication of requests for relief from the stay. It looked as though the bankruptcy system would see more reform with the introduction of GALE ENCYCLOPEDIA OF AMERICAN LAW, 3RD E DITION BANKRUPTCY 499 Asampleinvoluntary petition for bankruptcy NOITITEPYRATNULOVNI.5MROF United States Bankruptcy Court _________________________________ District of _______________________________________ IN RE (Name of Debtor – If Individual: Last, First, Middle) ALL OTHER NAMES used by debtor in the last 8 years ).semanedartdna,nediam,deirramedulcnI( Last four digits of Social-Security or other Individual’s Tax-I.D. No./ Complete EIN (If more than one, state all.): ROTBEDFOSSERDDAGNILIAMROTBEDFOSSERD DATEERTS )sserddateertsmorftnereffidfI()edocpizdna,etats,ytic,teertsdna.oN( COUNTY OF RESIDENCE OR PRINCIPAL PLACE OF BUSINESS ZIP CODE CHAPTER OF BANKRUPTCY CODE UNDER WHICH PETITION IS FILED ٗ Chapter 7 ٗ Chapter 11 ٗ Debtor has been domiciled or has had a residence, principal place of business, or principal assets in the District for 180 days immediately preceding the date of this petition or for a longer part of such 180 days than in any other District. ٗ A bankruptcy case concerning debtor’s affiliate, general partner or partnership is pending in this District. ٗ Full Filing Fee attached ٗ Petitioner is a child support creditor or its representative, and the form specified in § 304(g) of the Bankruptcy Reform Act of 1994 is attached. [If a child support creditor or its representative is a petitioner, and if the petitioner files the form specified in § 304(g) of the Bankruptcy Reform Act of 1994, no fee is required.] PENDING BANKRUPTCY CASE FILED BY OR AGAINST ANY PARTNER OR AFFILIATE OF THIS DEBTOR (Report information for any additional cases on attached sheets.) ALLEGATIONS (Check applicable boxes) 1. ٗ Petitioner(s) are eligible to file this petition pursuant to 11 U.S.C. § 303 (b). 2. ٗ The debtor is a person against whom an order for relief may be entered under title 11 of the United States Code. 3.a. ٗ The debtor is generally not paying such debtor’s debts as they become due, unless such debts are the subject of a bona fide dispute as to liability or amount; or 3b. ٗ Within 120 days preceding the filing of this petition, a custodian, other than a trustee, receiver, or agent appointed or authorized to take charge of less than substantially all of the property of the debtor for the purpose of enforcing a lien against such property was appointed or took possession. Involuntary Petition for Bankruptcy INVOLUNTARY PETITION B5 (Official Form 5) (12/07) COURT USE ONLY LOCATION OF PRINCIPAL ASSETS OF BUSINESS DEBTOR (If different from previously listed addresses) INFORMATION REGARDING DEBTOR (Check applicable boxes) VENUE FILING FEE (Check one box) Name of Debtor Relationship Case Number District Date Judge [continued] Type of Debtor (Form of Organization) ٗ Individual (Includes Joint Debtor) ٗ Corporation (Includes LLC and LLP) ٗ Partnership ٗ Other (If debtor is not one of the above entities, check this box and state type of entity below.) _________________________________ Nature of Business (Check one box.) ٗ Health Care Business ٗ Single Asset Real Estate as defined in 11 U.S.C. § 101(51)(B) ٗ Railroad ٗ Stockbroker ٗ Commodity Broker ٗ Clearing Bank ٗ Other Nature of Debts (Check one box.) Petitioners believe: ٗ Debts are primarily consumer debts ٗ Debts are primarily business debts GALE ENCYCLOPEDIA OF AMERICAN LAW, 3RD E DITION 500 BANKRUPTCY Name of Debtor _______________________________________ Case No. ____________________________________________ (court use only) TRANSFER OF CLAIM ٗ Check this box if there has been a transfer of any claim against the debtor by or to any petitioner. Attach all documents evidencing the transfer and any statements that are required under Bankruptcy Rule 1003(a). REQUEST FOR RELIEF Petitioner(s) request that an order for relief be entered against the debtor under the chapter of title 11, United States Code, specified in this petition. Petitioner(s) declare under penalty of perjury that the foregoing is true and correct according to the best of their knowledge, information, and belief. X__________________________________________________ X_________________________________________________ Signature of Petitioner or Representative (State title) Signature of Attorney Date ___________________________________________________ __________________________________________________ Name of Petitioner Date Signed Name of Attorney Firm (If any) __________________________________________________ Name & Mailing Address Address of Individual ____________________________ __________________________________________________ Signing in Representative Telephone No. Capacity ____________________________ X__________________________________________________ X ________________________________________________ Signature of Petitioner or Representative (State title) Signature of Attorney Date ________________________________________________ __________________________________________________ Name of Petitioner Date Signed Name of Attorney Firm (If any) __________________________________________________ Name & Mailing Address Address of Individual ____________________________ __________________________________________________ Signing in Representative Telephone No. Capacity ____________________________ X__________________________________________________ X ________________________________________________ Signature of Petitioner or Representative (State title) Signature of Attorney Date ___________________________________________________ __________________________________________________ Name of Petitioner Date Signed Name of Attorney Firm (If any) __________________________________________________ Name & Mailing Address Address of Individual _______________________________ __________________________________________________ Signing in Representative Telephone No. Capacity _______________________________ PETITIONING CREDITORS Name and Address of Petitioner Nature of Claim Amount of Claim Name and Address of Petitioner Nature of Claim Amount of Claim Name and Address of Petitioner Nature of Claim Amount of Claim Note: If there are more than three petitioners, attach additional sheets with the statement under Total Amount of penalty of perjury, each petitioner’s signature under the statement and the name of attorney Petitioners’ Claims and petitioning creditor information in the format above. Involuntary Petition for Bankruptcy B5 (Official Form 5) (12/07) ______continuation sheets attached A sample involuntary petition for bankruptcy (continued) ILLUSTRATION BY GGS CREATIVE RESOURCES. REPRODUCED BY PERMISSION OF GALE, A PART OF CENGAGE LEARNING. GALE ENCYCLOPEDIA OF AMERICAN LAW, 3 RD E DITION BANKRUPTCY 501 the Bankruptcy Reform Act of 1998. The act was a response to a report issued by the National Bankruptcy Review Commission, which recommended that the existing code be refined in order to provide incentives to debtors to file Chapter 13 reorganization and to increase debt repayment. The report was issued in response to concern that debtors were taking advantage of the bankruptcy system, evidenced by the fact that a record number of consumers filed for bankruptcy during a time of economic prosperity. Between 1997 and 2005, Congress consid- ered several bankruptcy reform bills. In several instances, bills passed the House of Representa- tives but failed in the Senate. With Republicans in control of Congress and President GEORGE W. BUSH in office, Congress finally passed the Bankruptcy Abuse and Prevention Act of 2005. The main concern of the 2005 legislation was to make it more difficult for debtors to file for bankruptcy. The law had its desired effect. In calendar year 2003, a total of 1,625,208 individuals filed for bankruptcy, and 1,156,274 of these were Chapter 7 filings. In 2005, the year that the bankruptcy reform law was passed, a total of 2,039,214 non-businesses filed for bankruptcy. Of these, 1,631,011 were Chapter 7 bankruptcies. By 2007, two years after the bankruptcy law was passed, only 822,590 individuals filed for bankruptcy, with 500,613 filing under Chapter 7 and 321,359 filing under Chapter 13. However, bankruptcy rates increased in 2008 with the weakened economy. Other provisions in the bankruptcy reform law included the addition of longer waiting periods between filings; requirements related to credit counseling before filing; expansion of exceptions to discharge; and limitations on the use of homestead exemptions. While Congress was considering bankruptcy reform, the U.S. Supreme Court handed down two decisions that further defined the limits of bankruptcy law. In Cohen v. De La Cruz 523 U.S. 213, 118 S. Ct. 1212, 140 L. Ed. 2d 341, a unanimous Court held that where a debtor committed actual fraud and was assessed punitive damages, the debt would not be dischargeable because the Bankruptcy Code’s prohibition against the discharge of fraudulently incurred debts is not restricted to the value of the money, property, or services received by the debtor. In Young v. U.S., 535 U.S. 43, 122 S. Ct. 1036, 152 L. Ed. 2d 79, the Court held that the three-year lookback period allowing IRS to collect taxes against a debtor was tolled during pendency of a debtor’s earlier Chapter 13 proceeding. Apart from developments in the law, bankruptcy was much in the news during the opening years of the twenty-first century as an economic downturn forced many prominent U.S. companies into Chapter 11 bankruptcy. In 2001, the energy-trading firm Enron filed for the biggest corporate bankruptcy in history, with $64 billion in assets. Less than a year later, TELECOMMUNICATIONS firm WorldCom topped that record when it listed $104 billion in assets in its bankruptcy filing. Other prominent U.S. companies filing for bankruptcy included re- tailer K-Mart, financial services firm Conseco, and United Airlines PARENT COMPANY UAL. The economic downturn in 2008 and 2009 also led to a new wave of high-profile bankruptcies. Probably the most stunning were bankruptcies filed in 2009 by Chrysler and General Motors, two of the so-called Big Three U.S. automakers. FURTHER READINGS Anderson, Nick. 2003. “House Passes Bankruptcy Reform Bill for the 7th Time.” Los Angeles Times (March 20). Hubler, James T. 2002. “The End Justifies the Means: The Legal, Social, and Economic Justifications for Means Testing under the Bankruptcy Reform Act of 2001.” American University Law Review (October). Jewell, Mark. 2002. “Conseco Bankruptcy Ranks Third in U.S.” Associated Press (December 19). Klee, Kenneth N. 2009. Bankruptcy and the Supreme Court. Newark, N.J.: LexisNexis. Kuney, George W. 2008 Mastering Bankruptcy. Durham, N.C.: Carolina Academic Press. CROSS REFERENCES Debt; Debtor; Petition in Bankruptcy BANKS AND BANKING Banks are authorized financial institutions and banking is the business in which they engage, which encompasses the receipt of money for deposit, to be payable according to the terms of the account; collection of checks presented for payment; issuance of loans to individuals who meet certain requirements; discount of commercial paper; and other money-related functions. Banks have existed since the founding of the United States, and their operation has been shaped and refined by major events in U.S. GALE ENCYCLOPEDIA OF AMERICAN LAW, 3RD E DITION 502 BANKS AND BANKING history. Banking was a rocky and fickle enter- prise, with periods of economic fortune and peril, between the 1830s and the early twentieth century. In the late nineteenth century, the restrained money policies of the U.S. TREASURY DEPARTMENT , namely an unwillingness to issue more bank notes to eastern-based national banks, contributed to a scarcity of cash in many Midwestern states. A few states went so far as to charter local banks and authorize them to print their own money. The collateral or capital that backed these local banks was often of only nominal value. By the 1890s, there was a full- fledged bank panic. Depositors rushed to banks to withdraw their money, only to find in many cases that the banks did not have the money on hand. This experience prompted insurance reforms that developed during the next fifty years. The lack of a regulated money supply led to the passage of the Federal Reserve Act in 1913 (in scattered sections of 12 U.S.C.A.), creating the Federal Reserve Bank System. Even as the banks sometimes suffered, there were stories of economic gain and wealth made through their operation. Industrial enterprises were sweeping the country, and their need for financing was seized upon by men such as J. P. Morgan (1837–1913). Morgan made his fortune as a banker and financier of various projects. His House of Morgan was one of the most powerful financial institutions in the world. Morgan’s holdings and interests included railroads, coal, steel, and steamships. His involvement in what we now consider commercial banking and SECURITIES would later raise concern over the appropriateness of mixing these two industries, especially after the STOCK MARKET crash of 1929 and the ensuing instability in banking. Between 1929 and 1933, thousands of banks failed. In 1933 President FRANKLIN D. ROOSEVELT temporarily closed all U.S. banks because of a widespread lack of confidence in the institutions. These events played a major role in the Great Depression and in the future reform of banking. Electronic banking has replaced many traditional banking methods. AP IMAGES GALE ENCYCLOPEDIA OF AMERICAN LAW, 3 RD E DITION BANKS AND BANKING 503 In 1933 Congress held hearings on the commingling of the banking and securities industries. Out of these hearings, a reform act that strictly separated commercial banking from securities banking was created (12 U.S.C.A. §§ 347a, 347b, 412). The act became known as the GLASS-STEAGALL ACT, after the two senators who sponsored it, CARTER GLASS (D-VA) and Henry B. Steagall (D-AL). The Glass-Steagall Act also created the FEDERAL DEPOSIT INSURANCE CORPORA- TION (FDIC), which insures money deposited at member banks against loss. Since its passage, Glass-Steagall has been the law of the land, with minor revision on several occasions. Despite the Glass-Steagall reforms, periods of instability have continued to recur in the banking industry. Between 1982 and 1987, about 600 banks failed in the United States. More than one- third of the closures occurred in Texas. Many of the failed banks closed permanently, with their customers’ deposits compensated by the FDIC; others were taken over by the FDIC and reorganized and eventually reopened. In 1999 Congress addressed concerns of many involved in the financial industries with the passage of the Financial Services Moderni- zation Act, Pub. L. No. 106-102, 113 Stat. 1338, also known as the Gramm-Leach Act. The act rewrote the banking laws from the 1930s and 1950s, including the Glass-Steagall Act, which had prevented commercial banks, securities firms, and insurance companies from merging their businesses. Under the act, banks, brokers, and insurance companies are able to combine and share consumer transaction records as well as other sensitive records. The act went into effect on November 12, 2000, though several of its provisions did not take effect until July 1, Between 1929 and 1933, thousands of banks failed. In this image, a crowd gathers before the United States National Bank in Los Angeles one day after its closing on August 23, 1931. AP IMAGES GALE ENCYCLOPEDIA OF AMERICAN LAW, 3 RD E DITION 504 BANKS AND BANKING 2001. Seven federal agencies were responsible for rewriting regulations that implemented the new law. Gramm-Leach goes beyond the repeal of the Glass-Steagall Act and similar laws. One section streamline s the supervision of banks. It directs the FEDERAL RESERVE BOARD to accept existing reports that a bank has filed with other federal and state regulators, thus reducing time and expenses for the bank. Moreover, the Federal Reserve Board may examinetheinsuranceandbrokerage subsidiaries of a bank only if r easonable cause exists to believe the subsidiary is engaged in activities posing a material risk to bank de positors. The new law contains many oth er similar provisions that restrict the ability of the Federal Reserve Board to regulate the new type of bank that the law contemplates. The Gramm-Leach Act also breaks down barriers of foreign banks wishing to operate in the United States by allowing foreign banks to purchase U.S. banks. Since the mid-1980s, periods of instability have recurred in the banking industry. Begin- ning in 2006, the decline in U.S. housing prices and cor responding subprime MORTGAGE crisis were believed by many to be the cause of banks suffering major adverse consequences, includ- ing many bank failures. Government-issued bailout funds were provided to banks in conjunction with other measures designed to stimulate the weak economy and restore liquidity to the financial markets. As of May 2009, many referred to the period of economic instability as the worst financial crisis since the Great Depression. Categories of Banks There are two main categories of banks: federally chartered national banks and state- chartered banks. A national bank is incorporated and oper- ates under the laws of the United States, subject to the approval and oversight of the comptroller of the currency, an office established as a part of the Treasury Department in 1863 by the National Bank Act (12 U.S.C.A. §§ 21, 24, 38, 105, 121, 141 note). All national banks are required to become members of the Federal Reserve System. The Federal Reserve, established in 1913, is a central bank with 12 regional district banks in the United States. The Federal Reserve creates and implements national fiscal policies affecting nearly every facet of banking. The system assists in the transfer of funds, handles government deposits and debt issues, and regulates member banks to achieve uniform commercial proce- dure. The Federal Reserve regulates the avail- ability and cost of credit through the buying and selling of securities, mainly government bonds. It also issues Federal Reserve notes, which account for almost all the paper money in the United States. A board of governors oversees the work of the Federal Reserve. This board was approved in 1935 and replaced the Federal Reserve Board. The seven-member board of governors is appointed to 14-year terms by the PRESIDENT OF THE UNITED STATES with Senate approval. Each district reserve bank has a board of directors with nine members. Three nonban- kers and three bankers are elected to each board of dire ctors by the member bank, and three directors are named by the Federal Reserve Board of Governors. A member bank must keep a reserve (a specific amount of funds) deposited with one of the district reserve banks. The reserve bank then issues Federal Reserve notes to the member bank or credits its account. Both methods provide stability in meeting customers’ needs in the member bank. One major benefit of belonging to the Federal Reserve System is that deposits in member banks are automatically insured by the FDIC. The FDIC protects each account in a member bank for up to $100,000 should the bank become insolvent. A state-chartered bank is granted authority by the state in which it operates and is under the regulatio n of an appropriate state agency. Many state-chartered banks also choose to belong to the Federal Reserve System, thus ensuring coverage by the FDIC. Banks that are not members of the Federal Reserve System can still be protected by the FDIC if they can meet certain requirements and if they submit an application. The Interstate Banking and Branching Efficiency Act of 1994 (in scattered sections of 12 U.S.C.A.) elevated banking from a regional enterprise to a more national pursuit. Previous- ly, a nationally chartered bank had to obtain a charter and set up a separate institution in each state where it wished to do business; the 1994 GALE ENCYCLOPEDIA OF AMERICAN LAW, 3RD E DITION BANKS AND BANKING 505 legislation removed this requirement. Also, throughout the 1980s and the early 1990s, a number of states passed laws that allowed for RECIPROCAL interstate banking. This trend resulted in a patchwork of regional compacts between various states, most heavily concen- trated in New England. Types of Banks The term bank is generally used to refer to commercial banks; however, it can also be used to refer to savings institutions, savings and loan associations, and building and loan associations. A commercial bank is authorized to receive demand deposits (payable on order) and time deposits (payable on a specific date), lend money, provide services for fiduciary funds, issue letters of credit, and accept and pay drafts. A commercial bank not only serves its deposi- tors but also can offer installment loans, commercial long-term loans, and credit cards. A savings bank does not offer as wide a range of services. Its primary goal is to serve its depositors through providing loans for pur- poses such as home improvement, mortgages, and education. By law, a savings bank can offer a higher interest rate to its depositors than can a commercial bank. A SAVINGS AND LOAN ASSOCIATION (S&L) is similar to a savings bank in offering savings accounts. It traditionally restricts the loans it makes to housing-related purposes, including mortgages, home improvement, and construction, although some S&Ls have entered into educational loans for their customers. An S&L can be granted its charter by either a state or the federal government; in the case of a federal charter, the organization is known as a federal savings and loan. Federally chartered S&Ls have their own system, which func- tions in a manner similar to that of the Federal Reserve System, called the Federal Home Loan Banks System. Like the Federal Reserve System, the Federal Home Loan Banks System provides an insurance program of up to $100,000 for each a ccount; this program i s called the Fede ral Savings and Loan Insurance Corporation (FSLIC). The Federal Home Loan Banks System also provides membership options for state-chartered S&Ls and an option for just FSLIC coverage f or S&Ls that can satisfy certain requirements. A BUILDING AND LOAN ASSOCIATION is a special type of S&L that restricts its lending to home mortgages. The distinctions between these financial organizations has become narrower as federal legislation has expanded the range of services that can be offered by each type of institution. Bank Financial Structure Banks are usually incorporated and, like any corporation, must be backed by a certain amount of capital (money or other assets). Banking laws specify that banks must maintain a certain minimum amount of capital. Banks acquire capital by selling CAPITAL STOCK to shareholders. The money that shareholders pay for the capital stock becomes the working capital of the bank. The working capital is put in a trust fund to protect the bank’s depositors. In turn, shareholders receive certificates that prove their ownership of stock in the bank. The working capital of a bank cannot be diminished. Dividends to shareholders must be paid only from the profits or surplus of the bank. Shareholders have their legal relationship with a bank defined by the terms outlined in the contract to purchase capital stock. With the investment in a bank comes certain rights such as the right to inspect the bank’s books and records and the right to vote at shareholders’ meetings. Shareholders may not personally sue a bank, but they can, under appropriate circumstances, bring a stockholder’s derivative suit on behalf of the bank (sue a THIRD PARTY for injury done to the bank when the bank fails to sue on its own). Shareholders also are not usually personally liable for the debts and acts of a bank , because the corporate form limits their LIABILITY. However, if shareholders have con- sented to or accepted benefits of unauthorized banking practices or illegal acts of the board of directors, they are not immune from liability. Bank Officials The election and term of office of a bank’s board of dire ctors are governed by statute or by the charter of the bank. The liabilities and duties of bank officials are prescribed by statute, charter, bylaws, customary banking practices, and employment contracts. Directors and bank officers are both responsible for the conduct and honorable management of a bank’s affairs, although their duties and liabilities are not the same. Officers and directors are liable to a bank for losses it incurs as a result of their illegal, fraudulent, or wrongful conduct. Liability is GALE ENCYCLOPEDIA OF AMERICAN LAW, 3RD E DITION 506 BANKS AND BANKING imposed for embezzlement, illegal use of funds or other assets, false representation of the bank’s condition made to deceive others, or fraudulent purchases or loans. The failure to exercise reasonable care in the execution of their duties also renders officials liable if such failure brings about bank losses. If such losses result from an error in judgment, liability will not be imposed so long as the officials acted in GOOD FAITH with reasonable skill and care. Officers and directors will not be held liable for the acts of their employees if they exercise caution in hiring qualified personnel and supervise them carefully. Civil actions against bank officials are maintained in the form of stockholders’ derivative suits. Criminal statutes determine the liability of officers and directors for illegal acts against their bank. Bank Duties The powers and duties of a bank are determined by the terms of its charter and the legislation under which it was created (either federal or state regulations). A bank can enact reasonable rules and regulations for the efficient operation of its business through its governing board. Deposits A deposit is a sum of money placed in an account to be held by a bank for the depositor. A customer can deposit money by cash or by a check or other document that represents cash. Deposits are how banks survive. The deposited money establishes a debtor and creditor relation- ship between the bank and the depositor. Most often, the bank pays the depositing customer interest for its use of the money until the customer withdraws the funds. The bank has the right to impose rules and regulations manag- ing the deposit, such as restrictions governing the rate of interest the deposited money will earn and guidelines for its withdrawal. Collections One primary function of a bank is to make collections of items such as checks and drafts deposited by customers. The bank acts as an agent for the customer. Collection occurs when the drawee bank (the bank ordered by the check to make payment) takes funds from the account of the drawer (its customer who has written the check) and presents it to the collecting bank. Checks A check is a written order made by a drawer to her or his bank to pay a designated person or organization (the payee) the amount specified on the check. Payment pursuant to the check must be made in strict compliance with its terms. The drawer’s account must be reduced by the amount specified on the check. A check is a demand instrument, which means it must be paid by the drawee bank on the demand of, or when presented by, the payee or the agent of the payee, the collecting bank. A payee usually receives payment of a check upon endorsing it and presenting it to a bank in which the payee has an account. The bank can require the payee to present identification to prove a relationship with the bank, before cashing the check. It has no obligation to cash a check for a person who is not a depositor, since it can refuse payment to a stranger. How- ever, it must honor (pay) a check if the payee has sufficient funds on deposit with the bank to cover the amount paid if the drawer of the check does not have ade quate funds in his or her account to pay it. A CERTIFIED CHECK is guaranteed by a bank, at the request of its drawer or endorser, to be cashable by the payee or succeeding holder. A bank is not obligated to certify a check, but it usually will do so for a customer who has sufficient funds to pay it, in exchange for a nominal fee. A certified check is considered the same as cash because any bank must honor it when the payee presents it for payment. A drawer can revoke a check unless it has been certified or has been paid to the payee. The notice of REVOCATION is often called a STOP PAYMENT ORDER. A check is automatically revoked if the drawer dies before it is paid or certified, since the drawer’s bank has no authority to complete the transaction under that circumstance. However, if the drawer’s bank does not receive notice of the drawer’s death, it is not held liable for the payment or certification of t hat drawer’schecks. Upon request, a bank must return to the drawer all the checks it has paid, so that the drawer can inspect the canceled checks to ensure that no forgeries or errors have occurred, in adjusting the balance of her or his checking account. This review of checks is usually completed through the monthly statement. If the drawer finds an error or forgery, it i s her or his obligation to notify the bank promptly or to accept full responsibility for whatever loss has been incurred. Bank Liabilities A bank has a duty to know a customer’s signature and therefore is generally liable for charging the customer ’s account with a forged check. A bank can recover the loss from the forger but not from the person who in good faith and without knowledge of the crime GALE ENCYCLOPEDIA OF AMERICAN LAW, 3RD E DITION BANKS AND BANKING 507 . bankruptcy, and 1, 156,274 of these were Chapter 7 filings. In 2005, the year that the bankruptcy reform law was passed, a total of 2,039, 214 non-businesses filed for bankruptcy. Of these, 1, 6 31, 011 were. the 19 94 GALE ENCYCLOPEDIA OF AMERICAN LAW, 3RD E DITION BANKS AND BANKING 505 legislation removed this requirement. Also, throughout the 19 80s and the early 19 90s, a number of states passed laws. the National Bank Act (12 U.S.C.A. §§ 21, 24, 38, 10 5, 12 1, 14 1 note). All national banks are required to become members of the Federal Reserve System. The Federal Reserve, established in 19 13, is a central bank