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Review chapters attached as reference material. In no more than 3-4 paragraphs address the following scenario:
You are an owner of a small food market and provide a check-cashing service to your customers. One of your customers, Jack, cashed a check at the store for $200. You make a daily deposit of checks and cash to your bank, and in the process properly indorsed Jack’s check and included it in your deposit.
Your deposit reached your bank, First State, and Jack’s check was credited to your bank account. The check then went into the clearing process and was presented for payment at Jack’s bank, Third State. Unfortunately, Jack had insufficient funds in his bank account and the check was dishonored and stamped as not paid due to insufficient funds. It was then sent back to your bank, First State, who deducted the $200 from your bank account and sent the dishonored check to you.
A. Who has primary liability for payment of the check?
B. Who has/had secondary liability and when does it come into play? (Note: There were two parties who become secondarily liable as the check moved through the system.)
C. Who do you ultimately go to recover the $200 you gave Jack for his check?
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Chapter 16
Liability and Discharge
L E A R N I N G O B J E C T I V E S
After reading this chapter, you should understand the following:
1. The liability of an agent who signs commercial paper
2. What contract liability is imposed when a person signs commercial paper
3. What warranty liability is imposed upon a transferor
4. What happens if there is payment or acceptance by mistake
5. How parties are discharged from liability on commercial paper
In Chapter 13 “Nature and Form of Commercial Paper”, Chapter 14 “Negotiation of Commercial Paper”,
and Chapter 15 “Holder in Due Course and Defenses”, we focused on the methods and consequences of
negotiating commercial paper when all the proper steps are followed. For example, a maker gives a
negotiable note to a payee, who properly negotiates the paper to a third-party holder in due course. As a
result, this third party is entitled to collect from the maker, unless the latter has a real defense.
In this chapter, we begin by examining a question especially important to management: personal liability
for signing company notes and checks. Then we look at the two general types of liability—contract and
warranty—introduced in Chapter 14 “Negotiation of Commercial Paper”. We conclude the chapter by
reviewing the ways in which parties are discharged from liability.
Chapter 16 from Advanced Business Law and the Legal Environment was adapted
by The Saylor Foundation under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0
license without attribution as requested by the work’s original creator or licensee. © 2014, The Saylor Foundation.
http://www.saylor.org/site/textbooks/Advanced%20Business%20Law%20and%20the%20Legal%20Environment
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16.1 Liability Imposed by Signature: Agents,
Authorized and Unauthorized
L E A R N I N G O B J E C T I V E S
1. Recognize what a signature is under Article 3 of the Uniform Commercial
Code.
2. Understand how a person’s signature on an instrument affects liability if the
person is an agent, or a purported agent, for another.
The liability of an agent who signs commercial paper is one of the most frequently litigated issues in this
area of law. For example, Igor is an agent (treasurer) of Frank N. Stein, Inc. Igor signs a note showing that
the corporation has borrowed $50,000 from First Bank. The company later becomes bankrupt. The
question: Is Igor personally liable on the note? The unhappy treasurer might be sued by the bank—the
immediate party with whom he dealt—or by a third party to whom the note was transferred (see Figure
16.1 “Signature by Representative”).
Figure 16.1 Signature by Representative
There are two possibilities regarding an agent who signs commercial paper: the agent was authorized to
do so, or the agent was not authorized to do so. First, though, what is a signature?
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A “Signature” under the Uniform Commercial Code
Section 3-401 of the Uniform Commercial Code (UCC) provides fairly straightforwardly that “a signature
can be made (i) manually or by means of a device or machine, and (ii) by the use of any name, including
any trade or assumed name, or by any word, mark, or symbol executed or adopted by a person with the
present intention to authenticate a writing.”
Liability of an Agent Who Has Authority to Sign
Agents often sign instruments on behalf of their principals, and—of course—because a corporation’s
existence is a legal fiction (you can’t go up and shake hands with General Motors), corporations can only
act through their agents.
The General Rule
Section 3-402(a) of the UCC provides that a person acting (or purporting to act) as an agent who signs an
instrument binds the principal to the same extent that the principal would be bound if the signature were
on a simple contract. The drafters of the UCC here punt to the common law of agency: if, under agency
law, the principal would be bound by the act of the agent, the signature is the authorized signature of the
principal. And the general rule in agency law is that the agent is not liable if he signs his own name and
makes clear he is doing so as an agent. In our example, Igor should sign as follows: “Frank N. Stein, Inc.,
by Igor,
Agent.”
Now it is clear under agency law that the corporation is liable and Igor is not. [1] Good job,
Igor.
Incorrect Signatures
The problems arise where the agent, although authorized, signs in an incorrect way. There are three
possibilities: (1) the agent signs only his own name—“Igor”; (2) the agent signs both names but without
indication of any agency—“Frank N. Stein, Inc., / Igor” (the signature is ambiguous—are both parties to be
liable, or is Igor merely an agent?); (3) the agent signs as agent but doesn’t identify the principal—“Igor,
Agent.”
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The UCC provides that in each case, the agent is liable to a holder in due course (HDC) who took the
instrument without notice that the agent wasn’t intended to be liable on the instrument. As to any other
person (holder or transferee), the agent is liable unless she proves that the original parties to the
instrument did not intend her to be liable on it. Section 3-402(c) says that, as to a check, if an agent signs
his name without indicating agency status but the check has the principal’s identification on it (that would
be in the upper left corner), the authorized agent is not liable.
Liability of an “Agent” Who Has No Authority to Sign
A person who has no authority to sign an instrument cannot really be an “agent” because by definition an
agent is a person or entity authorized to act on behalf of and under the control of another in dealing with
third parties. Nevertheless, unauthorized persons not infrequently purport to act as agents: either they are
mistaken or they are crooks. Are their signatures binding on the “principal”?
The General Rule
An unauthorized signature is not binding; it is—as the UCC puts it—“ineffective except as the signature of
the unauthorized signer.” [2]So if Crook signs a Frank N. Stein, Inc., check with the name “Igor,” the only
person liable on the check is Crook.
The Exceptions
There are two exceptions. Section 4-403(a) of the UCC provides that an unauthorized signature may be
ratified by the principal, and Section 3-406 says that if negligence contributed to an instrument’s
alteration or forgery, the negligent person cannot assert lack of authority against an HDC or a person who
in good faith pays or takes the instrument for value or for collection. This is the situation where Principal
leaves the rubber signature stamp lying about and Crook makes mischief with it, making out a check to
Payee using the stamp. But if Payee herself failed to exercise reasonable care in taking a suspicious
instrument, both Principal and Payee could be liable, based on comparative negligence principles. [3]
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K E Y T A K E A W A Y
Under the UCC, a “signature” is any writing or mark used by a person to indicate
that a writing is authentic. Agents often sign on behalf of principals, and when the
authorized agent makes clear that she is so signing—by naming the principal and
signing her name as “agent”—the principal is liable, not the agent. But when the
agent signs incorrectly, the UCC says, in general, that the agent is personally liable
to an HDC who takes the paper without notice that the agent is not intended to be
liable. Unauthorized signatures (forgeries) are ineffective as to the principal: they
are effective as the forger’s signature, unless the principal or the person paying on
the instrument has been negligent in contributing to, or in failing to notice, the
forgery, in which case comparative negligence principles are applied.
E X E R C I S E S
1. Able signs his name on a note with an entirely illegible squiggle. Is that a valid
signature?
2. Under what circumstances is an agent clearly not personally liable on an
instrument?
3. Under what circumstances is a forgery effective as to the person whose name
is forged?
[1] Uniform Commercial Code, Section 4-402(b)(1).
[2] Uniform Commercial Code, Section 3-403.
[3] Uniform Commercial Code, Section 3-406(b).
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16.2 Contract Liability of Parties
L E A R N I N G O B J E C T I V E
1. Understand that a person who signs commercial paper incurs contract
liability.
2. Recognize the two types of such liability: primary and secondary.
3. Know the conditions that must be met before secondary liability attaches.
Two types of liability can attach to those who deal in commercial paper: contract liability and warranty
liability. Contract liability is based on a party’s signature on the paper. For contract liability purposes,
signing parties are divided into two categories: primary parties and secondary parties.
We discuss here the liability of various parties. You may recall the discussion in Chapter 13 “Nature and
Form of Commercial Paper”about accommodation parties. An accommodation party signs a negotiable
instrument in order to lend his name to another party to the instrument. The Uniform Commercial Code
(UCC) provides that such a person “may sign the instrument as maker, drawer, acceptor, or indorser” and
that in whatever capacity the person signs, he will be liable in that capacity. [1]
Liability of Primary Parties
Two parties are primarily liable: the maker of a note and the acceptor of a draft. They are required to pay
by the terms of the instrument itself, and their liability is unconditional.
Maker
By signing a promissory note, the maker promises to pay the instrument—that’s the maker’s contract and,
of course, the whole point to a note. The obligation is owed to a person entitled to enforce the note or to
an indorser that paid the note. [2]
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Acceptor
Recall that acceptance is the drawee’s signed engagement to honor a draft as presented. The drawee’s
signature on the draft is necessary and sufficient to accept, and if that happens, the drawee as acceptor is
primarily liable. The acceptance must be written on the draft by some means—any means is good. The
signature is usually accompanied by some wording, such as “accepted,” “good,” “I accept.” When a
bankcertifies a check, that is the drawee bank’s acceptance, and the bank as acceptor becomes liable to the
holder; the drawer and all indorsers prior to the bank’s acceptance are discharged. So the holder—
whether a payee or an indorsee—can look only to the bank, not to the drawer, for payment. [3] If the
drawee varies the terms when accepting the draft, it is liable according to the terms as varied. [4]
Liability of Secondary Parties
Unlike primary liability, secondary liability is conditional, arising only if the primarily liable party fails to
pay. The parties for whom these conditions are significant are the drawers and the indorsers. By virtue of
UCC Sections 3-414 and 3-415, drawers and indorsers engage to pay the amount of an unaccepted draft to
any subsequent holder or indorser who takes it up, again, if (this is the conditional part) the (1) the
instrument is dishonored and, in some cases, (2) notice of dishonor is given to the drawer or indorser.
Drawer’s Liability
If Carlos writes (more properly “draws”) a check to his landlord for $700, Carlos does not expect the
landlord to turn around and approach him for the money: Carlos’s bank—the drawee—is supposed to pay
from Carlos’s account. But if the bank dishonors the check—most commonly because of insufficient funds
to pay it—then Carlos is liable to pay according to the instrument’s terms when he wrote the check or, if it
was incomplete when he wrote it, according to its terms when completed (subject to some
limitations). [5] Under the pre-1997 UCC, Carlos’s liability was conditioned not only upon dishonor but
also upon notice of dishonor; however, under the revised UCC, notice is not required for the drawer to be
liable unless the draft has been accepted and the acceptor is not a bank. Most commonly, if a check
bounces, the person who wrote it is liable to make it good.
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The drawer of a noncheck draft may disclaim her contractual liability on the instrument by drawing
“without
recourse.
” [6]
Indorser’s Liability
Under UCC Section 3-415, an indorser promises to pay on the instrument according to its terms if it is
dishonored or, if it was incomplete when indorsed, according to its terms when completed. The liability
here is conditioned upon the indorser’s receipt of notice of dishonor (with some exceptions, noted
in Section 16.2 “Contract Liability of Parties” on contract liability of parties. Indorsers may disclaim
contractual liability by indorsing “without recourse.” [7]
Conditions Required for Liability
We have alluded to the point that secondary parties do not become liable unless the proper conditions are
met—there are conditions precedent to liability (i.e., things have to happen before liability “ripens”).
Conditions for Liability in General
The conditions are slightly different for two classes of instruments. For an unaccepted draft, the drawer’s
liability is conditioned on (1) presentment and (2) dishonor. For an accepted draft on a nonbank, or for an
indorser, the conditions are (1) presentment, (2) dishonor, and (3) notice of
dishonor.
Presentment
Presentment occurs when a person entitled to enforce the instrument (creditor)
demands payment from the maker, drawee, or acceptor, or when a person entitled to enforce the
instrument (again, the creditor) demands acceptance of a draft from the drawee. [8]
The common-law tort that makes a person who wrongfully takes another’s property liable for that taking
is conversion—it’s the civil equivalent of theft. The UCC provides that “the law applicable to conversion
of personal property applies to instruments.” [9] Conversion is relevant here because if an instrument is
presented for payment or acceptance and the person to whom it is presented refuses to pay, accept, or
return it, the instrument is converted. An instrument is also converted if a person pays an instrument on a
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forged indorsement: a bank that pays a check on a forged indorsement has converted the instrument and
is liable to the person whose indorsement was forged. There are various permutations on the theme of
conversion; here is one example from the Official Comment:
A check is payable to the order of A. A indorses it to B and puts it into an envelope addressed to B. The
envelope is never delivered to B. Rather, Thief steals the envelope, forges B’s indorsement to the check
and obtains payment. Because the check was never delivered to B, the indorsee, B has no cause of action
for conversion, but A does have such an action. A is the owner of the check. B never obtained rights in the
check. If A intended to negotiate the check to B in payment of an obligation, that obligation was not
affected by the conduct of Thief. B can enforce that obligation. Thief stole A’s property not B’s. [10]
Dishonor
Dishonor generally means failure by the obligor to pay on the instrument when presentment for
payment is made (but return of an instrument because it has not been properly indorsed does not
constitute dishonor). The UCC at Section 3-502 has (laborious) rules governing what constitutes dishonor
and when dishonor occurs for a note, an unaccepted draft, and an unaccepted documentary draft. (A
documentary draft is a draft to be presented for acceptance or payment if specified documents,
certificates, statements, or the like are to be received by the drawee or other payor before acceptance or
payment of the draft.)
Notice of Dishonor
Again, when acceptance or payment is refused after presentment, the instrument is said to be dishonored.
The holder has a right of recourse against the drawers and indorsers, but he is usually supposed to give
notice of the dishonor. Section 3-503(a) of the UCC requires the holder to give notice to a party before the
party can be charged with liability, unless such notice is excused, but the UCC exempts notice in a number
of circumstances (Section 3-504, discussed in Section 16.2 “Contract Liability of Parties” on contract
liability). The UCC makes giving notice pretty easy: it permits any party who may be compelled to pay the
instrument to notify any party who may be liable on it (but each person who is to be charged with liability
must actually be notified); notice of dishonor may “be given by any commercially reasonable means
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including an oral, written, or electronic communication”; and no specific form of notice is required—it is
“sufficient if it reasonably identifies the instrument and indicates that the instrument has been
dishonored or has not been paid or accepted.” [11] Section 3-503(c) sets out time limits when notice of
dishonor must be given for collecting banks and for other persons. An oral notice is unwise because it
might be difficult to prove. Usually, notice of dishonor is given when the instrument is returned with a
stamp (“NSF”—the dreaded “nonsufficient funds”), a ticket, or a memo.
Suppose—you’ll want to graph this out—Ann signs a note payable to Betty, who indorses it to Carl, who in
turn indorses it to Darlene. Darlene indorses it to Earl, who presents it to Ann for payment. Ann refuses.
Ann is the only primary party, so if Earl is to be paid he must give notice of dishonor to one or more of the
secondary parties, in this case, the indorsers. He knows that Darlene is rich, so he notifies only Darlene.
He may collect from Darlene but not from the others. If Darlene wishes to be reimbursed, she may notify
Betty (the payee) and Carl (a prior indorser). If she fails to notify either of them, she will have no recourse.
If she notifies both, she may recover from either. Carl in turn may collect from Betty, because Betty
already will have been notified. If Darlene notifies only Carl, then she may collect only from him, but he
must notify Betty or he cannot be reimbursed. Suppose Earl notified only Betty. Then Carl and Darlene
are discharged. Why? Earl cannot proceed against them because he did not notify them. Betty cannot
proceed against them because they indorsed subsequent to her and therefore were not contractually
obligated to her. However, if, mistakenly believing that she could collect from either Carl or Darlene, Betty
gave each notice within the time allowed to Earl, then he would be entitled to collect from one of them if
Betty failed to pay, because they would have received notice. It is not necessary to receive notice from one
to whom you are liable; Section 3-503(b) says that notice may be given by any person, so that notice
operates for the benefit of all others who have rights against the obligor.
There are some deadlines for giving notice: on an instrument taken for collection, a bank must give notice
before midnight on the next banking day following the day on which it receives notice of dishonor; a
nonbank must give notice within thirty days after the day it received notice; and in all other situations, the
deadline is thirty days after the day dishonor occurred. [12]
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Waived or Excused Conditions
Presentment and notice of dishonor have been discussed as conditions precedent for imposing liability
upon secondarily liable parties (again, drawers and indorsers). But the UCC provides circumstances in
which such conditions may be waived
or excused.
Presentment Waived or Excused
Under UCC Section 3-504(a), presentment is excused if (1) the creditor cannot with reasonable diligence
present the instrument; (2) the maker or acceptor has repudiated the obligation to pay, is dead, or is in
insolvency proceedings; (3) no presentment is necessary by the instrument’s terms; (4) the drawer or
indorsers waived presentment; (5) the drawer instructed the drawee not to pay or accept; or (6) the
drawee was not obligated to the drawer to pay the draft.
Notice of Dishonor Excused
Notice of dishonor is not required if (1) the instrument’s terms do not require it or (2) the debtor waived
the notice of dishonor. Moreover, a waiver of presentment is also a waiver of notice of dishonor. Delay in
giving the notice is excused, too, if it is caused by circumstances beyond the control of the person giving
notice and she exercised reasonable diligence when the cause of delay stopped. [13]
In fact, in real life, presentment and notice of dishonor don’t happen very often, at least as to notes. Going
back to presentment for a minute: the UCC provides that the “party to whom presentment is made [the
debtor] may require exhibition of the instrument,…reasonable identification of the person demanding
payment,…[and] a signed receipt [from the creditor (among other things)]” (Section 3-501). This all
makes sense: for example, certainly the prudent contractor paying on a note for his bulldozer wants to
make sure the creditor actually still has the note (hasn’t negotiated it to a third party) and is the correct
person to pay, and getting a signed receipt when you pay for something is always a good idea.
“Presentment” here is listed as a condition of liability, but in fact, most of the time there is no
presentment at all:
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[I]t’s a fantasy. Every month millions of homeowners make payments on the notes that they signed when
they borrowed money to buy their houses. Millions of college graduates similarly make payments on their
student loan notes. And millions of drivers and boaters pay down the notes that they signed when they
borrowed money to purchase automobiles or vessels. [Probably] none of these borrowers sees the notes
that they are paying. There is no “exhibition” of the instruments as section 3-501 [puts it]. There is no
showing of identification. In some cases…there is no signing of a receipt for payment. Instead, each
month, the borrowers simply mail a check to an address that they have been given. [14]
The Official Comment to UCC Section 5-502 says about the same thing:
In the great majority of cases presentment and notice of dishonor are waived with respect to notes. In
most cases a formal demand for payment to the maker of the note is not contemplated. Rather, the maker
is expected to send payment to the holder of the note on the date or dates on which payment is due. If
payment is not made when due, the holder usually makes a demand for payment, but in the normal case
in which presentment is waived, demand is irrelevant and the holder can proceed against indorsers when
payment is not received.
K E Y T A K E A W A Y
People who sign commercial paper become liable on the instrument by contract:
they contract to honor the instrument. There are two types of liability: primary
and secondary. The primarily liable parties are makers of notes and drawees of
drafts (your bank is the drawee for your check), and their liability is unconditional.
The secondary parties are drawers and indorsers. Their liability is conditional: it
arises if the instrument has been presented for payment or collection by the
primarily liable party, the instrument has been dishonored, and notice of dishonor
is provided to the secondarily liable parties. The presentment and notice of
dishonor are often unnecessary to enforce contractual liability.
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E X E R C I S E S
1. What parties have primary liability on a negotiable instrument?
2. What parties have secondary liability on a negotiable instrument?
3. Secondary liability is conditional. What are the conditions precedent to
liability?
4. What conditions may be waived or excused, and how?
[1] Uniform Commercial Code, Section 3-419.
[2] Uniform Commercial Code, Section 3-412.
[3] Uniform Commercial Code, Section 3-414(b).
[4] Uniform Commercial Code, Section 3-413(a)(iii).
[5] Uniform Commercial Code, Section 3-414.
[6] Uniform Commercial Code, Section 3-414(d).
[7] Uniform Commercial Code, Section 3-415(b).
[8] Uniform Commercial Code, Section 3-501.
[9] Uniform Commercial Code, Section 3-420.
[10] Uniform Commercial Code, Section 3-420, Official Comment 1.
[11] Uniform Commercial Code, Section 3-503(b).
[12] Uniform Commercial Code, Section 3-503(c).
[13] Uniform Commercial Code, Section 3-504.
[14] Gregory E. Maggs, “A Complaint about Payment Law Under the U.C.C.: What You See Is
Often Not What You Get,” Ohio State Law Journal 68, no. 201, no. 207
(2007), http://ssrn.com/abstract=1029647.
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16.3 Warranty Liability of Parties
L E A R N I N G O B J E C T I V E S
1. Understand that independent of contract liability, parties to negotiable
instruments incur warranty liability.
2. Know what warranties a person makes when she transfers an instrument.
3. Know what warranties a person makes when he presents an instrument for
payment or acceptance.
4. Understand what happens if a bank pays or accepts a check by mistake.
Overview of Warranty Liability
We discussed the contract liability of primary and secondary parties, which applies to those who sign the
instrument. Liability arises a second way, too—by warranty. A negotiable instrument is a type of property
that is sold and bought, just the way an automobile is, or a toaster. If you buy a car, you generally expect
that it will, more or less, work the way cars are supposed to work—that’s the implied warranty of
merchantability. Similarly, when an instrument is transferred from A to B for consideration, the
transferee (B) expects that the instrument will work the way such instruments are supposed to work. If A
transfers to B a promissory note made by Maker, B figures that when the time is right, she can go to
Maker and get paid on the note. So A makes some implied warranties to B—transfer warranties. And
when B presents the instrument to Maker for payment, Maker assumes that B as the indorsee from A is
entitled to payment, that the signatures are genuine, and the like. So B makes some implied warranties to
Maker—presentment warranties. Usually, claims of breach of warranty arise in cases involving forged,
altered, or stolen instruments, and they serve to allocate the loss to the person in the best position to have
avoided the loss, putting it on the person (or bank) who dealt with the wrongdoer. We take up both
transfer and presentment warranties.
Transfer Warranties
Transfer warranties are important because—as we’ve seen—contract liability is limited to those who have
actually signed the instrument. Of course, secondary liability will provide a holder with sufficient grounds
for recovery against a previous indorser who did not qualify his indorsement. But sometimes there is no
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indorsement, and sometimes the indorsement is qualified. Sometimes, also, the holder fails to make
timely presentment or notice of dishonor, thereby discharging a previous indorsee. In such cases, the
transferee-holder can still sue a prior party on one or more of the five implied warranties.
A person who receives consideration for transferring an instrument makes the five warranties listed in
UCC Section 3-416. The warranty may be sued on by the immediate transferee or, if the transfer was by
indorsement, by any subsequent holder who takes the instrument in good
faith.
The warranties thus run
with the instrument. They are as follows:
1. The transferor is entitled to enforce the instrument. The transferor warrants that he is—or would
have been if he weren’t transferring it—entitled to enforce the instrument. As UCC Section 3-416,
Comment 2, puts it, this “is in effect a warranty that there are no unauthorized or missing
indorsements that prevent the transferor from making the transferee a person entitled to enforce
the instrument.” Suppose Maker makes a note payable to Payee; Thief steals the note, forges
Payee’s indorsement, and sells the note. Buyer is not a holder because he is not “a person in
possession of an instrument drawn, issued, or indorsed to him, or to his order, or to bearer, or in
blank,” so he is not entitled to enforce it. “‘Person entitled to enforce’ means (i) the holder, (ii) a
non-holder in possession of the instrument who has the rights of a holder [because of the shelter
rule]” (UCC, Section 3-301). Buyer sells the note to Another Party, who can hold Buyer liable for
breach of the warranty: he was not entitled to enforce it.
2. All signatures on the instrument are authentic and authorized. This warranty would be breached,
too, in the example just presented.
3. The instrument has not been altered.
4. The instrument is not subject to a defense or claim in recoupment of any party that can be
asserted against the warrantor. “Recoupment” means to hold back or deduct part of what is due
to another. The Official Comment to UCC Section 3-416 observes, “[T]he transferee does not
undertake to buy an instrument that is not enforceable in whole or in part, unless there is a
contrary agreement. Even if the transferee takes as a holder in due course who takes free of the
defense or claim in recoupment, the warranty gives the transferee the option of proceeding
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against the transferor rather than litigating with the obligor on the instrument the issue of the
holder-in-due-course status of the transferee.”
5. The warrantor has no knowledge of any insolvency proceeding commenced with respect to the
maker or acceptor or, in the case of an unaccepted draft, the drawer. The UCC Official Comment
here provides the following: “The transferor does not warrant against difficulties of collection,
impairment of the credit of the obligor or even insolvency [only knowledge of insolvency]. The
transferee is expected to determine such questions before taking the obligation. If insolvency
proceedings…have been instituted against the party who is expected to pay and the transferor
knows it, the concealment of that fact amounts to a fraud upon the transferee, and the warranty
against knowledge of such proceedings is provided accordingly.” [1]
Presentment Warranties
A payor paying or accepting an instrument in effect takes the paper from the party who presents it to the
payor, and that party has his hand out. In doing so, the presenter makes certain implied promises to the
payor, who is about to fork over cash (or an acceptance). The UCC distinguishes between warranties made
by one who presents an unaccepted draft for payment and warranties made by one who presents other
instruments for payment. The warranties made by the presenter are as follows. [2]
Warranties Made by One Who Presents an Unaccepted Draft
1. The presenter is entitled to enforce the draft or to obtain payment or acceptance. This is “in
effect a warranty that there are no unauthorized or missing indorsements.” [3] Suppose Thief steals
a check drawn by Drawer to Payee and forges Payee’s signature, then presents it to the bank. If
the bank pays it, the bank cannot charge Drawer’s account because it has not followed Drawer’s
order in paying to the wrong person (except in the case of an imposter or fictitious payee). It can,
though, go back to Thief (fat chance it can find her) on the claim that she breached the warranty
of no unauthorized indorsement.
2. There has been no alteration of the instrument. If Thief takes a check and changes the amount
from $100 to $1,000 and the bank pays it, the bank can recover from Thief $900, the difference
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between the amount paid by the bank and the amount Drawer (customer) authorized the bank to
pay. [4] If the drawee accepts the draft, the same rules apply.
3. The presenter has no knowledge that the signature of the drawer is unauthorized. If the
presenter doesn’t know Drawer’s signature is forged and the drawee pays out on a forged
signature, the drawee bears the loss. (The bank would be liable for paying out over the forged
drawer’s signature: that’s why it has the customer’s signature on file.)
These rules apply—again—to warranties made by the presenter to a drawee paying out on an unaccepted
draft. The most common situation would be where a person has a check made out to her and she gets it
cashed at the drawer’s bank.
Warranties Made by One Who Presents Something Other Than an Unaccepted
Draft
In all other cases, there is only one warranty made by the presenter: that he or she is a person entitled to
enforce the instrument or obtain payment on it.
This applies to the presentment of accepted drafts, to the presentment of dishonored drafts made to the
drawer or an indorser, and to the presentment of notes. For example, Maker makes a note payable to
Payee; Payee indorses the note to Indorsee, Indorsee indorses and negotiates the note to Subsequent
Party. Subsequent Party presents the note to Maker for payment. The Subsequent Party warrants to
Maker that she is entitled to obtain payment. If she is paid and is notentitled to payment, Maker can sue
her for breach of that warranty. If the reason she isn’t entitled to payment is because Payee’s signature
was forged by Thief, then Maker can go after Thief: the UCC says that “the person obtaining payment
[Subsequent Party] and a prior transferor [Thief] warrant to the person making payment in good faith
[Maker] that the warrantor [Subsequent Party] is entitled to enforce the instrument.” [5] Or, again, Drawer
makes the check out to Payee; Payee attempts to cash or deposit the check, but it is dishonored. Payee
presents the check to Drawer to make it good: Payee warrants he is entitled to payment on it.
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Warranties cannot be disclaimed in the case of checks (because, as UCC Section 3-417, Comment 7, puts
it, “it is not appropriate to allow disclaimer of warranties appearing on checks that normally will not be
examined by the payor bank”—they’re machine read). But a disclaimer of warranties is permitted as to
other instruments, just as disclaimers of warranty are usually OK under general contract law. The reason
presentment warranties 2 and 3 don’t apply to makers and drawers (they apply to drawees) is because
makers and drawers are going to know their own signatures and the terms of the instruments; indorsers
already warranted the wholesomeness of their transfer (transfer warranties), and acceptors should
examine the instruments when they accept them.
Payment by Mistake
Sometimes a drawee pays a draft (most familiarly, again, a bank pays a check) or accepts a draft by
mistake. The UCC says that if the mistake was in thinking that there was no stop-payment order on it
(when there was), or that the drawer’s signature was authorized (when it was not), or that there were
sufficient funds in the drawer’s account to pay it (when there were not), “the drawee may recover the
amount paid…or in the case of acceptance, may revoke the acceptance.” [6] Except—and it’s a big
exception—such a recovery of funds does not apply “against a person who took the instrument in good
faith and for value.”[7] The drawee in that case would have to go after the forger, the unauthorized signer,
or, in the case of insufficient funds, the drawer. Example: Able draws a check to Baker. Baker deposits the
check in her bank account, and Able’s bank mistakenly pays it even though Able doesn’t have enough
money in his account to cover it. Able’s bank cannot get the money back from Baker: it has to go after
Able. To rephrase, in most cases, the remedy of restitution will not be available to a bank that pays or
accepts a check because the person receiving payment of the check will have given value for it in good
faith.
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K E Y T A K E A W A Y
A transferor of a negotiable instrument warrants to the transferee five things: (1)
entitled to enforce, (2) authentic and authorized signatures, (3) no alteration, (4)
no defenses, and (5) no knowledge of insolvency. If the transfer is by delivery, the
warranties run only to the immediate transferee; if by indorsement, to any
subsequent good-faith holder. Presenters who obtain payment of an instrument
and all prior transferors make three presenter’s warranties: (1) entitled to enforce,
(2) no alteration, (3) genuineness of drawer’s signature. These warranties run to
any good-faith payor or acceptor. If a person pays or accepts a draft by mistake, he
or she can recover the funds paid out unless the payee took the instrument for
value and in good faith.
E X E R C I S E S
1. What does it mean to say that the transferor of a negotiable instrument
warrants things to the transferee, and what happens if the warranties are
breached? What purpose do the warranties serve?
2. What is a presenter, and to whom does such a person make warranties?
3. Under what circumstances would suing for breach of warranties be useful
compared to suing on the contract obligation represented by the instrument?
4. Why are the rules governing mistaken payment not very often useful to a
bank?
[1] Uniform Commercial Code, Section 3-416, Official Comment 4.
[2] Uniform Commercial Code, Section 3-417.
[3] Uniform Commercial Code, Section 3-417, Comment 2.
[4] Uniform Commercial Code, Sections 3-417(2) and (b).
[5] Uniform Commercial Code, Section 3-417(d).
[6] Uniform Commercial Code, Section 3-418.
[7] Uniform Commercial Code, Section 3-418(c).
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16.4 Discharge
L E A R N I N G O B J E C T I V E
1. Understand how the obligations represented by commercial paper may be
discharged.
Overview
Negotiable instruments eventually die. The obligations they represent are discharged (terminated) in two
general ways: (1) according to the rules stated in Section 3-601 of the Uniform Commercial Code (UCC) or
(2) by an act or agreement that would discharge an obligation to pay money under a simple contract (e.g.,
declaring bankruptcy).
Discharge under the Uniform Commercial Code
The UCC provides a number of ways by which an obligor on an instrument is discharged from liability,
but notwithstanding these several ways, under Section 3-601, no discharge of any party provided by the
rules presented in this section operates against a subsequent holder in due course unless she has notice
when she takes the instrument.
Discharge in General
Discharge by Payment
A person primarily liable discharges her liability on an instrument to the extent of payment by paying or
otherwise satisfying the holder, and the discharge is good even if the payor knows that another has claim
to the instrument. However, discharge does not operate if the payment is made in bad faith to one who
unlawfully obtained the instrument (and UCC Section 3-602(b) lists two other exceptions).
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Discharge by Tender
A person who tenders full payment to a holder on or after the date due discharges any subsequent liability
to pay interest, costs, and attorneys’ fees (but not liability for the face amount of the instrument). If the
holder refuses to accept the tender, any party who would have had a right of recourse against the party
making the tender is discharged. Mario makes a note payable to Carol, who indorses it to Ed. On the date
the payment is due, Mario (the maker) tenders payment to Ed, who refuses to accept the payment; he
would rather collect from Carol. Carol is discharged: had she been forced to pay as indorser in the event of
Mario’s refusal, she could have looked to him for recourse. Since Mario did tender, Ed can no longer look
to Carol for payment. [1]
Discharge by Cancellation and Renunciation
The holder may discharge any party, even without consideration, by marking the face of the instrument or
the indorsement in an unequivocal way, as, for example, by intentionally canceling the instrument or the
signature by destruction or mutilation or by striking out the party’s signature. The holder may also
renounce his rights by delivering a signed writing to that effect or by surrendering the instrument itself. [2]
Discharge by Material and Fraudulent Alteration
Under UCC Section 3-407, if a holder materially and fraudulently alters an instrument, any party whose
contract is affected by the change is discharged. A payor bank or drawee paying a fraudulently altered
instrument or a person taking it for value, in good faith, and without notice of the alteration, may enforce
rights with respect to the instrument according to its original terms or, if the incomplete instrument was
altered by unauthorized completion, according to its terms as completed.
Example 1: Marcus makes a note for $100 payable to Pauline. Pauline fraudulently raises the
amount to $1,000 without Marcus’s negligence and negotiates it to Ned, who qualifies as a holder
in due course (HDC). Marcus owes Ned $100.
Example 2: Charlene writes a check payable to Lumber Yard and gives it to Contractor to buy
material for a deck replacement. Contractor fills it in for $1,200: $1,000 for the decking and $200
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for his own unauthorized purposes. Lumber Yard, if innocent of any wrongdoing, could enforce
the check for $1,200, and Charlene must go after Contractor for the $200.
Discharge by Certification
As we have noted, where a drawee certifies a draft for a holder, the drawer and all prior indorsers are
discharged.
Discharge by Acceptance Varying a Draft
If the holder assents to an acceptance varying the terms of a draft, the obligation of the drawer and any
indorsers who do not expressly assent to the acceptance is discharged. [3]
Discharge of Indorsers and Accommodation Parties
The liability of indorsers and accommodation parties is discharged under the following three
circumstances. [4]
Extension of Due Date
If the holder agrees to an extension of the due date of the obligation of the obligor, the extension
discharges an indorser or accommodation party having a right of recourse against the obligor to the extent
the indorser or accommodation party proves that the extension caused her loss with respect to the right of
recourse.
Material Modification of Obligation
If the holder agrees to a material modification of the obligor’s obligation, other than an extension of the
due date, the modification discharges the obligation of an indorser or accommodation party having a right
of recourse against the obligor to the extent the modification causes her loss with respect to the right of
recourse.
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Impairment of Collateral
If the obligor’s duty to pay is secured by an interest in collateral and the holder impairs the value of the
interest in collateral, the obligation of an indorser or accommodation party having a right of recourse
against the obligor is discharged to the extent of the impairment.
The following explanatory paragraph from UCC Section 3-605, Official Comment 1, may be helpful:
Bank lends $10,000 to Borrower who signs a note under which she (in suretyship law, the “Principal
Debtor”) agrees to pay Bank on a date stated. But Bank insists that an accommodation party also become
liable to pay the note (by signing it as a co-maker or by indorsing the note). In suretyship law, the
accommodation party is a “Surety.” Then Bank agrees to a modification of the rights and obligations
between it and Principal Debtor, such as agreeing that she may pay the note at some date after the due
date, or that she may discharge her $10,000 obligation to pay the note by paying Bank $3,000, or the
Bank releases collateral she gave it to secure the note. Surety is discharged if changes like this are made by
Bank (the creditor) without Surety’s consent to the extent Surety suffers loss as a result. Section 3-605 is
concerned with this kind of problem with Principal Debtor and Surety. But it has a wider scope: it also
applies to indorsers who are not accommodation parties. Unless an indorser signs without recourse, the
indorser’s liability under section 3-415(a) is that of a surety. If Bank in our hypothetical case indorsed the
note and transferred it to Second Bank, Bank has rights given to an indorser under section 3-605 if it is
Second Bank that modifies rights and obligations of Borrower.
Discharge by Reacquisition
Suppose a prior party reacquires the instrument. He may—but does not automatically—cancel any
indorsement unnecessary to his title and may also reissue or further negotiate the instrument. Any
intervening party is thereby discharged from liability to the reacquiring party or to any subsequent holder
not in due course. If an intervening party’s indorsement is cancelled, she is not liable even to an HDC. [5]
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Discharge by Unexcused Delay in Presentment or Notice of Dishonor
If notice of dishonor is not excused under UCC Section 3-504, failure to give it discharges drawers and
indorsers.
K E Y T A K E A W A Y
The potential liabilities arising from commercial paper are discharged in several ways.
Anything that would discharge a debt under common contract law will do so. More
specifically as to commercial paper, of course, payment discharges the obligation. Other
methods include tender of payment, cancellation or renunciation, material and
fraudulent alteration, certification, acceptance varying a draft, reacquisition, and—in
some cases—unexcused delay in giving notice of presentment or dishonor. Indorsers and
accommodation parties’ liability may be discharged by the same means that a surety’s
liability is discharged, to the extent that alterations in the agreement between the
creditor and the holder would be defenses to a surety because right of recourse is
impaired to the surety.
E X E R C I S E S
1. What is the most common way that obligations represented by commercial paper
are discharged?
2. Parents loan Daughter $6,000 to attend college, and she gives them a promissory
note in return. At her graduation party, Parents ceremoniously tear up the note. Is
Daughter’s obligation terminated?
3. Juan signs Roberta’s note to Creditor as an accommodation party, agreeing to serve
in that capacity for two years. At the end of that term, Roberta has not paid
Creditor, who—without Juan’s knowledge—gives Roberta an extra six months to
pay. She fails to do so. Does Creditor still have recourse against Juan?
[1] Uniform Commercial Code, Section 3-603(b).
[2] Uniform Commercial Code, Section 3-604.
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[3] Uniform Commercial Code, Section 3-410.
[4] Uniform Commercial Code, Section 3-605.
[5] Uniform Commercial Code, Section 3-207.
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16.5 Cases
Breach of Presentment Warranties and Conduct Precluding Complaint
about Such Breach
Bank of Nichols Hills v. Bank of Oklahoma
196 P.3d 984 (Okla. Civ. App. 2008)
Gabbard, J.
Plaintiff, Bank of Nichols Hills (BNH), appeals a trial court judgment for Defendant, Bank of Oklahoma
(BOK), regarding payment of a forged check. The primary issue on appeal is whether BOK presented
sufficient proof to support the trial court’s finding that the [UCC] § 3-406 preclusion defense applied. We
find that it did, and affirm.
Facts
Michael and Stacy Russell owned a mobile home in Harrah, Oklahoma. The home was insured by
Oklahoma Farm Bureau Mutual Insurance Company (Farm Bureau). The insurance policy provided that
in case of loss, Farm Bureau “will pay you unless another payee is named on the Declarations page,” that
“Loss shall be payable to any mortgagee named in the Declarations,” and that one of Farm Bureau’s duties
was to “protect the mortgagee’s interests in the insured building.” The Declarations page of the policy
listed Conseco Finance as the mortgagee. Conseco had a mortgage security interest in the home.
In August 2002, a fire completely destroyed the mobile home. The Russells submitted an insurance claim
to Farm Bureau. Farm Bureau then negotiated a $69,000 settlement with the Russells, issued them a
check in this amount payable to them and Conseco jointly, and mailed the check to the Russells. Neither
the Russells nor Farm Bureau notified Conseco of the loss, the settlement, or the mailing of the check.
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The check was drawn on Farm Bureau’s account at BNH. The Russells deposited the check into their
account at BOK. The check contains an endorsement by both Russells, and a rubber stamp endorsement
for Conseco followed by a signature of a Donna Marlatt and a phone number. It is undisputed that
Conseco’s endorsement was forged. Upon receipt, BOK presented the check to BNH. BNH paid the
$69,000 check and notified Farm Bureau that the check had been paid from its account.
About a year later, Conseco learned about the fire and the insurance payoff. Conseco notified Farm
Bureau that it was owed a mortgage balance of more than $50,000. Farm Bureau paid off the balance and
notified BNH of the forgery. BNH reimbursed Farm Bureau the amount paid to Conseco. BNH then sued
BOK.
Both banks relied on the Uniform Commercial Code. BNH asserted that under § 4-208, BOK had
warranted that all the indorsements on the check were genuine. BOK asserted an affirmative defense
under § 3-406, alleging that Farm Bureau’s own negligence contributed to the forgery. After a non-jury
trial, the court granted judgment to BOK, finding as follows:
Conseco’s endorsement was a forgery, accomplished by the Russells;
Farm Bureau was negligent in the manner and method it used to process the claim and pay the
settlement without providing any notice or opportunity for involvement in the process to
Conseco;
Farm Bureau’s negligence substantially contributed to the Russells’ conduct in forging Conseco’s
endorsement; and
BOK proved its affirmative defense under § 3-406 by the greater weight of the evidence.
From this judgment, BNH appeals.
Analysis
It cannot be disputed that BOK breached its presentment warranty to BNH under § 4-208. [1] Thus the
primary issue raised is whether BOK established a preclusion defense under 3-406 [that BNH is
precluded from complaining about BOK’s breach of presentment warranty because of its own
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negligence]. [2] BNH asserts that the evidence fails to establish this defense because the mailing of its
check to and receipt by the insured “is at most an event of opportunity and has nothing to do with the
actual forgery.”
Section 3-406 requires less stringent proof than the “direct and proximate cause” test for general
negligence. [3] Conduct is a contributing cause of an alteration or forgery if it is a substantial factor in
bringing it about, or makes it “easier for the wrongdoer to commit his wrong.” The UCC Comment to § 3-
406 notes that the term has the meaning as used by the Pennsylvania court in Thompson
[Citation].
In Thompson, an independent logger named Albers obtained blank weighing slips, filled them out to show
fictitious deliveries of logs for local timber owners, delivered the slips to the company, accepted checks
made payable to the timber owners, forged the owners’ signatures, and cashed the checks at the bank.
When the company discovered the scheme, it sued the bank and the bank raised § 3-406 as a defense. The
court specifically found that the company’s negligence did not have to be the direct and proximate cause
of the bank’s acceptance of the forged checks. Instead, the defense applied because the company left blank
logging slips readily accessible to haulers, the company had given Albers whole pads of blank slips, the
slips were not consecutively numbered, haulers were allowed to deliver both the original and duplicate
slips to the company’s office, and the company regularly entrusted the completed checks to the haulers for
delivery to the payees without the payees’ consent. The court noted:
While none of these practices, in isolation, might be sufficient to charge the plaintiff [the company] with
negligence within the meaning of § 3-406, the company’s course of conduct, viewed in its entirety, is
surely sufficient to support the trial judge’s determination that it substantially contributed to the making
of the unauthorized signatures.…[T]hat conduct was ‘no different than had the plaintiff simply given
Albers a series of checks signed in blank for his unlimited, unrestrictive use.’
The UCC Comment to § 3-406 gives three examples of conduct illustrating the defense. One example
involves an employer who leaves a rubber stamp and blank checks accessible to an employee who later
commits forgery; another example involves a company that issues a ten dollar check but leaves a blank
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space after the figure which allows the payee to turn the amount into ten thousand dollars; and the third
example involves an insurance company that mails a check to one policyholder whose name is the same as
another policyholder who was entitled to the check. In each case, the company’s negligence substantially
contributed to the alterations or forgeries by making it easier for the wrongdoer to commit the
malfeasance.
In the present case, we find no negligence in Farm Bureau’s delivery of the check to the Russells. There is
nothing in the insurance policy that prohibits the insurer from making the loss-payment check jointly
payable to the Russells and Conseco. Furthermore, under § 3-420, if a check is payable to more than one
payee, delivery to one of the payees is deemed to be delivery to all payees. The authority cited by BOK, in
which a check was delivered to one joint payee who then forged the signature of the other, involve cases
where the drawer knew or should have known that the wrongdoer was not entitled to be a payee in the
first place. See
[Citations].
We also find no negligence in Farm Bureau’s violation of its policy provisions requiring the protection of
the mortgage holder. Generally, violation of contract provisions and laxity in the conduct of the business
affairs of the drawer do not per se establish negligence under this section. See [Citations].
However, evidence was presented that the contract provision merely reflected an accepted and customary
commercial standard in the insurance industry. Failure to conform to the reasonable commercial
standards of one’s business has been recognized by a number of courts as evidence of negligence. See, e.g.,
[Citations].
Here, evidence was presented that Farm Bureau did not act in a commercially reasonable manner or in
accordance with reasonable commercial standards of its business when it issued the loss check to the
insured without notice to the mortgagee. BOK’s expert testified that it is standard practice in the industry
to notify the lender of a loss this size, in order to avoid exactly the result that occurred here. Mortgagees
often have a greater financial stake in an insurance policy than do the mortgagors. That was clearly true in
this case. While there was opinion testimony to the contrary, the trial court was entitled to conclude that
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Farm Bureau did not act in a commercially reasonably manner and that this failure was negligence which
substantially contributed to the forgery, as contemplated by § 3-406.
We find the trial court’s judgment supported by the law and competent evidence. Accordingly, the trial
court’s decision is affirmed. Affirmed.
C A S E Q U E S T I O N S
1. How did BOK breach its presentment warranty to BNH?
2. What part of the UCC did BOK point to as why it should not be liable for that
breach?
3. In what way was Farm Bureau Mutual Insurance Co. negligent in this case, and
what was the consequence?
Presentment, Acceptance, Dishonor, and Warranties
Messing v. Bank of America
821 A.2d 22 (Md. 2003)
At some point in time prior to 3 August 2000, Petitioner, as a holder, came into possession of a check in
the amount of Nine Hundred Seventy-Six Dollars ($976.00) (the check) from Toyson J. Burruss, the
drawer, doing business as Prestige Auto Detail Center. Instead of depositing the check into his account at
his own bank, Petitioner elected to present the check for payment at a branch of Mr. Burruss’ bank, Bank
of America, the drawee. [4] On 3 August 2000, Petitioner approached a teller at Bank of America…in
Baltimore City and asked to cash the check. The teller, by use of a computer, confirmed the availability of
funds on deposit, and placed the check into the computer’s printer slot. The computer stamped certain
data on the back of the check, including the time, date, amount of the check, account number, and teller
number. The computer also effected a hold on the amount of $976.00 in the customer’s account. The
teller gave the check back to the Petitioner, who endorsed it. The teller then asked for Petitioner’s
identification. Petitioner presented his driver’s license and a major credit card. The teller took the
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indorsed check from Petitioner and manually inscribed the driver’s license information and certain credit
card information on the back of the check.
At some point during the transaction, the teller counted out $976.00 in cash from her drawer in
anticipation of completing the transaction. She asked if the Petitioner was a customer of Bank of America.
The Petitioner stated that he was not. The teller returned the check to Petitioner and requested, consistent
with bank policy when cashing checks for non-customers, that Petitioner place his thumbprint on the
check. [The thumbprint identification program was designed by various banking and federal agencies to
reduce check fraud.] Petitioner refused and the teller informed him that she would be unable to complete
the transaction without his thumbprint.
…Petitioner presented the check to the branch manager and demanded that the check be cashed
notwithstanding Petitioner’s refusal to place his thumbprint on the check. The branch manager examined
the check and returned it to the Petitioner, informing him that, because Petitioner was a non-customer,
Bank of America would not cash the check without Petitioner’s thumbprint on the instrument.…Petitioner
left the bank with the check in his possession.…
Rather than take the check to his own bank and deposit it there, or returning it to Burruss, the drawer, as
dishonored and demanding payment, Petitioner,…[sued] Bank of America (the Bank)…Petitioner claimed
that the Bank had violated the Maryland Uniform Commercial Code (UCC) and had violated his personal
privacy when the teller asked Petitioner to place an “inkless” thumbprint on the face of the check at
issue.…
…[T]he Circuit Court heard oral arguments…, entered summary judgment in favor of the Bank, dismissing
the Complaint with prejudice. [The special appeals court affirmed. The Court of Appeals—this court—
accepted the appeal.]
[Duty of Bank on Presentment and Acceptance]
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Petitioner argues that he correctly made “presentment” of the check to the Bank pursuant to § 3-111 and §
3-501(a), and demands that, as the person named on the instrument and thus entitled to enforce the
check, the drawee Bank pay him.…In a continuation, Petitioner contends that the teller, by placing the
check in the slot of her computer, and the computer then printing certain information on the back of the
check, accepted the check as defined by § 3-409(a).…Thus, according to Petitioner, because the Bank’s
computer printed information on the back of the check, under § 3-401(b) the Bank “signed” the check,
said “signature” being sufficient to constitute acceptance under § 3-409(a).
Petitioner’s remaining arguments line up like so many dominos. According to Petitioner, having
established that under his reading of § 3-409(a) the Bank accepted the check, Petitioner advances that the
Bank is obliged to pay him, pursuant to § 3-413(a)…Petitioner extends his line of reasoning by arguing
that the actions of the Bank amounted to a conversion under § 3-420,…Petitioner argues that because the
Bank accepted the check, an act which, according to Petitioner, discharged the drawer, he no longer had
enforceable rights in the check and only had a right to the proceeds. Petitioner’s position is that the Bank
exercised unauthorized dominion and control over the proceeds of the check to the complete exclusion of
the Petitioner after the Bank accepted the check and refused to distribute the proceeds, counted out by the
teller, to him.
We turn to the Bank’s obligations, or lack thereof, with regard to the presentment of a check by someone
not its customer. Bank argues, correctly, that it had no duty to the Petitioner, a non-customer and a
stranger to the Bank, and that nothing in the Code allows Petitioner to force Bank of America to act as a
depository bank…
Absent a special relationship, a non-customer has no claim against a bank for refusing to honor a
presented check. [Citations] This is made clear by § 3-408, which states:
A check or other draft does not of itself operate as an assignment of funds in the hands of the drawee
available for its payment, and the drawee is not liable on the instrument until the drawee accepts it.
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Once a bank accepts a check, under § 3-409, it is obliged to pay on the check under § 3-413. Thus, the
relevant question in terms of any rights Petitioner had against the Bank [regarding presentment] turns
not on the reasonableness of the thumbprint identification, but rather upon whether the Bank accepted
the check when presented as defined by § 3-409. As will be seen infra [below] the question of the
thumbprint identification is relevant only to the issue of whether the Bank’s refusal to pay the instrument
constituted dishonor under § 3-502, a determination which has no impact in terms of any duty allegedly
owed by the Bank to the Petitioner.
The statute clearly states that acceptance becomes effective when the presenter is notified of that fact. The
facts demonstrate that at no time did the teller notify Petitioner that the Bank would pay on the check.
Rather, the facts show that:
[T]he check was given back to [Petitioner] by the teller so that he could put his thumbprint signature on it,
not to notify or give him rights on the purported acceptance. After appellant declined to put his
thumbprint signature on the check, he was informed by both the teller and the branch manager that it was
against bank policy to honor the check without a thumbprint signature. Indignant, [Petitioner] walked out
of the bank with the check.
As the intermediate appellate court correctly pointed out, the negotiation of the check is in the nature of a
contract, and there can be no agreement until notice of acceptance is received. As a result, there was never
acceptance as defined by § 3-409(a), and thus the Bank, pursuant to § 3-408 never was obligated to pay
the check under § 3-413(a). Thus, the answer to Petitioner’s second question [Did the lower court err in
finding the Bank did not accept the…check at issue, as “acceptance” is defined in UCC Section 3-409?] is
“no.”
“Conversion” under § 3-420.
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Because it never accepted the check, Bank of America argues that the intermediate appellate court also
correctly concluded that the Bank did not convert the check or its proceeds under § 3-420. Again, we must
agree. The Court of Special Appeals stated:
“Conversion,” we have held, “requires not merely temporary interference with property rights, but the
exercise of unauthorized dominion and control to the complete exclusion of the rightful possessor.”
[Citation] At no time did [Respondent] exercise “unauthorized dominion and control [over the check] to
the complete exclusion of the rightful possessor,” [Petitioner].
[Petitioner] voluntarily gave the check to [Respondent’s] teller. When [Petitioner] indicated to the teller
that he was not an account holder, she gave the check back to him for a thumbprint signature in
accordance with bank policy. After being informed by both [Respondent’s] teller and branch manager that
it was [Respondent’s] policy not to cash a non-account holder’s check without a thumbprint signature,
[Petitioner] left the bank with the check in hand.
Because [Petitioner] gave the check to the teller, [Respondent’s] possession of that check was anything but
“unauthorized,” and having returned the check, within minutes of its receipt, to [Petitioner] for his
thumbprint signature, [Respondent] never exercised “dominion and control [over it] to the complete
exclusion of the rightful possessor,” [Petitioner]. In short, there was no conversion.
D. “Reasonable Identification” under § 3-501(b)(2)(ii) and “Dishonor” under § 3-502
We now turn to the issue of whether the Bank’s refusal to accept the check as presented constituted
dishonor under § 3-501 and § 3-502 as Petitioner contends. Petitioner’s argument that Bank of America
dishonored the check under § 3-502(d) fails because that section applies to dishonor of an accepted draft.
We have determined, supra, [above] that Bank of America never accepted the draft. Nevertheless, the
question remains as to whether Bank of America dishonored the draft under § 3-502(b)…
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(2) Upon demand of the person to whom presentment is made, the person making presentment must (i)
exhibit the instrument, (ii) give reasonable identification…
(3) Without dishonoring the instrument, the party to whom presentment is made may (i) return the
instrument for lack of a necessary indorsement, or (ii) refuse payment or acceptance for failure of the
presentment to comply with the terms of the instrument, an agreement of the parties, or other applicable
law or rule.
The question is whether requiring a thumbprint constitutes a request for “reasonable identification”
under § 3-501(b)(2)(ii). If it is “reasonable,” then under § 3-501(b)(3)(ii) the refusal of the Bank to accept
the check from Petitioner did not constitute dishonor. If, however, requiring a thumbprint is not
“reasonable” under § 3-501(b)(2)(ii), then the refusal to accept the check may constitute dishonor under §
3-502(b)(2). The issue of dishonor is arguably relevant because Petitioner has no cause of action against
any party, including the drawer, until the check is dishonored.
Respondent Bank of America argues that its relationship with its customer is contractual, [Citations] and
that in this case, its contract with its customer, the drawer, authorizes the Bank’s use of the Thumbprint
Signature Program as a reasonable form of identification.
According to Respondent, this contractual agreement allowed it to refuse to accept the check, without
dishonoring it pursuant to § 3-501(b)(3)(ii), because the Bank’s refusal was based upon the presentment
failing to comply with “an agreement of the parties.” The intermediate appellate court agreed. We,
however, do not.
…Bank and its customer cannot through their contract define the meaning of the term “reasonable” and
impose it upon parties who are not in privity with that contract. Whether requiring a thumbprint
constitutes “reasonable identification” within the meaning of § 3-501(b)(2)(ii) is therefore a broader
policy consideration, and not, as argued in this case, simply a matter of contract. We reiterate that the
contract does not apply to Petitioner and, similarly, does not give him a cause of action against the Bank
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for refusing to accept the check. This also means that the Bank cannot rely on the contract as a defense
against the Petitioner, on the facts presented here, to say that it did not dishonor the check.
Petitioner, as noted, argues that requiring a thumbprint violates his privacy, and further argues that a
thumbprint is not a reasonable form of identification because it does not prove contemporaneously the
identity of an over the counter presenter at the time presentment is made. According to Petitioner, the
purpose of requiring “reasonable identification” is to allow the drawee bank to determine that the
presenter is the proper person to be paid on the instrument. Because a thumbprint does not provide that
information at the time presentment and payment are made, Petitioner argues that a thumbprint cannot
be read to fall within the meaning of “reasonable identification” for the purposes of § 3-501(b)(2)(ii).
Bank of America argues that the requirement of a thumbprint has been upheld, in other non-criminal
circumstances, not to be an invasion of privacy, and is a reasonable and necessary industry response to
the growing problem of check fraud. The intermediate appellate court agreed, pointing out that the form
of identification was not defined by the statute, but that the Code itself recognized a thumbprint as a form
of signature, § 1-201(39), and observing that requiring thumbprint or fingerprint identification has been
found to be reasonable and not to violate privacy rights in a number of non-criminal contexts.…
We agree with [Petitioner] that a thumbprint cannot be used, in most instances, to confirm the identity of
a non-account checkholder at the time that the check is presented for cashing, as his or her thumbprint is
usually not on file with the drawee at that time. We disagree, however, with [Petitioner’s] conclusion that
a thumbprint signature is therefore not “reasonable identification” for purposes of § 3-501(b)(2).
Nowhere does the language of § 3-501(b)(2) suggest that “reasonable identification” is limited to
information [Bank] can authenticate at the time presentment is made. Rather, all that is required is that
the “person making presentment must…give reasonable identification.” § 3-501(b)(2). While providing a
thumbprint signature does not necessarily confirm identification of the checkholder at presentment—
unless of course the drawee bank has a duplicate thumbprint signature on file—it does assist in the
identification of the checkholder should the check later prove to be bad. It therefore serves as a powerful
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deterrent to those who might otherwise attempt to pass a bad check. That one method provides
identification at the time of presentment and the other identification after the check may have been
honored, does not prevent the latter from being “reasonable identification” for purposes of § 3-501(b)(2)
[Citation].
[So held the lower courts.] We agree, and find this conclusion to be compelled, in fact, by our State’s
Commercial Law Article.
The reason has to do with warranties. The transfer of a check for consideration creates both transfer
warranties (§ 3-416(a) and (c)) and presentment warranties (§ 3-417(a) and (e)) which cannot be
disclaimed. The warranties include, for example, that the payee is entitled to enforce the instrument and
that there are no alterations on the check. The risk to banks is that these contractual warranties may be
breached, exposing the accepting bank to a loss because the bank paid over the counter on an item which
was not properly payable.…In such an event, the bank would then incur the expense to find the presenter,
to demand repayment, and legal expenses to pursue the presenter for breach of his warranties.
In short, when a bank cashes a check over the counter, it assumes the risk that it may suffer losses for
counterfeit documents, forged endorsements, or forged or altered checks. Nothing in the Commercial Law
Article forces a bank to assume such risks. See [Citations] To the extent that banks are willing to cash
checks over the counter, with reasonable identification, such willingness expands and facilitates the
commercial activities within the State.…
Because the reduction of risk promotes the expansion of commercial practices, we… conclude that a
bank’s requirement of a thumbprint placed upon a check presented over the counter by a non-customer is
reasonable. [Citations] As the intermediate appellate court well documented, the Thumbprint Program is
part of an industry wide response to the growing threat of check fraud. Prohibiting banks from taking
reasonable steps to protect themselves from losses could result in banks refusing to cash checks of non-
customers presented over the counter at all, a result which would be counter to the direction of § 1-
102(2)(b).
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As a result of this conclusion, Bank of America in the present case did not dishonor the check when it
refused to accept it over the counter. Under § 3-501(b)(3)(ii), Bank of America “refused payment or
acceptance for failure of the presentment to comply with…other applicable law or rule.” The rule not
complied with by the Petitioner-presenter was § 3-502(b)(2)(ii), in that he refused to give what we have
determined to be reasonable identification. Therefore, there was no dishonor of the check by Bank of
America’s refusal to accept it. The answer to Petitioner’s third question is therefore “no,” [Did Bank
dishonor the check?]…
Judgment of the court of special appeals affirmed; costs to be paid by petitioner.
Eldridge, J., concurring in part and dissenting in part.
I cannot agree with the majority’s holding that, after the petitioner presented his driver’s license and a
major credit card, it was “reasonable” to require the petitioner’s thumbprint as identification.
Today, honest citizens attempting to cope in this world are constantly being required to show or give
drivers’ licenses, photo identification cards, social security numbers, the last four digits of social security
numbers, mothers’ “maiden names,” 16 digit account numbers, etc. Now, the majority takes the position
that it is “reasonable” for banks and other establishments to require, in addition, thumbprints and
fingerprints. Enough is enough. The most reasonable thing in this case was petitioner’s “irritation with the
Bank of America’s Thumbprint Signature Program.” Chief Judge Bell has authorized me to state that he
joins this concurring and dissenting opinion.
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C A S E Q U E S T I O N S
1. Petitioner claimed (a) he made a valid presentment, (b) Bank accepted the
instrument, (c) Bank dishonored the acceptance, and (d) Bank converted the
money and owes it to him. What did the court say about each assertion?
2. There was no dispute that there was enough money in the drawer’s account
to pay the check, so why didn’t Petitioner just deposit it in his own account
(then he wouldn’t have been required to give a thumbprint)?
3. What part of UCC Article 3 became relevant to the question of whether it was
reasonable for Bank to demand Petitioner’s thumbprint?
4. How do the presentment and transfer warranties figure into the majority
opinion?
5. What did the dissenting judges find fault with in the majority’s opinion? What
result would have obtained if the minority side had prevailed?
Breach of Transfer Warranties and the Bank’s Obligation to Act in
Good Faith
PNC Bank v. Robert L. Martin
2010 WL 3271725, U.S. Dist. Ct. (Ky. 2010)
Coffman, J.
This matter is before the court on plaintiff PNC Bank’s motion for summary judgment. The court will
grant the motion as to liability and damages, because the defendant, Robert L. Martin, fails to raise any
genuine issue of material fact, and the evidence establishes that Martin breached his transfer warranties
and account agreement with PNC.…
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I. Background
Martin, an attorney, received an e-mail message on August 16, 2008, from a person who called himself
Roman Hidotashi. Hidotashi claimed that he was a representative of Chipang Lee Song Manufacturing
Company and needed to hire a lawyer to collect millions of dollars from past-due accounts of North
American customers. Martin agreed to represent the company.
On September 8, 2008, Martin received a check for $290,986.15 from a purported Chipang Lee Song
Manufacturing Company customer, even though Martin had yet to commence any collections work. The
check, which was drawn on First Century Bank USA, arrived in an envelope with a Canadian postmark
and no return address. The check was accompanied by an undated transmittal letter. Martin endorsed the
check and deposited it in his client trust account at PNC. Martin then e-mailed Hidotashi, reported that
he had deposited the check, and stated that he would await further instructions.
Hidotashi responded to Martin’s e-mail message on September 9, 2008. Hidotashi stated that he had an
“immediate need for funds” and instructed Martin to wire $130,600 to a bank account in Tokyo. Martin
went to PNC’s main office in Louisville the next morning and met with representative Craig Friedman.
According to Martin, Friedman advised that the check Martin deposited had cleared. Martin instructed
Friedman to wire $130,600 to the Tokyo account.
Martin returned to PNC later the same day. According to Martin, Friedman accessed Martin’s account
information and said, “I don’t understand this. The check was cleared yesterday. Let me go find out what
is going on.” Friedman returned with PNC vice president and branch manager Sherry Jennewein, who
informed Martin that the check was fraudulent. According to Martin, Jennewein told him that she wished
he had met with her instead of Friedman because she never would have authorized the wire transfer.
First Century Bank, on which the check was drawn, dishonored the check. PNC charged Martin’s account
for $290,986.15. PNC, however, could not recover the $130,600 the bank had wired to the Tokyo account.
Martin’s account, as a result, was left overdrawn by $124,313.01.
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PNC commenced this action. PNC asserts one count for Martin’s alleged breach of the transfer warranties
provided in Kentucky’s version of the Uniform Commercial Code and one count for breach of Martin’s
account agreement. PNC moves for summary judgment on both counts.
II. Discussion
A. Breach of transfer warranties
PNC is entitled to summary judgment on its breach-of-transfer-warranties claim because the undisputed
facts
establish Martin’s liability.
Transfer warranties trigger when a person transfers an instrument for consideration. UCC § 3-416(a)). A
transfer, for purposes of the statute, occurs when an instrument is delivered by a person other than its
issuer for the purpose of giving to the person receiving delivery the right to enforce the instrument. § 3-
203(a). Martin transferred an instrument to PNC when he endorsed the check and deposited it in his
account, thereby granting PNC the right to enforce the check. [Citation] Consideration, for purposes of the
statute, need only be enough to support a simple contract. [Citation] Martin received consideration from
PNC because PNC made the funds provisionally available before confirming whether First Century Bank
would honor the check.
As a warrantor, Martin made a number of representations to PNC, including representations that he was
entitled to enforce the check and that all signatures on the check were authentic and authorized. [UCC] §
3-416(a). Martin breached his warranties twofold. First, he was not entitled to enforce the check because
the check was a counterfeit and, as a result, Martin had nothing to enforce. Second, the drawer’s signature
was not authentic because the check was a counterfeit.
Martin does not dispute these facts. Instead, Martin argues, summary judgment is inappropriate because
Friedman and Jennewein admitted that PNC made a mistake when Friedman said that he thought the
check cleared and Jennewein said that she never would have authorized the wire transfer. Friedman’s and
Jennewein’s statements are immaterial facts. The transfer warranties placed the risk of loss on Martin,
regardless of whether PNC, Martin, or both of them were at fault. [Citation] Martin, in any event, fails to
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support Friedman’s and Jennewein’s statements with firsthand deposition testimony or affidavits, so the
statements do not qualify as competent evidence. [Citation]
Martin claims that the risk of loss falls on the bank. But the cases Martin cites in support of that
proposition suffer from two defects. First, all but one of the cases were decided before the Kentucky
General Assembly adopted the Uniform Commercial Code. Martin fails to argue, much less demonstrate,
that his cases are good law. Second, Martin’s cases are inapposite even if they are good law. [UCC] § 3-
416(a) addresses whether a transferor or transferee bears the risk of loss. Martin’s cases address who
bears the risk of loss as between other players: a drawee bank and a collecting agent [Citation]; a drawer
and a drawee bank [Citation]; and an execution creditor and drawee bank [Citation—all of these cases are
from 1910–1930]. The one modern case that Martin cites is also inapposite because the case involves a
drawer and a drawee bank. [Citation]
In sum, the court must grant summary judgment in PNC’s favor on the breach-of-transfer-warranties
claim because the parties do not contest any material facts, which establish Martin’s liability.
B. Breach of Contract
PNC is also entitled to summary judgment on its breach-of-contract claim because the undisputed facts
establish Martin’s liability.
To support its allegation that a contract existed, PNC filed copies of Martin’s account agreement and
Martin’s accompanying signature card. Under the agreement’s terms, Martin agreed to bind himself to the
agreement by signing the signature card. Martin does not dispute that the account agreement was a
binding contract, and he does not dispute the account agreement’s terms.
Martin’s account agreement authorized PNC to charge Martin’s account for the value of any item returned
to PNC unpaid or any item on which PNC did not receive payment. If PNC’s charge-back created an
overdraft, Martin was required to pay PNC the amount of the overdraft immediately.
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The scam of which Martin was a victim falls squarely within the charge-back provision of the account
agreement. The check was returned to PNC unpaid. PNC charged Martin’s account, leaving it with an
overdraft. Martin was obliged to pay PNC immediately.
As with the breach-of-transfer-warranties claim, Martin cannot defend against the breach-of-contract
claim by arguing that PNC made a mistake. The account agreement authorized PNC to charge back
Martin’s account “even if the amount of the item has already been made available to you.” The account
agreement, as a result, placed the risk of loss on Martin. Any mistake on PNC’s part was immaterial
because PNC always had the right to charge back Martin’s account. [Citation]
C. Martin’s Counterclaims
Martin has asserted counterclaims for violations of various Uniform Commercial Code provisions;
negligence and failure to exercise ordinary care; negligent misrepresentation; breach of contract and
breach of the implied covenants of good faith and fair dealing; detrimental reliance; conversion; and
negligent retention and supervision. Martin argues that “[t]o the extent that either party should be
entitled to summary judgment in this case, it would be Martin with respect to his counterclaims against
PNC.” Martin, however, has not moved for summary judgment on his counterclaims, and the court does
not address them on PNC’s motion.
D. Damages
PNC’s recovery under both theories of liability is contingent on PNC’s demonstrating that it acted in good
faith. PNC may recover for breach of the transfer warranties only if it took the check in good faith. § 3-
416(b). Moreover, PNC must satisfy the implied covenant of good faith and fair dealing, which Kentucky
law incorporates in the account agreement. [Citation] Good faith, under both theories, means honesty in
fact and the observance of reasonable commercial standards of fair dealing. That means “contracts impose
on the parties thereto a duty to do everything necessary to carry them out.” [Citation]
The undisputed evidence establishes that PNC acted in good faith. PNC accepted deposit of Martin’s
check, attempted to present the check for payment at First Century Bank, and charged back Martin’s
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account when the check was dishonored. Martin cannot claim that PNC lacked good faith and fair dealing
when PNC took actions permitted under the contract. [Citation] Although PNC might have had the ability
to investigate the authenticity of the check before crediting Martin’s account, PNC bore no such obligation
because Martin warranted that the check was authentic. [UCC] § 3-416(a). Friedman’s and Jennewein’s
statements do not impute a lack of good faith to PNC, even if Martin could support the statements with
competent evidence. The Uniform Commercial Code and the account agreement place the risk of loss on
Martin, even if PNC made a mistake.
Martin suggests that an insurance carrier might have already reimbursed PNC for the loss. Martin,
however, presents no evidence of reimbursement, which PNC, presumably, would have disclosed in
discovery.
PNC, therefore, may recover from Martin the overdraft value of $124,313.01, which is the loss PNC
suffered as a result of Martin’s breach of the transfer warranties and breach of contract. [UCC] § 3-
416(b)…
III. Conclusion
For the foregoing reasons, IT IS ORDERED that PNC’s motion for summary judgment is granted…to the
extent that…PNC is permitted to recover $124,313.01 from Martin.…
C A S E Q U E S T I O N S
1. How did Martin come to have an overdraft of $124,313.01 in his account?
2. Under what UCC provision did the court hold Martin liable for this amount?
3. The contract liability the court discusses was not incurred by Martin on
account of his signature on the check (though he did indorse it); what was the
contract liability?
4. If the bank had not taken the check in good faith (honesty in fact and
observing reasonable commercial standards), what would the consequence
have been, and why?
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5. Is a reader really constrained here to say that Mr. Martin got totally scammed,
or was his behavior reasonable under the circumstances?
[1] Section 4-208 provides as follows: “(a) If an unaccepted draft is presented [in this case, by
BOK] to the drawee [BNH] for payment or acceptance and the drawee pays or accepts the
draft,(i) the person obtaining payment or acceptance, at the time of presentment, and(ii) a
previous transferor of the draft, at the time of transfer, warrant to the drawee that pays or
accepts the draft in good faith, that:(1) The warrantor is, or was, at the time the warrantor
transferred the draft, a person entitled to enforce the draft or authorized to obtain payment or
acceptance of the draft on behalf of a person entitled to enforce the draft;(2) The draft has not
been altered; and(3) The warrantor has no knowledge that the signature of the purported
drawer of the draft is unauthorized.(b) A drawee making payment may recover from a
warrantor damages for breach of warranty.…(c) If a drawee asserts a claim for breach of
warranty under subsection (a) of this section based on an unauthorized indorsement of the
draft or an alteration of the draft, the warrantor may defend by proving that…the drawer [here,
Farm Bureau] is precluded under Section 3-406 or 4-406 of this title from asserting against the
drawee the unauthorized indorsement or alteration.”
[2] (a) A person whose failure to exercise ordinary care substantially contributes to an
alteration of an instrument or to the making of a forged signature on an instrument is
precluded from asserting the alteration or the forgery against a person who, in good faith, pays
the instrument or takes it for value or for collection.
[3] The parties do not address Section 3-406(b), which states that the person asserting
preclusion may be held partially liable under comparative negligence principles for failing to
exercise ordinary care in paying or taking the check. They also do not address any possible
negligence by either bank in accepting the forged check without confirming the legitimacy of
Conseco’s indorsement.
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[4] Petitioner’s choice could be viewed as an attempt at risk shifting. Petitioner, an attorney,
may have known that he could have suffered a fee charged by his own bank if he deposited a
check into his own account and then the bank on which it was drawn returned it for insufficient
funds, forged endorsement, alteration, or the like. Petitioner’s action, viewed against that
backdrop, would operate as a risk-shifting strategy, electing to avoid the risk of a returned-
check fee by presenting in person the check for acceptance at the drawee bank.
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16.6 Summary and Exercises
Summary
As a general rule, one who signs a note as maker or a draft as drawer is personally liable unless he or she
signs in a representative capacity and either the instrument or the signature shows that the signing has
been made in a representative capacity. Various rules govern the permutations of signatures when an
agent and a principal are involved.
The maker of a note and the acceptor of a draft have primary contract liability on the instruments.
Secondarily liable are drawers and indorsers. Conditions precedent to secondary liability are presentment,
dishonor, and notice of dishonor. Under the proper circumstances, any of these conditions may be waived
or excused.
Presentment is a demand for payment made on the maker, acceptor, or drawee, or a demand for
acceptance on the drawee. Presentment must be made (1) at the time specified in the instrument unless
no time is specified, in which case it must be at the time specified for payment, or (2) within a reasonable
time if a sight instrument.
Dishonor occurs when acceptance or payment is refused after presentment, at which time a holder has the
right of recourse against secondary parties if he has given proper notice of dishonor.
A seller-transferor of any commercial paper gives five implied warranties, which become valuable to a
holder seeking to collect in the event that there has been no indorsement or the indorsement has been
qualified. These warranties are (1) good title, (2) genuine signatures, (3) no material alteration, (4) no
defenses by other parties to the obligation to pay the transferor, and (5) no knowledge of insolvency of
maker, acceptor, or drawer.
A holder on presentment makes certain warranties also: (1) entitled to enforce the instrument, (2) no
knowledge that the maker’s or drawer’s signature is unauthorized, and (3) no material alteration.
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Among the ways in which the parties may be discharged from their contract to honor the instrument are
the following: (1) payment or satisfaction, (2) tender of payment, (3) cancellation and renunciation, (4)
impairment of recourse or of collateral, (5) reacquisition, (6) fraudulent and material alteration, (7)
certification, (8) acceptance varying a draft, and (9) unexcused delay in presentment or notice of
dishonor.
E X E R C I S E S
1. Howard Corporation has the following instrument, which it purchased in good
faith and for value from Luft Manufacturing, Inc.
Figure 16.2
Judith Glen indorsed the instrument on the back in her capacity as president of
Luft when it was transferred to Howard on July 15, 2012.
a. Is this a note or a draft?
b. What liability do McHugh and Luft have to Howard? Explain.
An otherwise valid negotiable bearer note is signed with the forged signature of
Darby. Archer, who believed he knew Darby’s signature, bought the note in good
faith from Harding, the forger. Archer transferred the note without indorsement
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to Barker, in partial payment of a debt. Barker then sold the note to Chase for 80
percent of its face amount and delivered it without indorsement. When Chase
presented the note for payment at maturity, Darby refused to honor it, pleading
forgery. Chase gave proper notice of dishonor to Barker and to Archer.
a. Can Chase hold Barker liable? Explain.
b. Can Chase hold Archer liable? Explain.
c. Can Chase hold Harding liable? Explain.
Marks stole one of Bloom’s checks, already signed by Bloom and made payable to
Duval, drawn on United Trust Company. Marks forged Duval’s signature on the back of
the check and cashed it at Check Cashing Company, which in turn deposited it with its
bank, Town National. Town National proceeded to collect on the check from United.
None of the parties was negligent. Who will bear the loss, assuming Marks cannot be
found?
Robb stole one of Markum’s blank checks, made it payable to himself, and forged
Markum’s signature on it. The check was drawn on the Unity Trust Company. Robb
cashed the check at the Friendly Check Cashing Company, which in turn deposited it with
its bank, the Farmer’s National. Farmer’s National proceeded to collect on the check
from Unity. The theft and forgery were quickly discovered by Markum, who promptly
notified Unity. None of the parties mentioned was negligent. Who will bear the loss,
assuming the amount cannot be recovered from Robb? Explain.
Pat stole a check made out to the order of Marks, forged the name of Marks on the
back, and made the instrument payable to herself. She then negotiated the check to
Harrison for cash by signing her own name on the back of the instrument in Harrison’s
presence. Harrison was unaware of any of the facts surrounding the theft or forged
indorsement and presented the check for payment. Central County Bank, the drawee
bank, paid it. Disregarding Pat, who will bear the loss? Explain.
American Music Industries, Inc., owed Disneyland Records over $340,000. As
evidence of the debt, Irv Schwartz, American’s president, issued ten promissory notes,
signing them himself. There was no indication they were obligations of the corporation,
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American Music Industries, Inc., or that Irv Schwartz signed them in a representative
capacity, but Mr. Schwartz asserted that Disneyland knew the notes were corporate
obligations, not his personally. American paid four of the notes and then defaulted, and
Disneyland sued him personally on the notes. He asserted he should be allowed to prove
by parol evidence that he was not supposed to be liable. Is he personally liable?
Explain. [1]
Alice Able hired Betty Baker as a bookkeeper for her seamstress shop. Baker’s duties
included preparing checks for Able to sign and reconciling the monthly bank statements.
Baker made out several checks to herself, leaving a large space to the left of the amount
written, which Able noticed when she signed the checks. Baker took the signed checks,
altered the amount by adding a zero to the right of the original amount, and cashed
them at First Bank, the drawee. Able discovered the fraud, Baker was sent to prison, and
Able sued First Bank, claiming it was liable for paying out on altered instruments. What is
the result?
Christina Reynolds borrowed $16,000 from First Bank to purchase a used Ford
automobile. Bank took a note and a secured interest in the car (the car is collateral for
the loan). It asked for further security, so Christina got her sister Juanita to sign the note
as an accommodation maker. Four months later, Christina notified Bank that she wished
to sell the Ford for $14,000 in order to get a four-wheel drive Jeep, and Bank released its
security interest. When Christina failed to complete payment on the note for the Ford,
Bank turned to Juanita. What, if anything, does Juanita owe?
S E L F – T E S T Q U E S T I O N S
1. Drawers and indorsers have
a. primary contract liability
b. secondary liability
c. no liability
d. none of the above
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Conditions(s) needed to establish secondary liability include
a. presentment
b. dishonor
c. notice of dishonor
d. all of the above
A demand for payment made on a maker, acceptor, or drawee is called
a. protest
b. notice
c. presentment
d. certification
An example of an implied warranty given by a seller of commercial paper
includes a warranty
a. of good title
b. that there are no material alterations
c. that signatures are genuine
d. covering all of the above
Under UCC Article 3, discharge may result from
a. cancellation
b. impairment of collateral
c. fraudulent alteration
d. all of the above
S E L F – T E S T A N S W E R S
1. b
2. d
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3. c
4. d
5. d
[1] Schwartz v. Disneyland Vista Records, 383 So.2d 1117 (Fla. App. 1980).
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Chapter 17
Legal Aspects of Banking
L E A R N I N G O B J E C T I V E S
After reading this chapter, you should understand the following:
1. Banks’ relationships with their customers for payment or nonpayment of checks;
2. Electronic funds transfers and how the Electronic Fund Transfer Act affects the
bank-consumer relationship;
3. What a wholesale funds transfer is and the scope of Article 4A;
4. What letters of credit are and how they are used.
To this point we have examined the general law of commercial paper as found in Article 3 of the UCC.
Commercial paper—notwithstanding waves of digital innovation—still passes through bank collection
processes by the ton every day, and Article 3 applies to this flow. But there is also a separate article in the
UCC, Article 4, “Bank Deposits and Collections.” In case of conflict with Article 3 rules, those of Article 4
govern.
A discussion of government regulation of the financial services industry is beyond the scope of this book.
Our focus is narrower: the laws that govern the operations of the banking system with respect to its
depositors and customers. Although histories of banking dwell on the relationship between banks and the
national government, the banking law that governs the daily operation of checking accounts is state
based—Article 4 of the UCC. The enormous increase in noncheck banking has given rise to the Electronic
Fund Transfer Act, a federal law.
Chapter 17 from Advanced Business Law and the Legal Environment was adapted
by The Saylor Foundation under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0
license without attribution as requested by the work’s original creator or licensee. © 2014, The Saylor Foundation.
http://www.saylor.org/site/textbooks/Advanced%20Business%20Law%20and%20the%20Legal%20Environment
http://creativecommons.org/licenses/by-sa/3.0/
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17.1 Banks and Their Customers
L E A R N I N G O B J E C T I V E S
1. Understand how checks move, both traditionally and electronically.
2. Know how Article 4 governs the relationship between a bank and its customers.
The Traditional Bank Collection Process
The Traditional System in General
Once people mostly paid for things with cash: actual bills. That is obviously not very convenient or safe: a
lost ten-dollar bill is almost certainly gone, and carrying around large quantities of cash is dangerous
(probably only crooks do much of that). Today a person might go for weeks without reaching for a bill
(except maybe to get change for coins to put in the parking meter). And while it is indisputable that
electronic payment is replacing paper payment, the latter is still very significant. Here is an excerpt from a
Federal Reserve Report on the issue:
In 2008, U.S. consumers had more payment instruments to choose from than ever before: four types of
paper instruments—cash, check, money order, and travelers checks; three types of payment cards—debit,
credit, and prepaid; and two electronic instruments—online banking bill payment (OBBP) and electronic
bank account deductions (EBAD) using their bank account numbers. The average consumer had 5.1 of the
nine instruments in 2008, and used 4.2 instruments in a typical month. Consumers made 52.9 percent of
their monthly payments with a payment card. More consumers now have debit cards than credit cards
(80.2 percent versus 78.3 percent), and consumers use debit cards more often than cash, credit cards, or
checks individually. However, paper instruments are still popular and account for 36.5 percent of
consumer payments. Most consumers have used newer electronic payments at some point, but these only
account for 9.7 percent of consumer payments. Security and ease of use are the characteristics of payment
instruments that consumers rate as most important. [1]
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Americans still wrote some thirty billion checks in 2006. [2] You can readily imagine how complex the
bank collection process must be to cope with such a flood of paper. Every check written must eventually
come back to the bank on which it is drawn, after first having been sent to the landlord, say, to pay rent,
then to the landlord’s bank, and from there through a series of intermediate banks and collection centers.
Terminology
To trace the traditional check-collection process, it is necessary to understand the terminology used. The
bank upon which a check is written is the payor bank (the drawee bank). The depository bank is the
one the payee deposits the check into. Two terms are used to describe the various banks that may handle
the check after it is written: collecting banks and intermediary banks. All banks that handle the check—
except the payor bank—are collecting banks(including the depository bank); intermediary banks are
all the collecting banks except the payor and depository banks. A bank can take on more than one role:
Roger in Seattle writes a check on his account at Seattle Bank and mails it to Julia in Los Angeles in
payment for merchandise; Julia deposits it in her account at Bank of L.A. Bank of L.A. is a depository
bank and a collecting bank. Any other bank through which the check travels (except the two banks already
mentioned) is an intermediary bank.
Collection Process between Customers of the Same Bank
If the depository bank is also the payor bank (about 30% of all checks), the check is called an “on-us” item
and UCC 4-215(e)(2) provides that—if the check is not dishonored—it is available by the payee “at the
opening of the bank’s second banking day following receipt of the item.” Roger writes a check to Matthew,
both of whom have accounts at Seattle Bank; Matthew deposits the check on Monday. On Wednesday the
check is good for Matthew (he may have been given “provisional credit” before then, as discussed below,
the bank could subtract the money from his account if Roger didn’t have enough to cover the check).
Collection Process between Customers of Different Banks
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Roger in Seattle writes a check on Seattle Bank payable to Julia in L.A. Julia deposits it in her account at
L.A. Bank, the depository bank. L.A. Bank must somehow present the check to Seattle Bank either directly
or through intermediary banks. If the collecting banks (again, all of them except Seattle Bank) act before
the midnight deadline following receipt, they have acted “seasonably” according to UCC 4-202. When the
payor bank—Seattle Bank—gets the check it must pay it, unless the check is dishonored or returned (UCC
4-302).
Physical Movement of Checks
The physical movement of checks—such as it still occurs—is handled by three possible systems.
The Federal Reserve System’s regional branches process checks for banks holding accounts with them.
The Feds charge for the service, and prior to 2004 it regularly included check collection, air
transportation of checks to the Reserve Bank (hired out to private contractors) and ground transportation
delivery of checks to paying banks. Reserve Banks handle about 27 percent of US checks, but the air
service is decreasing with “Check 21,” a federal law discussed below, that allows electronic transmission of
checks.
Correspondent banks are banks that have formed “partnerships” with other banks in order to
exchange checks and payments directly, bypassing the Federal Reserve and its fees. Outside banks may go
through a correspondent bank to exchange checks and payments with one of its partners.
Correspondent banks may also form a clearinghouse corporation, in which members exchange
checks and payments in bulk, instead of on a check-by-check basis, which can be inefficient considering
that each bank might receive thousands of checks in a day. The clearinghouse banks save up the checks
drawn on other members and exchange them on a daily basis. The net payments for these checks are often
settled through Fedwire, a Federal Reserve Board electronic funds transfer (EFT) system that handles
large-scale check settlement among US banks. Correspondent banks and clearinghouse corporations
make up the private sector of check clearing, and together they handle about 43 percent of US checks.
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The Electronic System: Check 21 Act
Rationale for the “Check Clearing for the 21st Century Act”
After the events of September 11, 2001, Congress felt with renewed urgency that banks needed to present
and clear checks in a way not dependent upon the physical transportation of the paper instruments by air
and ground, in case such transportation facilities were disrupted. The federal Check Clearing for the 21st
Century Act (Public Law 108-100)—more commonly referred to as “Check 21 Act”—became effective in
2004.
Basic Idea of Check 21 Act
Check 21 Act provides the legal basis for the electronic transportation of check data. A bank scans the
check. The data on the check is already encoded in electronically readable numbers and the data, now
separated (“truncated”) from the paper instrument (which may be destroyed), is transmitted for
processing. “The Act authorizes a new negotiable instrument, called a substitute check, to replace the
original check. A substitute check is a paper reproduction of the original check that is suitable for
automated processing in the same manner as the original check. The Act permits banks to provide
substitute checks in place of original checks to subsequent parties in the check processing stream.…Any
financial institution in the check clearing process can truncate the original check and create a substitute
check. [3] However, in the check collection process it is not required that the image be converted to a
substitute check: the electronic image itself may suffice.
For example, suppose Roger in Seattle writes a check on Seattle Bank payable to Julia in L.A. and mails it
to her. Julia deposits it in her account at L.A. Bank, the depository bank. L.A. Bank truncates the check
(again, scans it and destroys the original) and transmits the data to Seattle Bank for presentation and
payment. If for any reason Roger, or any appropriate party, wants a paper version, a substitute check will
be created (see Figure 17.1 “Substitute Check Front and Back”). Most often, though, that is not necessary:
Roger does not receive the actual cancelled checks he wrote in his monthly statement as he did formerly.
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He receives instead a statement listing paid checks he’s written and a picture of the check (not a substitute
check) is available to him online through his bank’s website. Or he may receive his monthly statement
itself electronically, with pictures of the checks he wrote available with a mouse click. Roger may also
dispense with mailing the check to Julia entirely, as noted in the discussion of electronic funds transfers.
Figure 17.1 Substitute Check Front and Back
Front and back of a substitute check (not actual size).
Images from Federal Reserve Board:http://www.federalreserve.gov/pubs/check21/consumer_guide
Substitute checks are legal negotiable instruments. The act provides certain warranties to protect
recipients of substitute checks that are intended to protect recipients against losses associated with the
check substitution process. One of these warranties provides that “[a] bank that transfers, presents, or
returns a substitute check…for which it receives consideration warrants…that…[t]he substitute check
meets the requirements of legal equivalence” (12 CFR § 229.52(a)(1)). The Check 21 Act does not replace
existing state laws regarding such instruments. The Uniform Commercial Code still applies, and we turn
to it next.
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Two notable consequences of the Check 21 Act are worth mentioning. The first is that a check may be
presented to the payor bank for payment very quickly, perhaps in less than an hour: the customer’s “float”
time is abbreviated. That means be sure you have enough money in your account to cover the checks that
you write. The second consequence of Check 21 Act is that it is now possible for anybody—you at home or
the merchant from whom you are buying something—to scan a check and deposit it instantly. “Remote
deposit capture” allows users to transmit a scanned image of a check for posting and clearing using a web-
connected computer and a check scanner. The user clicks to send the deposit to the desired existing bank
account. Many merchants are using this system: that’s why if you write a check at the hardware store you
may see it scanned and returned immediately to you. The digital data are transmitted, and the scanned
image may be retrieved, if needed, as a “substitute check.”
UCC Article 4: Aspects of Bank Operations
Reason for Article 4
Over the years, the states had begun to enact different statutes to regulate the check collection process.
Eighteen states adopted the American Bankers Association Bank Collection Code; many others enacted
Deferred Posting statutes. Not surprisingly, a desire for uniformity was the principal reason for the
adoption of UCC Article 4. Article 4 absorbed many of the rules of the American Bankers Association Code
and of the principles of the Deferred Posting statutes, as well as court decisions and common customs not
previously codified.
Banks Covered
Article 4 covers three types of banks: depository banks, payor banks, and collecting banks. These terms—
already mentioned earlier—are defined in UCC Section 4-105. A depositary bank is the first bank to which
an item is transferred for collection. Section 4-104 defines “item” as “an instrument or a promise or order
to pay money handled by a bank for collection or payment[,]…not including a credit or debit card slip.” A
payor bank is any bank that must pay a check because it is drawn on the bank or accepted there—the
drawee bank (a depositary bank may also be a payor bank). A collecting bank is any bank except the payor
bank that handles the item for collection.
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Technical Rules
Detailed coverage of Parts 2 and 3 of Article 4, the substantive provisions, is beyond the scope of this
book. However, Article 4 answers several specific questions that bank customers most frequently ask.
1. What is the effect of a “pay any bank” indorsement? The moment these words are indorsed on a
check, only a bank may acquire the rights of a holder. This restriction can be lifted whenever (a)
the check has been returned to the customer initiating collection or (b) the bank specially
indorses the check to a person who is not a bank (4-201).
2. May a depositary bank supply a missing indorsement? It may supply any indorsement of the
customer necessary to title unless the check contains words such as “payee’s indorsement
required.” If the customer fails to indorse a check when depositing it in his account, the bank’s
notation that the check was deposited by a customer or credited to his account takes effect as the
customer’s indorsement. (Section 4-205(1)).
3. Are any warranties given in the collection process? Yes. They are identical to those provided in
Article 3, except that they apply only to customers and collecting banks (4-207(a)). The customer
or collecting bank that transfers an item and receives a settlement or other consideration
warrants (1) he is entitled to enforce the item; (2) all signatures are authorized authentic; (3) the
item has not been altered; (4) the item is not subject to a defense or claim in recoupment; (5) he
has no knowledge of insolvency proceedings regarding the maker or acceptor or in the case of an
unaccepted draft, the drawer. These warranties cannot be disclaimed as to checks.
4. Does the bank have the right to a charge-back against a customer’s account, or refund? The
answer turns on whether the settlement was provisional or final. A settlement is the proper
crediting of the amount ordered to be paid by the instrument. Someone writes you a check for
$1,000 drawn on First Bank, and you deposit it in Second Bank. Second Bank will make a
“provisional settlement” with you—that is, it will provisionally credit your account with $1,000,
and that settlement will be final when First Bank debits the check writer’s account and credits
Second Bank with the funds. Under Section 4-212(1), as long as the settlement was still
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provisional, a collecting bank has the right to a “charge-back” or refund if the check “bounces” (is
dishonored). However, if settlement was final, the bank cannot claim a refund.
What determines whether settlement is provisional or final? Section 4-213(1) spells out four
events (whichever comes first) that will convert a payor bank’s provisional settlement into final
settlement: When it (a) pays the item in cash; (b) settles without reserving a right to revoke and
without having a right under statute, clearinghouse rule, or agreement with the customer; finishes
posting the item to the appropriate account; or (d) makes provisional settlement and fails to
revoke the settlement in the time and manner permitted by statute, clearinghouse rule, or
agreement. All clearinghouses have rules permitting revocation of settlement within certain time
periods. For example an item cleared before 10 a.m. may be returned and the settlement revoked
before 2 p.m. From this section it should be apparent that a bank generally can prevent a
settlement from becoming final if it chooses to do so.
Relationship with Customers
The relationship between a bank and its customers is governed by UCC Article 4. However, Section 4-
103(1) permits the bank to vary its terms, except that no bank can disclaim responsibility for failing to act
in good faith or to exercise ordinary care. Most disputes between bank and customer arise when the bank
either pays or refuses to pay a check. Under several provisions of Article 4, the bank is entitled to pay,
even though the payment may be adverse to the customer’s interest.
Common Issues Arising between Banks and Their Customers
Payment of Overdrafts
Suppose a customer writes a check for a sum greater than the amount in her account. May the bank pay
the check and charge the customer’s account? Under Section 4-401(1), it may. Moreover, it may pay on an
altered check and charge the customer’s account for the original tenor of the check, and if a check was
completed it may pay the completed amount and charge the customer’s account, assuming the bank acted
in good faith without knowledge that the completion was improper.
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Payment of Stale Checks
Section 4-404 permits a bank to refuse to pay a check that was drawn more than six months before being
presented. Banks ordinarily consider such checks to be “stale” and will refuse to pay them, but the same
section gives them the option to pay if they choose. A corporate dividend check, for example, will be
presumed to be good more than six months later. The only exception to this rule is for certified checks,
which must be paid whenever presented, since the customer’s account was charged when the check was
certified.
Payment of Deceased’s or Incompetent’s Checks
Suppose a customer dies or is adjudged to be incompetent. May the bank honor her checks? Section 4-405
permits banks to accept, pay, and collect an item as long as it has no notice of the death or declaration of
incompetence, and has no reasonable opportunity to act on it. Even after notice of death, a bank has ten
days to payor certify checks drawn on or prior to the date of death unless someone claiming an interest in
the account orders it to refrain from doing so.
Stop Payment Orders
Section 4-403 expressly permits the customer to order the bank to “stop payment” on any check payable
for her account, assuming the stop order arrives in enough time to reasonably permit the bank to act on it.
An oral stop order is effective for fourteen days; a follow-up written confirmation within that time is
effective for six months and can be renewed in writing. But if a stop order is not renewed, the bank will
not be liable for paying the check, even one that is quite stale (e.g.,Granite Equipment Leasing Corp. v.
Hempstead Bank, 326 N.Y.S. 2d 881 (1971)).
Wrongful Dishonor
If a bank wrongfully dishonors an item, it is liable to the customer for all damages that are a direct
consequence of (“proximately caused by”) the dishonor. The bank’s liability is limited to the damages
actually proved; these may include damages for arrest and prosecution. SeeSection 17.4 “Cases” under
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“Bank’s Liability for Paying over Customer’s ‘Stop Payment’ Order” (Meade v. National Bank of Adams
County).
Customers’ Duties
In order to hold a bank liable for paying out an altered check, the customer has certain duties under
Section 4-406. Primarily, the customer must act promptly in examining her statement of account and
must notify the bank if any check has been altered or her signature has been forged. If the customer fails
to do so, she cannot recover from the bank for an altered signature or other term if the bank can show that
it suffered a loss because of the customer’s slowness. Recovery may also be denied when there has been a
series of forgeries and the customer did not notify the bank within two weeks after receiving the first
forged item. See Section 17.4 “Cases” under “Customer’s Duty to Inspect Bank Statements” (the Planters
Bank v. Rogers case).
These rules apply to a payment made with ordinary care by the bank. If the customer can show that the
bank negligently paid the item, then the customer may recover from the bank, regardless of how dilatory
the customer was in notifying the bank—with two exceptions: (1) from the time she first sees the
statement and item, the customer has one year to tell the bank that her signature was unauthorized or
that a term was altered, and (2) she has three years to report an unauthorized indorsement.
The Expedited Funds Availability Act
In General
In addition to UCC Article 4 (again, state law), the federal Expedited Funds Availability Act—also referred
to as “Regulation CC” after the Federal Reserve regulation that implements it—addresses an aspect of the
relationship between a bank and its customers. It was enacted in 1988 in response to complaints by
consumer groups about long delays before customers were allowed access to funds represented by checks
they had deposited. It has nothing to do with electronic transfers, although the increasing use of electronic
transfers does speed up the system and make it easier for banks to comply with Regulation CC.
The Act’s Provisions
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The act provides that when a customer deposits a cashier’s check, certified check, or a check written on an
account in the same bank, the funds must be available by the next business day. Funds from other local
checks (drawn on institutions within the same Federal Reserve region) must be available within two
working days, while there is a maximum five-day wait for funds from out-of-town checks. In order for
these time limits to be effective, the customer must endorse the check in a designated space on the back
side. The FDIC sets out the law at its website: http://www.fdic.gov/regulations/laws/rules/6500-
3210.html.
K E Y T A K E A W A Y
The bank collection process is the method by which checks written on one bank are
transferred by the collecting bank to a clearing house. Traditionally this has been a
process of physical transfer by air and ground transportation from the depository bank
to various intermediary banks to the payor bank where the check is presented. Since
2004 the Check 21 Act has encouraged a trend away from the physical transportation of
checks to the electronic transportation of the check’s data, which is truncated (stripped)
from the paper instrument and transmitted. However, if a paper instrument is required,
a “substitute check” will recreate it. The UCC’s Article 4 deals generally with aspects of
the bank-customer relationship, including warranties on payment or collection of checks,
payment of overdrafts, stop orders, and customers’ duties to detect irregularities. The
Expedited Funds Availability Act is a federal law governing customer’s access to funds in
their accounts from deposited checks.
E X E R C I S E S
1. Describe the traditional check-collection process from the drawing of the check to
its presentation for payment to the drawee (payor) bank
2. Describe how the Check 21 Act has changed the check-collection process.
3. Why was Article 4 developed, and what is its scope of coverage?
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[1] Kevin Foster, et al., The 2008 Survey of Consumer Payment Choice, Federal Reserve Bank of
Boston, Public Policy Discussion Paper No. 09-10, p. 2 (April
2010), http://www.bos.frb.org/economic/ppdp/2009/ppdp0910 .
[2] Scott Schuh, Overview of the Survey of Consumer Payment Choice (SCPC) Program, Federal
Reserve Bank of Boston, p. 5 (May
2010).http://www.bos.frb.org/economic/cprc/presentations/2010/Schuh050610 .
[3] United States Treasury, The Check Clearing for the 21st Century Act: Frequently Asked
Questions, October
2004,http://www.justice.gov/ust/eo/private_trustee/library/chapter07/docs/check21/Check21
FAQs-final .
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17.2 Electronic Funds Transfers
L E A R N I N G O B J E C T I V E S
1. Understand why electronic fund transfers have become prevalent.
2. Recognize some typical examples of EFTs.
3. Know that the EFT Act of 1978 protects consumers, and recognize what some of
those protections—and liabilities—are.
4. Understand when financial institutions will be liable for violating the act, and some
of the circumstances when the institutions will not be liable.
Background to Electronic Fund Transfers
In General
Drowning in the yearly flood of billions of checks, eager to eliminate the “float” that a bank customer gets
by using her money between the time she writes a check and the time it clears, and recognizing that better
customer service might be possible, financial institutions sought a way to computerize the check collection
process. What has developed is electronic fund transfer (EFT), a system that has changed how customers
interact with banks, credit unions, and other
financial institutions.
Paper checks have their advantages,
but their use is decreasing in favor of EFT.
In simplest terms, EFT is a method of paying by substituting an electronic signal for checks. A “debit
card,” inserted in the appropriate terminal, will authorize automatically the transfer of funds from your
checking account, say, to the account of a store whose goods you are buying.
Types of EFT
You are of course familiar with some forms of EFT:
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The automated teller machine (ATM) permits you to electronically transfer funds between
checking and savings accounts at your bank with a plastic ID card and a personal identification
number (PIN), and to obtain cash from the machine.
Telephone transfers or computerized transfers allow customers to access the bank’s computer
system and direct it to pay bills owed to a third party or to transfer funds from one account to
another.
Point of sale terminals located in stores let customers instantly debit their bank accounts and
credit the merchant’s
account.
Preauthorized payment plans permit direct electronic deposit of paychecks, Social Security
checks, and dividend checks.
Preauthorized withdrawals from customers’ bank accounts or credit card accounts allow paperless
payment of insurance premiums, utility bills, automobile or mortgage payments, and property tax
payments.
The “short circuit” that EFT permits in the check processing cycle is illustrated in Figure 17.2 “How EFT
Replaces Checks”.
Figure 17.2 How EFT Replaces Checks
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Unlike the old-fashioned check collection process, EFT is virtually instantaneous: at one instant a
customer has a sum of money in her account; in the next, after insertion of a plastic card in a machine or
the transmission of a coded message by telephone or computer, an electronic signal automatically debits
her bank checking account and posts the amount to the bank account of the store where she is making a
purchase. No checks change hands; no paper is written on. It is quiet, odorless, smudge proof. But errors
are harder to trace than when a paper trail exists, and when the system fails (“our computer is down”) the
financial mess can be colossal. Obviously some sort of law is necessary to regulate EFT systems.
Electronic Fund Transfer Act of 1978
Purpose
Because EFT is a technology consisting of several discrete types of machines with differing purposes, its
growth has not been guided by any single law or even set of laws. The most important law governing
consumer transactions is the Electronic Fund Transfer Act of 1978, [1] whose purpose is “to provide a
basic framework establishing the rights, liabilities, and responsibilities of participants in electronic fund
transfer systems. The primary objective of [the statute], however, is the provision of individual consumer
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rights.” This federal statute has been implemented and supplemented by the Federal Reserve Board’s
Regulation E, Comptroller of the Currency guidelines on EFT, and regulations of the Federal Home Loan
Bank Board. (Wholesale transactions are governed by UCC Article 4A, which is discussed later in this
chapter.)
The EFT Act of 1978 is primarily designed to disclose the terms and conditions of electronic funds
transfers so the customer knows the rights, costs and liabilities associated with EFT, but it does not
embrace every type of EFT system. Included are “point-of-sale transfers, automated teller machine
transactions, direct deposits or withdrawal of funds, and transfers initiated by telephone or computer”
(EFT Act Section 903(6)). Not included are such transactions as wire transfer services, automatic
transfers between a customer’s different accounts at the same financial institution, and “payments made
by check, draft, or similar paper instrument at electronic terminals” (Reg. E, Section 205.2(g)).
Consumer Protections Afforded by the Act
Four questions present themselves to the mildly wary consumer facing the advent of EFT systems: (1)
What record will I have of my transaction? (2) How can I correct errors? (3) What recourse do I have if a
thief steals from my account? (4) Can I be required to use EFT? The EFT Act, as implemented by
Regulation E, answers these questions as follows.
1. Proof of transaction. The electronic terminal itself must be equipped to provide a receipt of
transfer, showing date, amount, account number, and certain other information. Perhaps more
importantly, the bank or other financial institution must provide you with a monthly statement
listing all electronic transfers to and from the account, including transactions made over the
computer or telephone, and must show to whom payment has been made.
2. Correcting errors. You must call or write the financial institution whenever you believe an error
has been made in your statement. You have sixty days to do so. If you call, the financial institution
may require you to send in written information within ten days. The financial institution has
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forty-five days to investigate and correct the error. If it takes longer than ten days, however, it
must credit you with the amount in dispute so that you can use the funds while it is investigating.
The financial institution must either correct the error promptly or explain why it believes no error
was made. You are entitled to copies of documents relied on in the investigation.
3. Recourse for loss or theft. If you notify the issuer of your EFT card within two business days after
learning that your card (or code number) is missing or stolen, your liability is limited to $50. If
you fail to notify the issuer in this time, your liability can go as high as $500. More daunting is the
prospect of loss if you fail within sixty days to notify the financial institution of an unauthorized
transfer noted on your statement: after sixty days of receipt, your liability is unlimited. In other
words, a thief thereafter could withdraw all your funds and use up your line of credit and you
would have no recourse against the financial institution for funds withdrawn after the sixtieth
day, if you failed to notify it of the unauthorized transfer.
4. Mandatory use of EFT. Your employer or a government agency can compel you to accept a salary
payment or government benefit by electronic transfer. But no creditor can insist that you repay
outstanding loans or pay off other extensions of credit electronically. The act prohibits a financial
institution from sending you an EFT card “valid for use” unless you specifically request one or it is
replacing or renewing an expired card. The act also requires the financial institution to provide
you with specific information concerning your rights and responsibilities (including how to report
losses and thefts, resolve errors, and stop payment of preauthorized transfers). A financial
institution may send you a card that is “not valid for use” and that you alone have the power to
validate if you choose to do so, after the institution has verified that you are the person for whom
the card was intended.
Liability of the Financial Institution
The financial institution’s failure to make an electronic fund transfer, in accordance with the terms and
conditions of an account, in the correct amount or in a timely manner when properly instructed to do so
by the consumer makes it liable for all damages proximately caused to the consumer, except where
1) the consumer’s account has insufficient funds;
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2) the funds are subject to legal process or other encumbrance restricting such transfer;
3) such transfer would exceed an established credit limit;
4) an electronic terminal has insufficient cash to complete the transaction; or
5) a circumstance beyond its control, where it exercised reasonable care to prevent such an occurrence, or
exercised such diligence as the circumstances required.
Enforcement of the Act
A host of federal regulatory agencies oversees enforcement of the act. These include the Comptroller of the
Currency (national banks), Federal Reserve District Bank (state member banks), Federal Deposit
Insurance Corporation regional director (nonmember insured banks), Federal Home Loan Bank Board
supervisory agent (members of the FHLB system and savings institutions insured by the Federal Savings
& Loan Insurance Corporation), National Credit Union Administration (federal credit unions), Securities
& Exchange Commission (brokers and dealers), and the Federal Trade Commission (retail and
department stores) consumer finance companies, all nonbank debit card issuers, and certain other
financial institutions. Additionally, consumers are empowered to sue (individually or as a class) for actual
damages caused by any EFT system, plus penalties ranging from $100 to $1,000. Section 17.4 “Cases”,
under “Customer’s Duty to Inspect Bank Statements” (Commerce Bank v. Brown), discusses the bank’s
liability under the act.
K E Y T A K E A W A Y
Eager to reduce paperwork for both themselves and for customers, and to speed up the
check collection process, financial institutions have for thirty years been moving away
from paper checks and toward electronic fund transfers. These EFTs are ubiquitous,
including ATMs, point-of-sale systems, direct deposits and withdrawals and online
banking of various kinds. Responding to the need for consumer protection, Congress
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adopted the Electronic Fund Transfers Act, effective in 1978. The act addresses many
common concerns consumers have about using electronic fund transfer systems, sets
out liability for financial institutions and customers, and provides an enforcement
mechanism.
E X E R C I S E S
1. Why have EFTs become very common?
2. What major issues are addressed by the EFTA?
3. If you lose your credit card, what is your liability for unauthorized charges?
[1] FDIC, “Electronic Fund Transfer Act of
1978,”http://www.fdic.gov/regulations/laws/rules/6500-1350.html.
17.3 Wholesale Transactions and Letters of Credit
L E A R N I N G O B J E C T I V E S
1. Understand what a “wholesale transaction” is; recognize that UCC Article 4A
governs such transactions, and recognize how the Article addresses three
common issues.
2. Know what a “letter of credit” (LC) is, the source of law regarding LCs, and
how such instruments are used.
Wholesale Funds Transfers
Another way that money is transferred is by commercial fund transfers or wholesale funds transfers,
which is by far the largest segment of the US payment system measured in amounts of money transferred.
It is trillions of dollars a day. Wholesale transactions are the transfers of funds between businesses or
financial institutions.
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Background and Coverage
It was in the development of commercial “wholesale wire transfers” of money in the nineteeth and early
twentieth centuries that businesses developed the processes enabling the creation of today’s consumer
electronic funds transfers. Professor Jane Kaufman Winn described the development of uniform law
governing commercial funds transfers:
Although funds transfers conducted over funds transfer facilities maintained by the Federal Reserve
Banks were subject to the regulation of the Federal Reserve Board, many funds transfers took place over
private systems, such as the Clearing House for Interbank Payment Systems (“CHIPS”). The entire
wholesale funds transfer system was not governed by a clear body of law until U.C.C. Article 4A was
promulgated in 1989 and adopted by the states shortly thereafter. The Article 4A drafting process resulted
in many innovations, even though it drew heavily on the practices that had developed among banks and
their customers during the 15 years before the drafting committee was established. While a consensus was
not easy to achieve, the community of interests shared by both the banks and their customers permitted
the drafting process to find workable compromises on many thorny issues. [1]
All states and US territories have adopted Article 4A. Consistent with other UCC provisions, the rights and
obligations under Article 4A may be varied by agreement of the parties. Article 4A does not apply if any
step of the transaction is governed by the Electronic Fund Transfer Act. Although the implication may be
otherwise, the rules in Article 4A apply to any funds transfer, not just electronic ones (i.e., transfers by
mail are covered, too). Certainly, however, electronic transfers are most common, and—as the Preface to
Article 4A notes—a number of characteristics of them influenced the Code’s rules. These transactions are
characterized by large amounts of money—multimillions of dollars; the parties are sophisticated
businesses or financial institutions; funds transfers are completed in one day, they are highly efficient
substitutes for paper delivery; they are usually low cost—a few dollars for the funds transfer charged by
the sender’s bank.
Operation of Article 4A
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The UCC “Prefatory Note” to Article 4A observes that “the funds transfer that is covered by Article 4A is
not a complex transaction.” To illustrate the operation of Article 4A, assume that Widgets International
has an account with First Bank. In order to pay a supplier, Supplies Ltd., in China, Widgets instructs First
Bank to pay $6 million to the account of Supplies Ltd. in China Bank. In the terminology of Article 4A,
Widgets’ instruction to its bank is a “payment order.” Widgets is the “sender” of the payment order, First
Bank is the “receiving bank,” and Supplies Ltd. is the “beneficiary” of the order.
When First Bank performs the purchase order by instructing China Bank to credit the account of Supplies
Limited, First Bank becomes a sender of a payment order, China Bank becomes a receiving bank, and
Supplies Ltd. is still the beneficiary. This transaction is depicted in Figure 17.3 “Funds Transfer”. In some
transactions there may also be one or more “intermediary banks” between First and Second Bank.
Figure 17.3 Funds Transfer
Frequently Occurring Legal Issues in Funds Transfers
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Three legal issues that frequently arise in funds transfer litigation are addressed in Article 4A and might
be mentioned here.
Responsibility for Unauthorized Payments
First, who is responsible for unauthorized payment orders? The usual practice is for banks and their
customers to agree to security procedures for the verification of payment orders. If a bank establishes a
commercially reasonable procedure, complies with that procedure, and acts in good faith and according to
its agreement with the customer, the customer is bound by an unauthorized payment order. There is,
however, an important exception to this rule. A customer will not be liable when the order is from a
person unrelated to its business operations.
Error by Sender
Second, who is responsible when the sender makes a mistake—for instance, in instructing payment
greater than what was intended? The general rule is that the sender is bound by its own error. But in cases
where the error would have been discovered had the bank complied with its security procedure, the
receiving bank is liable for the excess over the amount intended by the sender, although the bank is
allowed to recover this amount from the beneficiary.
Bank Mistake in Transferring Funds
Third, what are the consequences when the bank makes a mistake in transferring funds? Suppose, for
example, that Widgets (in the previous situation) instructed payment of $2 million but First Bank in turn
instructed payment of $20 million. First Bank would be entitled to only $2 million from Widgets and
would then attempt to recover the remaining $18 million from Supplies Ltd. If First Bank had instructed
payment to the wrong beneficiary, Widgets would have no liability and the bank would be responsible for
recovering the entire payment. Unless the parties agree otherwise, however, a bank that improperly
executes a payment order is not liable for consequential damages.
Letters of Credit
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Because international trade involves risks not usually encountered in domestic trade—government control
of exports, imports, and currency; problems in verifying goods’ quality and quantity; disruptions caused
by adverse weather, war; and so on—merchants have over the years devised means to minimize these
risks, most notably the letter of credit (“LC”). Here are discussed the definition of letters of credit, the
source of law governing them, how they work as payments for exports and as payments for imports.
Definition
A letter of credit is a statement by a bank (or other financial institution) that it will pay a specified sum
of money to specific persons if certain conditions are met. Or, to rephrase, it is a letter issued by a bank
authorizing the bearer to draw a stated amount of money from the issuing bank (or its branches, or other
associated banks or agencies). Originally, a letter of credit was quite literally that—a letter addressed by
the buyer’s bank to the seller’s bank stating that the former could vouch for their good customer, the
buyer, and that it would pay the seller in case of the buyer’s default. An LC is issued by a bank on behalf of
its creditworthy customers, whose application for the credit has been approved by that bank.
Source of Law
Letters of credit are governed by both international and US domestic law.
International Law
Many countries (including the United States) have bodies of law governing letters of credit. Sophisticated
traders will agree among themselves by which body of law they choose to be governed. They can agree to
be bound by the UCC, or they may decide they prefer to be governed by the Uniform Customs and Practice
for Commercial Documentary Credits (UCP), a private code devised by the Congress of the International
Chamber of Commerce. Suppose the parties do not stipulate a body of law for the agreement, and the
various bodies of law conflict, what then? Julius is in New York and Rochelle is in Paris; does French law
or New York law govern? The answer will depend on the particulars of the dispute. An American court
must determine under the applicable principles of the law of “conflicts of law” whether New York or
French law applies.
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Domestic Law
The principal body of law applicable to the letter of credit in the United States is Article 5 of the UCC.
Section 5-103 declares that Article 5 “applies to letters of credit and to certain rights and obligations
arising out of transactions involving letters of credit.” The Official Comment to 5-101 observes, “A letter of
credit is an idiosyncratic form of undertaking that supports performance of an obligation incurred in a
separate financial, mercantile, or other transaction or arrangement.” And—as is the case in other parts of
the Code—parties may, within some limits, agree to “variation by agreement in order to respond to and
accommodate developments in custom and usage that are not inconsistent with the essential definitions
and mandates of the statute.” Although detailed consideration of Article 5 is beyond the scope of this
book, a distinction between guarantees and letters of credit should be noted: Article 5 applies to the latter
and not the former.
Letters of Credit as Payment for Exports
The following discussion presents how letters of credit work as payment for exports, and a sample letter of
credit is presented at Figure 17.4 “A Letter of Credit”.
Figure 17.4 A Letter of Credit
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Julius desires to sell fine quality magic wands and other stage props to Rochelle’s Gallery in Paris.
Rochelle agrees to pay by letter of credit—she will, in effect, get her bank to inform Julius that he will get
paid if the goods are right. She does so by “opening” a letter of credit at her bank—the issuing bank—the
Banque de Rue de Houdini where she has funds in her account, or good credit. She tells the bank the
terms of sale, the nature and quantity of the goods, the amount to be paid, the documents she will require
as proof of shipment, and an expiration date. Banque de Rue de Houdini then directs its correspondent
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bank in the United States, First Excelsior Bank, to inform Julius that the letter of credit has been opened:
Rochelle is good for it. For Julius to have the strongest guarantee that he will be paid, Banque de Rou de
Houdini can ask First Excelsior to confirm the letter of credit, thus binding both Banque de Rue de
Houdini and Excelsior to pay according to the terms of the letter.
Once Julius is informed that the letter of credit has been issued and confirmed, he can proceed to ship the
goods and draw a draft to present (along with the required documents such as commercial invoice, bill of
lading, and insurance policy) to First Excelsior, which is bound to follow exactly its instructions from
Banque de Rue de Houdini. Julius can present the draft and documents directly, through correspondent
banks, or by a representative at the port from which he is shipping the goods. On presentation, First
Excelsior may forward the documents to Banque de Rue de Houdini for approval and when First Excelsior
is satisfied it will take the draft and pay Julius immediately on a sight draft or will stamp the draft
“accepted” if it is a time draft (payable in thirty, sixty, or ninety days). Julius can discount an accepted
time draft or hold it until it matures and cash it in for the full amount. First Excelsior will then forward
the draft through international banking channels to Banque de Rue de Houdini to debit Rochelle’s
account.
As Payment for Imports
US importers—buyers—also can use the letter of credit to pay for goods bought from abroad. The
importer’s bank may require that the buyer put up collateral to guarantee it will be reimbursed for
payment of the draft when it is presented by the seller’s agents. Since the letter of credit ordinarily will be
irrevocable, the bank will be bound to pay the draft when presented (assuming the proper documents are
attached), regardless of deficiencies ultimately found in the goods. The bank will hold the bill of lading
and other documents and could hold up transfer of the goods until the importer pays, but that would
saddle the bank with the burden of disposing of the goods if the importer failed to pay. If the importer’s
credit rating is sufficient, the bank could issue a trust receipt. The goods are handed over to the importer
before they are paid for, but the importer then becomes trustee of the goods for the bank and must hold
the proceeds for the bank up to the amount owed
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K E Y T A K E A W A Y
Wholesale funds transfers are a mechanism by which businesses and financial
institutions can transmit large sums of money—millions of dollars—between each
other, usually electronically, from and to their clients’ accounts. Article 4A of the
UCC governs these transactions. A letter of credit is a promise by a buyer’s bank
that upon presentation of the proper paperwork it will pay a specified sum to the
identified seller. Letters of credit are governed by domestic and international law.
Next
[1] Jane Kaufman Winn, Clash of the Titans: Regulating the Competition between Established
and Emerging Electronic Payment
Systems,http://www.law.washington.edu/Directory/docs/Winn/Clash%20of%20the%20Titans.
htm.
17.4 Cases
Bank’s Liability for Paying over Customer’s “Stop Payment” Order
Meade v. National Bank of Adams County
2002 WL 31379858 (Ohio App. 2002)
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Kline, J.
The National Bank of Adams County appeals the Adams County Court’s judgment finding that it
improperly paid a check written by Denton Meade, and that Meade incurred $3,800 in damages as a
result of that improper payment.…
I.
Denton Meade maintained a checking account at the Bank. In 2001, Meade entered into an agreement
with the Adams County Lumber Company to purchase a yard barn for $2,784 and paid half the cost as a
deposit. On the date of delivery, Friday, March 9, 2001, Meade issued a check to the Lumber Company for
the remaining amount he owed on the barn, $1,406.79.
Meade was not satisfied with the barn. Therefore, at 5:55 p.m. on March 9, 2001, Meade called the Bank
to place a stop payment order on his check. Jacqueline Evans took the stop payment order from Meade.
She received all the information and authorization needed to stop payment on the check at that time.
Bank employees are supposed to enter stop payments into the computer immediately after taking them.
However, Evans did not immediately enter the stop payment order into the computer because it was 6:00
p.m. on Friday, and the Bank closes at 6:00 p.m. on Fridays. Furthermore, the Bank’s policy provides that
any matters that are received after 2:00 p.m. on a Friday are treated as being received on the next
business day, which was Monday, March 12, 2001 in this instance.
On the morning of Saturday, March 10, 2001, Greg Scott, an officer of the Lumber Company,
presented
the check in question for payment at the Bank. The Bank paid the check. On Monday, the Bank entered
Meade’s stop payment into the computer and charged Meade a $15 stop payment fee. Upon realizing that
it already paid the check, on Tuesday the Bank credited the $15 stop payment fee back to Meade’s
account. On Thursday, the Bank deducted the amount of the check, $1,406.79, from Meade’s account.
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In the meanwhile, Meade contacted Greg Scott at the Lumber Company regarding his dissatisfaction with
the barn. Scott sent workers to repair the barn on Saturday, March 10 and on Monday, March 12.
However, Meade still was not satisfied. In particular, he was unhappy with the runners supporting the
barn. Although his order with the Lumber Company specifically provided for 4 x 6” runner boards, the
Lumber Company used 2 x 6” boards. The Lumber Company “laminated” the two by six-inch boards to
make them stronger. However, carpenter Dennis Baker inspected the boards and determined that the
boards were not laminated properly.
Meade hired Baker to repair the barn. Baker charged Meade approximately three hundred dollars to make
the necessary repairs. Baker testified that properly laminated two by six-inch boards are just as strong as
four by six-inch boards.
Meade filed suit against the Bank in the trial court seeking $5,000 in damages. The Bank filed a motion
for summary judgment, which the trial court denied. At the subsequent jury trial the court permitted
Meade to testify, over the Bank’s objections, to the amount of his court costs, attorney fees, and deposition
costs associated with this case. The Bank filed motions for directed verdict at the close of Meade’s case
and at the close of evidence, which the trial court denied.
The jury returned a general verdict finding the Bank liable to Meade in the amount of $3,800. The Bank
filed motions for a new trial and for judgment notwithstanding the verdict, which the trial court denied.
The Bank now appeals, asserting the following five assignments of
error.…
II.
In its first assignment of error, the Bank contends that the trial court erred in denying its motion for
summary judgment. Specifically, the Bank asserts that Meade did not issue the stop payment order within
a reasonable time for the Bank to act upon it, and therefore that the trial court should have granted
summary judgment in favor of the Bank.
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Summary judgment is appropriate only when it has been established: (1) that there is no genuine issue as
to any material fact; (2) that the moving party is entitled to judgment as a matter of law; and (3) that
reasonable minds can come to only one conclusion, and that conclusion is adverse to the nonmoving
party. [Citation]
[UCC 4-403(A)] provides that a customer may stop payment on any item drawn on the customer’s
account by issuing an order to the bank that describes the item with reasonable certainty and is received
by the bank “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.” What constitutes a reasonable time depends upon the
facts of the case. See Chute v. Bank One of Akron, (1983) [Citation]
In Chute, Bank One alleged that its customer, Mr. Chute, did not give it a reasonable opportunity to act
upon his stop payment order when he gave an oral stop payment at one Bank One branch office, and a
different Bank One branch office paid the check the following day. In ruling that Bank One had a
reasonable opportunity to act upon Mr. Chute’s order before it paid the check, the court considered the
teller’s testimony that stop payment orders are entered onto the computer upon receipt, where they are
virtually immediately accessible to all Bank One tellers.
In this case, as in Chute, Meade gave notice one day, and the Bank paid the check the following day.
Additionally, in this case, the same branch that took the stop payment order also paid the check.
Moreover, Evans testified that the Bank’s policy for stop payment orders is to enter them into the
computer immediately, and that Meade’s stop payment order may have shown up on the computer on
Saturday if she had entered it on Friday. Based on this information, and construing the facts in the light
most favorable to Meade, reasonable minds could conclude that Meade provided the Bank with the stop
payment order within time for the Bank to act upon the stop payment order. Accordingly, we overrule the
Bank’s first assignment of error.
III.
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In its second assignment of error, the Bank contends that the trial court erred in permitting Meade to
testify regarding the amount he spent on court costs, attorney fees, and taking depositions. Meade
contends that because he incurred these costs as a result of the Bank paying his check over a valid stop
payment order, the costs are properly recoverable.
As a general rule, the costs and expenses of litigation, other than court costs, are not recoverable in an
action for damages. [Citations]
In this case, the statute providing for damages, [UCC 4-403(c)], provides that a customer’s recoverable
loss for a bank’s failure to honor a valid stop payment order “may include damages for dishonor of
subsequent items * * *.” The statute does not provide for recouping attorney fees and costs. Meade did not
allege that the Bank acted in bad faith or that he is entitled to punitive damages. Additionally, although
Meade argues that the Bank caused him to lose his bargaining power with the Lumber Company, Meade
did not present any evidence that he incurred attorney fees or costs by engaging in litigation with the
Lumber Company.
Absent statutory authority or an allegation of bad faith, attorney fees are improper in a compensatory
damage award.…Therefore, the trial court erred in permitting the jury to hear evidence regarding Meade’s
expenditures for his attorney fees and costs. Accordingly, we sustain the Bank’s second assignment of
error.…
IV.
In its third assignment of error, the Bank contends that the trial court erred when it overruled the Bank’s
motion for a directed verdict. The Bank moved for a directed verdict both at the conclusion of Meade’s
case and at the close of evidence.
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The Bank first asserts that the record does not contain sufficient evidence to show that Meade issued a
stop payment order that provided it with a reasonable opportunity to act as required by [the UCC]. Meade
presented evidence that he gave the Bank his stop payment order prior to 6:00 p.m. on Friday, and that
the Bank paid the check the following day.…We find that this constitutes sufficient evidence that Meade
communicated the stop payment order to the Bank in time to allow the Bank a reasonable opportunity to
act upon it.
The Bank also asserts that the record does not contain sufficient evidence that Meade incurred some loss
resulting from its payment of the check. Pursuant to [UCC 4-403(c)] “[t]he burden of establishing the fact
and amount of loss resulting from the payment of an item contrary to a stop payment order or order to
close an account is on the customer.” Establishing the fact and amount of loss, “the customer must show
some loss other than the mere debiting of the customer’s account.” [Citation]
…Baker testified that he charged Meade between two hundred-eighty and three hundred dollars to
properly laminate the runners and support the barn. Based upon these facts, we find that the record
contains sufficient evidence that Meade sustained some loss beyond the mere debiting of his account as a
result of the Bank paying his check. Accordingly, we overrule the Bank’s third assignment of error.
V.
…In its final assignment of error, the Bank contends that the trial court erred in denying its motions for
judgment notwithstanding the verdict and for a new trial.…
[U]nlike our consideration of the Bank’s motions for a directed verdict, in considering the Bank’s motion
for judgment notwithstanding the verdict, we also must consider whether the amount of the jury’s award
is supported by sufficient evidence. The Bank contends the jury’s general verdict, awarding Meade
$3,800, is not supported by evidence in the record.
A bank customer seeking damages for the improper payment of a check over a valid stop payment order
carries the burden of proving “the fact and amount of loss.” [UCC 4-403(C).] To protect banks and
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prevent unjust enrichment to customers, the mere debiting of the customer’s account does not constitute
a loss. [Citation]
In this case, the Bank’s payment of Meade’s $1,406.79 check to the Lumber Company discharged Meade’s
debt to the Lumber Company in the same amount. Therefore, the mere debiting of $1,406.79 from
Meade’s account does not constitute a loss.
Meade presented evidence that he incurred $300 in repair costs to make the barn satisfactory. Meade also
notes that he never got the four by six-inch runners he wanted. However, Meade’s carpenter, Baker,
testified that since he properly laminated the two by six-inch runners, they are just as strong or stronger
than the four by six-inch runners would have been.
Meade also presented evidence of his costs and fees. However, as we determined in our review of the
Bank’s second assignment of error, only the court may award costs and fees, and therefore this evidence
was improperly admitted. Thus, the evidence cannot support the damage award. Meade did not present
any other evidence of loss incurred by the Bank’s payment of his check.…Therefore, we find that the trial
court erred in declining to enter a judgment notwithstanding the verdict on the issue of damages. Upon
remand, the trial court should grant in part the Bank’s motion for judgment notwithstanding the verdict
as it relates to damages and consider the Bank’s motion for a new trial only on the issue of damages[.…]
Accordingly, we sustain the Banks fourth and fifth assignments of error in part.
VI.
In conclusion, we find that the trial court did not err in denying the Bank’s motions for summary
judgment and for directed verdict. However, we find that the trial court erred in permitting Meade to
testify as to his court costs, attorney fees and deposition costs. Additionally, we find that the trial court
erred in totally denying the Bank’s motion for judgment notwithstanding the verdict, as the amount of
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damages awarded by the jury is not supported by sufficient evidence in the record. Accordingly, we affirm
the judgment of the trial court as to liability, but reverse the judgment of the trial court as to the issue of
damages, and remand this cause for further proceedings consistent with this opinion.
C A S E Q U E S T I O N S
1. What did the bank do wrong here?
2. Why did the court deny Meade damages for his attorneys’ fees?
3. Why did the court conclude that the jury-awarded damages were not supported by
evidence presented at trial? What damages did the evidence support?
Customer’s Duty to Inspect Bank Statements
Union Planters Bank, Nat. Ass’n v. Rogers
912 So.2d 116 (Miss. 2005)
Waller, J.
This appeal involves an issue of first impression in Mississippi—the interpretation of [Mississippi’s UCC
4-406], which imposes duties on banks and their customers insofar as forgeries are concerned.
Facts
Neal D. and Helen K. Rogers maintained four checking accounts with the Union Planters Bank in
Greenville, Washington County, Mississippi.…The Rogers were both in their eighties when the events
which gave rise to this lawsuit took place. [1] After Neal became bedridden, Helen hired Jackie Reese to
help her take care of Neal and to do chores and errands.
In September of 2000, Reese began writing checks on the Rogers’ four accounts and forged Helen’s name
on the signature line. Some of the checks were made out to “cash,” some to “Helen K. Rogers,” and some
to “Jackie Reese.” The following chart summarizes the forgeries to each account:
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Account Number Beginning Ending Number of Checks Amount of Checks
54282309 11/27/2000 6/18/2001 46 $16,635.00
0039289441 9/27/2000 1/25/2001 10 $2,701.00
6100110922 11/29/2000 8/13/2001 29 $9,297.00
6404000343 11/20/2000 8/16/2001 83 $29,765.00
Total 168 $58,398.00
Neal died in late May of 2001. Shortly thereafter, the Rogers’ son, Neal, Jr., began helping Helen with
financial matters. Together they discovered that many bank statements were missing and that there was
not as much money in the accounts as they had thought. In June of 2001, they contacted Union Planters
and asked for copies of the missing bank statements. In September of 2001, Helen was advised by Union
Planters to contact the police due to forgeries made on her accounts. More specific dates and facts leading
up to the discovery of the forgeries are not found in the record.
Subsequently, criminal charges were brought against Reese. (The record does not reveal the disposition of
the criminal proceedings against Reese.) In the meantime, Helen filed suit against Union Planters,
alleging conversion (unlawful payment of forged checks) and negligence. After a trial, the jury awarded
Helen $29,595 in damages, and the circuit court entered judgment accordingly. From this judgment,
Union Planters appeals.
Discussion
…II. Whether Rogers’ Delay in Detecting the Forgeries Barred Suit against Union Planters.
The relationship between Rogers and Union Planters is governed by Article 4 of the Uniform Commercial
Code. [UCC] 4-406(a) and (c) provide that a bank customer has a duty to discover and report
“unauthorized signatures”; i.e., forgeries. [The section] reflects an underlying policy decision that furthers
the UCC’s “objective of promoting certainty and predictability in commercial transactions.” The UCC
facilitates financial transactions, benefiting both consumers and financial institutions, by allocating
responsibility among the parties according to whomever is best able to prevent a loss. Because the
customer is more familiar with his own signature, and should know whether or not he authorized a
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particular withdrawal or check, he can prevent further unauthorized activity better than a financial
institution which may process thousands of transactions in a single day.…The customer’s duty to exercise
this care is triggered when the bank satisfies its burden to provide sufficient information to the customer.
As a result, if the bank provides sufficient information, the customer bears the loss when he fails to detect
and notify the bank about unauthorized transactions. [Citation]
A. Union Planters’ Duty to Provide Information under 4-406(a).
The court admitted into evidence copies of all Union Planters statements sent to Rogers during the
relevant time period. Enclosed with the bank statements were either the cancelled checks themselves or
copies of the checks relating to the period of time of each statement. The evidence shows that all bank
statements and cancelled checks were sent, via United States Mail, postage prepaid, to all customers at
their “designated address” each month. Rogers introduced no evidence to the contrary. We therefore find
that the bank fulfilled its duty of making the statements available to Rogers and that the remaining
provisions of 4-406 are applicable to the case at bar.…
In defense of her failure to inspect the bank statements, Rogers claims that she never received the bank
statements and cancelled checks. Even if this allegation is true, [2] it does not excuse Rogers from failing to
fulfill her duties under 4-406(a) & (c) because the statute clearly states a bank discharges its duty in
providing the necessary information to a customer when it “sends…to a customer a statement of account
showing payment of items.”…The word “receive” is absent. The customer’s duty to inspect and report does
not arise when the statement is received, as Rogers claims; the customer’s duty to inspect and report
arises when the bank sends the statement to the customer’s address. A reasonable person who has not
received a monthly statement from the bank would promptly ask the bank for a copy of the statement.
Here, Rogers claims that she did not receive numerous statements. We find that she failed to act
reasonably when she failed to take any action to replace the missing statements.
B. Rogers’ Duty to Report the Forgeries under 4-406(d).
[Under UCC 4-406] a customer who has not promptly notified a bank of an irregularity may be precluded
from bringing certain claims against the bank:
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“(d) If the bank proves that the customer failed, with respect to an item, to comply with the duties
imposed on the customer by subsection (c), the customer is precluded from asserting against the bank:
(1) The customer’s unauthorized signature…on the item,…
Also, when there is a series of forgeries, 406(d)(2) places additional duties on the customer, [who is
precluded from asserting against the bank]:
(2) The customer’s unauthorized signature…by the same wrongdoer on any other item paid in good faith
by the bank if the payment was made before the bank received notice from the customer of the
unauthorized signature…and after the customer had been afforded a reasonable period of time, not
exceeding thirty (30) days, in which to examine the item or statement of account and notify the bank.
Although there is no mention of a specific date, Rogers testified that she and her son began looking for the
statements in late May or early June of 2001, after her husband had died.…When they discovered that
statements were missing, they notified Union Planters in June of 2001 to replace the statements. At this
time, no mention of possible forgery was made, even though Neal, Jr., thought that “something was
wrong.” In fact, Neal, Jr., had felt that something was wrong as far back as December of 2000, but failed
to do anything. Neal, Jr., testified that neither he nor his mother knew that Reese had been forging checks
until September of 2001. [3]
Rogers is therefore precluded from making claims against Union Planters because (1) under 4-406(a),
Union Planters provided the statements to Rogers, and (2) under 4-406(d)(2), Rogers failed to notify
Union Planters of the forgeries within 30 days of the date she should have reasonably discovered the
forgeries.…
Conclusion
The circuit court erred in denying Union Planters’ motion for JNOV because, under 4-406, Rogers is
precluded from recovering amounts paid by Union Planters on any of the forged checks because she failed
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to timely detect and notify the bank of the unauthorized transactions and because she failed to show that
Union Planters failed to use ordinary care in its processing of the forged checks. Therefore, we reverse the
circuit court’s judgment and render judgment here that Rogers take nothing and that the complaint and
this action are finally dismissed with prejudice. Reversed.
C A S E Q U E S T I O N S
1. If a bank pays out over a forged drawer’s signature one time, and the customer
(drawer) reports the forgery to the bank within thirty days, why does the bank take
the loss?
2. Who forged the checks?
3. Why did Mrs. Rogers think she should not be liable for the forgeries?
4. In the end, who probably really suffered the loss here?
Customer’s Duty to Inspect Bank Statements
Commerce Bank of Delaware v. Brown
2007 WL 1207171 (Del. Com. Pl. 2007)
I. Procedural Posture
Plaintiff, Commerce Bank/Delaware North America (“Commerce”) initially filed a civil complaint against
defendant Natasha J. Brown (“Brown”) on October 28, 2005. Commerce seeks judgment in the amount of
$4.020.11 plus costs and interest and alleges that Brown maintained a checking account with Commerce
and has been unjustly enriched by $4,020.11.…
The defendant, Brown…denied all allegations of the complaint. As an affirmative defense Brown claims
the transaction for which plaintiff seeks to recover a money judgment were made by means of an ATM
Machine using a debit card issued by the defendant. On January 16, 2005 Brown asserts that she became
aware of the fraudulent transactions and timely informed the plaintiff of the facts on January 16, 2005.
Brown asserts that she also requested Commerce in her answer to investigate the matter and to close her
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account. Based upon these facts, Brown asserts a maximum liability on her own part from $50.00 to
$500.00 in accordance with the Electronic Fund Transfer Act (“EFTA”) 15 U.S.C. § 1693(g) and regulation
(e), 12 CFR 205.6. [Commerce Bank withdrew its complaint at trial, leaving only the defendant’s counter-
claim in issue.]
Defendant Brown asserts [that] defendant failed to investigate and violated EFTA and is therefore liable
to the plaintiff for money damages citing [EFTA].
II. The Facts
Brown was the only witness called at trial. Brown is twenty-seven years old and has been employed by
Wilmington Trust as an Administrative Assistant for the past three years. Brown previously opened a
checking account with Commerce and was issued a debit/ATM card by Commerce which was in her
possession in December 2004. Brown, on or about January 14, 2005 went to Commerce to charge a $5.00
debit to the card at her lunch-break was informed that there was a deficiency balance in the checking
account. Brown went to the Talleyville branch of Commerce Bank and spoke with “Carla” who agreed to
investigate these unauthorized charges, as well as honor her request to close the account. Defendant’s
Exhibit No.: 1 is a Commerce Bank electronic filing and/or e-mail which details a visit by defendant on
January 16, 2005 to report her card loss. The “Description of Claim” indicates as follows:
Customer came into speak with a CSR “Carla Bernard” on January 16, 2005 to report her card loss. At this
time her account was only showing a negative $50.00 balance. She told Ms. Bernard that this was not her
transaction and to please close this account. Ms. Bernard said that she would do this and that there would
be an investigation on the unauthorized transactions. It was at this time also that she had Ms. Bernard
change her address. In the meantime, several transactions posted to the account causing a balance of
negative $3,948.11 and this amount has since been charged off on 1/27/05. Natasha Brown never received
any notification of this until she received a letter from one of our collection agencies. She is now here to
get this resolved.
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On the back of defendant’s Exhibit No.: 1 were 26 separate unauthorized transactions at different
mercantile establishments detailing debits with the pin number used on Brown’s debit card charged to
Commerce Bank. The first charge was $501.75 on January 13, 2005.…Brown asserts at trial that she
therefore timely gave notice to Commerce to investigate and requested Commerce to close the debit
checking account on January 16, 2005.
At trial Brown also testified she “never heard” from Commerce again until she received a letter in
December 2005 citing a $4,000.00 deficiency balance.…
On cross-examination Brown testified she received a PIN number from Commerce and “gave the PIN
number to no other person.” In December 2004 she resided with Charles Williams, who is now her
husband. Brown testified on cross-examination that she was the only person authorized as a PIN user and
no one else knew of the card, ‘used the card,’ or was provided orally or in writing of the PIN number.
Brown spoke with Carla Bernard at the Commerce Bank at the Talleyville branch. Although Brown did not
initially fill out a formal report, she did visit Commerce on January 16, 2005 the Talleyville branch and
changed her address with Carla. Brown does not recall the last time she ever received a statement from
Commerce Bank on her checking account. Brown made no further purchases with the account and she
was unaware of all the “incidents of unauthorized debit charges on her checking account” until she was
actually sued by Commerce Bank in the Court of Common Pleas.
III. The Law
15 U.S.C. § 1693(g). Consumer Liability:
(a) Unauthorized electronic fund transfers; limit. A consumer shall be liable for any unauthorized
electronic fund transfer.…In no event, however, shall a consumer’s liability for an unauthorized transfer
exceed the lesser of—
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(1) $ 50; or
(2) the amount of money or value of property or services obtained in such unauthorized electronic fund
transfer prior to the time the financial institution is notified of, or otherwise becomes aware of,
circumstances which lead to the reasonable belief that an unauthorized electronic fund transfer involving
the consumer’s account has been or may be affected. Notice under this paragraph is sufficient when such
steps have been taken as may be reasonably required in the ordinary course of business to provide the
financial institution with the pertinent information, whether or not any particular officer, employee, or
agent of the financial institution does in fact receive such information.
15 U.S.C. § 1693(m) Civil Liability:
(a) [A]ction for damages; amount of award.…[A]ny person who fails to comply with any provision of this
title with respect to any consumer, except for an error resolved in accordance with section 908, is liable to
such consumer in an amount equal to the sum of—
(1) any actual damage sustained by such consumer as a result of such failure;
(2) in the case of an individual action, an amount not less than $ 100 nor greater than $
1,000; or…
(3) in the case of any successful action to enforce the foregoing liability, the costs of the action, together
with a reasonable attorney’s fee as determined by the court.
12 C.F.R. § 205.6 Liability of consumer for unauthorized transfers.
(b) Limitations on amount of liability. A consumer’s liability for an unauthorized electronic fund transfer
or a series of related unauthorized transfers shall be determined as follows:
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(1) Timely notice given. If the consumer notifies the financial institution within two business days after
learning of the loss or theft of the access device, the consumer’s liability shall not exceed the lesser of $ 50
or the amount of unauthorized transfers that occur before notice to the financial institution.
(2) Timely notice not given. If the consumer fails to notify the financial institution within two business
days after learning of the loss or theft of the access device, the consumer’s liability shall not exceed the
lesser of $ 500 or the sum of:
(i) $ 50 or the amount of unauthorized transfers that occur within the two business days, whichever is
less; and
(ii) The amount of unauthorized transfers that occur after the close of two business days and before notice
to the institution, provided the institution establishes that these transfers would not have occurred had
the consumer notified the institution within that two-day period.
IV. Opinion and Order
The Court finds based upon the testimony presented herein that defendant in her counter-claim has
proven by a preponderance of evidence damages in the amount of $1,000.00 plus an award of attorney’s
fees. Clearly, Commerce failed to investigate the unauthorized charges pursuant to 15 U.S.C. § 1693(h).
Nor did Commerce close the account as detailed in Defendant’s Exhibit No. 1. Instead, Commerce sued
Brown and then withdrew its claim at trial. The Court finds $50.00 is the appropriate liability for Brown
for the monies charged on her account as set forth within the above statute because she timely notified, in
person, Commerce on January 16, 2005. Brown also requested Commerce to close her checking account.
Based upon the trial record, defendant has proven by a preponderance of the evidence damages of
$1,000.00 as set forth in the above statute, 15 U.S.C. § 1693(m).
C A S E Q U E S T I O N S
1. Why—apparently—did the bank withdraw its complaint against Brown at the time
of trial?
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2. Why does the court mention Ms. Brown’s occupation, and that she was at the time
of the incident living with the man who was—at the time of trial—her husband?
3. What is the difference between the United States Code (USC) and the Code of
Federal Regulations (CFR), both of which are cited by the court?
4. What did the bank do wrong here?
5. What damages did Ms. Brown suffer for which she was awarded $1,000? What else
did she get by way of an award that is probably more important?
[1] Neal Rogers died prior to the institution of this lawsuit. Helen Rogers died after Union
Planters filed this appeal. We have substituted Helen’s estate as appellee.
[2] Since there was a series of forged checks, it is reasonable to assume that Reese intercepted
the bank statements before Rogers could inspect them. However, Union Planters cannot be
held liable for Reese’s fraudulent concealment.
[3] Actually, it was Union Planters that notified Rogers that there had been forgeries, as
opposed to Rogers’ discovering the forgeries herself
17.5 Summary and Exercises
Summary
Traditionally when a customer wrote a check (on the payor bank) and the payee deposited it into his
account (at the depository bank), the check was physically routed by means of ground and air
transportation to the various intermediary banks until it was physically presented to the payor bank for
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final settlement. The federal Check 21 Act (2004) promotes changes in this process by allowing banks to
process electronic images of customers’ checks instead of the actual paper instrument: the data on the
check is truncated (stripped) from the instrument and the data are transmitted. The original check can be
digitally recreated by the making of a “substitute check.” Merchants—indeed, anyone with a check scanner
and a computer—can also process electronic data from checks to debit the writer’s account and credit the
merchant’s instantly.
In addition to Check 21 Act, the Electronic Fund Transfer Act of 1978 also facilitates electronic banking. It
primarily addresses the uses of credit and debit cards. Under this law, the electronic terminal must
provide a receipt of transfer. The financial institution must follow certain procedures on being notified of
errors, the customer’s liability is limited to $50 if a card or code number is wrongfully used and the
institution has been notified, and an employer or government agency can compel acceptance of salary or
government benefits by EFT.
Article 4 of the UCC—state law, of course—governs a bank’s relationship with its customers. It permits a
bank to pay an overdraft, to pay an altered check (charging the customer’s account for the original tenor of
the check), to refuse to pay a six-month-old check, to pay or collect an item of a deceased person (if it has
no notice of death) and obligates it to honor stop payment orders. A bank is liable to the customer for
damages if it wrongfully dishonors an item. The customer also has duties; primarily, the customer must
inspect each statement of account and notify the bank promptly if the checks have been altered or
signatures forged. The federal Expedited Funds Availability Act requires that, within some limits, banks
make customers’ funds available quickly.
Wholesale funds transactions, involving tens of millions of dollars, were originally made by telegraph
(“wire transfers”). The modern law governing such transactions is, in the United States, UCC Article 4A.
A letter of credit is a statement by a bank or other financial institution that it will pay a specified sum of
money to specified persons when certain conditions are met. Its purpose is to facilitate nonlocal sales
transactions by ensuring that the buyer will not get access to the goods until the seller has proper access to
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the buyer’s money. In the US letters of credit are governed by UCC Article 5, and in international
transactions they may be covered by a different internationally recognized law.
E X E R C I S E S
1. On March 20, Al gave Betty a check for $1,000. On March 25, Al gave Carl a
check for $1,000, which Carl immediately had certified. On October 24, when
Al had $1,100 in his account, Betty presented her check for payment and the
bank paid her $1,000. On October 25, Carl presented his check for payment
and the bank refused to pay because of insufficient funds. Were the bank’s
actions proper?
2. Winifred had a balance of $100 in her checking account at First Bank. She
wrote a check payable to her landlord in the amount of $400. First Bank
cashed the check and then attempted to charge her account. May it?
Why?
3. Assume in Exercise 2 that Winifred had deposited $4,000 in her account a
month before writing the check to her landlord. Her landlord altered the
check by changing the amount from $400 to $4,000 and then cashed the
check at First Bank. May the bank charge Winifred’s account for the check?
Why?
4. Assume in Exercise 2 that Winifred had deposited $5,000 in her account a
month before writing the check but the bank misdirected her deposit, with
the result that her account showed a balance of $100. Believing the landlord’s
check to be an overdraft, the bank refused to pay it. Was the refusal justified?
Why?
5. Assume in Exercise 2 that, after sending the check to the landlord, Winifred
decided to stop payment because she wanted to use the $300 in her account
as a down payment on a stereo. She called First Bank and ordered the bank to
stop payment. Four days later the bank mistakenly paid the check. Is the bank
liable to Winifred? Why?
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6. Assume in Exercise 5 that the landlord negotiated the check to a holder in due
course, who presented the check to the bank for payment. Is the bank
required to pay the holder in due course after the stop payment order? Why?
7. On Wednesday, August 4, Able wrote a $1,000 check on his account at First
Bank. On Saturday, August 7, the check was cashed, but the Saturday activity
was not recorded by the bank until Monday, August 9. On that day at 8:00
a.m., Able called in a stop payment order on the check and he was told the
check had not cleared; at 9:00 he went to the bank and obtained a printed
notice confirming the stop payment, but shortly thereafter the Saturday
activity was recorded—Able’s account had been debited. He wants the $1,000
recredited. Was the stop payment order effective? Explain.
8. Alice wrote a check to Carl’s Contracting for $190 on April 23, 2011. Alice was
not satisfied with Carl’s work. She called, leaving a message for him to return
the call to discuss the matter with her. He did not do so, but when she
reconciled her checks upon receipt of her bank statement, she noticed the
check to Carl did not appear on the April statement. Several months went by.
She figured Carl just tore the check up instead of bothering to resolve any
dispute with her. The check was presented to Alice’s bank for payment on
March 20, 2012, and Alice’s bank paid it. May she recover from the bank?
9. Fitting wrote a check in the amount of $800. Afterwards, she had second
thoughts about the check and contacted the bank about stopping payment. A
bank employee told her a stop payment order could not be submitted until
the bank opened the next day. She discussed with the employee what would
happen if she withdrew enough money from her account that when the $800
check was presented, there would be insufficient funds to cover it. The
employee told her that in such a case the bank would not pay the check.
Fitting did withdraw enough money to make the $800 an overdraft, but the
bank paid it anyway, and then sued her for the amount of the overdraft. Who
wins and why? Continental Bank v. Fitting, 559 P.2d 218 (1977).
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10. Plaintiff’s executive secretary forged plaintiff’s name on number checks by
signing his name and by using a rubber facsimile stamp of his signature: of
fourteen checks that were drawn on her employer’s account, thirteen were
deposited in her son’s account at the defendant bank, and one was deposited
elsewhere. Evidence at trial was presented that the bank’s system of
comparing its customer’s signature to the signature on checks was the same
as other banks in the area. Plaintiff sued the bank to refund the amount of the
checks paid out over a forged drawer’s signature. Who wins and why? Read v.
South Carolina National Bank, 335 S.E.2d 359 (S.C., 1965).
11. On Tuesday morning, Reggie discovered his credit card was not in his wallet.
He realized he had not used it since the previous Thursday when he’d bought
groceries. He checked his online credit card account register and saw that
some $1,700 had been charged around the county on his card. He
immediately notified his credit union of the lost card and unauthorized
charges. For how much is Reggie liable?
S E L F – T E S T Q U E S T I O N S
1. Article 4 of the UCC permits a bank to pay
a. an overdraft
b. an altered check
c. an item of a deceased person if it has no notice of death
d. all of the above
The type of banks covered by Article 4 include
a. depository banks
b. payor banks
c. both of the above
d. none of the above
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A bank may
a. refuse to pay a check drawn more than six months before being
presented
b. refuse to pay a check drawn more than sixty days before being
presented
c. not refuse to pay a check drawn more than six months before
being presented
d. do none of the above
Forms of electronic fund transfer include
a. automated teller machines
b. point of sale terminals
c. preauthorized payment plans
d. all of the above
S E L F – T E S T A N S W E R S
1. d
2. c
3. a
4. d
