Deck 14: Checks and Banking in the Digital Age

Question 1

Answers to the even-numbered questions in this For Review section can be found in Appendix F at the end of this text.
What are the four most common types of electronic fund transfers

Answer 1

The 4 most common types of electronic fund transfer systems used by the customers of the banks are provided below:
1. Point off sales systems
2. Automated teller machines
3. Pay by telephone system
4. Automated systems which directly handle withdrawal and deposit of funds.

Question 2

Forged Checks. Roy Supply, Inc., and R. M. R. Drywall, Inc., had checking accounts at Wells Fargo Bank. Both accounts required all checks to carry two signatures-that of Edward Roy and that of Twila June Moore, both of whom were executive officers of both companies. Between January 2006 and March 2008, the bank honored hundreds of checks on which Roy's signature was forged by Moore. On January 31, 2009, Roy and the two corporations notified the bank of the forgeries and then filed a suit in a California state court against the bank, alleging negligence. Who is liable for the amounts of the forged checks? Why? (See pages 416-418.)

Answer 2

Generally, it is the bank's responsibility to verify the customer's signatures before processing the checks but most of the banks do not process these checks manually. In these banks the checks are processed by specific machines which read the MICR number on the check.
The customers are themselves responsible for reviewing their periodic account statements and to notify the bank about the forged transactions within 30 days from the statement date in case there are multiple forged transactions by same person. In case of only one forged transaction, the customer can notify the bank within one year after the statement date.
In this case, the bank is not liable for the damages caused to the Mr ER because he himself failed in timely notifying the bank about the forged transactions. If he would have taken due care in reviewing his account statements then he would have easily known about these transactions which were in hundreds and occurred over two years. His failure in doing so relieves bank from any liability towards his damages.

Question 3

Case Problem with Sample Answer-Honoring Checks. Adley Abdulwahab (Wahab) opened an account on behalf of W Financial Group, LLC, with Wells Fargo Bank. Wahab was one of three authorized signers on the account. Five months later, Wahab withdrew $1,701,250 from W Financial's account to buy a cashier's check payable to Lubna Lateef. Wahab visited a different Wells Fargo branch and deposited the check into the account of CA Houston Investment Center, LLC. Wahab was the only authorized signer on this account. Lateef never received or indorsed the check. W Financial filed a suit to recover the amount. Applying the rules for payment on a forged indorsement, who is liable? [ Jones v. Wells Fargo Bank, 666 F.3d 955 (5th Cir. 2012)] (See page 418.)

Answer 3

Check is the signed document that promises the bearer for payment of the sum of money on demand or future date. The honoring of check involves presentment or acceptance of the check for encasing the same or transferring the fund to the account of another person.
In this case, the bank is liable for the underlying fraud. W Bank had issued a Cashier's Check in L's name but deposited the check into another account. The bank also allowed the transactions to be made in the accounts. It is ascertained that taking into account the rules of the forged indorsements the bank is liable for the underlying fraud as it has not received the order from the W group for the indorsement.

Question 4

MidAmerica Bank v. Charter One Bank
FACTS Mary Christelle was the mother of David Hernandez, president of Essential Technologies of Illinois (ETI). Christelle bought a $50,000 cashier's check from Charter One Bank payable to ETI. ETI deposited the check into its account with MidAmerica Bank, FSB. Four days later, Christelle asked Charter One to stop payment (see the discussion on page 415). Charter One agreed and refused to honor the check. MidAmerica returned the check to ETI. Within two weeks, ETI's account had a negative balance of $52,000. MidAmerica closed the account and filed a suit in an Illinois state court against Charter One, alleging that the defendant wrongfully dishonored the cashier's check. Charter One argued that a cashier's check should be treated as a note subject to the defense of fraud. The court ruled in MidAmerica's favor, but a state intermediate appellate court reversed the ruling. MidAmerica appealed.
ISSUE Can a bank obtain payment on a cashier's check over the drawee bank's stop-payment order?
DECISION Yes. The Illinois Supreme Court reversed the lower court's decision, awarded MidAmerica the amount of the check, and remanded the case for a determination of interest and fees.
REASON A bank's refusal to pay a cashier's check based on its customer's request to stop payment is wrongful under UCC 3-411 because a customer has no right to stop payment on a cashier's check under UCC 4-403, which permits payment to be stopped only on items drawn "on the customer's account." A cashier's check is drawn on the issuing bank, not on the customer's account. Thus, Christelle had no right to stop payment after she gave the check to ETI. As for Charter One's argument that the check should be treated as a note, the court agreed that the drawer of a cashier's check has the same liability as the maker of a note "because a bank issuing a cashier's check is both the drawer and drawee of the check." But "the UCC provides that cashier's checks are drafts, not notes." Besides, the bank cannot assert fraud as a defense because it did not know of any fraud when it dishonored the check.
WHY IS THIS CASE IMPORTANT? As noted earlier in the text, the UCC has been amended periodically since it was first published in 1952. In particular, Article 3 was significantly revised in 1990 when many sections were rewritten and renumbered. The reasoning in this case underscores that through all of the changes, the treatment of cashier's checks as "cash equivalents" in the world of commerce has never varied, and none of the amendments to Article 3 have been intended to alter that status.

Question 5

A Question of Ethics-Forged Signatures. From the 1960s, James Johnson served as Bradley Union's personal caretaker and assistant, and was authorized by Union to handle his banking transactions. Louise Johnson, James's wife, wrote checks on Union's checking account to pay his bills, normally signing the checks "Brad Union." Branch Banking Trust Co. (BB T) managed Union's account. In December 2000, on the basis of Union's deteriorating mental and physical condition, a North Carolina state court declared him incompetent. Douglas Maxwell was appointed as Union's guardian. Maxwell "froze" Union's checking account and asked BB T for copies of the canceled checks, which were provided by July 2001. Maxwell believed that Union's signature on the checks had been forged. In August 2002, Maxwell contacted BB T, which refused to recredit Union's account. Maxwell filed a suit on Union's behalf in a North Carolina state court against BB T. [Union v. Branch Banking Trust Co., 176 N.C.App. 711, 627 S.E.2d 276 (2006)] (See pages 416-418.)
1. Before Maxwell's appointment, BB T sent monthly statements and canceled checks to Union, and Johnson reviewed them, but no unauthorized signatures were ever reported. On whom can liability be imposed in the case of a forged drawer's signature on a check? What are the limits set by Section 4-406(f ) of the Uniform Commercial Code? Should Johnson's position, Union's incompetence, or Maxwell's appointment affect the application of these principles? Explain.
2. Why was this suit brought against BB T? Is BB T liable? If not, who is? Why? Regardless of any violations of the law, did anyone act unethically in this case? If so, who and why?

Question 6

ISSUE SPOTTERS
Lyn writes a check for $900 to Mac, who indorses the check in blank and transfers it to Nan. She presents the check to Omega Bank, the drawee bank, for payment. Omega does not honor the check. Is Lyn liable to Nan? Could Lyn be subject to criminal prosecution? Why or why not? (See page 414.)

Question 7

Critical Legal Thinking. Since the 1990 revision of Article 4, a bank is no longer required to include the customer's canceled checks when it sends monthly statements to the customer. A bank may simply itemize the checks (by number, date, and amount). It may provide photocopies of the checks as well but is not required to do so. What implications do the revised rules have for bank customers in terms of liability for unauthorized signatures and indorsements? (See pages 416-417.)

Question 8

Answers to the even-numbered questions in this For Review section can be found in Appendix F at the end of this text.
What type of check does a bank agree in advance to accept when the check is presented for payment?

Question 9

Business Law Critical Thinking Group Assignment. On January 5, Brian drafts a check for $3,000 drawn on Southern Marine Bank and payable to his assistant, Shanta. Brian puts last year's date on the check by mistake. On January 7, before Shanta has had a chance to go to the bank, Brian is killed in an automobile accident. Southern Marine Bank is aware of Brian's death. On January 10, Shanta presents the check to the bank, and the bank honors the check by payment to Shanta. Later, Brian's widow, Joyce, claims that because the bank knew of Brian's death and also because the check was by date over one year old, the bank acted wrongfully when it paid Shanta. Joyce, as executor of Brian's estate and sole heir by his will, demands that Southern Marine Bank recredit Brian's estate for the check paid to Shanta.
1. The first group will determine whether the bank acted wrongfully by honoring Brian's check and paying Shanta.
2. The second group will assess whether Joyce has a valid claim against Southern Marine Bank for the amount of the check paid to Shanta.
3. A third group will assume that the check Brian drafted was on his business account rather than on his personal bank account and that he had two partners in the business. Would a business partner be in a better position than his widow to force Southern Marine Bank to recredit Brian's account? Why or why not?

Question 10

RPM Pizza, Inc., issued a check for $96,000 to Systems Marketing for an advertising campaign. A few days later, RPM decided not to go through with the deal and placed a written stop-payment order on the check. RPM and Systems had no further contact for many months. Three weeks after the stop-payment order expired, however, Toby Rierson, an employee at Systems, cashed the check. Bank One Cambridge, RPM's bank, paid the check with funds from RPM's account. Because the check was more than six months old, it was stale. Thus, according to standard banking procedures as well as Bank One's own policies, the signature on the check should have been specially verified, but it was not. RPM filed a suit in a federal district court against Bank One to recover the amount of the check. Using the information presented in the chapter, answer the following questions.
1. How long is a written stop-payment order effective? What else could RPM have done to prevent this check from being cashed?
2. What would happen if it turned out that RPM did not have a legitimate reason for stopping payment on the check?
3. What are a bank's obligations with respect to stale checks?
4. Would a court be likely to hold the bank liable for the amount of the check because it failed to verify the signature on the check? Why or why not?
DEBATE THIS To reduce fraud, checks that utilize mechanical or electronic signature systems should not be honored.

Question 11

Question with Sample Answer-Customer Negligence. Gary goes grocery shopping and carelessly leaves his checkbook in his shopping cart. His checkbook, with two blank checks remaining, is stolen by Dolores. On May 5, Dolores forges Gary's name on a check for $100 and cashes the check at Gary's bank, Citizens Bank of Middletown. Gary has not reported the loss of his blank checks to his bank. On June 1, Gary receives his monthly bank statement from Citizens Bank that includes the forged check, but he does not notice the item nor does he examine his bank statement. On June 20, Dolores forges Gary's last check. This check is for $1,000 and is cashed at Eastern City Bank, a bank with which Dolores has previously done business. Eastern City Bank puts the check through the collection process, and Citizens Bank honors it. On July 1, on receipt of his bank statement and canceled checks covering June transactions, Gary discovers both forgeries and immediately notifies Citizens Bank. Dolores cannot be found. Gary claims that Citizens Bank must recredit his account for both checks, as his signature was forged. Discuss fully Gary's claim. (See pages 416-417.)

Question 12

Michigan Basic Property Insurance Association v. Washington
FACTS The Michigan Basic Property Insurance Association (MBP) issued a check for $69,559.06 from its account with Fifth Third Bank to Joyce Washington, Countrywide Home Loans, and T C Federal Credit Union as co-payees. Washington indorsed the check herself by signing all three payees' names and did not distribute the proceeds to the co-payees. When the check reached Fifth Third Bank, it notified MBP of the payment through a daily account statement. MBP did not object, so Fifth Third Bank withdrew the funds from MBP's account. Fifth Third Bank also sent information about the check in a monthly account statement, and MBP still failed to object, even though the account agreement required it to provide prompt notice of any forgeries. MBP was forced to issue a second check to Countrywide, so it sued Fifth Third Bank and sought to have its account recredited. The trial court found that Fifth Third Bank was liable to MBP, and another party appealed on Fifth Third Bank's behalf.
ISSUE Was Fifth Third Bank liable to MBP for paying a check with forged indorsements?
DECISION No. The Michigan appellate court reversed the trial court's judgment.
REASON The court noted that, under the Uniform Commercial Code (UCC), the check was not properly payable because it had two forged indorsements. When a bank pays a check bearing a forged indorsement, the UCC ordinarily requires the bank to recredit the customer's account. Nevertheless, the court pointed out that the UCC allows parties to change their duties by contract. In this case, the account agreement obligated MBP to carefully review its checking account statements and to notify Fifth Third Bank of any problems within thirty days. In the absence of such notice, the contract provided that MBP, not Fifth Third Bank, was liable for any forged indorsements. Because MBP did not provide prompt notice of the forgeries, Fifth Third Bank was not required to recredit MBP's account.
CRITICAL THINKING-Legal Consideration As a practical matter, does it make sense for the customer to bear primary responsibility for discovering instances of fraud? Which party is in a better position to detect any irregularities? Explain.

Question 13

ISSUE SPOTTERS
Roni writes a check for $700 to Sela. Sela indorses the check in blank and transfers it to Titus, who alters the check to read $7,000 and presents it to Union Bank, the drawee, for payment. The bank cashes it. Roni discovers the alteration and sues the bank. How much, if anything, can Roni recover? From whom can the bank recover this amount? (See pages 419-420.)

Question 14

Answers to the even-numbered questions in this For Review section can be found in Appendix F at the end of this text.
When may a bank properly dishonor a customer's check without being liable to the customer?

Question 15

Spotlight on Embezzlement-Forged Drawers' Signatures. In December 1999, Spacemakers of America, Inc., hired Jenny Triplett as a bookkeeper. Triplett was responsible for maintaining the company checkbook and reconciling it with the monthly statements from SunTrust Bank. She also handled invoices from vendors. Spacemakers president, Dennis Rose, reviewed the invoices and signed the checks to pay them, but no other employee checked Triplett's work. By the end of her first full month of employment, Triplett had forged six checks totaling more than $22,000, all payable to Triple M Entertainment, which was not a Spacemakers vendor. By October 2000, Triplett had forged fifty-nine more checks, totaling more than $475,000. A SunTrust employee became suspicious of an item that required sight inspection under the bank's fraud detection standards, which exceeded those of other banks in the area. Triplett was arrested. Spacemakers sued SunTrust Bank, which filed a motion for summary judgment. On what basis could the bank avoid liability? In whose favor should the court rule, and why? [Spacemakers of America, Inc. v. SunTrust Bank, 271 Ga.App. 335, 609 S.E.2d 683 (2005)] (See pages 416-418.)

Question 16

Cumis Mutual Insurance Society, Inc. v. Rosol
FACTS Mizek Rosol received an e-mail message from someone he did not know, offering a fee if he would receive checks, deposit them, and transfer the funds to others. He agreed and opened an account at Polish Slavic Federal Credit Union (PSFCU). He received and deposited a cashier's check for $9,800 issued by a credit union in Florida. Three days later, he deposited a check for $45,000 drawn on a Canadian bank. Within a week, PSFCU told him that payment on the first check had been stopped, but it did not disclose that the check was fraudulent. PSFCU issued a provisional credit for the amount of the Canadian check. After Rosol had transferred $36,240 to a party in Japan and $4,500 to a party in Great Britain, the Canadian check was dishonored. PSFCU demanded that Rosol repay the transferred funds. He refused. PSFCU filed a claim with its insurer, Cumis Mutual Insurance Society, Inc. Cumis paid the claim and filed a suit against Rosol to recover the amount. The court issued a summary judgment in Cumis's favor. Rosol appealed.
ISSUE Were the funds that Rosol deposited from the Canadian check provisional at the time he transferred them to the parties in Japan and Great Britain?
DECISION Yes. A state intermediate appellate court reversed the lower court's judgment and remanded the case because "there were genuine issues of material fact precluding summary judgment." If PSFCU reasonably led Rosol to believe that the Canadian check had been finally credited to his account, the credit union could not rely on UCC 4-201(a) to recover the transferred funds.
REASON The appellate court explained that UCC 4-201(a) governed the relationship between PSFCU and Rosol. Under that provision, a credit to the account of "the owner" of a check is provisional until the final settlement of the check. The credit to Rosol's account for the checks was thus provisional between the time of their deposit and the time of their dishonor. During that period, PSFCU had a "right of recoupment" for the funds that Rosol had transferred. But Rosol contended that he would not have transferred those funds if PSFCU had told him that the first check was fraudulent-not just that it had been stopped. The court reasoned that "the state of his knowledge" about the first check could bear on the question of whether Rosol had acted reasonably in relying on what he was told about the second check.
CRITICAL THINKING-Ethical Consideration In what ways was Rosol's apparent motive similar to the most common reason that ethical problems occur in business?

Question 17

Answers to the even-numbered questions in this For Review section can be found in Appendix F at the end of this text.
What duties does the Uniform Commercial Code impose on a bank's customers with regard to forged and altered checks? What are the consequences if a customer is negligent in performing those duties?

Question 18

Bank's Duty of Care. When Arnett Gertrude was diagnosed with cancer, she added her nephew, Jack Scriber, as an authorized signatory to her checking account. Before Gertrude died, Scriber wrote checks on the account to transfer nearly all of the $600,000 in the account to his own account. After Gertrude's death, Bobbie Caudill, the administrator of her estate, discovered the withdrawals and filed a suit against the bank. What is the relationship between a bank and its customer? Is the bank liable in this case? Why or why not? [Caudill v. Salyersville National Bank, 2010 WL 45882 (Ky.App. 2010)] (See page 416.)

Question 19

Answers to the even-numbered questions in this For Review section can be found in Appendix F at the end of this text.
What is electronic check presentment, and how does it differ from the traditional check-clearing process?

Question 20

Forged Drawers' Signatures. Debbie Brooks and Martha Tingstrom lived together. Tingstrom handled their finances. For five years, Brooks did not look at any statements concerning her accounts. When she finally reviewed the statements, she discovered that Tingstrom had taken $85,500 from Brooks's checking account with Transamerica Financial Advisors. Tingstrom had forged Brooks's name on six checks paid between one and two years earlier. Another year passed before Brooks filed a suit against Transamerica. Who is most likely to suffer the loss for the checks paid with Brooks's forged signature? Why? [Brooks v. Transamerica Financial Advisors, 57 So.3d 1153 (La.App. 2 Cir. 2011)] (See pages 416-418.)