Cengage Advantage Books: Fundamentals of Business Law Today 10th Edition by Roger LeRoy Miller

Exercise 10

FACTS The board of the Royal Arcanum Hospital Association of Kings County, Inc., passed a resolution to require that all corporate checks be signed by two of three officers-Frank Vassallo, Joseph Rugilio, and William Herrnkind. The three were also named as signatories on the firm's account with Capital One Bank, but the terms of the account did not include the two-signature requirement. After Vassallo and Rugilio died, Herrnkind opened a new account in the corporate name that expressly permitted checks to be drawn on it with only one signature-and only Herrnkind's name appeared on the signature card. The account statements were sent to Royal Arcanum "care of William Herrnkind."
Over the next four years, a series of transactions reduced the balance of the account from nearly $200,000 to zero. Royal Arcanum filed a suit in a New York state court against Herrnkind and Capital One to recover the funds. The court dismissed the complaint against the bank. Royal Arcanum appealed.
ISSUE Was Capital One liable for the payment of unauthorized withdrawals from its customer's corporate accounts?
DECISION No. A state intermediate appellate court affirmed the decision of the lower court to dismiss Royal Arcanum's complaint against Capital One.
REASON The contractual relationship between a bank and its customer includes the understanding that the bank will pay out the customer's funds only as instructed. In this case, although Royal Arcanum's board required two signatures on its corporate checks, the terms of the accounts with Capital Bank did not include a two-signature requirement. Because the terms permitted checks to be drawn on the accounts with only one signature, the bank did not breach any company requirement by allowing withdrawals only on the approval of one officer.
Additionally, "insofar as the Bank's transactions with the plaintiff were concerned, the plaintiff conferred, at the least, apparent authority on Herrnkind to act on its behalf." Under these circumstances, the bank used "due care and diligence" because there was nothing to "arouse the suspicion of its employees." Thus, the bank was not liable for the payment of unauthorized withdrawals from Royal Arcanum's accounts.
FOR CRITICAL ANALYSIS-Legal Environment Consideration What circumstances indicated that Herrnkind had Royal Arcanum's authority to act on its behalf?