Cengage Advantage Books: Fundamentals of Business Law 9th Edition by Roger LeRoy Miller

Exercise 21

Cumis Mutual Insurance Society, Inc. v. Rosol
Superior Court of New Jersey, Appellate Division, __A.3d__(2011).
FACTS Mizek Rosol, a resident of New Jersey, received an e-mail message from someone he did not know offering to pay him a 10 percent fee if he would receive checks, deposit them, and transfer the funds to others. He agreed and began to receive checks. Rosol opened a new account at Polish Slavic Federal Credit Union (PSFCU) 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 to Rosol's account for the amount of the Canadian check. A PSFCU employee told Rosol that "these monies were collected and in his account." Rosol transferred $36,240 to a party in Japan and $4,500 to someone in Great Britain. Ten days later, PSFCU told Rosol that the Canadian check had been dishonored and demanded that he 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 in a New Jersey state court 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 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 recover the transferred funds.
REASON The appellate court explained that UCC 2-401(a) governed the relationship between PSFCU and Rosol. Under that statute, 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 "stopped." The court reasoned that "the state of his knowledge" about the first check could bear on the question of whether he had acted reasonably in relying on what he was told about the second check.
FOR CRITICAL ANALYSIS-Ethical Consideration In what ways was Rosol's apparent motive similar to the most common reason that ethical problems occur in business?