Fundamentals of Business Law

Business

Quiz 17 :

Checks and Banking in the Digital Age

Quiz 17 :

Checks and Banking in the Digital Age

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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?
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The bank is generally responsible for determining that whether the customer's signature on a check is genuine or not. When the bank makes a payment on a forged check having a forged signature, then it must re credit the customer's account with the amount of which the payment is made.
A customer must regularly examine his/her monthly statements for any cancelled checks and should report any activity of forged signatures promptly. In case a customer fails to do this, then he/she is liable for any losses that the bank incurs.

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Bank's Duty to Honor Checks. 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. Discuss fully Southern Marine's liability in light of Joyce's demand.
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SM Bank is not liable towards late Mr B or Ms J. Ms J's claim that SM bank's knowledge of Mr B's death revoked its authority to pay is wrong. The reason behind this is that Uniform Civil Code specifically states that the death or incompetence of customer does not revoke an authority on the part of bank to pay. It also states that bank can pay for those checks which were drawn prior to customer's death for ten days after the death of the customer until a proper stop order has been issued by someone claiming interest in that account.
In this case, Ms J did not issue any stop order and therefore SM bank's payment on check, three days after Mr B's death constitutes a proper payment.
Ms J's other claim that the SM bank should not have made payment on the check which was presented after six month of its date is also incorrect. The reason behind this is that a check whose presentment and date are six months apart is considered a stale check and bank can honour this check in good faith without bearing any liability even though it is not obliged to do so. Consultation with the account holder is not necessary in this case and therefore any payment made in good faith is allowed.

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The five Learning Objectives below are designed to help improve your understanding of the chapter. After reading this chapter, you should be able to answer the following questions: 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?
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Universal commercial code is a set of laws that provides legal rules and regulations that governs commercial or business dealings and transactions. The Universal Commercial code regulates the transfer or sale of personal property, but does not address dealings in real property. This code was published in 1952 and has been revised many times throughout the following years.
It is the bank's responsibility to determine whether the signature on a customer's check is genuine or not. A bank that pays a customer's check bearing a forged signature must re credit the customer's account or be liable to the customer drawer for a breach of contract.
The customer has the duty to report forged checks; the bank is relieved of liability if the customer fails to report the forgery within a three year period after the forged items have been made available to the customer.
The bank has an obligation to assess each check before making a last payment. If the bank fails to perceive an alteration, it is accountable to its customer for the loss because it did not pay as the customer directed. The loss is the difference between the original amount of the check and the amount actually paid.
If a customer is negligent in performing his or her duties, then the bank will reduce its liability for reimbursing the customer's account. The bank reduces its liability if the bank traces its loss on successive altered checks to the customer's failure to understand the initial alterations.

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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.)
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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?
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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?
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Bank's Duty of Care. Arnett Gertrude, a widow with no children, lived with her sister and her nephew Jack Scriber. When Gertrude was diagnosed with cancer, she added Scriber to her checking account as an authorized signatory and gave him power of attorney. Shortly before Gertrude died, Scriber wrote checks on the account to withdraw nearly all of the $600,000 in the account and transferred the funds into his account. After her death, the administrator of Gertrude's estate discovered the withdrawals. The administrator sued the bank for aiding Scriber in converting Gertrude's funds. The bank's defense was that Scriber had power of attorney over Gertrude's finances and had the power to write checks on the account, so the bank had to honor the checks that Scriber had written. The estate argued that the bank breached its duty to Gertrude to guard against such obvious misappropriation. The trial court held for the bank. Did the bank breach its duty to Gertrude? Discuss why or why not. [ Caudill v. Salyersville National Bank, S.W3d (Ky.App. 2010)]
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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 2007 and March 2009, the bank honored hundreds of checks on which Roy's signature was forged by Moore. On January 31, 2010, 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?
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What laws apply to e-money transactions and online banking services?
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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.)
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Online Banking. iBank operates exclusively on the Web with no physical branch offices. Although some of iBank's business is transacted with smart-card technology, most of its business with its customers is conducted through the mail. iBank offers free checking, no-fee money market accounts, mortgage refinancing, and other services. With what regulation covering banks might iBank find it difficult to comply, and what is the difficulty?
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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 $10 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 and copies of canceled checks from Citizens Bank, including the forged check, but he does not examine the canceled checks. 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.
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What laws apply to e-money transactions and online banking services?
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The five Learning Objectives below are designed to help improve your understanding of the chapter. After reading this chapter, you should be able to answer the following questions: When may a bank properly dishonor a customer's check without being liable to the customer?
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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.
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The five Learning Objectives below are designed to help improve your understanding of the chapter. After reading this chapter, you should be able to answer the following questions: What are the four most common types of electronic fund transfers?
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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
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Forged Indorsements. In 1994, Brian and Penny Grieme bought a house in Mandan, North Dakota. They borrowed for the purchase through a loan program financed by the North Dakota Housing Finance Agency (NDHFA). The Griemes obtained insurance for the house from Center Mutual Insurance Co. When a hailstorm damaged the house in 2001, Center Mutual determined that the loss was $4,378 and issued a check for that amount, drawn on Bremer Bank, N.A. The check's payees included Brian Grieme and the NDHFA. Grieme presented the check for payment to Wells Fargo Bank of Tempe, Arizona. The back of the check bore his signature and in hand-printed block letters the words "ND Housing Finance." The check was processed for collection and paid, and the canceled check was returned to Center Mutual. By the time the insurer learned that NDHFAs indorsement had been forged, the Griemes had canceled their policy, defaulted on their loan, and filed for bankruptcy. The NDHFA filed a suit in a North Dakota state court against Center Mutual for the amount of the check. Who is most likely to suffer the loss in this case? Why? [ State ex rel. North Dakota Housing Finance Agency v. Center Mutual Insurance Co., 720 N.W2d 425 (N.Dak. 2006)]
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Bank's Duty to Honor Checks. Sheila Bartell was arrested and subject to various charges related to burglary, the possession for sale of methamphetamine, and other crimes. She pleaded guilty in a California state court to some charges in exchange for the dismissal of others and an agreement to reimburse the victims. The victims included "Rita E.," who reported that her checkbook had been stolen and her signature forged on three checks totaling $590. Wells Fargo Bank had "covered" the checks and credited her account, however, so the court ordered Bartell to pay the bank. Bartell appealed, arguing that the bank was not entitled to restitution. What principles apply when a person forges a drawer's signature on a check? Is the bank entitled to recover from the defendant? Explain. [ People v. Bartell, 170 Cal. App.4th 1258, 88 Cal.Rptr.3d 844 (3 Dist. 2009)]
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The five Learning Objectives below are designed to help improve your understanding of the chapter. After reading this chapter, you should be able to answer the following questions: What type of check does a bank agree in advance to accept when the check is presented for payment?
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