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ANSWERS TO PROBLEMS
1. On November 9, Jane Jones writes a check for $5,000 payable to Ralph Rodgers in payment for
goods to be received later in the month. Before the close of business on November 9, Jane notifies
the bank by telephone to stop payment on the check. On December 19, Ralph gives the check to
Bill Briggs for value and without notice. On December 20, Bill deposits the check in his account
at Bank A. On December 21, Bank A sends the check to its correspondent, Bank B. On December
22, Bank B presents the check through the clearinghouse to Bank C. On December 23, Bank C
presents the check to Bank P, the payor bank. On December 28, the payor bank makes payment of
the check final. Is Jane Jones’ stop payment order effective against the payor bank? Explain.
2. Howard Harrison, a longtime customer of Western Bank, operates a small department store,
Harrison’s Store. Because his store has few experienced employees, Harrison frequently travels
throughout the United States on buying trips, although he also runs the financial operations of
the business. On one of his buying trips, Harrison purchased two hundred sport shirts from
Well-Made Shirt Company and paid for the transaction with a check on his store account with
Western Bank in the amount of $3,000. Adams, an employee of Well-Made who deposits its
checks in Security Bank, sloppily raised the amount of the check to $30,000 and indorsed the
check, “Pay to the order of Adams from Pension Plan Benefits, Well-Made Shirt Company by
Adams.” He cashed the check and cannot be found. Western Bank processed the check, paid it,
and sent it to Harrison’s Store with the monthly statement. After briefly examining the statement,
Harrison left on another buying trip for three weeks.
(a) Assuming the bank acted in good faith and the alteration is not discovered and reported to the
bank until an audit conducted thirteen months after the statement was received by Harrison’s
Store, who must bear the loss on the raised check?
(b) Assume that Harrison, who was unable to examine his statement promptly because of his
buying trips, left instructions with the bank to carefully examine and to notify him of any item
over $5,000 to be charged to his account; assume further that the bank nevertheless paid the item
in his absence. Who bears the loss if the alteration is discovered one month after the statement
was received by Harrison’s Store? If the alteration is discovered thirteen months later?
Answer: Customer's Duties.
(a) Harrison’s Store must bear the loss. Section 4-406(f) of the U.C.C. provides: "Without regard
to care or lack of care of either the customer or the bank a customer who does not within one year
3. Tom Jones owed Bank of Cleveland $10,000 on a note due November 17, with 1 percent interest
due the bank for each day delinquent in payment. Jones issued a $10,000 check to Bank of
Cleveland and deposited it in the night vault the evening of November 17. Several days later, he
received a letter saying he owed one day’s interest on the payment because of a one-day
delinquency in payment. Jones refused because he said he had put the payment in the vault on
November 17. Who is correct? Why?
Answer: Duty to Act Timely. The Bank of Cleveland is correct. Assuming that the interest rate is
within the state's legal limits, Jones will have to pay the one per cent per day or one day's
4. Assume that Davis draws a check on Dallas Bank, payable to the order of Perkins; that Perkins
indorses it to Cooper; that Cooper deposits it to her account in Houston Bank; that Houston
Bank presents it to Dallas Bank, the drawee; and that Dallas Bank dishonors it because of
insufficient funds. Houston Bank receives notification of the dishonor on Monday but, because of
an interruption of communication facilities, fails to notify Cooper until Wednesday. What result?
Answer: Duty to Act Timely. Houston Bank is a collecting bank. As such it has a duty to act timely.
A collecting bank acts timely in any event if it takes proper action before its "midnight deadline"
5. Jones, a food wholesaler whose company has an account with City Bank in New York City, is
traveling in California on business. He finds a particularly attractive offer and decides to buy a
carload of oranges for delivery in New York. He gives Saltin, the seller, his company’s check for
$25,000 to pay for the purchase. Saltin deposits the check, with others he received that day, with
his bank, the Carrboro Bank. Carrboro Bank sends the check to Downs Bank in Los Angeles,
which in turn deposits it with the Los Angeles Federal Reserve Bank (L.A. Fed). The L.A. Fed
sends the check, with others, to the New York Federal Reserve Bank (N.Y. Fed), which forwards
the check to City Bank, Jones’s bank, for collection.
(a) Is City Bank a depositary bank? A collecting bank? A payor bank?
(b) Is Carrboro Bank a depositary bank? A collecting bank?
(c) Is the N.Y. Fed. an intermediary bank?
(d) Is Downs Bank a collecting bank?
Answer: Collecting Banks.
6. On April 1, Moore gave Pipkin a check properly drawn by Moore on Zebra Bank for $5,000 in
payment of a painting to be framed and delivered the next day. Pipkin immediately indorsed the
check and gave it to Yeager Bank as payment in full of his indebtedness to the bank on a note he
previously had signed. Yeager Bank canceled the note and returned it to Pipkin.
On April 2, upon learning that the painting had been destroyed in a fire at Pipkin’s studio, Moore
promptly went to Zebra Bank, signed a printed form of stop payment order, and gave it to the
cashier. Zebra Bank refused payment on the check upon proper presentment by Yeager Bank.
(a) What are the rights of Yeager Bank against Zebra Bank?
(b) What are the rights of Yeager Bank against Moore?
(c) Assuming that Zebra Bank inadvertently paid the amount of the check to Yeager Bank and
debited Moore's account, what are the rights of Moore against Zebra Bank?
Answer: Payment of an Item.
(a) Yaeger Bank cannot recover anything from Zebra Bank. In the absence of certification, a
drawee bank is not liable to the holder of a check for failure to honor it, despite the fact that the
action of the bank in refusing to pay the check was unjustified, and even despite that the holder
sustained a loss as a result thereof. This is because the holder of a check is a stranger to the bank
7. As payment in advance for services to be performed, Acton signed and delivered the following
instrument:
December 1, 2011
LAST NATIONAL BANK MONEYVILLE, STATE X
Pay to the order of Olaf Owen $10,500.00 &————————;
Ten Thousand Five Hundred Dollars & —————————;
For services to be performed by Olaf Owen starting on December 6, 2011.
(signed) Arthur Acton
Owen requested and received Last National Bank’s certification of the check even though Acton
had only $9,000 on deposit. Owen indorsed the check in blank and delivered it to Dan Doty in
payment of a preexisting debt.
When Owen failed to appear for work, Acton issued a written stop payment order ordering the
bank not to pay the check. Doty presented the check to Last National Bank for payment. The bank
refused payment.
What are the bank's rights and liabilities relating to the transactions described?
Answer: Payment of an Item. The instrument is negotiable. The fact that there is a statement on the
check of the consideration for which it was issued does not affect its negotiable character. The
fact that the consideration for which the check was given is executory in nature, that it is for work
to be performed in the future, does not make the order conditional.
8. Jones drew a check for $1,000 on The First Bank and mailed it to the payee, Thrift, Inc.
Caldwell stole the check from Thrift, Inc., chemically erased the name of the payee, and inserted
the name of Henderson as payee. Caldwell also increased the amount of the check to $10,000
and, by using the name of Henderson, negotiated the check to Willis. Willis then took the check to
The First Bank, obtained its certification on the check, and negotiated the check to Griffin, who
deposited the check in The Second National Bank for collection. The Second National forwarded
the check to the Detroit Trust Company for collection from The First Bank, which honored the
check. Griffin exhausted her account in The Second National Bank, and the account was closed.
Shortly thereafter, The First Bank learned that it had paid an altered check.
What are the rights of each of the parties?
Answer: Payor Bank and Its Customer. Jones may compel the First Bank to re-credit his account
for the entire amount of the certified check, or, in alternative, Thrift Inc. may recover the original
amount of the check from the payor-bank in an action for conversion, and Jones may then compel
the payor-bank to recredit his account for the difference between the original amount of the check
9. Jason, who has extremely poor vision, went to an automated teller machine (ATM) to withdraw
$200 on February 1. Joshua saw that Jason was having great difficulty reading the computer
screen and offered to help. Joshua obtained Jason’s personal identification number and secretly
exchanged one of his old credit cards for Jason’s ATM card. Between February 1 and February
15, Joshua withdrew $1,600 from Jason’s account. On February 15, Jason discovered that his
ATM card was missing and immediately notified his bank. The bank closed Jason’s ATM account
on February 16, by which time Joshua had withdrawn another $150. What is Jason’s liability, if
any, for the unauthorized use of his account?
10. On July 21, Boehmer, a customer of Birmingham Trust, secured a loan from that bank for the
principal sum of $5,500 in order to purchase a boat allegedly being built for him by A. C.
Manufacturing Company, Inc. After Boehmer signed a promissory note, Birmingham Trust issued
a cashier’s check to Boehmer and A. C. Manufacturing Company as payees. The check was given
to Boehmer, who then forged A. C. Manufacturing Company’s indorsement and deposited the
check in his own account at Central Bank. Central Bank credited Boehmer’s account and then
placed the legend “P.I.G.,” meaning “Prior Indorsements Guaranteed,” on the check. The check
was presented to and paid by Birmingham Trust on July 22. When the loan became delinquent in
March of the following year, Birmingham Trust contacted A. C. Manufacturing Company to learn
the location of the boat. They were informed that it had never been purchased, and they soon
after learned that Boehmer had died on January 24 of that year. Can Birmingham Trust obtain
reimbursement from Central Bank under Central’s warranty of prior indorsements? Explain.
Answer: Warranties. Decision for Birmingham Trust based upon breach of the guarantee of prior
indorsements. If Central Bank had not guaranteed the indorsements with the "PIG" stamp,
11. Advanced Alloys, Inc., issued a check in the amount of $2,500 to Sergeant Steel Corporation.
The check was presented for payment fourteen months later to the Chase Manhattan Bank, which
made payment on the check and charged Advanced Alloys’s account. Can Advanced Alloys
recover the payment made on the check? Why?
Answer: Payment of an Item. No, Advanced Alloys cannot recover from Chase Manhattan. A bank
is under no obligation to a customer having a checking account to pay a check, other than a
12. Laboratory Management deposited into its account at Pulaski Bank a check issued by Fairway
Farms in the amount of $150,000. The date of deposit was February 5. Pulaski, the depositary
bank, initiated the collection process immediately by forwarding the check to Worthen Bank on
the sixth. Worthen sent the check on for collection to M Bank Dallas, and M Bank Dallas, still on
February 6, delivered the check to M Bank Fort Worth. That same day, M Bank Fort Worth
delivered the check to the Fort Worth Clearinghouse. Because TAB/West Side, the drawee/payor
bank, was not a clearinghouse member, it had to rely on TAB/Fort Worth for further transmittal
of the check. TASI, a processing center used by both TAB/Fort Worth and TAB/West Side, received
the check on the sixth and processed it as a reject item because of insufficient funds. On the
seventh, TAB/West Side determined to return the check unpaid. TASI gave M Bank Dallas
telephone notice of the return on February 7, but physically misrouted the check. Because of this,
M Bank Dallas did not physically receive the check until February 19. However, M Bank notified
Worthen by telephone on the fifteenth of the dishonor and return of the check. Worthen received
the check on the twenty-first and notified Pulaski by telephone on the twenty-second. Pulaski
actually received the check from Worthen on the twenty-third. On February 22 and 23,
Laboratory Management’s checking account with Pulaski was $46,000. Pulaski did not freeze the
account because it considered the return to be too late. The Laboratory Management account
was finally frozen on April 30, when it had a balance of $1,400. Pulaski brings this suit against
TAB/Fort Worth, Tab/Dallas, and TASI, alleging their notice of dishonor was not timely relayed
to Pulaski. Explain whether Pulaski is correct in its assertion.
Answer: Collection of Items. Decision for Pulaski Bank & Trust. A payor bank's liability is for the
full amount of a check, whereas the collecting bank's liability is for the full amount minus the loss
13. On Tuesday, June 11, Siniscalchi issued a $200 check on the drawee, Valley Bank. On Saturday
morning, June 15, the check was cashed. This transaction, as well as others taking place on that
Saturday morning, was not recorded or processed through the bank’s bookkeeping system until
Monday, June 17. On that date, Siniscalchi arrived at the bank at 9:00 A.M. and asked to place a
stop payment order on the check. A bank employee checked the bank records, which at that time
indicated the instrument had not cleared the bank. At 9:45 A.M., she gave him a printed notice
confirming his request to stop payment. May Siniscalchi recover the $200 paid on the check?
Explain.
Answer: Stop Payment Order. No, Siniscalchi may not recover on the check; judgment for Valley
Bank. A customer has a right to stop payment on a check, but the stop payment order must be
14. Morvarid Kashanchi and her sister, Firoyeh Paydar, held a savings account with Texas
Commerce Medical Bank. An unauthorized withdrawal of $4,900 from the account was allegedly
made by means of a telephone conversation between some other unidentified individual and a
bank employee. Paydar learned of the transfer of funds when she received her bank statement
and notified the bank that the withdrawal was unauthorized. The bank, however, declined to
recredit the account for the $4,900 transfer. Kashanchi brought an action against the bank,
claiming that the bank had violated the Electronic Funds Transfer Act (EFTA) The bank defended
by arguing that the Act did not apply. Does the EFTA govern the transaction? Explain.
Answer: Electronic Fund Transfer. The act defines an "electronic funds transfer" to include
"transfers initiated by telephone," with the exception of "any transfer of funds which is initiated
15. Tally held a savings account with American Security Bank. On seven occasions, Tally’s personal
secretary, who received his bank statements and had custody of his passbook, forged Tally’s name
on withdrawal slips that she then presented to the bank. The secretary obtained $52,825 in this
manner. Three years after the secretary’s last fraudulent withdrawal she confessed to Tally who
promptly notified the bank of the issue. Can Tally recover the funds from American Security
Bank?
Answer: Customer’s Duties. Partial summary judgment for American Security Bank granted. The
U.C.C. imposes a duty upon a bank customer to inspect promptly statements and items either sent
to the customer or reasonably made available to him. A customer must report any unauthorized
16. During a period of sixteen months, Great Lakes Higher Education Corp. (Great Lakes), a
not-for-profit student loan servicer, issued 224 student loan checks totaling $273,152.88. The
checks were drawn against Great Lakes’s account at First Wisconsin National Bank of
Milwaukee (First Wisconsin). Each of the 224 checks was presented to Austin Bank of Chicago
(Austin) without indorsement of the named payee. Austin Bank accepted each check for purposes
of collection and without delay forwarded each check to First Wisconsin for that purpose. First
Wisconsin paid Austin Bank the face amount of each check even though the indorsement
signature of the payee was not on any of the checks. Has Austin Bank breached its warranty to
First Wisconsin and Great Lakes due to the absence of proper indorsements? Explain.
Answer: Bank’s Duties. Negligence claims and breach of warranty to a third party are dismissed
with prejudice. [Author’s Note: This case applies Revised Article 3 and 4.] Plaintiffs have
claimed negligence in the presentment of checks as a theory of recovery. Presentment under the
U.C.C. means “a demand made by or on behalf of a person entitled to enforce an
17. Mary Mansi, claims that eighteen checks on her account contain forgeries but were paid by the
defendant bank, Sterling National Bank. The checks bore signatures which, according to the
plaintiff’s handwriting expert, were apparently “written by another person who attempted to
simulate her signature” and thus were not considered obvious forgeries. Sterling National Bank
acknowledged that while it did honor those eighteen checks, nine of them were returned to the
plaintiff more than one year prior to this action. The defendant asserts that the plaintiff’s claims
on the remaining nine checks are barred due to her failure to examine her monthly bank
statements. Who should prevail? Why
