Business Law Chapter 27 Homework This was not rocket science. It was uncovered

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CHAPTER 27

CHECKS AND BANKING IN THE DIGITAL AGE

ANSWER TO CRITICAL ANALYSIS

QUESTION IN THE FEATURE

INSIGHT INTO ETHICS—CRITICAL THINKING—INSIGHT INTO THE SOCIAL ENVIRONMENT (PAGE 532)

Why would banks say that they, too, are worse off because of the EFAA? The longer that banks can keep

funds without releasing them to their customers, the more interest the banks earn for themselves.

Thus, the shorter the time between when funds are deposited and when they become available, the

greater the earnings of banks and other deposit-accepting financial institutions.

ANSWERS TO QUESTIONS

AT THE ENDS OF THE CASES

CASE 27.1—QUESTION (PAGE 520)

WHAT IF THE FACTS WERE DIFFERENT?

Suppose that the court had accepted Charter One’s argument that a cashier’s check should be treated as

a note and the bank had presented proof of fraud in the procurement of the check. What might have

been the result in this case? Explain. Charter One would most likely contend that it issued the check

CASE 27.2—QUESTIONS (PAGE 526)

232 UNIT FIVE: NEGOTIABLE INSTRUMENTS

THE LEGAL ENVIRONMENT DIMENSION

What reasonable steps could Auto-Owners have taken to prevent such internal fraud? Spot audits of the

check handling process would have uncovered the scam. This was not rocket science. It was uncovered,

as such things often are, when Wulf was on vacation and another employee handled some of his files. To

allow this to go on for eight years shows negligence in the design of the audit process at Auto-Owners.

WHAT IF THE FACTS WERE DIFFERENT?

Would the outcome in this case have been changed if Auto-Owners had never given Wulf (and other

staff members) the authority to deposit checks to its bank account? Why or why not? It would not likely

have changed the court’s holding in this case because the UCC section involved in this case, UCC 3–

405(b), does not mention a bank’s responsibilities when opening an account for a new customer.

CASE 27.3—QUESTIONS (PAGE 528)

1A. “Expert testimony should not be required to inform jurors of what a reasonable standard of care

should be in commonplace banking transactions.” Do you agree with this statement? Why or why not?

The Uniform Commercial Code (UCC) does not specify what degree of care is required in specific banking

transactions. Rather, the UCC defines ordinary care on the part of a bank within the broad framework of

commercial reasonableness and the procedures commonly used by banks in the relevant region. This

means that it is up to the courts to determine, on a case–by-case basis, whether a bank has exercised

ordinary care in a particular situation. Not surprisingly, courts—and even judges within the same

court—have disagreed in their conclusions. However you answered this question, you have support

CHAPTER 27: CHECKS AND BANKING IN THE DIGITAL AGE 233

care might have been, it logically “could not have been less than a reasonable person’s duty to take

ordinary care in day-to-day life.”

2A. Suppose that both Schultz and the bank had been found negligent in the addition of Holbrook’s

name to Schultz’s account. In this situation, which party would be liable for any damages resulting from

the negligence? Explain. When both the bank and the bank’s customer are found to have been

negligent, both parties will be liable for any damages caused by the negligence. Generally, the loss will

be allocated between the bank and the customer on the basis of comparative negligence..

ANSWERS TO QUESTIONS IN THE REVIEWING FEATURE

AT THE END OF THE CHAPTER

1A. Written stop-payment order

A written stop payment order (or an oral order confirmed in writing) is effective for six months, when it

may be renewed in writing, under UCC 4–403(b). To prevent the cashing of the check, RPM might have

asked Systems Marketing to return.

3A. Stale checks

Under UCC 4–404, a bank is not obligated to pay a stale check, although the bank has that option. If a

bank pays a stale check in good faith, the bank has the right to charge the customer’s account for the

amount even without consulting the customer. But it would make sense to check with the customer

before paying such a stale check.

4A. Signature verification

The failure to verify the signature will result in Bank One’s loss of the amount of the check. A bank that

pays a customer’s check bearing a forged indorsement must recredit the customer’s account or be liable

234 UNIT FIVE: NEGOTIABLE INSTRUMENTS

considered to have been negligent, the liability for the amount of the check may be apportioned

between the bank and its customer.

ANSWER TO DEBATE THIS QUESTION IN THE REVIEWING FEATURE AT THE

END OF THE CHAPTER

ANSWERS TO QUESTIONS AND CASE PROBLEMS

AT THE END OF THE CHAPTER

27-1A. Forged signatures

(Chapter 27—Page 528)

The UCC requires customers to discover and report forgeries to their banks within one year of the time

27-2A. QUESTION WITH SAMPLE ANSWER: Customer negligence

Citizens Bank will not have to recredit Gary’s account for the $1,000 check and probably will not have to

recredit his account for the first forged check for $100. Generally, a drawee bank is responsible for

CHAPTER 27: CHECKS AND BANKING IN THE DIGITAL AGE 235

good faith will not be obligated to recredit the customer’s account for the full amount of the check [UCC

3–406]. In addition, when a drawee bank sends to its customer a statement of account and canceled

checks, the customer has a duty to exercise reasonable care and promptness in examining the statement

to discover any forgeries and report them to the drawee bank. Failure of the customer to do so relieves

the drawee from liability to the customer to the extent that the drawee bank suffers a loss [UCC 4–

27-3A. Bank’s duty to honor checks

(Chapter 27—Page 523)

Southern Marine Bank is not liable to Joyce or to Brian’s estate for the $3,000 paid to Shanta. Joyce’s

claim that Brian’s death and Southern Marine Bank’s knowledge of it revoked Southern Marine Bank’s

27-4A. Electronic fund transfers

(Chapter 27—Pages 536–537)

If a customer believes there is an error on his or her statement and notifies the bank of this supposed

27-5A. CASE PROBLEM WITH SAMPLE ANSWER: Forgery

SunTrust could argue that it should not be held liable for Spacemakers’s loss on two grounds:

Spacemakers failed to timely report the forgeries to the bank, and the bank did not fail to exercise

ordinary care. On these grounds, the court should grant the bank’s motion for summary judgment. UCC

4–406 imposes on a bank customer the duty to promptly examine monthly statements and notify the

bank of any unauthorized transaction. A customer who fails to report the first forged item within thirty

days is precluded from recovering for that transaction and for any additional items forged by the same

27-6A. Forged indorsements

(Chapter 27—Page 529)

The court held Center Mutual liable to NDHFA for the amount of the check. Center Mutual appealed to

the North Dakota Supreme Court, which affirmed the lower court’s judgment. The state supreme court

concluded that the “forged endorsement of NDHFA on the check did not operate as a signature of

NDHFA and. . . did not discharge Center Mutual’s obligations as drawer.” The insurer, in turn, under

UCC 4–401, “had a right to demand reimbursement for the improperly paid check from Bremer Bank.”

Also, “[b]ecause each bank in the collection chain warrants that all signatures on the item are authentic

and authorized [under UCC 4–207], Bremer Bank as the payor bank and each collecting bank in the chain

could have sought reimbursement up through the chain until reaching the depositary bank, Wells Fargo

27–7A. Bank’s duty to honor checks

(Chapter 27—Pages 521–522 & 524)

The general rule is that the forgery of a drawer’s signature does not bind the person whose name is

forged [UCC 3–403]. When a bank pays a check on which the drawer’s signature is forged, generally the

27-8A. Bank’s duty of care

(Chapter 27—Pages 521–522)

The trial court was correct. The relationship between a bank and a depositor is that of debtor-creditor

27-9A. A QUESTION OF ETHICS: Forged drawer’s signature

(a) When a bank pays a check on which the drawer’ s signature is forged, normally the bank

is liable. If the customer whose signature was forged was negligent, and this negligence contributed to

the loss, the customer may be liable to the bank for some or all of the loss, subject to any negligence on

238 UNIT FIVE: NEGOTIABLE INSTRUMENTS

Regardless of the degree of care that a customer takes, under UCC 4–406(f), any forgeries must

be reported to the bank within one year of the receipt of the statement to require the bank to recredit

the customer’s account.

In this case, the court issued a summary judgment in favor of BB&T, and Maxwell appealed to a

state intermediate appellate court, which affirmed this judgment The appellate court held that under

UCC 4–406(f) the “failure of a customer or his representative to report his unauthorized signature within

one year after the bank makes account statements available precludes a claim against the bank.”

The court explained that the application of this time limit was not affected by any of the

circumstances in this case—not by Johnson’s position or authority, Union’s state of mind, or Maxwell’s

appointment. “BB&T sent monthly statements and returned checks to Mr. Union’s residence. Mr.

the drawer’ s signature is forged is ordinarily the liable party. BB&T was not liable here because, in the

court’s interpretation, neither Union nor his representative reported any forged signatures within the

one-year period established by UCC 4–406(f).

Among other parties that might be liable for any loss in these circumstances are the forger and

the customer under the UCC, and those who were charged with a fiduciary duty with respect to the

Johnson in this litigation, however, indicates either that some element of the crime could not be proved

or that Johnson did not have sufficient funds from which any judgment could be satisfied. Maxwell

might also be liable, for negligence in failing to act within the one-year period set by UCC 4–406(f), but

of course he was not likely to be seeking to recover from himself, and even if he were held liable, he, like

Johnson, may not have had enough funds to cover the amount of a judgment.

27-10A. SPECIAL CASE ANALYSIS: Bank’s duty of care

Case No. 27.3

Schultz v. Bank of America, N.A.

Court of Appeals of Maryland, 2010.

413 Md. 15, 990 A.2d 1078.

(b) Rule of Law: What rule of law was applicable to this case’s circumstances? The

applicable rule of law was the Uniform Commercial Code’s requirement that banks exercise ordinary

care in transactions involving its customers’ accounts. UCC 3–103(a)(7) defines ordinary care as the

observance of reasonable commercial standards prevailing in the relevant geographic area.

(c) Applying the Rule of Law: How did the rule of law apply to the specific circumstances

in this case? The court held that in the circumstances of this case, expert testimony was required to

determine whether the bank had exercised ordinary care—that is, whether the bank had observed

reasonable commercial standards prevailing in the relevant geographic area when it added a name to its

customer’s account.

(d) Conclusion: After applying the rule of law to the facts, what did the court conclude?