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CHAPTER 28
BANKING IN THE DIGITAL AGE
ANSWER TO CRITICAL THINKING QUESTION
IN THE FEATURE
DIGITAL UPDATE—CRITICAL THINKING
Are there additional risks when electronic payment systems are used instead of checks?
ANSWERS TO QUESTIONS
AT THE ENDS OF THE CASES
CASE 28.1—CRITICAL THINKING
LEGAL ENVIRONMENT
What circumstances indicated that Herrnkind had Royal Arcanum’s authority to act on its
behalf? An individual has apparent authority as an agent to act on behalf of another party when
the other party (the principal) by words or actions, causes a third party reasonably to believe
2 UNIT FIVE: NEGOTIABLE INSTRUMENTS
CASE 28.2—LEGAL REASONING QUESTIONS
1. After the initial sequencing change, West Bank provided its customers with a
document titled “Miscellaneous Fees” in which a footnote stated, “Checks written on
your account will be paid in order daily with the largest check paid first and the smallest
2. How did the decisions of other courts in similar cases affect the rulings of the courts
in this case? Both the lower court and the Iowa Supreme Court mentioned the opinions of
other courts in similar cases, and appeared to be persuaded by, and to endorse, their decisions
by coming to the same conclusion.
CHAPTER 28: BANKING IN THE DIGITAL AGE 3
3. Suppose that West Bank’s “Deposit Account Agreement” had not included “an
obligation to Depositor to exercise good faith and ordinary care in connection with each
CASE 28.3—CRITICAL THINKING
ECONOMIC
Is $1,000 an appropriate penalty for the failure of a depository institution to comply with
Regulation CC’s notice provision? Why or why not? Regulation CC requires a depository
4 UNIT FIVE: NEGOTIABLE INSTRUMENTS
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.
2A. Reason for stop-payment order
A customer-drawer must have a valid legal ground for issuing a stop payment order on a check
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
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 to the customer-drawer for breach of contract, under UCC 4–401(a),
ANSWER TO DEBATE THIS QUESTION IN THE REVIEWING FEATURE
AT THE END OF THE CHAPTER
To reduce fraud, checks that utilize mechanical or electronic signature systems
should not be honored. If businesses were forced to always have physical person sign each
CHAPTER 28: BANKING IN THE DIGITAL AGE 5
ANSWERS TO ISSUE SPOTTERS
AT THE END OF THE CHAPTER
1A. Lyn writes a check for $900 to Mac, who indorses the check in blank and transfers
it to Nan. She then 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
2A. Herb steals a check from Kay’s checkbook, forges Kay’s signature, and transfers
the check to Will for value. Unaware that the signature is not Kay’s, Will presents the
check to First State Bank, the drawee. The bank cashes the check. Kay discovers the
forgery and insists that the bank recredit her account. Can the bank refuse to recredit
Kay’s account? If not, can the bank recover the amount paid to Will? Why or why not?
The general rule is that the bank must recredit a customer’s account when it pays on a forged
ANSWERS TO BUSINESS SCENARIOS
AT THE END OF THE CHAPTER
28-1A. Forged signatures
The UCC requires customers to discover and report forgeries to their banks within one year of
the time the checks and a statement of account showing payment of the checks are made
available to the customer [UCC 4–406(f)]. Thus, Roy and the two corporations can only be held
liable for the amounts of any forged checks that were reported less than one year after the bank
6 UNIT FIVE: NEGOTIABLE INSTRUMENTS
28-2A. 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 determining whether the signature of its customer is genuine, and when it pays
on a forged customer’s signature, the bank must recredit the customer’s account [UCC 3–401,
4–406]. There are, however, exceptions to this general rule. First, when a customer’s
negligence substantially contributes to the making of an unauthorized signature (including a
forgery), the drawee bank that pays the instrument in 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
ANSWERS TO BUSINESS CASE PROBLEMS
AT THE END OF THE CHAPTER
28-3A. SPOTLIGHT ON EMBEZZLEMENT—Forged drawers’ signatures
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
CHAPTER 28: BANKING IN THE DIGITAL AGE 7
28–4A. Forged drawers’ signatures
Brooks is most likely to suffer the loss for the checks paid with her forged signature. When a
bank pays a check on which the drawer’s signature is forged, generally the bank suffers the
loss. A bank may be able to recover some or all of the loss from the customer if the customer’s
negligence substantially contributed to the forgery. A bank—or the customer—may also obtain
partial recovery from the forger of the check (if he or she can be found and there are assets
against which a recovery can be enforced).
28–5A. BUSINESS CASE PROBLEM WITH SAMPLE ANSWER—Honoring checks
A bank that pays a customer’s check bearing a forged indorsement must recredit the customer’s
account or be liable to the customer-drawer for breach of contract. The bank must recredit the
account because it failed to carry out the drawer’s order to pay to the order of the named party.
8 UNIT FIVE: NEGOTIABLE INSTRUMENTS
28–6A. Consumer fund transfers
Yes, the bank’s refusal to reimburse Patterson more than $677.46 was justified. Under the
Electronic Fund Transfer Act (EFTA), if a customer’s debit card is lost or stolen and used
without her or his permission, the customer does not have to pay more than $50. But for this
limit to apply, the customer must notify the bank of the loss or theft within two days of learning
about it. Otherwise, the liability increases to $500. The customer may be liable for more than
28–7A. Forged drawers’ signatures
Yes, Nacim is entitled to a recredit of his account for the amount of Peterson’s unauthorized
withdrawal. A forged signature on a check—or other means of effecting an unauthorized
withdrawal from a customer’s account—has no legal effect as the signature or authorization of a
customer-drawer. When a bank pays a check in this situation, generally the bank is liable. The
contract between the bank and its customer may shift the loss to the customer in some
circumstances. For example, a bank may send a monthly statement that shows the activity in
CHAPTER 28: BANKING IN THE DIGITAL AGE 9
28–8A. The bank-customer relationship
Yes, the bank has a duty to honor the request of the party authorized to access both accounts.
Thus, the Bank of America should follow the instructions of Mark Pupke, whom Euro
International Mortgage (EIM) provided with the authority to access both accounts. When a bank-
customer relationship is established, certain contractual rights and duties arise. The contractual
rights and duties of the bank and the customer depend on the nature of a transaction and the
surrounding circumstances.
In this problem, EIM had two accounts at Bank of America. Ravi Kadiyala was an
28-9A. 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 the part of the bank or anyone else paying the instrument.
10 UNIT FIVE: NEGOTIABLE INSTRUMENTS
(b) BB&T was the bank in this case, and under the UCC, a bank that pays a check on
which 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).
Johnson might be liable, if the forgeries could be proved. The fact that Maxwell did not
include 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.
CHAPTER 28: BANKING IN THE DIGITAL AGE 11
ANSWERS TO LEGAL REASONING GROUP ACTIVITY QUESTIONS
AT THE END OF THE CHAPTER
28–10A. Bank’s duty to honor checks
(a) Southern Marine Bank did not act wrongfully by honoring Brian’s check and paying
Shanta. The UCC provides that the death of a customer does not revoke a payor bank’s
authority to pay a check drawn by the customer and that even with knowledge of the customer’s
(b) Joyce’s claim that Brian’s death and Southern Marine Bank’s knowledge of it re-
voked Southern Marine Bank’s authority to pay is incorrect. As noted in the answer to the
previous question, the UCC provides that the death of a customer does not revoke a payor
bank’s authority to pay a check drawn by the customer and that even with knowledge of the cus-
(c) A business partner might be in a better position to force Southern Marine Bank to
recredit Brian’s account than his widow. The death of a bank’s customer does not revoke the
bank’s authority to pay a check drawn by the customer. Even with knowledge of the death, the
bank may for ten days after the date of death pay checks drawn before death. There is an
