5 Risk of Loss in the Checking System Flashcards
What are the 4 UCC routes of recovery?
- Chargeback (§4-214(a))
• Only available to depositor banks or intermediary collector banks
• Never available to payor bank or non-bank party
• Requires payor bank to have dishonored the check - Conversion liability (§3-420(a))
• Right against Payor Bank who paid the check with forged payee signature
• The only plaintiff is a payee who took the instrument for some underlying obligation (not PB or DB or intermediary bank) - Contract Liability (Indorser contract §3-415(a), Drawer’s contract §3-414(a))
• Liability does not arise unless or until payor bank dishonors the check
• Indorsement stating that it is “without recourse” eliminates contract liability alone - Warrantee Liability (Transfer §3-416, §4-207; Presentment §3-417, §4-208)
• Article 3 is more general, Art. 4 deals with checks more specifically (where there is conflict defer to 4)
What are the four types of instrument movement?
• Issue – creator of instrument transfers it
o No warrantees made, must rely on common law rights
• Transfer – voluntary movements of instrument between first and last
o Both transfer and presentment warrantees made (transfer not made if no consideration given)
Transfer warrantees are made to all future transferees and subsequent collecting banks, but NOT to the payor bank
o Presentment warrantee of transferors is made to payor bank simultaneously with final presentment
• Presentment – final transfer to payor bank
o Only presentment warrantee made
Entitled to enforce (broken by payee forgery, not by drawer forgery)
No alterations
• Theft – a theft
o No warrantees by the victim in a theft
o Thief can make warrantees to later holders
When is the chain of title breached with respect to forgery on an instrument?
Not breached?
Breached by forged indorsement;
Not breached by forged drawer signature
What are the Payor Bank Rights with respect to a forged instrument?
Payor bank must choose whether to honor or not honor a check
If payor bank honors a check:
• And endorser signature forged, may chargeback via presentment warrantee to presenting bank
• And issuer signature was forged – must hold the loss, presentment warrantee doesn’t apply, expected to know its customers signature
o Only has rights against the fraudulent issue, or parties which didn’t give value in good faith for the check (cannot get innocent parties)
Problem S29.6
Dorothea Brooke wrote a $300 check to Dr. Lydgate, which was ultimately honored by Dorothea’s bank, Bulstrode. The check has what appears to be an indorsement by Lydgate as payee of the check, followed by indorsements by Edward Casaubon and Wessex Bank. Lydgatesays he never got the check, and Edward said that he got the check from Will Ladislaw as partial payment for a debt that Will owed to Edward. Edward said that Lydgate’s signature was already on the check at the time he got the check from Will. Will apparently stole the check from Lydgate’s office and forged Lydgate’s indorsement on the check. Lydgate called Dorothea to complain that he had never received the check, and Dorothea called Bulstrode Bank and had the bank recredit her account. Bulstrode wants to know what it can do to avoid taking the loss here.
What should Bulstrode do? UCC §§3-203(a), 3-301, 3-414, 3-415, 3-416, 3-417, 3-420(a), 4-207, 4-208, 4-214(a).
FIRST, diagram the transaction and summarize the events:
issue theft; transfer transfer presentment
forgery DB -----> DL-------->WL------->EC----------->WB <====>BB
$ (1) Issuer writes check. (2) Thief steals check from payee. (3) Thief forged indorsement and (4) gave to relative. (5) Relative deposited. (6) Depositing bank sent to payor bank. (6) Payor bank honored check.
SECOND analyze:
a) Which party is stuck with the loss; AND
b) What other party can the the one stuck with the loss recover from (presumably other than the thief)
(a)
The payor bank BB is currently stuck with the loss b/c it is holding the check. Note that BB had no choice but to recredit DB’s account b/c under UCC §4-401 the bank has no right to charge against the customer’s account. UCC §4-401 gives the bank the right to charge against an account ONLY properly payable items.
(b)
The possible parties BB could recover from (aside from the thief of course) are WB, EC, and WL. But to determine how to recover, you must analyze which of the four routes to recovery apply.
1-Chargeback under §4-214(a);
- N/A b/c the check was not dishonored.
- Also, N/A b/c they aren’t depository or intermediary banks.
2-Conversion liability under §3-420(a);
* N/A b/c only proper plaintiff would be the payee victim
3-Contract Liability (Indorser contract under §3-415(a), Drawer’s contract under §3-414(a));
* N/A b/c check was never dishonored
4-Warrantee Liability
* Yes; breach of Presentment Warranty under §3-417, §4-208
S29.7
Referring to Problem S29.6, if Bulstrode Bank successfully recovers from Wessex Bankfor the amount of the check, what rights will Wessex have against earlier transferors to makeitself whole? UCC §§3-403(a), 3-415, 3-416, 4-207.
Transfer warranty – §3-416, §4-207 against relative or thief.
Which transfer warranty ?
§3-416(1); AND
§3-416(2)
S29.8
Bulstrode Bank asks about another problem arising out of a check written on an accountthat Dorothea Brooke has at another bank (Wessex Bank). It appears that some unknown person stole a check from Dorothea’s checkbook and issued the check by forging her signature as drawer. Lydgate, the payee who was tricked by the forger, agreed to cash the check for the forger. After Lydgate deposited the check in an account he has at Chettam Bank, Chettam forwarded the check for collection through its correspondent Bulstrode Bank. Wessex Bank (the payor bank) dishonored the check and returned it to Bulstrode Bank.
Recognizing that it has no right to pursue Dorothea, Bulstrode Bank wants to know if it has any basis for recovering from Chettam Bank, Lydgate, or the forger. See UCC §§3-403(a), 3-414(b), 3-415, 3-416, 4-207(a)(2), (d),4-214(a).
Theft Presentment
&
drawer-
forgery issue transfer transfer
DB —–> Thief—->DL——>CB—–>BB<====>WB
dishonor
1-Thief stole issuer’s check.
2-Thief wrote check to payee.
3- Payee deposited to DB.
4-DB transferred to IB.
5-IB transferred to PB.
6-PB dishonored and sent back to IB.
BB vs. VB
- Transfer warranty – 3-416(a)(2), 4-207(a)(2) – unauthorized signature;
- Chargeback rights – 4-214(a) – remove provisional credit – simplest solution –self-help remedy;
- Customer can sue thief under – 1-103 fraud, 3-414 contract of drawer, or 3-404 forged signature acts as signature of the forger.
S29.9
Referring to Problem S29.8, what rights (and against which parties) would Wessex Bankhave had if it had honored the check with the forged drawer’s signature, but then recredited Dorothea’s account when the fraud was discovered? UCC §§3-415(a), 3-417(a), 3-418(a) & (c),4-207, 4-208(a).
(a) Price v. Neal – When PB pays a forged drawer’s signature, no recourse against innocent parties
(b) Still has common law fraud action (1-103) and UCC 3-418 “Payment by Mistake” – unjust enrichment (does not work against innocent parties)
