Banks and Commercial Paper

Question 1

When may a bank pay out the customer’s money?

Answer 1

Only if it follows the customer’s orders exactly

• if it does not do so, must recredit the account
• “Properly Payable Rule”

Question 2

What does a thief’s forged signature of the drawer on a check operate as?

Answer 2

As the signature of the unauthorized signor

The signature is not properly payable.

Question 3

What is the effect of the thief forging and indorsement and negotiating the check to subsequent parties?

Answer 3

Check is not properly payable

Nobody from the forger on is a holder

Bank must recredit

Question 4

What do you need for a check made to two payees jointly for it to be properly payable?

Answer 4

Indorsements from both payees

Question 5

What is there was a material alteration on the check?

Answer 5

Properly payable to the original amount

Question 6

What amount is properly payable if a party violated an agreement concerning a blank check?

Answer 6

Properly payable to the amount that was filled in on the blank check

Question 7

When does a check become stale and is the bank obligated to pay it?

Answer 7

A check is stale after 6 months

The bank is not obligated to pay**, but it **may in good faith

NOTE: the bank is not obligated to pay if it creates an overdraft, but it may if it chooses to

Question 8

Is a bank liable for a wrongful dishonor of an item?

Answer 8

Yes–liability is limited to actual damages proved

• may include damages for arrest or prosecution or other consequential damages

Question 9

At what point does death or incompetence of the customer revoke the bank’s authority to pay a check?

Answer 9

Until the bank:

• knows of the death or adjudication of incompetency and has had a reasonable opportunity to act upon it
• even with such knowledge, the bank may for 10 days after the date of death keep paying checks, unless a person claiming an interest in the account orders the payment be stopped

Question 10

When and how may a customer stop payment of a check?

Answer 10

Stop payment order:

• describe the item with reasonable certainty–a reasonably prudent banker with that information should be able to find the check
• must be received at a time and in a manner that affords the bank a reasonable opportunity to act on it

Effective for 6 months

• lapses in 14 calendar days if original order was oral and not confirmed in writing

Bank cannot contract out liability for negligently failing to honor

Burden** of fact and loss is on **customer

Question 11

What are at the payee’s recovery options for forged indorsement?

Answer 11

Payee may recover from the drawer

• drawer will then demand drawee to recredit the account b/c check not properly payable

Payee can sue Drawee or anyone taking the check after the forgery for conversion

• drawee cannot recover from a prior party as an indorser or drawer b/c the check was not dishonored and because the drawee is not a holder or someone with the rights of a holder
• cannot recover from a prior party–payment to an HDC OR to one who in good faith changed her position in reliance on the payment is final

NOTE: payee would not have a conversion action if the check had been stolen from the mails before it had been received by the payee

Question 12

How may a drawee bank recover from prior parties?

Answer 12

Presentment Warranty–the party obtaining payment and previous transferors warrant:

• they are entitled to enforce the instrument; and
• the instrument is not altered; and
• they have no knowledge that the drawer’s signature is unauthorized

NOTE: may recover for breach of presentment warranties, even from an HDC or one who detrimentally relied on the payment

Question 13

How may a depository bank recover from prior tranferors?

Answer 13

Transfer warranty–each party that transfers an instrument and receives consideration warrants:

• they are entitled to enforce the instrument
• all signatures on the instrument are authentic and authorized
• instrument has not been altered
• no defense or claim of any party is good against the warrantor
• warrantor has no knowledge of any insolvency proceedings

NOTE: drawee bank does not receive transfer warranties because the instrument is presented to the drawee bank for payment, not transferred to it

NOTE: generally, the loss generally should pass to the earliest solvent person after the forger

Question 14

What is the effect of a valid restrictive indorsement?

Answer 14

“For deposit only”

Drawee bank** and any **intermediary bank may disregard the restrictive indorsement

Any individual or depository bank that acts inconsistently** with the restrictive indorsement can be liable for **conversion

Question 15

What are the effects of a forged drawer’s signature?

Answer 15

Drawee bank must recredit the drawer’s account

Drawee** bank then **probably cannot recover from anyone

• drawee bank takes the risk that the drawer’s signature is unauthorized unless a prior party in the hcain of collection had knowledge that the drawer’s signature was unauthorized (presentment warranty)
• forger probably the only party with this knowledge

Question 16

What is the Fictitious Payee Rule?

Answer 16

At the time the instrument was issued

If the drawer, maker, or other person whose intent determines to whom** an instrument is **payable

Does not intend** for the **person identified** **to have any interest in the instrument;

• OR if** the person identified is **fictitious

Then an indorsement in the name of the payee is effective

NOTE: always state the general rule first, then apply this special exception

Question 17

How does Article 3 treat fraudulent indorsements by employees?

Answer 17

If an employer enrusts an employee** with the **responsibility with respect to an instrument

• sign or indorse instruments on behalf of the employer
• process instruments received by the employer for bookkeeping purposes, deposit, or other disposition
• prepare or process instruments for issue in the name of the employer
• supply information determining the names or addresses of payees of instruments to be issued in the name of the employer
• to control the disposition of instruments issued in the name of the employer

And the employee makes a fraudulent indorsement on the instrument, then

The endorsement is effective

Question 18

What is the negligence rule?

Answer 18

If a person, by his negligence,

substantially contributes to a material alteration** or to the **making of an unauthorized signature,

• must afford an opportunity from which advantage is taken

he is precluded from asserting the alteration or lack of authority against

• a holder in due course or
• the drawee or other payor who pays in good faith and in accordance with the reasonable commercial standards of the drawee’s or payor’s business

Question 19

What happens when multiple parties are culpable for the loss?

Answer 19

The person bearing the loss may recover from the drawee bank or other person failing to exercise ordinary care to the extent that ththe failure to exercise ordinary care contributed to the loss

Question 20

Define the Bank Statement Rule.

Answer 20

A customer** must exercise **reasonable promptness** in **examining the statement or the items to determine whether any payment was not authorized

Prompt notice must then be given to the bank by its customer of any unauthorized payment that the customer reasonably should have discovered

If** the customer **fails** to do this, and the **bank can show that it suffered a loss** because of this failure, the bank **need not recredit its customer’s account

• If the statement has been available to the customer for a reasonable period (no more than 30 days), and no complaint, customer is estopped from demanding recredit

NOTE: if the bank fails to exercise ordinary care in paying** a check, the **loss is then allocated between the bank and the customer according to the extent of contribution to the loss

NOTE: in Ga., 60 days after the statement made available on the face of the instrument; 1 year for the back of the instrument

Question 21

What is the impact of a material alteration in a note?

Answer 21

A holder who fraudulently alters an instrument discharges the parties to that instrument as to the holder

a Holder in due course may enforce the original amount

Transfer warranties floating about

Question 22

What is the impact of a material alteration in a check?

Answer 22

Only properly payable as to the original amount

Presentment warranties floating about

Question 23

What are the statutes of limitations for commercial paper?

Answer 23

Check–3 years

Note–6 years

Sealed instruments–20 years