Honor

Question 1

Situations of wrongful honor (not properly payable)

Answer 1

1. Stop payment orders (oral 14 days, written 6 months)
2. Stale checks (checks payable for 6 months from issue)
3. Post-dated checks (if proper notice to bank)
4. Checks paid after drawer’s death (more than 10 days later)

Note: overdrafts are still properly payable

Question 2

Post-dated checks

Answer 2

Presumed payable on demand
To be enforceable (not-properly payable):
1. Customer must provide notice to bank describing check with reasonable certainty
2. Notice must be received in time for bank to have reasonable opportunity to act on it
3. Notice effective for same period as stop payment orders

Question 3

Forgeries and alterations

Answer 3

Forgery of drawer’s name: Alleged drawer typically not liable (not properly payable) unless bank has a defense

Forgery of payee’s name: Breaks chain of title for order paper (irrelevant for bearer paper since indorsement not necessary), drawer typically not liable

Question 4

Bank’s defenses to recrediting drawer’s account

Answer 4

1. Drawer’s negligence may validate forgery or alteration in whole or part if negligence substantially contributed
2. Drawer’s failure to inspect bank statements and report (1 year grace period)

Question 5

When issuer, drawer or maker is precluded from asserting forged indorsement of payee’s name

Answer 5

1. Impostor rule
2. Fictitious payee
3. Employees responsible for check writing who forges signature

Question 6

Presentment warranty

Answer 6

EVERY party that transfers a check makes a presentment warranty to the final payor bank.

As to checks–Includes:

1. Good title (forged indorsement, but not forged drawer’s signature breaches this)
2. No material alteration
3. No knowledge that drawer’s signature unauthorized
4. If remotely created item, that person identified as the drawer

As to notes–Includes:
1. Good title

Question 7

Breach of Presentment warranty

Answer 7

Creates cause of action in final payor bank against all prior transferors

Forged drawer’s signature: no recovery unless shown that prior transferor had knowledge that drawer’s signature was unauthorized

Forged indorsement: bank may recover from the party that presented or any prior transferor

Question 8

Recourse for transferor liable to bank under presentment warranties

Answer 8

Presenter who loses to payor bank for breach of presentment warranty may sue entities further up the chain for breach of the various transfer warranties