TBE--UCC (Comm Paper) Flashcards
02/14 #4:
On March 10, 2013: C borrowed $20k from G. C signs p/n for $20k to G dated March 15, 2013 payable to order of G in Austin, TX one year from date. P/n provided that, at C’s option, exercised on/before the original due date, C could extend the due date of the p/n for additional year. P/n further provided that C promised to pay note from checking account at First Bank, and interest rate published in The Interest Rate Reporter (stopped publication six months b4 date of note).
On may 1, 2013: C signed and delivered check for $200 payable to B & K drawn on First Bank account. Next day K bought table from S. K indorsed $200 check and gave it to S. S indorsed and deposited at Secure Bank. Secure Bank credited account, forwarded to First Bank, First Bank refused to honor returning to Secure Bank. Secure Bank immediately debited S’s account and returned check to S.
When C delivered note to G, was it an instrument?
The issue is the requirements for a negotiable instrument. A negotiable instrument is:
(1) a written, signed agreement;
(2) providing an unconditional promise;
(3) to pay a fixed sum;
(4) of money;
(5) on demand or a specified date;
(6) contains language of negotiability; and
(7) does not contain any other undertakings. Negotiability is determined at the time of issuance and does not thereafter change.
02/14 #4:
On March 10, 2013: C borrowed $20k from G. C signs p/n for $20k to G dated March 15, 2013 payable to order of G in Austin, TX one year from date. P/n provided that, at C’s option, exercised on/before the original due date, C could extend the due date of the p/n for additional year. P/n further provided that C promised to pay note from checking account at First Bank, and interest rate published in The Interest Rate Reporter (stopped publication six months b4 date of note).
On may 1, 2013: C signed and delivered check for $200 payable to B & K drawn on First Bank account. Next day K bought table from S. K indorsed $200 check and gave it to S. S indorsed and deposited at Secure Bank. Secure Bank credited account, forwarded to First Bank, First Bank refused to honor returning to Secure Bank. Secure Bank immediately debited S’s account and returned check to S.
Under TUCC, what interest rate is applicable to the p/n C gave to G?
The issue is what interest rate will be applied when the one listed in a promissory note is no longer published. Generally, the interest rate applied is the one listed in a promissory note agreed to by the parties. If a note is silent with regard to interest, it is assumed that no interest will apply. If a note specifies that interest will be paid but does not provide a calculation method, the judgment rate will be used.
02/14 #4:
On March 10, 2013: C borrowed $20k from G. C signs p/n for $20k to G dated March 15, 2013 payable to order of G in Austin, TX one year from date. P/n provided that, at C’s option, exercised on/before the original due date, C could extend the due date of the p/n for additional year. P/n further provided that C promised to pay note from checking account at First Bank, and interest rate published in The Interest Rate Reporter (stopped publication six months b4 date of note).
On may 1, 2013: C signed and delivered check for $200 payable to B & K drawn on First Bank account. Next day K bought table from S. K indorsed $200 check and gave it to S. S indorsed and deposited at Secure Bank. Secure Bank credited account, forwarded to First Bank, First Bank refused to honor returning to Secure Bank. Secure Bank immediately debited S’s account and returned check to S.
Was First Bank justified in dishonoring C’s $200 check?
The issue is whether a bank may dishonor a check that does not contain all proper endorsements. First, it is important to identify the type of instrument at issue, a note (promise to pay between maker and payee) or a draft (an instruction by a drawer to a drawee to pay a payee). A check is a draft whereby the drawer (Cathy) orders the drawee (First Bank) to make payment on demand to a payee (here Bill and Kay). Second, we should note that the check is negotiable as it meets the requirements listed in part 1 above. Then we must determine if the check was properly negotiated. In order for someone to be a holder of the check (entitled to cash it), it must be properly negotiated. For order paper, such as the check here made out to specific people (Bill and Kay) this requires both possession and proper endorsements. Because the check was made out to Bill and Kay, it required both signatures to be properly negotiated. Only Kay endorsed the check. This means that it was not properly negotiated and that Steve was not a holder (and not entitled to enforce).
02/14 #4:
On March 10, 2013: C borrowed $20k from G. C signs p/n for $20k to G dated March 15, 2013 payable to order of G in Austin, TX one year from date. P/n provided that, at C’s option, exercised on/before the original due date, C could extend the due date of the p/n for additional year. P/n further provided that C promised to pay note from checking account at First Bank, and interest rate published in The Interest Rate Reporter (stopped publication six months b4 date of note).
On may 1, 2013: C signed and delivered check for $200 payable to B & K drawn on First Bank account. Next day K bought table from S. K indorsed $200 check and gave it to S. S indorsed and deposited at Secure Bank. Secure Bank credited account, forwarded to First Bank, First Bank refused to honor returning to Secure Bank. Secure Bank immediately debited S’s account and returned check to S.
Was Secure Bank justified in debiting S’s account for $200?
The issue is whether a bank may debit a customer’s account when a check is deposited and subsequently dishonored. A bank may debit an account if a check is dishonored before final settlement of the check. This means that it may do so before a check is cashed, final settlement is made, or before the midnight rule deadline expires. The midnight rule allows the bank until midnight the next business day after a check is dishonored to debit the account. Here, as explained in Part 3 above, First Bank was justified in dishonoring the check and returning it to Secure Bank. Because Secure Bank “immediately” debited the account and returned the check to Steve (assuming “immediately” means before the midnight deadline), the debit was proper.
07/13 #3:
Dec 15, 2012: B mailed M $2500 check from B’s account at First Bank as gift. M put it, unopened, in backpack, leaving for 6 months.
May 1, 2013: B realized that M didn’t deposit and called First Bank and put oral stop payment.
July 5, 2013: B mailed $1k check to T for installing water heater–B never met T. T received next day, indorsed by signing on back–forgot about it; went to laundry. S discovered check, went to B’s house. S (saying he was T’s EE and it cost $500 more). B wrote check to T and gave to S. S signed T’s name on $500 check and cashed both at National Bank. First Bank paid both checks from B’s account when presented by National Bank.
Last week, M discovered check, indorsed to TVshop for Big Screen TV. TVshop deposited at National Bank, which presented to First Bank. B has insufficient funds.
What are the rights, remedies, and defenses of the parties in regard to $500 check and $1,000 check made payable to T?
At issue is whether the check was properly payable. Under Texas law a drawee (bank, usually) is liable for a check that is not properly payable. A check, however, is properly payable if the maker signed with the intent to authorize the check. If made payable to a specific person, the check is deemed order paper and may only be indorsed or deposited by that person. However, order paper may be converted by the holder of the instrument by indorsing the check in blank by signing only his name. Once in bearer form, anyone with possession of the check has the authority to present the check for payment. As such, where a person finds a check in bearer form and deposits it, the check is properly payable regardless of the fact that it was stolen.
07/13 #3:
Dec 15, 2012: B mailed M $2500 check from B’s account at First Bank as gift. M put it, unopened, in backpack, leaving for 6 months.
May 1, 2013: B realized that M didn’t deposit and called First Bank and put oral stop payment.
July 5, 2013: B mailed $1k check to T for installing water heater–B never met T. T received next day, indorsed by signing on back–forgot about it; went to laundry. S discovered check, went to B’s house. S (saying he was T’s EE and it cost $500 more). B wrote check to T and gave to S. S signed T’s name on $500 check and cashed both at National Bank. First Bank paid both checks from B’s account when presented by National Bank.
Last week, M discovered check, indorsed to TVshop for Big Screen TV. TVshop deposited at National Bank, which presented to First Bank. B has insufficient funds.
On what basis, if any, might First Bank assert that it is not obligated to pay $2500 check payable to M, and what liability, if any, would First Bank have to B if it paid the $2500 check?
The issue is how long can a check go undeposited before a drawee bank is not required to honor it. If a check is not deposited within six months, it is considered stale. At that point, a drawee bank may refuse to honor it. It can still choose to honor it, but it does not have to. Here, the check made payable to Michael was over six months old.
The issue is whether or not an oral stop payment is valid and whether a drawee bank can pay on a check presented to it when there are insufficient funds in the account. Oral stop payment orders are not valid. In order to be enforceable, a stop payment order has to be in writing. Also, a drawee bank may pay on a check, even if there are insufficient funds in the account on which the check is drawn. If it does, the drawer would be liable to the bank for the deficit, plus any fees it might charge for the overdraw.
02/13 # 4:
Jan 3: S told B wanted to sell pickup truck. B asked about condition, S says “really good shape. Both engine and transmission rebuilt 2 months ago, driven only 500 miles since then, has more than 100k miles, truck should run for another 50k miles w/out problem.”
B wrote on piece of paper giving to S: S agrees to sell, and B agrees to buy, S’s truck for $5k. S will deliver to B’s house Jan 4 and S will pay $5k cash in exchange for title.” S agreed to terms, and both signed and dated paper. B didn’t reveal that he intended to use pickup to make extra $ helping people move.
Jan 4: S delivered truck. B wanted to get truck inspected by mechanic. S said dont “waste money” because it was “exactly as described.” B inspected, drove truck. Looked clean, couldn’t tell if motor rebuilt. B decided to proceed with transaction without mechanic inspection and gave S $5k cash.
Jan 12: truck died while B helping X move antique table. B called tow truck. While waiting, it started to rain, warping table top. If pickup hadn’t died, B would have been able to deliver X’s table before it rained.
Mechanic tell B the engine seized bc ran out of oil. Said engine/transmission had never been rebuilt and engine had oil leak. Said both needed to be rebuilt otherwise truck only worth $500. $3800 estimate to rebuild. Charged B $250 for tow and inspection.
X made B pay $2000 for table (was ruined).
Jan 14: B hand-delivered letter to S revoking acceptance and S could recover truck at mechanic’s shop. Letter demanded return of $5k plus reimbursement for amts paid to mechanic ($250) and X ($2k).
What rights/remedies are available to B under the TUCC?
B has right to recover from S $5k for truck and $250 for mechanic, but not $2k paid to X.
At issue are the available rights and remedies available to Brandon under the UCC.
Rights:
Because the car is a good (a moveable tangible object), the UCC applies to the sale of the car. The UCC gives buyers causes of action for breaches of express and implied warranties in the sale of goods.
Under the UCC, an express warranty is an express promise or an affirmation of fact that forms the basis of the bargain. Puffery is not considered an express promise or affirmation of fact, and neither are statements of opinion. Stephen gave express warranties to Brandon while the parties formed the contract and consummated the sale. Stephen stated that the car was in really good shape and in great mechanical condition. Stephen would argue hat this is merely puffery; however, it is conceivable that “good shape” “great mechanical condition” are definitive enough descriptions of the truck’s quality so as to be affirmations of facts. Further, Stephen stated that the transmission and engine were rebuilt, which is clearly an express statement of fact. Stephen also stated that the truck should run for another 50,000 miles, without a problem. This may just be an opinion, but it may also be definitive enough to qualify
as a promise of the quality of the truck. For the above reasons, Brandon made express warranties during
the sale. The warranties formed the basis of the bargain. Brandon purchased the truck on the guidance of Stephen’s claim that the truck was in good working condition and had been remodeled. The fact that Brandon wanted to take the car to a mechanic in order to verify the quality of the transmission and engine evidence the fact that Brandon was concerned about having a well-working and up-to-date truck. The express warranties were breached. As stated in the facts, the trucks’ engine had not been rebuilt. Further, the truck was not in great mechanical condition or in good shape. The fact that the truck had an oil leak that caused the truck to run out of oil every few hundred miles evidences the poor shape of the truck.
The UCC also provides two implied warranties– the implied warranties of merchantability and
particular fitness. There are no such warranties present in these facts. The implied warranty of
merchantability warrants that the goods are fit for their ordinary purpose. To give an implied warranty of merchantability, the seller must be a merchant. Here, Stephen was likely just a casual seller, and thus would not qualify as a merchant. The implied warranty of particular fitness arises when a buyer states a particular need to the seller and relies on the seller’s recommendation of a good that will accomplish
that particular need. Here, no such conversation took place. Further, Brandon did not have a particular need for the truck that was beyond the ordinary purpose of a truck– he merely wanted to us the truck to haul furniture, which is an ordinary use of a truck. Brandon may also try to assert a claim for unconscionability however, such a claim would not likely be viable.
Remedies:
Here, Brandon will be able to assert damages for the decreased value of the truck or the costs to repair
the truck, and possibly a rescission of the contract. Further, Brandon should be able to recover the
foreseeable consequential damages resulting from the beach. Because Stephen breached express warranties, Brandon may recover damages. The facts state that the value for the truck was only $500.
The truck was sold for $5,000. Thus, Brandon could recover at least $4,500 due to the decreased value of the truck. As Brandon had to tow the truck due to the truck’s poor condition, he could likely recover $250 for the cost of towing. Brandon could elect to repair the truck for $3,800 and recover that cost under a cost of repair recovery. It is possible that due to the breached express warranties that Brandon could return the truck and recover all $5,000 in return plus consequential damages.
Brandon would need to show that he elected to reject the goods within a reasonable amount of time from the time that Brandon should have realized that the truck was defective. Further, he would have to make the election prior to reject the goods before there was a substantial change to the goods that was not caused by the defect in the goods.
Here, Brandon discovered the patent defect within a reasonable time. The facts state that while test driving the truck, Brandon had no way of telling whether the truck was operating well or whether the truck was remodeled. Perhaps Brandon could have inspected the engine himself to see whether it was in good shape and remodeled; however, there are no facts suggesting that he would have the expertise necessary to make those judgments. Brandon discovered the defect on January 12th when the car broke down. He then sent proper notice of the defect and his intent to reject the truck within 2 days, which is likely a reasonable time. The fact that Brandon elected not to have a mechanic inspect the engine would not defeat his claim, as Stephen urged Brandon that such an inspection would not be necessary.
Finally, the truck’s change in condition after Brandon took the truck, while it may be substantial, was due to the truck’s defect, and thus would not defeat Brandon’s claim. Brandon could recover for foreseeable and reasonable consequential damages. The damage to the furniture may not have been foreseeable, as it was caused by rain after the truck broke down. If it was foreseeable, then Brandon could recover those damages long with the foreseeable costs for towing and inspecting the truck.
07/12 #5:
Facts: In September 2011, albert’s trusted business manager of many years, Jane, finalized her divorced and moved from Austin to port aransas, Texas. Unbeknownst to Albert, Jane took albert’s business checkbook which had been entrusted to Jane for many years (she often rent checks that Albert signed to pay albert’s business expenses). On October 15, 2011, Jane wrote a check for $800 payable to herself on albert’s business account at local bank, forging albert’s signature. Joining cashed the check at port bank, and the check was subsequently paid by local bank and charged against albert’s account. The forgery would have been obvious had local bank compared the signature on the check with previous signatures provided by Albert. However local bank did not compare the signatures because, in keeping with industry standards, it did not compare signatures on checks less than $1000. Albert received his regular bank statement from local bank on November 4, 2011 but did not get around to reviewing it until December 5, 2011. He discovered the $800 forged check and when to local bank that day to report the forgery and demand a credit of his account of $800. In January 2012, Albert contracted with Dave network all of albert’s computers in his office for $2000. Albert gave Dave two promissory notes for his services payable to do Dave: one for $1500 due July 1, 2012; the other for $500 due July 15, 2012. Within a few days, Albert discovered Dave had not done anything and was in fact and incapable of performing the contract. Albert demanded the return of both promissory notes. Later that same day, Denny endorsed the $1500 note by signing it on the back and delivered it to supplier. Supplier accepted the note in satisfaction of a longstanding $2500 debt. Also that day, Denny endorsed the $500 note and gave it to his nephew as a birthday gift. Neither supplier nor nephew had any knowledge of the dispute between Albert and Denny. On the due dates of the notes, supplier and nephew presented them to Albert demanding payment, but Albert refused to pay.
what defenses might local bank assert against albert’s demand to credit his account for the October 15, 2011 check for $800?
Local bank can raise negligence and bank statement rule defenses. Issue is whether check was properly payable from Alberts account. A forged drawers signature not properly payable. Albert failed to exercise ordinary care and this failure contributed to the forgery. Albert should have obtained the checkbook from Jane a timely manner. Albert may assert bank was negligent in paying a check on which the forgery was obvious. Trier of fact to allocate the loss between them. Albert has duty to examine his bank statements in a timely manner and to give prompt notice of unauthorized payment (Albert waited over a months from time he received the statement). May be difficult for local bank however to show that it actually suffered a loss because of this relatively short delay.
07/12 #5:
Facts: In September 2011, albert’s trusted business manager of many years, Jane, finalized her divorced and moved from Austin to port aransas, Texas. Unbeknownst to Albert, Jane took albert’s business checkbook which had been entrusted to Jane for many years (she often rent checks that Albert signed to pay albert’s business expenses). On October 15, 2011, Jane wrote a check for $800 payable to herself on albert’s business account at local bank, forging albert’s signature. Joining cashed the check at port bank, and the check was subsequently paid by local bank and charged against albert’s account. The forgery would have been obvious had local bank compared the signature on the check with previous signatures provided by Albert. However local bank did not compare the signatures because, in keeping with industry standards, it did not compare signatures on checks less than $1000. Albert received his regular bank statement from local bank on November 4, 2011 but did not get around to reviewing it until December 5, 2011. He discovered the $800 forged check and when to local bank that day to report the forgery and demand a credit of his account of $800. In January 2012, Albert contracted with Dave network all of albert’s computers in his office for $2000. Albert gave Dave two promissory notes for his services payable to do Dave: one for $1500 due July 1, 2012; the other for $500 due July 15, 2012. Within a few days, Albert discovered Dave had not done anything and was in fact and incapable of performing the contract. Albert demanded the return of both promissory notes. Later that same day, Denny endorsed the $1500 note by signing it on the back and delivered it to supplier. Supplier accepted the note in satisfaction of a longstanding $2500 debt. Also that day, Denny endorsed the $500 note and gave it to his nephew as a birthday gift. Neither supplier nor nephew had any knowledge of the dispute between Albert and Denny. On the due dates of the notes, supplier and nephew presented them to Albert demanding payment, but Albert refused to pay.
• what liability does Albert have to supplier for the $1500 promissory note?
Issue is whether Alberts contract defense of failure of consideration relieve him of his obligation as the maker of the note. Albert will not be able to raise the contract defense of failure of consideration if supplier qualifies as a holder in due course (HDC). HDC status: be a holder, pay value, act in good faith, and have no notice of problems with the instrument. Dave indorsed the note to supplier making supplier a holder and the note is authentic. Suppliers satisfies the value requirement because past consideration is deemed to be value. Failure of consideration is not an effective defense against an HDC.
07/12 #5:
Facts: In September 2011, albert’s trusted business manager of many years, Jane, finalized her divorced and moved from Austin to port aransas, Texas. Unbeknownst to Albert, Jane took albert’s business checkbook which had been entrusted to Jane for many years (she often rent checks that Albert signed to pay albert’s business expenses). On October 15, 2011, Jane wrote a check for $800 payable to herself on albert’s business account at local bank, forging albert’s signature. Joining cashed the check at port bank, and the check was subsequently paid by local bank and charged against albert’s account. The forgery would have been obvious had local bank compared the signature on the check with previous signatures provided by Albert. However local bank did not compare the signatures because, in keeping with industry standards, it did not compare signatures on checks less than $1000. Albert received his regular bank statement from local bank on November 4, 2011 but did not get around to reviewing it until December 5, 2011. He discovered the $800 forged check and when to local bank that day to report the forgery and demand a credit of his account of $800. In January 2012, Albert contracted with Dave network all of albert’s computers in his office for $2000. Albert gave Dave two promissory notes for his services payable to do Dave: one for $1500 due July 1, 2012; the other for $500 due July 15, 2012. Within a few days, Albert discovered Dave had not done anything and was in fact and incapable of performing the contract. Albert demanded the return of both promissory notes. Later that same day, Denny endorsed the $1500 note by signing it on the back and delivered it to supplier. Supplier accepted the note in satisfaction of a longstanding $2500 debt. Also that day, Denny endorsed the $500 note and gave it to his nephew as a birthday gift. Neither supplier nor nephew had any knowledge of the dispute between Albert and Denny. On the due dates of the notes, supplier and nephew presented them to Albert demanding payment, but Albert refused to pay.
• what liability does Albert have to nephew for the $500 promissory note?
Albert will be able to raise the contract defense of failure of consideration as nephew does not qualify as HDC. Nephew must pay value to be HDC. Nephew received the note as a gift.
02/12 #9:
• Editor’s note: bar examiner incorrectly refers to Glenn as the maker of the check rather than as the drawer.
Facts: Glenn needed pest control for the house. Exterminator performed the contract for $4500. Glen mailed a check for $4500 to exterminators, which she signed as a maker and made payable to exterminators. After the check was received, exterminators misplaced the check. Exterminators requested that Glenn send them another check.
• must Glenn issue another check or otherwise pay for the work:
Glenn is not required to issue another check or otherwise pay for the work add delete that of the proposed draft story gets. When an uncertified check is taken as payment of an underlying obligation, the underlying obligation is suspended until the check is dishonored. Accordingly, when exterminators received the check in payment for its services, Glenns obligation to pay for those services was suspended; that is exterminators cannot sue him on the obligation to pay for termite services. Because bank has not dishonored (refused to pay) Glenns check, the underlying obligation remains suspended and Glenn is not required to issue a replacement checke or otherwise pay for exterminators services.
02/12 #9:
• Editor’s note: bar examiner incorrectly refers to Glenn as the maker of the check rather than as the drawer.
Facts: Glenn needed pest control for the house. Exterminator performed the contract for $4500. Glen mailed a check for $4500 to exterminators, which she signed as a maker and made payable to exterminators. After the check was received, exterminators misplaced the check. Exterminators requested that Glenn send them another check.
• if glenn refuses to issue another check or otherwise pay, what recourse does exterminators have:
exterminators may follow the procedure provided for in article three of the UCC to enforce Glenns lost check by obtaining a court judgment against glen after providing Glenn protection from the risk of double liability.
Exterminators must show required elements to enforce a lost check:
1) exterminators must prove it was entitled to enforce Glenn check when it misplaced it,
2) exterminators must show that the reason it doesn’t have possession of the check was not due to a purposeful transfer or a lawful seizure,
3) exterminators must demonstrate that it cannot obtain possession of the instrument because its whereabouts cannot be determined.
Before issuing a judgment in favor of exterminators the court will require exterminators to show that Glenn is adequately protected against loss. Thus, the court will require that exterminators provide Glenn with reasonable protection such as posting a bond or security.
02/12 #9:
• Editor’s note: bar examiner incorrectly refers to Glenn as the maker of the check rather than as the drawer.
Facts: Glenn needed pest control for the house. Exterminator performed the contract for $4500. Glen mailed a check for $4500 to exterminators, which she signed as a maker and made payable to exterminators. After the check was received, exterminators misplaced the check. Exterminators requested that Glenn send them another check.
- Assume for next question that the $4500 check was stolen from exterminators office by a thief who endorsed exterminators name and cashed it at bank. Bank debited Glenns account for $4500.
- if glenn requests that bank credit her account for the $4500, must bank do so:
the bank must RE credit Glenns account for $4500. A bank cannot charge a check against a customer’s account unless the check is properly payable. To be properly payable, the check cannot contain a forged payees endorsement. Exterminators did not indorse the check (the thief did). Thus, bank did not have a right to debit Glenns account for the check.
02/12 #9:
• Editor’s note: bar examiner incorrectly refers to Glenn as the maker of the check rather than as the drawer.
Facts: Glenn needed pest control for the house. Exterminator performed the contract for $4500. Glen mailed a check for $4500 to exterminators, which she signed as a maker and made payable to exterminators. After the check was received, exterminators misplaced the check. Exterminators requested that Glenn send them another check.
- Assume for next question that the $4500 check was stolen from exterminators office by a thief who endorsed exterminators name and cashed it at bank. Bank debited Glenns account for $4500.
- What recourse does exterminator have:
exterminators may recover against bank for conversion. Assuming exterminators could locate the thief, exterminators could alternatively recover against the thief for conversion. When bank paid the thief for the check, bank converted exterminators money. Glenns check was payable to exterminators and bank was required to pay the money to exterminators but didn’t. Instead, bank paid money to thief and thus bank is liable to exterminators for $4500. However if Glenn was successful in having bank RE credits his account, bank will not be held liable to exterminators for conversion. Instead Glenn should issue a replacement check.
07/11 #3:
Jan 5, 2009: S fumigating B’s apt. S stole check #4009 from B’s Eagle Bank check book, made it payable to self for $1k and forged B’s signature. Later same day, S indorsed and deposited check into his Roach Bank acct. Upon presentment on Jan 7, 2009 Eagle Bank paid Roach bank on that check.
Dec 5, 2009: B received invoice from CS for $1,250, a law firm doing estate planning for B. B signed check # 5061 as maker (editor’s note: NOT maker, but actually drawer) on Eagle Bank acct payable to CS, mailed same day to CS.
Dec. 11, 2009: W, client of CS stole check from CS’s desk. W gave check to C.S.R., who altered payee of check to read “C.S.R.,” indorsed, and cashed at Credulous Bank on Dec 11. Credulous Bank presented check to Eagle Bank, which paid it on Dec 13, 2009.
Eagle Bank sent monthly statement to B on 5th day of each succeeding month containing check #’s, amounts, payment dates of previous month. Copies of checks didn’t accompany statements. B received all his statements w/in 3 days of their being sent.
March 3, 2010: B reviewed all of 2009 Eagle Bank statements in prep to file income taxes. B noticed problem with $1k check paid Jan 7, 2009. Same day, B received notice that CS didnt receive payment for invoice of $1250. B obtained copies of checks 4009 and 5061 from Eagle Bank on March 7, 2010. On same day, B notified Eagle Bank those checks were not properly payable and demanded Eagle Bank credit account for both $1k and $1250.
Must Eagle Bank credit B’s account for $1k (#4009)?
Issue: The main issues are whether the check was properly payable and the bank statement rule.
Generally, a bank may charge its customers account for being out on a negotiable instrument—such as the check—only if the instrument was properly payable. A check is properly payable when it is authorized (signed) by the customer and is in accordance with the agreement between the customer and the bank.
In this case, the check was not authorized because he did not sign the check (drawers signature was forged). Thus, the check was not properly payable from drawers account. A bank must credit the customer’s account if it pays a check that is not properly payable, unless it has a defense.
The bank statement rule is a defense which requires the customer to report a forgery of the customer’s name or alteration of a check within one year of when a bank statement was made available to the customer showing at least the check number, the amount of the check, and the payment date. Banks are not required to provide customers with a copy of the check itself. If these requirements are met, bank customer/drawer will be precluded from asserting forgery and bank and not be required to credit his account.
