Negotiability Instrument Questions (Problem 68-103)

Trunicating Bank

Bank have the option (not duty) to create an image of the original check and pass it on if the receiving bank agrees to that. A bank creating such am image is called Truncating bank. After truncation the image check is passed along a computer file until someone (a later bank, customer etc) refuses to take imaged version and insists on getting paper. In this case, the bank (now name 'Reconverting Bank') will print out paper version of the check. The paper version is called' Sunstitute Check." The reconverting bank must also add to the substitute check all the indorsement that would have been placed on the original check had it tarveled the same route as the image. Some banks allow the customer to use an ap to photograph the check's front and back,a nd deposit check iamge instantly. the customers are instructed to wrte "void" on the check later.

Subrogation

Bank's ability to step into the shows of payee.

Collecting Bank

Any bank in the collection process, except the payor bank, can be called a collecting bank; this includes the depository bank.

If someone gives you a check and you (payee) and you deposit in your own acccount, how quickly may you take it out?

As soon as your bank will let you!

If someone gives you a check and you (payee) walk into the drawee bank and present it across the counter, how quickly must the bank pay or dishonor it?

Before the close of the busienss of the same day.

Rupert Signer gave his fiancee, Maggie Lee, a check for $1,000 as a birthday gift. She took the check, thanked him politely, and then told him that she was getting ready to marry his best friend Charlie and ''this is good-bye.'' Rupert left in a huff and went straight to his bank, the Careless State Bank, where he filled out a written stop-payment order on the check he had given to Maggie Lee. In the meantime, Maggie Lee indorsed the check over to Computer City in payment for a $1,000 software package she purchased there. When Computer City presented the check to Careless State Bank for payment, the bank paid it without a murmur. Rupert sued when the bank refused to recredit his account, alleging a $1,000 loss because he had tried to revoke a gift promise on which the bank now made him liable. Are either of these defenses by the bank good? (a) Computer City was a holder in due course of Rupert's check, and he could not have refused to pay Computer City if it had presented the check to him. See Official Comment 7 to §4-403. Under §4-407, the bank is subrogated to the rights of any holder in due course of the check. Does this help the bank? See Official Comment 1 to §4-407. (b) Same argument that Computer City was a holder in due course and that Rupert would eventually have had to pay Computer City if the bank had been able to remember to stop payment. This being true, Rupert has really suffered no loss by the wrongful payment, so he cannot recover. Cf. §4-403(c).

Both of the arguments listed in subsection a) and b) work. Under 4-407 and Comment 1 the bank is subrogated or steps into the position of Computer City and as a holder in due course is entitled to get paid by Rupert. Therefore, as in a previous problem, under 4-403, Rupert will not be able to prove a loss and therefore although the bank did violate the stop payment order the bank owes nothing. The presence of a Holder in Due Course, absent a real defense, permits the bank to avoid recrediting the drawer's account. Bank violated the stop payment order. Bank mistakenly paid the check. Again, subrogation occurs. Bank will step in the shoes of payee (Computer City) who are HDC. The only defense against Computer city will be real defense which is not here. Bank will win! The bank will not recredit the account. If computer was not HDC, Rupert would have good argument, and he wouldn't be liable to pay. Rupert should have taken the check back from Maggie.

The Notice

Except new account, large cehcks, redeposited cehcks, repeated overdraft and reasonable cause exception, the bank must notify the depositor when the funds will be available to them.

Emergency Conditions

Excuses compliance with the normal availability rules due to emergencies beyond the bank's control.

Next Business Day Availablility of Special Items

1. Government Checks: Check issued by any branch if government, faedaral, state or local. 2. Bank Checks: Checks on which bank is primarily liable (cashier, Teller and Certified checks) 3. Wire Transfers: Electronically sent payment order of the sort covered by Article 4A. 4. Customer gets $200 non cash the next business day.

Harry Flashman agreed to sell his sports car to Tom Brown if the latter paid with a cashier's check (see §3-104(g)) for $15,000, issued by Fraser National Bank. Tom purchased such a cashier's check from the bank; it was payable to the order of Harry Flashman. After Tom handed the check over to Harry, the latter told him that the car was parked at an address Harry gave him. Tom went to the address and found it was an automobile dump. The sports car had been wrecked and was worthless. He phoned Fraser National Bank and demanded that the bank not pay the check. Should the bank do this? See §3-411 and its Official Comment; see also §3-305(c). What can Tom do if the bank refuses to help him? See §3-202 and Official Comment 2 to §3-201.

3-411 discourages dishonor by the bank because the bank could be liable for consequential damages as well as the amount of the check. Further, 3-411(c)(ii) is not available to the bank since the bank does not personally have a defense against Flashman. Finally, the bank cannot assert Tom's defense under 3-305(c). Therefore, the bank must pay the check. Tom's option is to sue Flashman to rescind the transaction, that is to undo the transaction under 3-202 as Tom as a remitter under 3- 201 Comment 2, would be entitled to use any of the defense in 3-202, including fraud, to rescind the deal with Flashman. It is a cashier's check which discharges the obligation. The bank will be liable for any damages. Bank doesn't have any personal defense. It is the cashier check so bank can escape liability. Tom should sue Flashman to undo the transaction because of the fraud.

Expedited Recredit for Bank

A bank that is forced to recredit a consumer's account may seek indemnity from the bank that presented the check to it. Claim should be made within 120 days and it must describe the reason for recredit clearly. If the claiming bank includes a copy of the substitute check, it must take reasonable steps to make sure that the copy does not get into circulation and be mistaken for legal equivalent of original check. The identifying bank must recredit the bank within 10 days.

Stop payment on Certified Check

A customer has no right to stop payment on the certified check. The reason is that once the check is certified, the payor bank itself is primary liable on the instrument, and the drawer has no right to require the bank to breach it's acceptor contract.

Late Return

A payor bank that tries to return a check on which it has already made final payment is said to be making a "Late Return" for checks, so that If a bank is guilty of making a late returnit has to respond in damages.

Expedite Recredit for Consumer

Act allows consumers (but not non consumer customers) to get an expedite recredit to their account in certain circumstances whent he consumer disputes the validity of the charge to the account. Example: If the consumer cannot read the substitute check because the image is not clear. In this case, consumer must report the problem within 40 days and may demand immediate recredit. The bank may investigate for 10 business days or if it recredits the account while it investigates, for 45 calendar days.

Drawee Bank

Drawee bank gets a new name, they are also called as payor bank (or in federal regulation on check collection, the paying bank.)

New Accounts

During the first 30 days of the bank's new account, there must be next day availability of cash or wire deoposits for government checks and bank generated checks. If bank or govt check exceeds $5000, the depository bank may put a hold upto 9 days.

Final Payment (Important for Exam)

Final Payment only apply towards drawee/ payor bank where payement of check occurs. The steps are Issuance, Tranfer (to drawee bank for presentmet) and Presetment. We present the check to drawee bank for final payment of instrument. Final payment can be done in 3 ways: 1. By cash, 2. By settlement (Bank stamps the check as they accept it which makes it certified check). This makes bank primary liable for the instrument, 3. Midnight Deadline [Bank fails to return the check in the process within the time period prescribed by the UCC code] - Only drawee bank will comply with this deadline. Failure to return the check will make the final payment to occur.

Sandra Shirker and Frank Foxholer, two commercial law students, learned about the Midnight Deadline Statutes and decided to see if they could use them to create money out of thin air. Shirker, who had a checking account at the Busy National Bank, withdrew all the money in the account and, by agreement with the bank, closed it. She then wrote a $5,000 check on the account payable to Foxholer, who deposited the check in his own bank account with a different bank. At the same time, Shirker called up her old bank and talked to the vice president in charge of check payment. Shirker told him that a $5,000 check would be presented against the closed-out account but that there was ''something funny'' about it and Shirker would appreciate it if the vice president would call her when it came in. The vice president did so when the check came in late in the banking day, and Shirker told him that it was important that they meet. Shirker promised to come down to the bank the next day. The following morning Shirker called the bank and said that she was delayed but was still coming and the vice president should wait. Shirker never showed up and eventually the vice president went home. On the second banking day following receipt, the Busy National Bank marked the check ''Account closed'' and returned it to the depositary-presenting bank, which passed it on to Foxholer, the payee. Foxholer sued the payer bank, claiming final payment had been made under §4-215(a)(3) in that the provisional settlement had not been revoked within the time allowed by §4-301, so the bank was accountable for the check under §4-302(a). Assume that Foxholer has not breached one of the §4-208 presentment warranties. All right-thinking people would agree that Foxholer shouldlose this suit; the only question is as to what defense the Code permits. Read §§4-302(b) and 3-418; cf. §1-304.

Final payment ends the ability to use the rights afforded under the UCC as the instrument is cancelled and the payor bank has got to pay the amount of the check. However, other rights that are "off" the instrument such as the transfer and presentment warranties still survive final payment as do common law rights. This problem involves the common law right for the payor bank to assert mistake as a defense to payment. In this problem the assumption is true that Foxholder has not breached any presentment warranty under 4-208 (as weird as that may seem) but Shirker and Foxholder are liable for fraud. Which would be good grounds for a lawsuit against them using 1-103 as would 1-304 for a failure to live up to the obligation of good faith and 4- 302(b) which permits a payor bank to raise the defense of fraud. Final payment has been made. The bank can do a law suit against both students for fraud.

Sally Phillips was the payee on a $1,000 check given to her by Joseph Armstrong. She and Joe both banked at the same bank, Octopus National Bank. Sally took Joe's check to the bank and filled out a deposit slip for her checking account, putting $800 of the check in her account and taking the other $200 in cash across the counter (this is called a split deposit). Two hours later, while posting the check, the bank clerk discovered that Joe's account was overdrawn. Can the bank now dishonor the whole check? $800 worth? Does §4-215(a)(1) apply here?

Final payment has occurred as the bank cannot split final payment. Therefore, final payment in the amount of $1000 has been made. See 3-203, Comment 5 and 4-302(a). If part of check is given out, it is considered final payment.

In the last problem, would Finch himself be liable to a holder in due course? To Wickets National Bank?

Finch is personally on the hook If his signature could be looked at as ambiguous by an HIDC such that an HIDC would not know that Finch is signing just as an agent. Now Finch's failure to Identify the principal might work to make the signature ambiguous...Look at Comment 2 to 3-402. I think otherwise...I think the mere fact that Finch puts AGENT by his signature constitutes notice to any potential HIDC that Finch Is not signing in an individual capacity...take your pick! The bank is not a holder in due course because it knows that the loan is not for Finch but his principal's business venture. Therefore, Finch could prove that he was not intended by the parties to incur personal liability.

Repeated Overdrafts

If it is repeatly overdraft, thn usually 5-6 business days. ?????

The Reasonable Cause Exception

If the bank has 'Reasonable cause" to believe that a check is uncollectible, then it may ignore the usual rules if it gives the notice to the customer.

Transit Items

If the depository bank and the payor (drawee) banks are not same, than the check is transit itema nd it must go through multi-bank collection machinery. In this case, your bank is collecting bank.

Indemnity Liability

In addition to warranty liability, the statute creates indemnity liability against banks transfering either the image or the sunstitute check if doing so causes damages that could have been prevented by use of original check. Example: A drawer received a substitute check that met all the legal requirement and that was only charged once on the drawers account, but the drawer believes that the original check was a forgery. If a drawer suffered a loss because it could not prove the forgery based on substitute check, for example because proving the forgery required analysis of pen pressure that coud be determined only from original check, the drawer would have an indemnity claim. However, the drawer would not have warranty claim because the substitute check was legal equivalence of original check and no person wa sasked to pay the sunstitute check more than once. All the claims must be made within 120 days after the transaction.

Teller's Check

It is a check drawn by one bank on another. A customer has no right to stop payment on the Teller's check. The reason is that once the check is certified, the payor bank itself is primary liable on the instrument, and the drawer has no right to require the bank to breach it's acceptor contract.

Cashier's Check

It is a check on which bank is both drawer and drawee. It is like a cash, and the customer has no right to stop payment on the cashier's check. The reason is that once the check is certified, the payor bank itself is primary liable on the instrument, and the drawer has no right to require the bank to breach it's acceptor contract.

"The Property Payable Rule"

It is the basic contract between drawer and drawee. The bank may pay out customers only only if it follows his/her orders exactly. If it does not, it must recredit the account. Bank may charge the account only if it is properly payable. An item is properly payable if it is authorized by the customer and it is in accordance with the agreement between the customer and bank. If a bank makes a mistake and pays money or check in a manner not instructed by the customer, it must put the money back in the account.

Depository Bank

It is the first bank to which an item is transfered for collection. It could be the payor bank in situatons where the holder and drawer do their banking int he same institution.

If the payee (me) and drawer each maintain account at the same bank, the bankers call this "On Us" item.

It lets to take out money on next banking day follwing the receipt of the item.

You are the attorney for Octopus National Bank, and the bank has presented you with the following problem: it recently paid a check drawn on a customer's account, and there was no drawer's signature on the check. The payee on the check was a telemarketing firm that had apparently called the bank's customer, sold him some product over the phone, had the customer read off the magnetically encoded numbers at the bottom of the check,2 and then created the check, including the magnetically encoded line. In lieu of the drawer's signature, the check is stamped ''drawer's signature on file.'' The customer has now called and complained, apparently suffering from ''buyer's remorse,'' and wants the account recredited with the amount of the check. There are a lot of these ''preauthorized drafts'' (or ''telechecks'') now being created. Is the payor bank (drawee) doing wrong when it honors them?

It never occurred to the drafters of the UCC that banks would ever pay a check without the signature of the drawer and certainly not pay a check based on the word of a payee without a drawer's signature (this is just an invitation to steal!). There is very good argument that the bank violates the properly payable rule of 4-401 when it honors this kind of telecheck although if the bank's customer authorized this kind of check then the customer/drawer may be estopped from questioning the validity of the telecheck. The bank needs to be very careful when dealing with this kind of suspect item. If the customer authorized the check, than the bank will properly pay the check. The bank is taking risk in paying this kind of check.

MICR Line

Magnetic Character Ink Recognition. It refers to the line at the bottom of all checks with strange printing, identifying the routing information so that the check can be sent to the payor bank and charge against the correct account.

What is the latest the payor bank can return a check before expiration of its midnight deadline, assuming: the bank has established cut-off hour of 2:00 pm, it is not open on Saturdays (nor, of course, on Sundays), Monday is a holiday, and the Federal Reserve Bank presents a check for $1,000,000 on Friday at 4:00 pm?

Midnight deadline, which is the time period within which a bank must dishonor and return a check is midnight on its next banking day following the banking day on which it receives the relevant item or notice or from which the time for taking action commences to run, whichever is later under 4-104(a)(10). In this problem, the Federal Reserve check was presented after 2pm on Friday so that check did not come into the bank until Tuesday. Therefore, the bank will until midnight Wednesday to dishonor and return the check. Payor bank means drawee. This midline rule only applies to Drawee bank. Midnight deadline is the 12am of next banking day.

Sunstitute Check

No one can refuse to take the substitute check, which is legally same as the original check. Customers cannot insist on getting the orginal check back. The image have the same legal effect as the original check.

Lewis Rakocy sold his vintage motorcycle on eBay for $6000, and the buyer sent him a cashier's check for $10,000 (payable to his order), asking Lew to refund him a check for the extra $4000. Lew did this promptly, sending the buyer a $4000 personal check, and depositing the larger cashier's check in his bank account with Bergen National Bank. The bank gave him next day availability for the amount of the cashier's check. However, two days after that the cashier's check was returned NSF by the bank on which it was drawn. Apparently the cashier's check is a forgery. Is it too late for Bergen National Bank to charge back the amount of the check to Lew's account?

No the bank is not too late in seeking a charge back as long as Bergen bank follows the time deadlines and procedure for charge back under 2-214. Lew should' not have given up the motorcycle until the cashier's check cleared the drawee bank. This is a variation on a scam that permeates the country and Lew's only recourse is against the buyer who, as we all know is now in Costa Rica! Final payment hasn't occured. Lew shouldn't have given the motorcycle until the cashier's check was cleared.

If you deposit a cash in your account, how quicly can you take it out again?

On the next banking day.

Warrant Liability

Parties passing on the substitute check make both transfer and presentment warranties that everything on the up and up. The check meets all the requirement for legal equivalence.

Sally Phillips was the payee on a $1,000 check given to her by Joseph Armstrong. She walked it into Octopus National Bank, on which the check was drawn, and presented it across the counter, asking for a $1,000 cashier's check payable to her order as the method of payment. The bank gave her such a check; see §§3-104(g) and 3-412. She indorsed the check over to one of her creditors, but when Octopus National Bank failed and closed its doors before the check could be presented and paid, the creditor returned the cashier's check to her and demanded payment. Must she repay the creditor? See 3-310(a). If she does repay the creditor, may she sue Joseph Armstrong either as drawer of the check, §3-414, or on the original obligation, §3-310(b)(1)? See §§4-215(a)(2) and 4-213(c).

Payment by cashier's check, absent some other agreement, discharges the underlying obligation up; to the amount of the check so Joe is off the hook and Sally has no recourse against Joe under Comment 8 of 4-215. This is true even if the bank upon which the check is drawn refuses to pay for whatever reason as Sally assumes the risk if the issuing bank does not pay. Sally's liability to the creditor comes from her indorser liability under 3-310(a) and 3-415 as she is the remitter/payee and she must sign the cashier's check. The making of cashier's check discharges Joe's underlying obligation. Sally has no recourse against Joe even though bank deosn't pay for any reason. Sally liability remains as an indorser. Based on indorser liability, Sally is still liable.

Portia Moot agreed to buy a car from her uncle who lived in another state. The uncle demanded a cashier's check in payment. Portia obtained a cashier's check for the correct amount from ONBank which took a corresponding amount from her bank account, making the check payable to the order of Portia Moot. Portia signed her name to the back of the check and mailed it to her uncle. The uncle denied receiving the check (a lie), and Portia went down to ONBank and filled out a declaration of loss on March 1. Having heard nothing during the next 90 days, on June 1, the bank refunded the money to Portia. In the meantime, the uncle cashed the check at his local bank on May 25th. Assume that the local bank qualifies as a holder in due course. What do ONB do when the local bank presents the check on June 2 and demands payment? If ONB won't pay, what should the local bank do? If the bank is in a state that has not adopted 3-312, could it achieve much the same result by marking the checks "Void if not presented within 90 days"?

Per 3-312(b) ONB followed the procedure set out in 3-312 and is off the hook and does not have to pay the local bank even if the local bank is a holder in due course. The key is that the check was not presented for payment within the time period permitted by 3-312(b). Almost all cashier's checks are presented for payment within the time period, 90 days. The local bank must look to Portia or the uncle to get paid under 3-312(c). Portia signed her name making it a bearer paper. ON bank was not presented the payment within 90 days. The local bank will ahve to go to Portia or Uncle to pay. Bank won't pay because 90 days have passed. If it was presented before 90 days, the bank would have to pay.

The Widow Douglas gave a check for $10.00 to Ben Rogers in return for the latter's mowing her lawn. Rogers' friend Joe Harper stole the check from Rogers, raised the amount to $1,000 by erasing the decimal point and cleverly altering the writing, and forged Rogers' signature to the back of the check. Harper presented the check for payment to the drawee bank, Clemens State Bank, which paid Harper $1,000. This reduced the balance in the Widow Douglas' account to zero and caused four other checks she had sent to her creditors to bounce. The Widow Douglas sued her bank, arguing as follows: Read pg 182, Problem 74

The bank loses here on all counts and Widow Douglas wins. The check is not properly payable under 4-401 because of the forged payee's signature. The bank can use 4-401(d) if Harper was a holder and he is not. The bank can go after Harper (good luck he is Costa Rica!) using 3-417(a)(l) for violation of a presentment warranty. The cancelled check is still the property of Rogers who may sign it and present it to the bank for payment of the $10 and the bank must pay it. Alteration and forged payee indorsement. If bank recredit the warrant, they can recoup by warranty theory. The bank will loose is this case because it is bank who paid the check. Customer is not in fault here. Widow Douglas will win here. The bank will loose because of forged signature. The fees for the other checks will be recredited.

After he had purchased a new car from Flash Motors, Thomas Crandall got the car home and discovered that it clashed with the color of his garage. He couldn't stand this, of course, so he phoned his bank, Octopus National, and placed an oral stop-payment order on the check he had written for the car. Negligently, the bank paid the check anyway. Must the bank recredit the account? See §4-407(2)?

The bank steps into the shoes of the payee, Flash motors under 4-407(2) and now can argue the legal rights of Flash Motors. Flash Motors would win in a legal dispute with Crandall as Crandall cannot get out of his car purchase contract because the color clashed with his garage. Therefore, if Crandall would lose to Flash Motors, the failure of the bank to stop payment on the Crandall check has not resulted in a loss to Crandall as he would have had to pay Flash Motors anyway and the bank would have to honor the check from Crandall. Subrogation is a wonderful thing for the banks especially if the bank has violated the properly payable rule of 4-401! The bank has improperly paid the check. However bank now steps into the shoes of payee. In the dispute between Crandall and Flash Motor, Crandall will loose. Because Crandall will loose, bank will also win against Crandall. The bank will have to honor the check from Crandall. Bank will excape liability because of this subrogation rule. Bank, even though violated is subrogated to the rights of payee. Therefore, bank is "OK" When bank improperly pays an item, they subrogate the rights of payee. Between Flash Motors and Crandall, Crandall will loose because he can't back up his car agreement because the car didn't match the color of garage. Therefore, If Crandall will loose to Flash Motors thn it will also loose against bank.

Jack Point lost his checkbook. A month later his bank, Yeomen National, returned his canceled checks, including one payable to W. Shadbolt for $1,000, to which Jack's name was forged as drawer. He notified Yeoman National Bank promptly. Was this check properly payable? See §§3-401, 3-403. If Jack had called Yeomen National immediately on finding out that his checkbook was missing, could the bank have made him stop payment on all those blank checks and also pay a good hefty stop-payment fee on each one? See Official Comment 1 to §4-401.

The check is not properly payable per 3-401 and 3-403 which states that the unauthorized signature is not a valid signature of Jack unless ratified by Jack, but may be a valid signature of the forger as to a person who takes the instrument in good faith for value. The customer under Comment 1 of 4-401 cannot be compelled to order a stop payment and pay a stop payment fee on a lost check that was not indorsed or specially indorsed as stated because the check is not properly payable because of a forged indorsement. It is the bank's responsibility to not pay this lost check and could and should stop payment on the check on its own. Banks do like this outcome as it means the bank loses out on fees it would like to collect. It is forged drawer signature. The check is not properly payable because of forged signature of drawer. It is bank's fault. Jack cannot be compelled to stop payment and stop payment fees.

Ciivil Liability

The customer may sue the bank if the bank deosn't follow the rules. Cost of suit, attorney fees will be given to customer. The suit may be brought in federal or state court within 1 year after the violation.

Check Truncation OR Check Retention

The depository bank simply keeps the deposited check, and forwards only a description of it through the bank collection process.

Large desposits

The first $5000 of the day's deposit is subject to normal availiability rules. The excess may be held for additional period of time, usually 5 busienss days.

Damon owed $500 to his friend Pythias and in payment gave him a check for that amount drawn on the Bulfinch National Bank, which Pythias deposited in his account with the Dionysius State Bank on Monday, July 8. On July 11, not having heard anything, Pythias assumed that final payment had occurred and wrote checks against the augmented balance. On July 10 the check reached the Bulfinch National Bank and was marked ''NSF'' and returned to Dionysius State Bank the next day. Dionysius State Bank took $500 out of Pythias' account without notice, causing several other checks of his to bounce on July 15. (a) Can Pythias sue Dionysius State Bank under §4-402 for wrongful dishonor of these later checks? See §§4-215(d), 4-215(e)(1), 4-214; (b) Since Dionysius State Bank has failed to give a proper charge-back notice, is it liable for the amount of the item? See §4-214(a)'s second sentence. (c) If it had given Pythias notice of dishonor, could Dionysius State Bank have recovered the $500 even if it had let Pythias withdraw all the money from his account prior to the return of the check from the payer bank? See §4-214(d)(1). (d) Would your answer to the first question be the same if Dionysius State were both the depositary and the payer bank? See §§4-215(e)(2), 4-302; and Regulation CC §229.10(c)(vi) (e) If the check had been returned by Bulfinch National Bank to Dionysius State Bank on September 25, could Dionysius have still charged back? See §4-214(a)'s final sentence. (f) Assume that when the check is first returned to Dionysius, the bank does not charge it back against Pythias' account, but instead again sends the check through for re-presentment, hoping this time there will be money in the drawer's account and the check will be paid. If this hope proves fruitless and the check is returned by Bulfinch a second time, does §4-214 allow Dionysius to charge back, assuming that it does so immediately on learning of the second return?

The key here is that the final payment rules only apply to payor (drawee) banks not depository banks. Dionysius, as a depository bank, has done nothing wrong in undoing the transaction except that it failed to give notice to Pythias within the midnight deadline upon its receipt of the NSF check from Bullfish on July 11 (the midnight deadline would be midnight of July 12). The only mistake bank did is that it failed to give notice. Dionysius State Bank is collecting/ depository bank and is responsible for Charge back notice. Looses if delay in notice of charge back or check return. Drawee bank responsible for Midnight deadline) a)and b) - Under 4-214(a) Dionysius can charge back because it did not receive final settlement under 2-215(d) and (e)(1) but will be liable for any loss resulting from the delay in the notice of charge back, which in this case would be Pythias' other bounced checks. Dionysius State Bank got the check from Bulfinch. Dionysius should return the check who drew he check tbefore their midnight deadline so that they don't have to pay anything. If midnight deadline passed, they will have to pay the loss. Dionysius State Bank should notify Pythias before their midnight deadline. It was Dionysius State Bank fault. Dionysius State Bank will have to credit back for the check. Dionysius State Bank will have to pay any loss in any delay of charge back within its midnight deadline. c) Yes - because the right of charge back is not affected by permitting Pythias to withdraw all of the money from his account prior to the return of the check to Bullfish bank under 4-214(d)(l). d) Although 4-215(e)(2) would require that Dionysius to dishonor by July 10 the UCC is trumped by Regulation CC 229 per 4-215(e) and Dionysius would have to dishonor by July 9 (one day earlier). This means Midnight deadline will apply. If Dionysius State were both the depositary and the payer bank, than midnight deadline will apply. e) No - once final settlement has occurred then under 4-214(a) the charge back option is terminated. Final payment by the drawee/payor bank terminates the ability of the drawee bank to charge back and return the item and this is the case for all of the other banks in the collection process. A bank who makes a late return can be sued for breach of warranty under Regulation CC 229. Wrongful charge back by a bank has resulted in punitive damages being assessed against a bank. Once final payment is made, charge back is terminated. f) Many banks re-present without notifying the customer. This does not work in an attempt to extend the charge back timing deadlines unless the deposit agreement permits the bank to do this and then the charge-back deadlines can be extended until the check is returned a second time. Most bank deposit agreements contain this re- presentment provision. Re-presentment doesn't extend the midnight deadline. They re-present it because it's in the agreement we sign.

Customer's right to stop payment on Ordinary Checks

The position taken by this section is that stopping payment or closing an account is a service which depositors expect and are entitled to receive from bank notwithstanding its difficulty, inconvenience and expense. The inevitable occasional looses through failure to stop or close should be borne by the banks as a cost of the business of banking.

Julio Perez, newly arrived in New York from Puerto Rico, was tricked into buying a $50 refrigerator for $280. He paid the seller, Honest Juan, by check and took the appliance home in his truck. His brother saw the refrigerator, told Julio that he had been had, and advised him to call the bank to stop payment on the check. Julio phoned his bank and said, ''This is Julio Perez. You must stop—do not give Honest Juan money for my check.'' The bank clerk who took the call asked, ''Which check?'' Julio replied, ''Today—refrigerator check'' and hung up. The bank failed to stop payment on the check, and the next day it was presented by Honest Juan and paid. Julio demanded that the money be replaced in his account, and when the bank refused, Julio retained Juanita Martinez, a lawyer, who filed suit on his behalf, contending that the check was not ''properly payable'' per §4-401. The complaint set out only the facts of the stop-payment order and the payment in spite of it. As a judge, how would you rule on each of the following issues raised by the bank? (a) The stop-payment order did not give enough information to be effective. See §4-403(a); (b) The contract of deposit that Julio initially signed stated: ''Customer agrees that no oral stop-payment order shall be effective; stop-payment orders must be in writing to be effective.'' The bank argues that fully onehalf of its customers are Spanish-speaking Americans and that oral stoppayment orders are a nightmare to try to decode. See §4-103(a); (c) The contract of deposit also contained this clause: ''Customer agrees that the bank shall not be liable if it mistakenly pays an item on which payment has been stopped.'' See Official Comment 7 to §4-403. (d) The bank's rules require that a stop-payment order be accompanied by a $15 stop-payment fee, and Julio failed to tender such a fee. See Official Comment 1 to §4-403. (e) Plaintiff's complaint is defective in that it fails to allege any loss to plaintiff as a result of the bank's alleged wrongful payment, and plaintiff carries this burden under §4-403(c). For all the bank knows, plaintiff has revoked his acceptance of the refrigerator and avoided the sale on grounds of unconscionability.

The stop payment order did not give enough information to stop a payment. Which Julio Perez? Julio did not gave enough information to stop the payment. a) The answer to this question is in the quoted language from Comment 5 of 4- 403(a) contained in the question. This is close call as the bank would have to locate the correct Julio Perez to get the proper account. b) and c) The contract provisions in both of these questions are void for public policy because even though the banks do not like oral stop payment orders 4- 103 permits such an order and Comment 7 of 4-403 clearly says that a mistaken payment is not a reason for the bank to escape liability. It is not adequate. The bank accont escape liability like this. It will be void under customer agreement. d) The bank is permitted to charge a fee but the fee must be proportional to the expense the bank incurred in stopping payment on the check. If it costs the bank $1 to stop payment then a fee of $15 or even a fee of more than $1 may leave the bank open to a massive class action lawsuit which has already happen and the banks lost those lawsuits and yet still charge high fees. The banks have now set up an expense record to justify those higher fees. This is just waiting to be challenged again...an argument can be made using Comment 1 of 4-403 that the bank must bear the cost of the stop payment and that no fee is permitted. e) 4-403 requires proof of a loss and if Juan's complaint is defective because it does not allege any loss then Juan should be permitted to amend his complaint to allege whatever loss he can prove. If Juan cannot prove a loss then even if the bank is found to have violated the Code provision Juan would recover nothing. Julio have to prove the loss. If he can't, the bank can escape liability. How can Julio prove it? Julio didn't loose anyting because he got the refrigeratior. He may say that because bank didn't stop, my other checks bounced etc. Julio's loss: Payment of check and bank fees.

When Joe Armstrong opened a checking account with Last National Bank, he signed an account agreement authorizing the bank to destroy the checks and return to him only a list of checks paid from the account identified only by check number, amount, and date of payment. The first time he received a statement it reflected the following: Check Number Date Paid Amount 101 6-1-16 $132.45 102 6-1-16 $84.00 103 6-2-16 $1204.00 104 6-3-16 $50.00 105 6-4-16 $2000.00 Two things bothered Joe about this: (1) his records show that check 103 was written for $204.00 only, and (2) he has written no more than four checks on this account since he opened it. Looking in his checkbook, he discovered that check 105 was missing. Does §4-406(c) require Joe to report all this to his bank?

The test is found in 4-406(c) which requires the bank's customer to report to the bank if the bank's customer should have reasonably discovered the unauthorized payment. As to Check # 103, the customer must report. As to Check # 105, the check is most likely a forgery because Joe knows that Check #105 is missing, and the customer must report. Federal banking rules have resulted in banks sending back and front check images to the customer in a bank statement and that makes the determination under 4-406(c) easier as the customer has everything he or she needs to see if a report is necessary. (1) Alteration (2) Forgery The customer should prompty tell the bank if they discovered it. It is within 30 days because customer gets statement in 30 days.

Kit Fielding was the corporate president of Francis Racing Stables. The corporate checks had the words "Francis Racing Stables" printed prominently in the upper left-hand corner of the checks, but when Fielding went to sign the checks on the drawer's line, he simply signed his name and did not sign the name of the company or in any way indicate that he was signing as an agent. If the check is negotiated to a HDC and then dishonored by the drawee bank, may the HDC successfully impose personal liability on Fielding? See §3-402(c) and OC 3.

Under 3-402(c) and Comment 3, if the Principal, Francis Racing Stables, is identified anywhere on the check and the check is payable from the principal's account, then the principal is liable and an HIDC has notice and the agent, even if authorized to sign the check, is free from personal liability.

Harold Sure walked into Octopus National Bank and made a presentment of a $12,000 check drawn on the bank to the head cashier, Christopher Coin, who was staffing one of the teller's windows. Coin asked Sure (who was the check's payee) to indorse the check on the back and then tapped the computer's memory bank to check on the state of the drawer's account. The computer replied that the account contained ''one thousand dollars,'' but Coin misread the display and thought it said ''one hundred thousand dollars.'' He went back to the teller's window and counted out the money thoughtfully. When he was done, a nagging doubt about his vision overcame him, and—passing the money to Sure—he said, ''Excuse me a minute,'' and rechecked the computer. This time he read the amount correctly and rushed back to his window to discover Sure still standing there, slowly recounting the money in front of him. Coin snatched the money out of Sure's hands, saying, ''I'm sorry, we must dishonor the check.'' Sure protested, but in vain. If Sure sues, will he win? Had the bank made final payment? See §4-215(a)(1).

Under 4-215(a)(l) final payment in cash has been made and the bank's recourse is against the teller for negligence or against the drawer of the check based on the contract of deposit using Comment 1 of 4-401. Final payment has been made in cash.

When Portia Moot paid off a debt she owed to her law school roommate, she gave her a postdated check, dating it one week later (planning to cover it with the paycheck she would receive before that date). The roommate deposited the check in her own bank immediately, and that bank presented it to the payor bank before the date of the check. Portia's bank paid the check even though this created an overdraft (for which Portia was charged). Was the check properly payable before its date? See §4-401(a) and See §4-401(c). If Portia had phoned the bank and warned it that she had written this postdated check, would it have still been properly payable?

Under 4-401(c) the bank is permitted to pay a postdated check unless the customer has notified the bank of the date of the check. This notice can be oral. Without this notice the check is properly payable even though the payment is made before the date of the check. Banks do not have an obligation to explain these rules to a customer but lawyers representing banks suggest that the deposit agreement with the customer say something about this kind of thing to ward any complaints. Finally, although there is no case law on point, if the customer writes this notice of the date on the check itself, it would probably not be enough because the whole idea is to give the bank special warning of the post date on the check. Banks can offer overdraft protection but are not required to do so. Most banks like to do this because the bank can collect a fee for overdraft payments. This overdraft option does not violate the properly payable rule of 4-401. The bank can pay post dated check before the date for which it says until the customer notifies the bank. The customer can notify the bank orally or written.

Redeposit Checks

Until there is an exception, the availiability in usually 5-6 business days.

When tycoon J.B. Biggley wanted to borrow money for a business venture, he had his agent, J. Pierpont Finch, negotiate the loan from Wicket's National Bank. When Finch signed the promissory note payable to the bank, he simply wrote his name as "J. Pierpont Finch, Agent," and failed to mention the name of his principal Biggley. Is Biggley bound to this note? See §3-402 and OC 1.

Usually a person whose signature is not on an Instrument is not liable but 3-402 and Comment 1 does permit a principal to be bound by an agent's signature even if as In this case, the principal is not named.

Provisional Settlement

When a customer desposits a check at a bank, the bank will sometimes credit the customer's account immediately with the face amount of the check and permit the customer to draw on the deposited fund. This is called Provisional Settlement because the bank has not yet presented the check to drawee bank and received payemnt from check master's account which will constitute 'Final Payment'.

Wrongful Dishonor

Whenever a bank makes an improper payment from an account, this debit may cause other checks written by the customer to be wrongfully dishonored. The customer may recover all actual damages whenever the bank makes a wrongful (which includes mistaken) dishonor of a check that is properly payable from the account.

The Checking Account

Whenever someone opens a checking account with a bank, two legal relationships spring into being: 1. Debtor/ Creditor 2. Principal/ Agent The depositor is the creditor and the bank is the debtor. The bank is an agent for payment of the principal's draft and other instructions. When a customer puts money in the bank, that money is on loan to the bank; the bank becomes a debtor, and the customer is a creditor.

The president of Money Corporation was John Smith. He signed three corporate promissory notes as follows: (a) "John Smith." Money Corporation was not mentioned in the note. (b) "Money Corporation, John Smith." (c) "Money Corporation, John Smith, President." In each case is he personally liable to a HDC of the instrument?

a) Money Corporation is liable if the signature is authorized and Smith would be liable personally to a HIDC (no notice can be manufactured here!) If Smith's signature is unauthorized, then Smith is the one who Is liable under 3-403 (note parol (oral) or extrinsic evidence would be permitted to show that the signature was or was not authorized.) b) Comment 2 to 3-402 says that this signature is ambiguous so an HIDC could enforce against the agent...I got the same problem with this answer as I did with the previous problem involving "Finch, Agent." I think an HIDDIC Is on notice that Smith is not signing individually...If a person signs underneath a corporation's name then some courts have said that the person is signing as an agent, for example.... Money Corporation John Smith I think both examples put a potential HIDC on notice of Smith's agency... c) This is the preferred way to sign as an agent and bind the principal and not the agent...3-402(b)(l)