A. The Basic Relationship

Figure 1.3 - Payment by Check

B. The Bank's Right to Pay

1. When is it Proper for the Bank to Pay

(a) Overdrafts
   McGuire v. Bank One, Louisiana, N.A.

(b) Stopping Payment

2. Remedies for Improper Payment
    McIntyre v. Harris

Problem Set 1

Figure 1.1
Basic Payment Systems
EPS | GIF | WMF

Figure 1.2
Payment by the Third Party
EPS | GIF | WMF

Figure 1.3
Payment by Check
EPS | GIF | WMF

Try the suggestions page on how best to use these figures.

Problem Set 1

1.1. Tertius Lydgate comes to you with a problem about a $1,500 check that his wife Rosamund wrote recently on their joint bank account. The account contained only $50 at the time, and Tertius had declined to purchase overdraft protection from the bank at which he maintained the account. Still, the bank honored the check and has now written Tertius a letter threatening unspecified “serious consequences” if he does not reimburse the bank for the amount of the check.

(a) Is Tertius liable for the check? UCC § 4-401(a) & 4-401 comment 1.

(b) Would your answer change if you learned that Rosamund and he are estranged and that she used the funds to purchase an airplane ticket for a trip that she took (by herself) to London? UCC § 4-401(b) & 4-401 comment 2.

Revised Problem 1.2.— Your old college classmate Ben Darrow is a senior vice president at the First State Bank of Matacora (FSB), which his father-in-law owns. He calls you one Monday afternoon to ask you about a problem that has arisen at his bank. Darrow explains that his problem relates to a $900 check drawn by his customer Jasmine Ball, which Darrow's bank received for payment on Monday January 22. The check was payable to Checks2Cash (a local payday lender) and dated January 31 of the current year. Because his bank's brand-new automated check-processing system does not examine the dates on checks, and because the account did not contain $900 at that time, the system bounced the check and charged Ball a fee of $50. Ball is outraged, because her $1000 paycheck was deposited on January 30 and would have been adequate to cover the item. She contends that the Bank should have dishonored the check because it was presented too early. Has Darrow's bank acted improperly? What should Ball have done? UCC §§ 3-113(a), 4-401(c), 4-401 comment 3, 4-403(b).

1.3. Pleased with your advice in Problem 1.2, Darrow calls you again a few days later. Because of a clerical error, the bank paid a check in contravention of a written stop-payment order. The check was written by Albert “Bud” Lassen, and payable to Carol Long in the amount of $1,500, apparently for some cooking equipment. Shortly after Bud got home with the equipment, he decided that he did not want it because it was slightly larger than he had understood. As a result, the equipment was too big for the space in his kitchen. Carol refused to take back the equipment. Bud immediately came to the bank and filled out the bank’s stop-payment form, identifying the account number, as well as the number, amount, and date of the check. Unfortunately, a clerk incorrectly entered the information supplied by Bud. As a result, the system did not recognize the check to Carol when she came in and cashed it the next day. Bud is furious and insists that the bank recredit his account. Darrow wants to know if he must recredit Bud’s account. If he does recredit Bud’s account, will the bank lose the money? UCC §§ 4-401(a), 4-403(a) & (b), 4-407(2) & (3), 4-407 comments 2 & 3.

1.4. What would have happened if the bank had complied with Bud’s stop-payment order and refused to honor Bud’s check? Could Carol force Bud to pay for the equipment? UCC § 3-310(b)(1), (3) & comment 3.

1.5. You come into work one morning to find a voice-mail message from Caleb Garth asking for an urgent appointment to discuss a problem with his bank. When you meet him later that morning, he explains that he is the President and sole shareholder of Garth Management, Inc. (“GMI”), a corporation that manages rural estates for absentee landowners. Caleb tells you that GMI has had its only bank account at Bulstrode Bank for the last three years. The signature card for GMI (executed at the time that the account was opened) listed as authorized signatories on the account Garth’s daughter Mary Garth and his son-in-law Fred Vincy, who took over operational control of GMI from Caleb about five years ago. Because GMI has been losing money ever since Mary and Fred took over, Caleb finally lost patience two weeks ago and decided to regain control of the corporation. He convened a shareholder’s meeting at which he voted his shares to elect himself the sole director of the corporation. Acting in that capacity, he removed Mary and Fred as officers of the corporation and named himself as President.

His problem came when he went to the bank to remove Fred and Mary from the signature card. When he explained the situation to the bank, the account officer (Nicholas Bulstrode) told Caleb that the bank would freeze all funds in the account until Caleb presented the bank with a letter from Mary and Fred consenting to their removal from the account. The bank officer relied on the following provision in the account agreement:

If another person or entity makes a claim against funds in your account, or if we have reason to believe there is or may be a dispute over matters such as the ownership of the account or the authority to withdraw funds, we may, in our sole discretion, (1) continue to rely on current signature cards, resolutions or other account documents, (2) freeze all or part of the funds until the dispute is resolved to our satisfaction, or (3) pay the funds into an appropriate court of law for resolution.

You are satisfied that Caleb has complied with all of the appropriate corporate formalities. His problem is that Mary and Fred are out of town (on a walking tour of old cathedrals). Can he force the bank to release the funds without providing the letter from Mary and Fred? UCC § 4-103(a), 4-103 comments 1 & 2.

1.6. Your friend Jodi Kay is an executive at CountryBank. She comes to you to discuss a proposed restructuring of CountryBank’s fee structure for checking accounts. CountryBank has been involved in an aggressive program to open branches of its bank in underserved areas of the community, where most of the customers have relatively modest income. Unfortunately, although the new branches have been doing well at getting accounts opened, several of them have been unprofitable. Because the bank’s senior management is committed to keeping the branches open, it called Jodi in to investigate the situation. After studying the records of the branches, she attributed the lack of profitability to an unusually large number of overdrafts and stop-payment requests. Those items are consuming a larger amount of administrative time than is normal for branches of similar size.

Jodi has come up with two different ways to return the branches to profitability. First, she could increase the monthly account charges on low-balance accounts from $10 to $25. She is worried about that course because of the possibility that it will drive out the low-income customers she is trying to reach. Second, she could increase the fees on dishonored checks and stop-payment requests from $25 to $50. She asks you for your advice, specifically inquiring whether it would be lawful for her to impose the charges that she has proposed. UCC §§ 4-401 comment 3, 4-403 comment 1.

Assignment Update