A. Non-payment

Figure 4.1 - Indorser Liability

B. Forged Signatures

1. Forged Drawers' Signatures and the Rule of Price v. Neal

(a) What if the Payor Bank Pays the Forged Check?

Decibel Credit Union v. Pueblo Bank & Trust Company
Figure 4.2 -- Presentment and Transfer Warranties

(b) What if the Payor Bank Dishonors the Forged Check?
       The Special Case of Telephone Checks

2. Forged Indorsements

1. What if the Payor Bank Dishonors the Check Because of the Forged Indorsement?
2. What if the Payor Bank Pays the Check Despite the Forged Indorsement?
3. Conversion

C. Alteration

Problem Set 4

Figure 4.1
Indorser Liability
EPS | GIF | WMF

Figure 4.2
Presentment and Transfer Warranties
EPS | GIF | WMF

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Problem Set 4

4.1. Impressed by the advice you’ve been giving his customers (most recently in Problem Set 3), Nicholas Bulstrode came in this morning to discuss a forgery incident that recently occurred with respect to a $300 check written by Dorothea Brooke. Dorothea gave the check to Tertius Lydgate to pay for a recent visit to Dr. Lydgate. Bulstrode Bank honored the check, which now is in Nicholas’s possession. The check bears what appears to be a blank indorsement by Lydgate, followed by indorsements by Edward Casaubon and Wessex Bank.

Lydgate, however, claims that he never received the check, and Bulstrode believes him (for reasons that should be clear from what ensues). Casaubon told Bulstrode on the phone yesterday that she got the check from Will Ladislaw (a somewhat disreputable relative of Casaubon’s) as partial payment of some outstanding debts Ladislaw owed to Casaubon. Casaubon said that Lydgate’s indorsement was on the check at the time that he got the check from Will. On inquiry to Lydgate, it appears that Will is a patient of Lydgate’s who saw Lydgate the day before Will gave the check to Casaubon. Lydgate discovered Will’s apparent theft of the check when he called Dorothea to ask her why she had not paid him. Bulstrode promptly agreed to recredit Dorothea’s account. Bulstrode is galled at the prospect of taking a loss for the check and wants to know what he can do. What should he do? UCC §§ 3-203(a), 3-301, 3-415, 4-208, 3-417.

4.2. Referring to Problem 4.1, what could Wessex Bank have done if Bulstrode had noticed the forged indorsement and dishonored the check? UCC §§ 3-403(a), 3-415, 3-416, 4-207.

4.3. Before he leaves, Bulstrode asks about another problem arising out of a check written on an account that Dorothea Brooke has at another bank (Wessex Bank). It appears that some unknown person stole a check from Dorothea’s checkbook and issued the check by forging her signature. Lydgate, tricked by the forger, agreed to cash the check for the forger. After Lydgate deposited the check in an account he has at Chettam Bank, Chettam forwarded the check for collection through its correspondent Bulstrode Bank. Chettam included the following legend as part of its indorsement: “Without Recourse and Without Any Warranty Whatsoever.” Wessex Bank (the payor bank) dishonored the check and returned it to Bulstrode Bank. Recognizing that he has no right to pursue, Dorothea, Bulstrode wants to know if he has any basis for recovering from Chettam Bank or the forger. See UCC §§ 3-403(a), 3-414(b), 3-415, 3-418(a), 4-207(a)(2) & (d).

4.4. Referring to Problem 4.3, what rights would Wessex Bank have had if it had honored the check, but then recredited Dorothea’s account when the fraud was discovered. UCC §§ 3-415(a), 3-418(a) & (c), 4-207, 4-208(a).

4.5. Ben Darrow asks you about another problem with Carol Long. Carol seems to have the habit of carrying signed checks in her wallet, completed except for the amount, date, and name of the payee. When Carol left her wallet in a diner last week, one of those checks was taken, completed for the amount of $1,000, cashed at Nazareth State Bank, and honored by Darrow’s bank (FSB) without anybody noticing the problem. Carol has come to Darrow claiming that the check should not have been honored. Darrow feels sorry for Carol, but does not want his employer FSB to bear the loss. What are Darrow’s options? UCC §§ 3-407(c) & comment 2, 4-208(a)(2) & (b), 4-401(d)(2) & comment 4.

4.6. Before letting you off the phone, Darrow has one other question. In reviewing her statements in connection with the discussion in Problem 4.5, Carol noticed another check that she recalled writing to one of her suppliers for $1,000. At some point in the collection process, the check was altered to indicate an amount of $10,000. Darrow’s bank did not notice the skillful alteration and honored the check for the full amount. Darrow tells you that he assumes that he can’t charge Carol for anything but the $1,000 for which she wrote the check. What he wants to know is whether he can recover the extra $9,000 from anybody. What is your advice? UCC §§ 3-407(c), 4-208(a)(2), 4-401(d)(1).

4.7. Dorothea Brooke receives a telephone call from a marketer selling encyclopedias. At first, she is quite attracted to the idea of buying a new encyclopedia. The marketer asks her for her checking-account number so that he can collect payment. Dorothea then gives him the  number. After further discussion, however, she decides not to go through with the transaction until she receives further details in the mail. To her surprise, the next month she finds that the telemarketer (EncarPedia.com) has created and processed a check charging her $1,800 for the encyclopedias. The check was deposited at Bulstrode Bank and paid by her bank Wessex Bank. Assuming that EncarPedia.com is insolvent, who will bear the loss? UCC §§3-416, 3-417, 4-207, 4-208.

4.8. For your last problem of the day, Darrow's bank recently honored a check, apparently created by a telemarketer, which shows a signature line for John Smith, with a stamp on the line indicating that "Drawer's Authorization Is On File With Payee." As it happens, however, John Smith does not have an account at Darrow's bank. The item was prepared (apparently by the payee) with MICR-line information for Stephanie Heller's account at Darrow's bank. As normal practice would make likely, the item was processed and paid from Heller's account without anybody noticing the discrepancy. Heller has now complainted (justly) that the item should not have been charged to her account. Can Darrow recover from the bank from which he received the item? From the payee? UCC §§3-415, 3-416, 4-207, 4-208.

Assignment Update