Chapter 27
Checks
and Banking
in
the Digital Age
TRUE/FALSE QUESTIONS
A1. A cashier’s check is an instrument in
which a bank draws a check on itself.
ANSWER: T PAGE: 544 TYPE: =
NAT: AACSB Analytic AICPA Legal
B1. UCC
Articles 3 and 4 govern checks.
ANSWER: T PAGE: 544 TYPE: =
NAT: AACSB Analytic AICPA Legal
A2. A
bank that has certified a check is under no obligation to accept it.
ANSWER: F PAGE: 545 TYPE: =
NAT: AACSB Analytic AICPA Legal
B2. A
check is a special type of certificate of deposit.
ANSWER: F PAGE: 544 TYPE: N
NAT: AACSB Analytic AICPA Legal
A3. A person who writes a bad check is subject
to a civil suit only.
ANSWER: F PAGE: 546 TYPE: =
NAT: AACSB Analytic AICPA Legal
B3. Certified checks are instruments that have
been accepted for payment by the institutions on which they are drawn.
ANSWER: T PAGE: 545 TYPE: =
NAT: AACSB Analytic AICPA Legal
A4. A
drawer is liable to the holder of a check if the check is not honored.
answer: T PAGE: 547 TYPE: =
NAT: AACSB Analytic AICPA Legal
B4. A
bank is subject to a civil suit if its customer writes a bad check.
ANSWER: F PAGE: 546 TYPE: =
NAT: AACSB Analytic AICPA Legal
A5. Once
a check “bounces,” a holder cannot resubmit it for payment.
ANSWER: F PAGE: 547 TYPE: =
NAT: AACSB Analytic AICPA Legal
B5. Generally,
a bank has no obligation to pay a customer’s overdrafts.
ANSWER: T PAGE: 547 TYPE: =
NAT: AACSB Analytic AICPA Legal
A6. The death of a customer revokes a bank’s
authority to pay an item.
ANSWER: F PAGE: 547 TYPE: N
NAT: AACSB Analytic AICPA Legal
B6. When a check “bounces,” its holder can
resubmit the check later, hoping that sufficient funds will be available.
ANSWER: T PAGE: 547 TYPE: =
NAT: AACSB Analytic AICPA Legal
A7. A
stale check is one that has been outstanding for longer than one month.
answer: f PAGE: 547 TYPE: =
NAT: AACSB Analytic AICPA Legal
B7. A
bank has no right to charge a customer’s account for the amount of a stale
check.
answer: f PAGE: 547 TYPE: =
NAT: AACSB Analytic AICPA Legal
A8. An
oral stop payment order is valid for fourteen days.
ANSWER: T PAGE: 548 TYPE: =
NAT: AACSB Analytic AICPA Legal
B8. The
incompetence of a customer revokes a bank’s authority to pay an item.
answer: f PAGE: 547 TYPE: N
NAT: AACSB Analytic AICPA Legal
A9. A bank that pays a customer’s check with a
forged drawer’s signature can generally pass the loss onto the customer.
ANSWER: F PAGE: 549 TYPE: N
NAT: AACSB Analytic AICPA Legal
B9. A bank is obligated to pay an uncertified
check presented less than six months from its date.
ANSWER: T PAGE: 547 TYPE: =
NAT: AACSB Analytic AICPA Legal
A10. A
customer who fails to examine a bank statement and report a forged signature
may be liable for later forgeries by the same wrongdoer.
ANSWER: T PAGE: 551 TYPE: =
NAT: AACSB Analytic AICPA Legal
B10. A
check carries with it an implied promise to reimburse the bank for paying the
check.
ANSWER: T PAGE: 547 TYPE: N
NAT: AACSB Analytic AICPA Legal
A11. A
bank that fails to detect an alteration to its customer’s check is liable to
the customer for the loss.
ANSWER: T PAGE: 552 TYPE: N
NAT: AACSB Analytic AICPA Legal
B11. An oral stop payment order is valid for
thirty days.
ANSWER: F PAGE: 548 TYPE: =
NAT: AACSB Analytic AICPA Legal
A12. A
bank cannot recover from a holder who cashes a check bearing a forged
indorsement once the bank has accepted and paid the item.
ANSWER: F PAGE: 552 TYPE: N
NAT: AACSB Analytic AICPA Legal
B12. A
forged signature is effective as the signature of a drawer to the extent that
is resembles the drawer’s actual signature.
ANSWER: F PAGE: 549 TYPE: N
NAT: AACSB Analytic AICPA Legal
A13. Generally,
the funds represented by a deposited local check must be available for
withdrawal within one business day.
answer: T PAGE: 555 TYPE: =
NAT: AACSB Analytic AICPA Legal
B13. A
customer does not need to examine a bank statement and report his or her forged
signature to recover from the bank for the forgery.
ANSWER: F PAGE: 551 TYPE: =
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A14. The
first bank to receive a check for payment is the depositary bank.
ANSWER: T PAGE: 556 TYPE: N
NAT: AACSB Analytic AICPA Legal
B14. Generally,
a cash deposit is not available for withdrawal until the next business day.
ANSWER: T PAGE: 555 TYPE: =
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A15. Each
bank in a collection chain must pass a check on before midnight of the day of
its receipt.
ANSWER: F PAGE: 557 TYPE: N
NAT: AACSB Reflective AICPA Critical Thinking
B15. The
bank on which a check is drawn is the payor bank.
answer: T PAGE: 556 TYPE: N
NAT: AACSB Analytic AICPA Legal
A16. A
bank that encodes information on an item after its issue warrants to any
subsequent bank that the information is correct.
ANSWER: T PAGE: 559 TYPE: N
NAT: AACSB Analytic AICPA Legal
B16. The
Federal Reserve System acts as a clearinghouse where banks exchange checks.
ANSWER: T PAGE:
558 TYPE: N
NAT: AACSB Analytic AICPA Legal
A17. Stored-value
cards are a form of digital cash.
answer: T PAGE: 560 TYPE: N
NAT: AACSB Reflective AICPA Critical Thinking
B17. Financial
institutions that exchange digital images of checks eventually must exchange
the original paper checks.
answer: F PAGE: 561 TYPE: N
NAT: AACSB Analytic AICPA Legal
A18. Under
the Check Clearing in the 21st Century Act, a substitute check is the legal
equivalent of an original check.
answer: t PAGE: 561 TYPE: N
NAT: AACSB Analytic AICPA Legal
B18. If
a customer’s debit card is lost or stolen, the customer will not be liable for
any unauthorized use of the card.
ANSWER: F PAGE: 562 TYPE: N
NAT: AACSB Analytic AICPA Legal
A19. Financial
institutions that exchange digital images of checks do not have to exchange the
original paper checks.
answer: T PAGE: 561 TYPE: N
NAT: AACSB Analytic AICPA Legal
B19. Gaining
unauthorized access to an electronic fund transfer system is a felony.
ANSWER: T PAGE: 563 TYPE: N
NAT: AACSB Analytic AICPA Legal
A20. A
customer has sixty days from the date of receipt of a statement of an
electronic transfer to notify the financial institution of any errors.
ANSWER: T PAGE: 562 TYPE: =
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B20. Currently,
it is not clear which, if any, laws apply to the security of e-money payment
information.
ANSWER: T PAGE: 565 TYPE: =
NAT: AACSB Analytic AICPA Legal
MULTIPLE CHOICE QUESTIONS
A1. Rikki signs a check “pay to the order of
Scholar University” drawn on Rikki’s account in State Bank to pay her tuition.
Rikki is
a. the certifier.
b. the
drawee.
c. the drawer.
d. the payee.
ANSWER: C PAGE: 544 TYPE: N
NAT: AACSB Reflective AICPA Legal
B1. Ian buys a cell phone in Jiffy Mart, using
the means that accounts for more retail payments than any other. This means of
payment is
a. a commercial check.
b. a
debit card.
c. a personal check.
d. a trade acceptance.
ANSWER: B PAGE: 544 TYPE: N
NAT: AACSB Reflective AICPA Legal
A2. Scott presents an instrument that states
“pay to the order of Scott” to Town Bank for payment. This instrument is the
most common type of negotiable instrument, which is
a. a certificate of deposit.
b. a
check.
c. a note.
d. a trade acceptance.
ANSWER: B PAGE: 544 TYPE: N
NAT: AACSB Reflective AICPA Legal
B2. Kris presents an instrument that states
“pay to the order of Liv” to Metro Bank for payment. This is a special type of
draft drawn on a bank, ordering the bank to pay a fixed amount of money on
demand. This is
a. a certificate of deposit.
b. a
check.
c. a debit card transaction receipt.
d. a trade acceptance.
ANSWER: B PAGE: 544 TYPE: N
NAT: AACSB Reflective AICPA Legal
A3. Elmo pays First National Bank $1,000 plus
a service fee to draw a check on itself made payable to Go Delivery Service. This
is
a. a cashier’s check.
b. a
certified check.
c. a trade acceptance.
d. a traveler’s check.
ANSWER: A PAGE: 544 TYPE: N
NAT: AACSB Reflective AICPA Legal
B3. Brendan signs a check “pay to the order of
City College Bookstore” drawn on his account in Delta Bank to pay for his
current semester’s textbooks. The bookstore deposits the check in its account
in Eagle Bank. Like most checks, this check is
a. a one-party instrument.
b. a
four-party instrument.
c. a
three-party instrument.
d. a
two-party instrument.
ANSWER: C PAGE: 544 TYPE: N
NAT: AACSB Reflective AICPA Legal
A4. First
Community Bank agrees to accept a check by setting aside sufficient funds to
cover the amount. This check is considered
a. cashed.
b. certified.
c. deposited.
d. provisionally
credited.
ANSWER: B PAGE: 545 TYPE: =
NAT: AACSB Reflective AICPA Legal
B4. Jen signs a check “pay to the order of
Key” drawn on Jen’s account in Little Bank to buy Key’s car. Jen asks Little
Bank to indicate on the face of the check that it will accept it when Key
presents it for payment. If the bank agrees, this will be
a. a cashier’s check.
b. a
certified check.
c. a trade acceptance.
d. a traveler’s check.
ANSWER: B PAGE: 545 TYPE: N
NAT: AACSB Reflective AICPA Legal
A5. Kip writes a check for $1,000 drawn on
Local Bank and presents it to Mira. Mira presents the check for payment to
Local Bank, which dishonors it. The party most likely liable to Mira is
a. Kip
in a civil suit.
b. Kip
in a criminal prosecution.
c. Local
Bank in an administrative proceeding.
d. neither
Kip nor Local Bank.
ANSWER: A PAGE: 546 TYPE: =
NAT: AACSB Reflective AICPA Legal
B5. Pat, the manager of Quik Mart, deposits
the store’s receipts in its account at Regional Bank. As to the receipts, the
relationship between Quik Mart and the bank is
a. attorney
and client.
b. creditor
and debtor.
c. guardian
and ward.
d. trustee
and beneficiary.
ANSWER: B PAGE: 546 TYPE: =
NAT: AACSB Reflective AICPA Legal
A6. Thelma signs a check “pay to the order of
Uri” drawn on Thelma’s account in Verity Bank. Thelma has $400 in her account
but the amount of the check is $500, which the bank pays. This is
a. a dishonored check.
b. an overdraft.
c. a postdated check.
d. a stale check.
ANSWER: B PAGE: 547 TYPE: N
NAT: AACSB Reflective AICPA Legal
B6. Dan
writes a check to Emma on his account at First State Bank. The bank dishonors
the check even though Dan has sufficient funds in his account. The bank is
a. liable
to Dan only.
b. liable
to Dan and Emma.
c. liable
to Emma only.
d. not
liable to Dan or Emma.
ANSWER: A PAGE: 546 TYPE: =
NAT: AACSB Reflective AICPA Legal
A7. Liu signs a check “pay to the order of
Marv” drawn on Liu’s account in National Bank. Liu later orders National not to
pay the check, but the bank pays it over Liu’s order. Subsequent checks written
on Liu’s account “bounce.” Most likely liable for the costs to Liu is
a. any party to whom a subsequent check
was written.
b. Liu.
c. Marv.
d. National.
ANSWER: C PAGE: 547 TYPE: N
NAT: AACSB Reflective AICPA Legal
B7. Dora
writes a check for $100 drawn on Eastern Bank and presents it to Fast Cash,
Inc., for payment. If the check is not backed by sufficient funds, Dora may be
prosecuted for
a. forgery.
b. fraud.
c. negligence.
d. robbery.
ANSWER: B PAGE: 547 TYPE: =
NAT: AACSB Reflective AICPA Legal
Fact Pattern 27-1A (Questions A8 and A9
apply)
Echo takes her car to Fix-It, Inc.,
which repairs the car and bills Echo for $500. Echo writes out a check drawn on
Capital Bank, but later, believing that Fix-It did not repair the car properly,
issues a stop-payment order.
A8. Refer
to Fact Pattern 27-1A. Capital Bank pays the check. Capital
a. can
sue Echo for a wrongful stop-payment order.
b. can
sue Fix-It for breach of contract.
c. can
sue no one because it paid a check that was not properly payable.
d. is
liable for Echo’s loss due to the wrongful payment.
ANSWER: D PAGE: 548 TYPE: =
NAT: AACSB Reflective AICPA Legal
B8. Dhani signs a check “pay to the order of
Etan” drawn on Dhani’s account in First State Bank and dates the check “May 1.”
Etan presents the check to the bank for payment on December 15. This is
a. a dishonored check.
b. an overdraft.
c. a postdated check.
d. a stale check.
ANSWER: D PAGE: 547 TYPE: N
NAT: AACSB Reflective AICPA Legal
Fact Pattern 27-1A (Questions A8 and A9
apply)
Echo takes her car to Fix-It, Inc.,
which repairs the car and bills Echo for $500. Echo writes out a check drawn on
Capital Bank, but later, believing that Fix-It did not repair the car properly,
issues a stop-payment order.
A9. Refer
to Fact Pattern 27-1A. Capital Bank
a. is
liable to Fix-It for the amount of the check.
b. must
stop payment if Capital has a reasonable time to act.
c. need
not stop payment unless Echo had a valid reason to act.
d. need
not follow Echo’s order unless the check was certified.
ANSWER: B PAGE: 548 TYPE: =
NAT: AACSB Reflective AICPA Legal
B9. Earl
issues a check drawn on First National Bank to Good Office Supply to pay for
six filing cabinets. Later, Earl discovers defects in the goods and orders
First National to stop payment on the check. Earl does not renew the order, and
the bank clears the check eight months later. The bank
a. must
recredit Earl’s account and substitute acceptable goods.
b. must
recredit Earl’s account or substitute acceptable goods.
c. must
substitute acceptable goods but not recredit Earl’s account.
d. need
not recredit Earl’s account or substitute acceptable goods.
ANSWER: D PAGE: 548 TYPE: =
NAT: AACSB Reflective AICPA Legal
A10. John
writes a check to Kay as payment for a DVD player but soon discovers the
player is broken. He goes to the drawee bank and orally authorizes Larry, a
bank officer, to stop payment on the check. This order is valid for
a. fourteen
days.
b. fourteen
months.
c. six
days.
d. six
months.
ANSWER: A PAGE: 548 TYPE: =
NAT: AACSB Reflective AICPA Legal
B10. Steve
steals one of Tricia’s checks and forges her signature. Tricia’s bank, Unity
Bank, pays the check. Tricia can recover from
a. Steve,
but not Unity Bank.
b. Unity
Bank, which cannot recover from Steve.
c. Unity
Bank, which can recover from Steve.
d. no
one.
ANSWER: C PAGE: 549 TYPE: =
NAT: AACSB Reflective AICPA Legal
A11. Brandy forges Caleb’s signature on a check
“payable to the order of Brandy” drawn on Caleb’s account in Downtown Bank.
Caleb’s forged signature is
a. effective if an innocent third party
accepts the check.
b. effective to the degree that it matches
Caleb’s genuine signature.
c. effective to the extent that Downtown
Bank debits Caleb’s account.
d. not effective.
ANSWER: D PAGE: 549 TYPE: N
NAT: AACSB Reflective AICPA Legal
B11. Trudy forges Uma’s signature on a check
“payable to the order of Trudy” drawn on Una’s account in Verity Bank. Most
likely, if the bank pays the check
a. the Federal Reserve will reimburse all
parties for their costs.
b. the loss will be apportioned among all
of Verity’s customers.
c. Uma will be liable for the amount.
d. Verity will have to recredit Uma’s
account.
ANSWER: D PAGE: 549 TYPE: N
NAT: AACSB Reflective AICPA Legal
A12. Dru signs a check “pay to the order of
Eppie” drawn on Dru’s account in First Federal Bank. Greta forges Eppie’s
indorsement. First Federal pays the check. Most likely
a. Dru will be liable for the amount.
b. Eppie will have to pay Dru for the amount.
c. First Federal will have to recredit
Dru’s account.
d. the Federal Reserve will reimburse all
parties for their costs.
ANSWER: C PAGE: 552 TYPE: N
NAT: AACSB Reflective AICPA Legal
B12. Simon signs a check “pay to the order of
Tilly” drawn on Simon’s account in United Bank. Vela forges Tilly’s
indorsement, First Federal Bank cashes the check, and Vela disappears. United
pays First Federal and debits Simon’s account. Most likely, the ultimate loss
will fall on
a. Simon.
b. Trudy.
c. United Bank.
d. First Federal Bank.
ANSWER: C PAGE: 552 TYPE: N
NAT: AACSB Reflective AICPA Legal
A13. Ed
can write checks on his account at First City Bank. Gina steals the checks,
forges Ed’s signature, and cashes the checks at First City
a. five
days.
b. fourteen
days.
c. one
year.
d. three
years.
answer: C PAGE: 552 TYPE: =
NAT: AACSB Reflective AICPA Legal
B13. Clyde
issues a check payable to Discount Mart. Elle, Discount’s cashier, forges the
store’s indorsement and deposits the check in her bank account. Clyde ’s bank, First State Bank, pays the check. Clyde can recover from
a. Elle,
but not First State Bank.
b. First State
c. First State
d. no
one.
ANSWER: C PAGE: 552 TYPE: =
NAT: AACSB Reflective AICPA Legal
Fact Pattern 27-2A (Questions A14 and A15 apply)
Ruth opens an account with State Bank
under an agreement in which the bank reserves the right to charge the account
for any item returned due to its unauthorized alteration.
A14. Refer
to Fact Pattern 27-2A. The agreement between Ruth and State Bank
a. cannot
change the effect of the UCC.
b. is in accord with the UCC.
c. violates federal banking regulations.
d. violates the UCC.
ANSWER: B PAGE: 553 TYPE: =
NAT: AACSB Reflective AICPA Legal
B14. On Monday, Eve deposits in her account at
First State Bank a local check for $500. After 5:00 p.m. on Friday, from these funds, Eve can withdraw no more
than
a. $100.
b. $400.
c. $500.
d. $600.
answer: C PAGE: 555 TYPE: =
NAT: AACSB Reflective AICPA Legal
Fact Pattern 27-2A (Questions A14 and A15 apply)
Ruth opens an account with State Bank
under an agreement in which the bank reserves the right to charge the account
for any item returned due to its unauthorized alteration.
A15. Refer to Fact Pattern 27-2A. Tom deposits an
altered check in Ruth’s account. When Unity Bank, the check’s drawee bank, returns
the item due to its alteration, State Bank files a suit against Ruth to recover
the amount. The court is most likely to rule that
a. Ruth
does not have to pay, because she did not indorse the check.
b. State Bank is entitled to recover under
its account agreement.
c. Tom is the party from whom State Bank
should seek recovery.
d. Unity Bank is the party from whom State
Bank should seek recovery.
ANSWER: B PAGE: 553 TYPE: =
NAT: AACSB Reflective AICPA Legal
Fact Pattern 27-1B (Questions B15–B17 apply)
Tom draws a check, on
his account in State Bank in New York , payable
to Digital Computers, Inc., in San
Francisco . Digital deposits the check in its account
at First National Bank. First National deposits the check in the Federal
Reserve Bank of San Francisco , which transfers
it to the Federal Reserve Bank of New
York . That Federal Reserve bank sends the check to
State Bank.
B15. Refer to Fact Pattern 27-1B. Digital’s bank is
a. the
cashing bank.
b. the
depositary bank.
c. the
intermediary bank.
d. the
payor bank.
answer: B PAGE: 556 TYPE: =
NAT: AACSB Reflective AICPA Legal
A16. On
Monday morning, Bob deposits into his account at County Bank a $500 check from
Dina, who also has an account at County Bank. On that same day, this check is
considered
a. cashiered.
b. certified.
c. paid.
d. provisionally
credited.
ANSWER: D PAGE: 556 TYPE: =
NAT: AACSB Reflective AICPA Legal
Fact Pattern 27-1B (Questions B15–B17 apply)
Tom draws a check, on
his account in State Bank in New York , payable
to Digital Computers, Inc., in San
Francisco . Digital deposits the check in its account
at First National Bank. First National deposits the check in the Federal
Reserve Bank of San Francisco , which transfers
it to the Federal Reserve Bank of New
York . That Federal Reserve bank sends the check to
State Bank.
B16. Refer to Fact Pattern 27-1B. Tom’s bank is
a. the
cashing bank.
b. the
depositary bank.
c. the
intermediary bank.
d. the
payor bank.
answer: D PAGE: 556 TYPE: =
NAT: AACSB Reflective AICPA Legal
Fact Pattern 27-3A (Questions A17 and A18 apply)
Mike loses his National Bank access
card. He realizes his loss the next day but waits a week to call National.
Meanwhile, Opal finds and uses Mike’s card to withdraw $3,000 from Mike’s
account.
A17. Refer
to Fact Pattern 27-3A. Mike is responsible for
a. $0.
b. $50.
c. $500.
d. $3,000.
ANSWER: C PAGE: 562 TYPE: =
NAT: AACSB Reflective AICPA Legal
Fact Pattern 27-1B (Questions B15–B17 apply)
Tom draws a check, on
his account in State Bank in New York , payable
to Digital Computers, Inc., in San
Francisco . Digital deposits the check in its account
at First National Bank. First National deposits the check in the Federal
Reserve Bank of San Francisco , which transfers
it to the Federal Reserve Bank of New
York . That Federal Reserve bank sends the check to
State Bank.
B17. Refer to Fact Pattern 27-1B. When Digital’s
bank received the check, it was required to pass it on
a. before
midnight of the next banking day.
b. before
midnight of the next day, whether or not it was a “banking” day.
c. before
noon of the next banking day.
d. within
five business days.
answer: A PAGE: 557 TYPE: =
NAT: AACSB Reflective AICPA Legal
Fact Pattern 27-3A (Questions A17 and A18 apply)
Mike loses his National Bank access
card. He realizes his loss the next day but waits a week to call National.
Meanwhile, Opal finds and uses Mike’s card to withdraw $3,000 from Mike’s
account.
A18. Refer
to Fact Pattern 27-3A. When Mike receives his National statement, he demands
that the bank investigate the matter and recredit his account. The bank
a. has
no duty to investigate.
b. must
investigate and, if the dispute is not resolved within ten days, recredit
Mike’s account (at least until the dispute is resolved).
c. must
investigate and immediately recredit Mike’s account (at least until the dispute
is resolved).
d. must
investigate but need not recredit Mike’s account.
ANSWER: B PAGE: 562 TYPE: =
NAT: AACSB Reflective AICPA Legal
B18. First
National Bank receives a check drawn on the account of Get-Rich Industries,
Inc., one of the bank’s customers, at 3 p.m.
Friday. Harry, the presenter of the check, is not one of the bank’s customers.
The bank uses deferred posting with a 2
p.m. cutoff hour. If it decides to dishonor the check, it must do so by
midnight
a. Saturday.
b. Sunday.
c. Monday.
d. Tuesday.
ANSWER: D PAGE: 557 TYPE: =
NAT: AACSB Reflective AICPA Legal
A19. First
State First
State
a. the
Community Reinvestment Act.
b. the
Federal Reserve Board’s Regulation E.
c. the
Federal Trade Commission Act.
d. the
Home Mortgage Disclosure Act.
answer: A PAGE: 565 TYPE: =
NAT: AACSB Reflective AICPA Legal
B19. Dina’s
debit card, issued by Eagle Bank, is stolen and used without Dina’s permission.
Dina tells Eagle Bank within thirty days. Dina may be required to pay no more
than
a. $5.
b. $50.
c. $500.
d. $5,000.
ANSWER: C PAGE: 562 TYPE: =
NAT: AACSB Reflective AICPA Legal
A20. E-Bank,
an online financial institution, gives financial information about Paula and
other customers to a federal agency without the customers’ permission. E-Bank
may be liable under
a. the
Federal Trade Commission Act.
b. the
Financial Services Modernization Act.
c. the
Right to Financial Privacy Act.
d. the
Uniform Electronic Transactions Act.
ANSWER: C PAGE: 566 TYPE: =
NAT: AACSB Reflective AICPA Legal
B20. Pete knowingly divulges to Media Exposure magazine
information about Randy’s e-money payments to City Bank. The payments were in
transmission to City Bank when Pete, without the consent of Randy or City
Bank, discovered and revealed them. This may be a violation of
a. the
Electronic Communications Privacy Act.
b. the
Federal Reserve Board’s Regulation E.
c. the
Right to Financial Privacy Act.
d. the
Uniform Electronic Transactions Act.
answer: A PAGE: 566 TYPE: =
NAT: AACSB Reflective AICPA Legal
Essay
Questions
A1. Hoppy steals two checks from Eagle
Retail Stores, Inc.: a blank check and a check payable to the order of General
Supplies Company (GSC), drawn on Eagle’s account with First National Bank.
Hoppy forges Eagle’s signature on the blank check and makes it payable to
himself. Hoppy forges GSC’s indorsement on the back of the check payable to
GSC, and adds “Pay to the order of Hoppy.” At Friendly Credit, Inc., Hoppy
indorses the back of both checks with his own name and gives them to Friendly for
cash. Friendly does not know about the theft or the forged signatures and
presents the checks to First National, which pays them. Eagle, which was not
negligent, discovers the forgeries and asks First National to recredit its account.
Who suffers the loss on each check?
ANSWER: First National will suffer the loss of the amount on the blank
check unless it can recover from Hoppy. Friendly will suffer the loss on the
amount on the check with the forged indorsement of GSC unless Friendly, too,
can recover from Hoppy. When the signature of a drawer is forged, the drawer
has not been negligent, and the drawee bank pays the check over the forged
signature, the party who bears the loss is the drawee bank. The bank has a
right to recover from the party who forged the signature, or from any party who
does not take the check in good faith and for value, or who changes his or her
position in reliance on payment or acceptance. Here, regarding the blank
check, Eagle, the drawer, was not negligent, its signature was forged, and
First National, the drawee bank, paid the check over the forged signature.
(First National cannot recover from Friendly on the basis of a breach of a
presentment warranty, because Friendly warranted only that it did not know the
drawer’s signature was forged.) First National has a right to recover from
Hoppy, but in most cases, actual recovery from a thief is a remote
possibility. Because Friendly took the check in good faith and for value, First
National does not have a right to recover the amount of this check from
Friendly. A bank that pays a customer’s check bearing a forged indorsement must
recredit the customer’s account. A forged indorsement does not transfer title,
however, and so whoever takes a check with a forged indorsement cannot become a
holder and will likely suffer a loss on the check. (A subsequent transfer of
the check breaches the presentment warranty that in effect there are no
unauthorized indorsements.) In this problem, First National must recredit
Eagle’s account, but First National can recover the amount from Friendly, who
did not acquire title to the check and thus did not become a holder. Friendly
has a right to recover from Hoppy, but again actual recovery is unlikely.
PAGES: 549–552 type: =
NAT: AACSB Reflective AICPA Decision Modeling
B1. Joy steals a check from Kyle, forges
his signature, and transfers the check to Loco Loans, Inc., for value. Unaware
that the signature is not Kyle’s, Loco Loans presents the check to Metro Bank,
the drawee, which cashes the check. Kyle discovers the forgery and insists that
Metro recredit his account. Can Metro refuse? If not, from whom can the bank
recover?
ANSWER: Metro cannot refuse to recredit Kyle’s account under the facts as
stated in this problem. The general rule is that a bank must recredit a
customer’s account when it pays on the customer’s forged signature. Thus, the
bank here cannot collect from its customer. Furthermore, a bank has no right to
recover from a holder who, without knowledge, cashes a check bearing a forged
drawer’s signature, which appears to be the circumstance in this problem.
Therefore, Metro cannot collect from Loco Loans either. The bank can collect
the amount of the check from the thief who forged the signature, however. The
bank’s best course of action is to charge Joy.
PAGES: 549–551 type: =
NAT: AACSB Reflective AICPA Decision Modeling
A2. City Bank mistakenly transfers $1,000
from the account of Donna, its customer, to the account of Earl in First
Federal Bank. The transfer is done electronically. When City Bank learns of the
mistake, it credits Donna’s account and asks First Federal to “return” $1,000.
First Federal refuses. City Bank files a suit against First Federal, claiming
that it is violation of the Electronic Fund Transfer Act. How might the court
rule?
ANSWER: The court will likely rule in favor of First Federal on City
Bank’s claim under the Electronic Fund Transfer Act (EFTA). The EFTA does not
apply because the plaintiff and defendant are financial institutions, not consumers.
The EFTA covers only electronic fund transfers made by consumers. Transfers
between financial institutions are not covered under the EFTA. City Bank may
recover under other legal theories, however, possibly including a cause
founded on Article 4A of the Uniform Commercial Code.
PAGES: 562 & 563 type: =
NAT: AACSB Reflective AICPA Decision Modeling
B2. Tiny authorizes United Bank to make
transfers from his account to make payments on his debt to Vic’s Auto
Dealership, which sold Tiny the car that serves as collateral for the debt.
After three payments, Vic’s repossesses the car and refuses to return it. Tiny
phones the bank to stop the payments and follows up with a confirming letter.
The bank fails to stop the next two payments, and Vic’s refuses to refund
anything. Can Tiny get his money from the bank? Explain.
ANSWER: Yes. Under the Electronic Fund Transfer Act (EFTA), a financial
institution is liable for failing to stop payment of a preauthorized transfer
from a customer’s account when instructed to do so under the account’s terms
and conditions, which likely require that notice must precede a scheduled
payment within a certain period of time. For other electronic transactions,
reversal is generally not possible, however, because of the instantaneous
nature of the transactions, and the EFTA does not provide for their reversal.
PAGES: 562–563 type: =
NAT: AACSB Reflective AICPA Decision Modeling
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