Chapter 24



Indicate whether the statement is true or false.1.??The Uniform Commercial Code regulates checks.?a.?True?b.?False2.??A check is a special type of draft.?a.?True?b.?False3.??When a bank draws a check on itself, the check is called a cashier’s check.?a.?True?b.?False4.?A certified check is a check that has been accepted by the bank on which it is drawn.?a.?True?b.?False5.?When a customer deposits cash into a checking account, he or she becomes a debtor for the amount deposited.?a.?True?b.?False6.?The rights and duties of a bank and its customer are contractual.?a.?True?b.?False7.?An agency relationship arises between the customer and the bank when the customer writes a check on his or her account.?a.?True?b.?False8.?A drawer is liable to the holder of a check in a civil suit if the check is dishonored for insufficient funds.?a.?True?b.?False9.?A bank’s duty to honor its customer’s check is subject to the stipulation that the account has sufficient funds to pay the check.?a.?True?b.?False10.?Commercial banking practices consider a check that has been outstanding for three months to be a stale check.?a.?True?b.?False11.?A bank is notobligated to pay an uncertified check presented less than six months from its date.?a.?True?b.?False12.?Any failure of a bank to honor a check because it would create an over-draft is a wrongful dishonor.?a.?True?b.?False13.?The death of a customer immediately revokes a bank’s authority to pay an item.?a.?True?b.?False14.?Acheck that is presented for payment more than six months from its date is a stale check.?a.?True?b.?False15.?Only a customer or a person authorized to draw on an account can order a bank not to pay a check when it is presented for payment.?a.?True?b.?False16.?Awritten stop payment order is only valid for thirty days.?a.?True?b.?False17.?A customer can stop payment on a check that has been certified or accepted by a bank.?a.?True?b.?False18.?The incompetence of a customer revokes a bank’s authority to pay an item.?a.?True?b.?False19.?A customer can escape liability for failing to notify the bank of forged or altered checks when the customer can prove that the bank was negligent.?a.?True?b.?False20.?A forged signature is effective as the signature of a drawer to the extent that is resembles the drawer’s actual signature.?a.?True?b.?False21.?When a bank pays a check on which the drawer’s signature is forged, generally the customer suffers the loss.?a.?True?b.?False22.?A customer must examine a bank statement and report any discovered forged signa-ture to recover from the bank for the forgery.?a.?True?b.?False23.?A bank that pays a customer’s check bearing a forged indorsement is obligated to recredit the customer’s account.?a.?True?b.?False24.?Any local check deposited must be available for withdrawal by check or as cash within one business day from the date of deposit.?a.?True?b.?False25.?The first bank to receive a check for payment is the intermediary bank.?a.?True?b.?False26.?Each bank in a collection chain must pass a check on before midnight of the day of its receipt.?a.?True?b.?False27.?The Federal Reserve System acts as a clearinghouse where banks exchange checks.?a.?True?b.?False28.?Today, most checks are processed manually.?a.?True?b.?False29.??A bank that encodes information on an item after its issue warrants to any subsequent bank that the information is correct.?a.?True?b.?False30.?The Check Clearing in the 21st Century Act (Check 21) applies only in about 75 percent of the states.?a.?True?b.?False31.?A substitute check is a paper reproduction of the front and back of an original check that contains all the same information required on checks for automated processing.?a.?True?b.?False32.?Financial institutions that exchange digital images of checks must also send the original paper checks.?a.?True?b.?False33.?A customer has two days to discover and notify the bank of any error on the monthly statement involving an electronic transfer of funds.?a.?True?b.?False34.?Stored-value cards can be used to buy goods and services offered by the cards’ issuer.?a.?True?b.?False35.?Smart cards carry and process security programming.?a.?True?b.?FalseIndicate the answer choice that best completes the statement or answers the question.36.??Keanu presents an instrument that states “pay to the order of Laura” to MegaBank 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 payment via a mobile device.37.?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.?cash.38.?TriState 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.?a provisional credit.39.?Drew signs a check “pay to the order of Eastern State University” drawn on Drew’s account in Fidelity Bank to pay her tuition. Drew is?a.?none of the choices.?b.?the drawee.?c.?the drawer.?d.??the payee.40.?Franco buys a sound system from Georg at Georg’s garage sale. Franco writes Georg a check for $250 to pay for the system. Georg is?a.?none of the choices.?b.?the drawee.?c.?the drawer.?d.??the payee.41.?Marta has a checking account with Neighbors Bank. Marta signs a check “payable to Olive” drawn on Marta’s account. Neighbors Bank is?a.?none of the choices.?b.?the drawee.?c.?the drawer.?d.??the payee.42.?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.?anonnegotiable instrument.?c.?atype of draft.?d.?not a substitute for cash.43.?Elmore 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.?an overdraft.?c.?a stale check.?d.?a stop-payment order.44.?Riley pays State Bank $500 plus a service fee to draw a check on itself payable to Torque Plumbing. The party that is responsible for paying the check is?a.?onlyRiley.?b.?bothRiley and State Bank.?c.?only State Bank.?d.?none of the choices.45.?Ana writes a check to Becky on Ana’s account at Community Bank. The bank dishonors the check even though Ana has sufficient funds in her account. The bank is liable to?a.?Ana.?b.?Becky.?c.?the payee on Ana’s next check.?d.?no one.46.?Cleo writes a check for $100 drawn on Debit & Credit Bank and presents it to Elegant Jewelers for payment. If the check is not backed by sufficient funds, Cleo may be prosecuted for?a.?forgery.?b.?fraud.?c.?negligence.?d.?nothing.47.?Travis signs a check “pay to the order of Umberto” drawn on Travis’s account in Valley Bank. Travis has $400 in his account but the amount of the check is $500, which the bank pays. This is?a.?a dishonored check.?b.?an overdraft.?c.?an oversight.?d.?a stale check.48.?Ervin signs a check “pay to the order of Felicia” drawn on Ervin’s account in Garden Fields Bank. Ervin later orders the bank not to pay the check, but the bank pays it over Ervin’s order. Subsequent checks written on Ervin’s account “bounce.” Most likely liable for the costs to Ervin is?a.?any party to whom a subsequent check was written.?b.?Ervin.?c.?Felicia.?d.?Garden Fields Bank.49.?Dalton presents an uncertified check for payment more than six months after its date. The check was drawn by Emma on her account in First City Bank. If First City follows the usual banking practice in such a case, it will?a.?cash the check.?b.?consultEmma.?c.?refuse to cash the check.?d.?askDalton what he would prefer.50.?Joni writes Keizer an uncertified check for $500 drawn on Joni’s account at Labor Employees Credit Union. Seven months later, Keizer presents the check for payment. The credit unionpays the check in good faith without consulting Joni. The credit union?a.?cannot charge Joni’s account for any amount.?b.?can charge Joni’s account for $250 only.?c.?can charge Joni’s account for $500.?d.?is liable for breach of contract.51.?Tomas writes a check for $1,000 drawn on Unified Bank and presents it to Viola. Viola presents the check for payment to Unified Bank, which dis-honors it. The party most likely liable to Viola is?a.?Tomas in a civil suit.?b.?Tomas in a criminal prosecution.?c.?Unity Bank in a civil suit.?d.?none of the choices.52.?Dhani signs a check “pay to the order of Eton” drawn on Dhani’s account in FidelityGuaranty Bank and dates the check “May 1.” Eton presents the check to the bank for payment on December 15. This is?a.?an oversight.?b.?an overdraft.?c.?a certified check.?d.?a stale check.53.?O’Shea issues a check drawn on Prime Bank to Quality Equipment Supply to pay for a backhoe. Later, O’Shea discovers a defect in the backhoe and orders the bank to stop payment on the check. O’Shea does not renew the order, and the bank clears the check eight months later. The bank?a.?must recredit O’Shea’s account.?b.?must obtain funds from Quality to cover the amount of the check.?c.?must substitute acceptable goods.?d.?need not recredit O’Shea’s account.54.?Gillian writes a check to Harris as payment for a video game player but soon discovers the player is broken. She goes to the drawee bank and orally authorizes Ilene, a bank officer, to stop payment on the check. This order is valid for?a.?fourteen days.?b.?one year.?c.?six days.?d.?six months.55.?Gary writes a check drawn on Hilltop Bank for $400 “payable to Ivan” on May 1. Gary dies on May 3. Ivan presents the check to the bank on May 5. Unaware of Gary’s death, the bank?a.?mustcertify the check.?b.?may pay the check.?c.?must consult with Gary’s heirs before paying the check.?d.?can do nothing until Ivan claims an interest in the account.56.?Foster forges Greta’s signature on a check “payable to the order of Foster” drawn on Greta’s account in Hearthside 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 Hearthside’s customers.?c.?Greta will be liable for the amount.?d.?Hearthside will have to recredit Greta’s account.57.?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.58.?Homer can write checks on his account at InterCity Bank. Jemma steals the checks, forges Homer’s signature, and cashes the checks at InterCity.? The bank is excused from any liability if, after receipt of the first forged check, Homer fails to report the forgeries within?a.?fourteen days.?b.?one year.?c.?six days.?d.?six months.59.?Simon signs a check “pay to the order of Tilly” drawn on Simon’s account in United Bank. Vela forges Tilly’s indorsement, Western Bank cashes the check, and Vela disappears. United pays Western and debits Simon’s account. Most likely, the ultimate loss will fall on?a.?Simon.?b.?Trudy.?c.?United Bank.?d.?Western Bank.60.?Daisy signs a check “pay to the order of Ewan” drawn on Daisy’s account in Finance Bank. Graham forges Ewan’s indorsement. FinanceBank pays the check. Most likely?a.?Daisy will be liable for the amount.?b.?Ewanwill have to pay Daisy for the amount.?c.?FinanceBank will have to recredit Daisy’s account.?d.?the Federal Reserve will reimburse all parties for their costs.61.?Clyde issues a check payable to Discount Mart. Ethel, Discount’s cashier, forges the store’s indorsement and deposits the check in her bank account. Clyde’s bank, Farmers State Bank, pays the check. Clyde can recover from?a.?Ethel, but not the bank.?b.?the bank, which cannot recover from Ethel.?c.?thebank, which can recover from Ethel.?d.?neither Ethel nor the bank.62.?On Friday morning, Geoff deposits into his account at Heartland Bank a $500 check from Imelda, who also has an account at Heartland. On that same day, this check is considered?a.?cashiered.?b.?certified.?c.?paid.?d.?a provisional credit.63.?Falls River Bank receives a check drawn on the account of Get-Rich Industries, Inc., one of the bank’s customers, at 3 p.m. Friday. Hildy, the pre-senter 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 dis-honor the check, it must do so by midnight?a.?Saturday.?b.?Sunday.?c.?Monday.?d.?Tuesday.64.?On Monday, Ellery deposits in her account at Fiscal Bank a local check for $500. After 5:00 p.m. on Friday, from these funds, Ellery can withdraw no more than?a.?$100.?b.?$400.?c.?$500.?d.?$600.65.?Smith & Jones Associates is a business customer of Town Bank. Under federal law, Smith & Jones cannot demand?a.?any proof of payment except Town’sgood faith.?b.?monthly statements.?c.?recrediting of its account on payment of a forged item.?d.?the return of its original checks with its monthly statements.66.?Ridgetop Bank creates a paper reproduction of customer Sophie’s check with the statement “This is a legal copy of your check. You can use it in the same way you would use the original check.” This is?a.?acertified check.?b.?acashier’s check.?c.?asubstitute check.?d.?avoid check.67.?When processing a check, Savings & Trust Bank encodes information, such as the amount of the check, on the item. Savings & Trustthereby warrants to any subsequent bank or payor that?a.?the item has been returned to the drawer.?b.?none of the choices.?c.?the check has been processed manually.?d.?the encoded information is correct.Britney loses her Campus Bank access card. She realizes her loss the next day but waits a week to call the bank. Meanwhile, Drake finds and uses Britney’s card to withdraw $3,000 from Britney’saccount.?68.??Refer to Fact Pattern 24-1.Britney is responsible for?a.??$0.?b.??$50.?c.??$500.?d.??$3,000.69.?Refer to Fact Pattern 24-1. When Britney receives her Campus Bank statement, she 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 Britney’saccount (at least until the dispute is resolved).?c.?must investigate and immediately recredit Britney’saccount (at least until the dispute is resolved).?d.?must investigate but need not recredit Britney’saccount.70.?Jackie inserts a debit card issued by her bank into a machine and keys in her personal identification number. She is then able to withdraw $500 in cash. Jackie is using?a.?an automated teller machine.?b.?apoint-of-sale system.?c.?adirect deposit system.?d.?an Internet payment system.71.?Nick steals two checks from Pauline—a blank check and a check payable to the order of Retail Outlets Company, drawn on Pauline’s account with State Bank. Nick forges Pauline’s sig-na-ture on the blank check and makes it payable to himself. Nick forges Retail Outlets’s indorsement on the back of the check payable to Retail Outlets, and adds “Pay to the order of Nick.” At United Credit Union, Nick indorses the back of both checks with his own name and gives them to United for cash. United does not know about the theft or the forged signatures and presents the checks to State Bank, which pays them. Pauline, who was not negli-gent, discovers the forgeries and asks State Bank to recredit her ac-count. Who suffers the loss on each check??72.?On an automated teller machine (ATM) belonging to USA Bank, Sven placed a card-skimming device to pull information from the magnetic strips of users’ debit cards. The device then transmitted the stolen data to thieves who used it to gain access to, and empty, the bank accounts of the users, including Megan. Megan learned of the theft the next day and promptly notified USA. Is Megan entitled to a recredit of her account for the most of the loss due to the theft? Explain.Answer Key1.?True2.?True3.?True4.?True5.?False6.?True7.?True8.?True9.?True10.?False11.?False12.?False13.?False14.?True15.?True16.?False17.?False18.?False19.?True20.?False21.?False22.?True23.?True24.?True25.?False26.?False27.?True28.?False29.?True30.?False31.?True32.?True33.?False34.?True35.?True36.?b37.?b38.?b39.?c40.?d41.?b42.?b43.?a44.?c45.?a46.?b47.?b48.?d49.?b50.?c51.?a52.?d53.?d54.?a55.?b56.?d57.?d58.?b59.?c60.?c61.?c62.?d63.?d64.?c65.?d66.?c67.?d68.?c69.?b70.?a71.?State Bank will suffer the loss of the amount on the blank check unless it can recover from Nick. United will suffer the loss on the amount on the check with the forged indorsement of Retail Outlets unless the credit union, too, can recover from Nick.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 ac-ceptance.Here, regarding the blank check, Pauline, the drawer, was not negligent, her signature was forged, and State Bank, the drawee bank, paid the check over the forged signature. (State Bank cannot recover from United on the basis of a breach of a pre-sentment warranty, because United war-ranted only that it did not know the drawer’s signature was forged.) State Bank has a right to recover from Nick, but in most cases, actual re-covery from a thief is a remote possibility. Because United took the check in good faith and for value, State Bank does not have a right to recover the amount of this check from United.A bank that pays a customer’s check bearing a forged indorsement must recredit the cus-tomer’s account. A forged in-dorsement 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 in-dorsements.)In this problem, State Bank must recredit Pauline’s ac-count, but State Bank can recover the amount from United, who did not acquire title to the check and thus did not become a holder. United has a right to recover from Nick, but again actual recovery is unlikely.?72.?Yes, Megan is entitled to a recredit of her account for the most of the loss due to the theft.Under the Electronic Fund Transfer Act, if a customer’s debit card is lost or stolen and used without his or her permission, the customer may be required to pay no more than $50. The customer must notify the bank of the loss or theft within two days of learning about it. Otherwise, the liability increases to $500. The customer may be liable for more than $500 if he or she does not report the unauthorized use within sixty days after it appears on the customer’s statement.In this situation, Megan promptly notified USA, so her liability will be no more than $50. ................
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