c. Assuming that Zebra Bank inadvertently paid the amount of the check to Yeager Bank and debited Moore’s account, what are the rights of Moore against Zebra Bank?
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On April 1, Moore gave Pipkin a check properly drawn by Moore on Zebra Bank for $5,000 in payment of a painting to be framed and delivered the next day. Pipkin immediately indorsed the check and gave it to Yeager Bank as payment in full of his indebtedness to the bank on a note he previously had signed. Yeager Bank canceled the note and returned it to Pipkin. On April 1, Moore gave Pipkin a check properly drawn by Moore on Zebra Bank for $5,000 in payment of a painting to be framed and delivered the next day. Pipkin immediately indorsed the check and gave it to Yeager Bank as payment in full of his indebtedness to the bank on a note he previously had signed. Yeager Bank canceled the note and returned it to Pipkin. On April 1, Moore gave Pipkin a check properly drawn by Moore on Zebra Bank for $5,000 in payment of a painting to be framed and delivered the next day. Pipkin immediately indorsed the check and gave it to Yeager Bank as payment in full of his indebtedness to the bank on a note he previously had signed. Yeager Bank canceled the note and returned it to Pipkin. |
Explanation
Bank Y is the depository and collection bank where a check is presented for collection.
Bank Y has the right to remove the provisional credit given to Individual P.
Individual P has to recover from Individual M.
But Individual P has written off the debt by endorsing the check to the bank, which makes Bank Y the holder.
Nothing from Bank Z can be recovered by Bank Y. In the absence of the approval, the drawee bank is not liable to the holder of the check for the failure to pay the check, despite the fact that the bank's decision to refuse to pay the check is unjustified and also despite the loss incurred by the holder as a result of the non-payment of the check.
This is because a check holder is a stranger to the bank, with whom the bank has no clear contractual arrangement.
Verified Answer
It is not possible for Bank Y to recuperate any amount from Bank Z. Bank Y has not certified. So, Bank Y is not obliged to make any payments to Individual P.
Bank Z has received the stop payment order. So, Bank Z has to abide by the order and stop the payment of the check. Bank Y can recover the amount from Individual M.
Explanation
The liability of the drawer and the endorser are similar. If the party to the contract has dishonored the payment, the drawer or the endorser is liable to the holder in due course. Bank Z has dishonored the payment for the check. So, Individual M, who is the drawer of the check, is liable to Bank Y for the value of the check.
Verified Answer
Bank Y has the privilege to recover the check amount from Individual M. Bank Y is the holder in due course of the check, since check is received from Individual P for the predecessor’s debt. Bank Y has accepted and presented the check in good faith to clear the receivables. According to Article 3, Individual M is liable to Bank Y, being the holder in due course of the check.
Explanation
Individual M cannot recover anything from Bank Z, if, by inadvertence, Bank Z paid the check contrary to Individual M’s stop payment order. The failure of the drawee bank to honor a timely stop payment order is a breach of its contract of deposit. The stop payment order is issued at that time and in such a way that the bank has a fair opportunity to act on it prior to any other check operation.
The position taken by this chapter is that preventing payment is a facility that, despite its complexity, inconvenience, and cost, the depositors expect and are entitled to receive from the banks. The banks can bear the unavoidable periodic loss from the failure to stop as a cost of the banking sector.
Since the stop payment order is received timely, Bank Z has breached its contract of deposit by failing to honor the stop payment order.
The stop payment order is binding on Bank Z. When Bank Z pays a check on such a stop order, it is prima facie liable, but Individual M is responsible for deciding the truth and amount of the loss from such a charge.
In addition, the protection of Bank Z in the issue is that Individual M suffered no loss because, in any case, Individual M would have been accountable to a holder in due course.
The payment can be avoided and Individual M is liable if it is. The sound rule is that Bank Z is subrogated to Bank Y’s rights as a holder in due course. Individual M cannot bear a loss and Bank Z cannot recover anything.
Verified Answer
Individual M has the right to claim any loss or damage if the check is cleared by Bank Z, even after the stop payment order. Individual M has not faced any loss, which can be proven, but Individual M is liable to Bank Y, the holder in due course.
Based on Article 4, Bank Z has the right, under the clause of subrogation of improper payment, to claim that Individual M has not faced any loss as Individual M is liable to the holder in due course of the check.
Though there is a breach of contract when Bank Z has honored the payment of the check despite the stop payment order, it has not caused any damage to Individual M. However, Individual M is liable to Bank Y.
